bmnm10k12312007.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the fiscal year ended December 31, 2007
Commission
File Number: 001-32171
BIMINI
CAPITAL MANAGEMENT, INC.
(Exact
name of registrant as specified in its charter)
Maryland
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72-1571637
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
|
|
3305
Flamingo Drive, Vero Beach, FL 32963
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(Address
of principal executive offices - Zip Code)
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|
772-231-1400
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(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Title
of Each Class
|
Class
A Common Stock, $0.001 par value
|
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ý Non-accelerated
filer ¨
Smaller Reporting Company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No ý
As of
June 30, 2007, there were 24,603,560
shares of the Registrant’s Class A Common Stock
outstanding. The aggregate market value of the Class A Common Stock
held by non-affiliates of the Registrant (22,755,539 shares) at June 30, 2007
was approximately $61.9 million. The aggregate market value was
calculated by using the last sale price of the Class A Common Stock as of that
date. As of June 30, 2007, all of the Registrant’s Class B Common
Stock was held by affiliates of the Registrant. As of June 30, 2007,
the aggregate market value of the Registrant’s Class C Common Stock held by
non-affiliates (319,388 shares) was $319, which value is based on the initial
purchase price of the Class C Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s
definitive Proxy Statement for its 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on
Form 10-K.
BIMINI
CAPITAL MANAGEMENT, INC.
INDEX
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|
PART
I
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ITEM
1. Business.
|
3
|
ITEM
1A. Risk Factors
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17
|
ITEM
1B. Unresolved Staff Comments.
|
25
|
ITEM
2. Properties.
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25
|
ITEM
3. Legal Proceedings.
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25
|
ITEM
4. Submission of Matters to a Vote of Security Holders.
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26
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PART
II
|
ITEM
5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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27
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ITEM
6. Selected Financial Data.
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29
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ITEM
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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30
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ITEM
7A. Quantitative and Qualitative Disclosures About Market
Risk.
|
45
|
ITEM
8. Financial Statements and Supplementary Data.
|
46
|
ITEM
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
86
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ITEM
9A. Controls and Procedures.
|
86
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ITEM
9A (T). Controls and Procedures.
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86
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ITEM
9B. Other Information.
|
86
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PART
III
|
ITEM
10. Directors, Executive Officers and Corporate
Governance.
|
87
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ITEM
11. Executive Compensation.
|
87
|
ITEM
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
87
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ITEM
13. Certain Relationships and Related Transactions, and Director
Independence.
|
87
|
ITEM
14. Principal Accountant Fees and Services.
|
87
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PART
IV
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ITEM
15. Exhibits, Financial Statement Schedules.
|
88
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PART
I
ITEM 1.
BUSINESS
Overview
Bimini
Capital Management, Inc., a Maryland corporation (“Bimini Capital” and,
collectively with its subsidiaries, the “Company,” “we” or “us”), is primarily
in the business of investing in mortgage-backed securities. We are
organized and operate as a real estate investment trust, or REIT, for federal
income tax purposes, and our corporate structure includes a taxable REIT
subsidiary (“TRS”). Bimini Capital’s website is located at http://www.biminicapital.com.
From
November 30, 2005 to June 30, 2007 we operated a mortgage banking business
through our subsidiary, Orchid Island TRS, LLC (“OITRS”). OITRS,
formerly known as Opteum Financial Services, LLC, ceased originating mortgages
on June 30, 2007 and is now accounted for as a discontinued
operation.
History
and Structure
We were
originally formed in September 2003 as Bimini Mortgage Management, Inc. (“Bimini
Mortgage”) for the purpose of creating and managing a leveraged investment
portfolio consisting of residential mortgage backed securities
(“MBS”).
·
|
On
November 3, 2005, the Company, then known as Bimini Mortgage, acquired
Opteum Financial Services, LLC. This entity 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.” Upon
closing of the transaction, OITRS became a wholly-owned taxable REIT
subsidiary of the Company. Under the terms of the transaction,
the Company issued 3.7 million shares of Class A Common Stock and 1.2
million shares of Class A Redeemable Preferred Stock to the former members
of OITRS.
|
·
|
On
February 10, 2006, the Company changed its name to Opteum Inc.
(“Opteum”). At the Company’s 2006 Annual Meeting of
Stockholders, the shares of Class A Redeemable Preferred Stock issued to
the former members of OITRS were converted into shares of the Company’s
Class A Common Stock on a one-for-one basis following the approval of such
conversion by the Company’s
stockholders.
|
·
|
On
December 21, 2006, the Company sold to Citigroup Global Markets Realty
Corp. (“Citigroup Realty”) a Class B non-voting limited liability company
membership interest in OITRS, representing 7.5% of all of OITRS’s
outstanding limited liability company membership interests, for $4.1
million. Immediately following the transaction, the Company held Class A
voting limited liability company membership interests in OITRS
representing 92.5% of all of OITRS’s outstanding limited liability company
membership interests. In connection with the transaction, the
Company also granted Citigroup Realty the option, exercisable on or before
December 20, 2007, to acquire additional Class B non-voting limited
liability company membership interests in OITRS representing 7.49% of all
of OITRS’s outstanding limited liability company membership
interests. This option was not
exercised.
|
·
|
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 OITRS’
wholesale and conduit mortgage loan origination channels in the second
quarter of 2007. Also, during the second and third quarters of
2007, substantially all of the other operating assets of OITRS were sold
and the proceeds were primarily used to repay secured
indebtedness.
|
·
|
On
September 28, 2007, the Company changed its name to Bimini Capital
Management, Inc.
|
We have
elected to be taxed as a real estate investment trust (“REIT”) under Sections
856 and 859 of the Internal Revenue Code of 1986, as amended (the
“Code”). Our qualification as a REIT depends upon our ability to
meet, on an annual or in some cases quarterly basis, various complex
requirements under the Internal Revenue Code relating to, among other things,
the sources of our gross income, the composition and values of our assets, our
distribution levels and the diversity of ownership of our shares. We have elected to treat
OITRS as a taxable REIT subsidiary (TRS).
As used
in this document, discussions related to “Bimini Capital,” the parent company,
the registrant, and to real estate investment trust (“REIT”) qualifying
activities or the general management of our portfolio of mortgage backed
securities (“MBS”) refer to “Bimini Capital Management,
Inc.” Further, discussions related to our 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). The assets and activities that are not
REIT eligible, such as mortgage origination, acquisition and servicing
activities, were formerly conducted by OITRS and are now reported as
discontinued operations.
Description
of Our Business
In
general, under our current business strategy, we expect to maximize the
operational and tax benefits provided by our REIT structure. We seek to generate
net interest income from our portfolio of mortgage-backed securities, which is
the difference between (1) the interest income we receive from
mortgage-backed securities and (2) the interest we pay on the debt used to
finance these investments, plus certain administrative expenses.
Mortgage-Backed
Securities Portfolio
Investment
Strategy
Our
current investment strategy, which is subject to change at any time without
notice to our stockholders, is to realize net interest income from our
investment in mortgage-backed securities (“MBS”). Our MBS portfolio is a
leveraged investment portfolio consisting primarily of investments in
pass-through certificates, which are securities representing interests in pools
of mortgage loans secured by residential real property in which payments of both
interest and principal on the securities are generally made monthly. In effect,
these securities pass through the monthly payments made by the individual
borrowers on the mortgage loans that underlie the securities, net of fees paid
to the issuer or guarantor of the securities. Pass-through certificates can be
divided into various categories based on the characteristics of the underlying
mortgages, such as the term or whether the interest rate is fixed or
variable.
The
mortgage loans underlying pass-through certificates can generally be classified
in the following categories:
·
|
Adjustable-Rate
Mortgages. Adjustable-Rate Mortgages, or ARMs, are mortgages
for which the borrower pays an interest rate that varies over the term of
the loan. The interest rate usually resets based on market interest rates,
although the adjustment of such an interest rate may be subject to certain
limitations. Traditionally, interest rates reset periodically. We refer to
such ARMs as "traditional" ARMs. Since interest rates on
ARMs fluctuate based on market conditions, ARMs tend to have
interest rates that do not deviate from current market rates by a large
amount. This in turn can mean that ARMs have less price sensitivity
to interest rates. We classify ARMs, as those securities whose coupons
reset within one year.
|
·
|
Fixed-Rate
Mortgages. Fixed-rate mortgages allow each borrower to pay an
interest rate that is constant throughout the term of the loan.
Traditionally, most fixed-rate mortgages have an original term of
30 years. However, shorter terms (also referred to as final maturity
dates) have become common in recent years. Because the interest rate on
the loan never changes, even when market interest rates change, over time
there can be a divergence between the interest rate on the loan and
current market interest rates. This in turn can make a fixed-rate mortgage
price sensitive to market fluctuations in interest rates. In general, the
longer the remaining term on the mortgage loan, the greater the price
sensitivity.
|
·
|
Hybrid
Adjustable-Rate Mortgages. Hybrid ARMs have a fixed-rate
for the first few years of the loan, often three, five, or seven years,
and thereafter reset periodically like traditional ARMs. Effectively, such
mortgages are hybrids, combining the features of a pure fixed-rate
mortgage and a "traditional" ARM. Hybrid ARMs have price sensitivity
to interest rates similar to that of a fixed-rate mortgage during the
period when the interest rate is fixed and similar to that of an ARM when
the interest rate is in its periodic reset stage. However, even though
hybrid ARMs usually have a short time period in which the interest
rate is fixed, during such period the price sensitivity may be
high.
|
·
|
Balloon
Maturity Mortgages. Balloon maturity mortgages are a type of fixed-rate
mortgage where all or most of the principal amount is due at maturity,
rather than paid in periodic equal installments, or amortized, over the
life of the loan. These mortgages have a static interest rate for the life
of the loan. However, the term of the loan is usually quite short,
typically less than seven years. As the balloon maturity mortgage
approaches its maturity date, the price sensitivity of the mortgage
declines.
|
The
following table shows the breakdown of mortgage loans underlying the mortgage
backed securities portfolio as of December 31, 2007 and 2006:
($
in thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
Value
|
|
|
%
of Total
|
|
|
Carrying
Value
|
|
|
%
of Total
|
|
Adjustable
Rate Mortgages
|
|
$ |
177,608 |
|
|
|
25.7 |
|
|
$ |
2,105,818 |
|
|
|
75.0 |
|
Fixed
Rate Mortgages
|
|
|
113,989 |
|
|
|
16.5 |
|
|
|
626,428 |
|
|
|
22.3 |
|
Hybrid
ARMs
|
|
|
398,982 |
|
|
|
57.8 |
|
|
|
76,488 |
|
|
|
2.7 |
|
Totals
|
|
$ |
690,579 |
|
|
|
100.0 |
|
|
$ |
2,808,734 |
|
|
|
100.0 |
|
As of
December 31, 2007, 92.5% of our portfolio was issued by Fannie Mae, 6.7% was
issued by Freddie Mac and 0.8% was issued by Ginnie Mae. As of
December 31, 2007, our portfolio had a weighted average yield of
6.06%. The constant prepayment rate (CPR) for the portfolio, which
reflects the annualized proportion of principal that was prepaid, was 16.38% for
December 2007. The effective duration for the portfolio was 1.267 as
of December 31, 2007. Duration measures the price sensitivity of a
fixed income security to movements in interest rates. Effective
duration captures both the movement in interest rates and the fact that the cash
flows of a mortgage related security are altered when interest rates
move.
We do not
anticipate investing any of our MBS portfolio assets in certain other types of
mortgage related securities, known as derivative securities, such as "inverse
floaters," "inverse I.O.s" and "residuals". In evaluating our MBS
portfolio assets and their performance, we primarily evaluate the following
critical factors:
·
|
asset
performance in differing interest rate
environments,
|
·
|
duration
of the particular MBS asset,
|
·
|
potential
for prepayment of principal, and
|
·
|
the
market price of the investment.
|
We seek
to minimize the effects on our income caused by prepayments on the mortgage
loans underlying our securities at a rate materially different than anticipated.
Toward that end, we have positioned our portfolio to include securities with
prepayment characteristics that we expect to result in less interest rate
sensitive and, therefore, more stable prepayments. We believe that
MBS collateralized by the following types of loan pools achieves this
goal.
§
|
Borrowers
with low loan balances have a lower economic incentive to refinance and
have historically prepaid at lower rates than borrowers with larger loan
balances. The reduced incentive to refinance has two parts: borrowers with
low loan balances will have smaller interest savings because overall
interest payments are smaller on their loans; and closing costs for
refinancing, which are generally not proportionate to the size of a loan,
make refinancing of smaller loans less attractive as it takes a longer
period of time for the interest savings to cover the cost of
refinancing.
|
§
|
Fannie
Mae's Expanded Approval Program allows borrowers with slightly impaired
credit histories or loan-to-value ratios greater than 80% to qualify for
conventional conforming financing. Borrowers under this program have
proportionately higher delinquency rates than typical Fannie Mae
borrowers, resulting in a higher than market interest rate because of the
increased default and delinquency risk. Prepayment rates on these
securities are lower than average because refinancing is more difficult
for delinquent or recently delinquent
loans.
|
§
|
Agency
pools collateralized by loans against investment properties generally
result in slower prepayments because borrowers financing investment
properties are required to pay an up front premium. Payment of this
premium requires a larger rate movement for the borrower to achieve the
same relative level of savings upon
refinancing.
|
We have
created a diversified portfolio to avoid undue geographic, loan originator, and
other types of concentrations. By maintaining essentially all of our MBS
portfolio in AAA rated, government or government-sponsored or chartered
enterprises and government or federal agencies, which may include an implied
guarantee of the federal government as to payment of principal and interest,
management believes it can significantly reduce its exposure to losses from
credit risk. Legislation may be proposed to change the relationship between
certain agencies, such as Fannie Mae and the federal government. This may have
the effect of reducing the actual or perceived credit quality of mortgage
related securities issued by these agencies. As a result, such legislation could
increase the risk of loss on investments in Fannie Mae and/or Freddie Mac MBS.
The Company currently intends to continue to invest in such securities, even if
such agencies' relationships with the federal government change.
Leverage
Strategy
Our
mortgage-backed securities portfolio is funded through borrowings in the
repurchase market. In addition, we use leverage in an attempt to
increase potential returns to our stockholders. However, the use of leverage may
also have the effect of increasing losses when economic conditions are
unfavorable. We generally borrow between eight and twelve times the amount of
our equity, although our investment policies require no minimum or maximum
leverage. For purposes of this calculation, we treat our trust preferred
securities as an equity capital equivalent. We use repurchase agreements to
borrow against existing mortgage related securities and use the proceeds to
acquire additional mortgage related securities.
We seek
to structure the financing in such a way as to limit the effect of fluctuations
in short-term rates on our interest rate spread. In general, our borrowings are
short-term and we actively manage, on an aggregate basis, both the interest rate
indices and interest rate adjustment periods of our borrowings against the
interest rate indices and interest rate adjustment periods on our mortgage
related securities in order to limit our liquidity and interest rate related
risks.
We
generally borrow at short-term rates from various lenders through various
contractual agreements including, repurchase agreements. Repurchase agreements
are generally, but not always, short-term in nature. Under these repurchase
agreements, we sell securities to a lender and agree to repurchase those
securities in the future for a price that is higher than the original sales
price. The difference between the sales price we receive and the repurchase
price we pay represents interest paid to the lender. This is determined by
reference to an interest rate index (such as the London Interbank Offered Rate
or, LIBOR) plus an interest rate spread. Although structured as a sale and
repurchase obligation, a repurchase agreement operates as a financing under
which the initial seller effectively pledges its securities as collateral to
secure a short-term loan equal in value to a specified percentage of the market
value of the pledged collateral. The initial seller retains beneficial ownership
of the pledged collateral, including the right to distributions. At the maturity
of a repurchase agreement, the initial seller is required to repay the loan and
concurrently receive its pledged collateral from the lender or, with the consent
of the lender, it renews such agreement at the then prevailing financing rate.
Our repurchase agreements may require us to pledge additional assets to the
lender in the event the market value of the existing pledged collateral
declines. At December 31, 2007, repurchase agreements outstanding totaled $678.2
million.
We have
engaged AVM, L.P., a securities broker-dealer, and III Associates, a registered
investment adviser affiliated with AVM, L.P., to provide us with repurchase
agreement trading, clearing and administrative services. III Associates acts as
our agent and adviser in arranging for third parties to enter into repurchase
agreements with us, executes and maintains records of our repurchase
transactions and assists in managing the margin arrangements between us and our
counterparties for each of our repurchase agreements.
Risk Management
Approach
We seek
to differentiate ourselves from other mortgage portfolio managers through our
approach to risk management.
·
|
Interest
Rate Risk Management
|
We
believe the primary risk inherent in our portfolio investments is the effect of
movements in interest rates. This risk arises because the effects of interest
rate changes on our borrowings will not be perfectly correlated with the effects
of interest rate changes on the income from, or value of, our portfolio
investments. We therefore follow an interest rate risk management program
designed to offset the potential adverse effects resulting from the rate
adjustment limitations on our mortgage related securities. We seek to minimize
differences between interest rate indices and interest rate adjustment periods
of our adjustable-rate MBS and related borrowings by matching the terms of
assets and related liabilities both as to maturity and to the underlying
interest rate index used to calculate interest rate charges.
Our
interest rate risk management program encompasses a number of procedures,
including the following:
|
§
|
monitoring
and adjusting, if necessary, the interest rate sensitivity of our mortgage
related securities compared with the interest rate sensitivities of our
borrowings.
|
|
§
|
structuring
our repurchase agreements that fund our purchases of adjustable-rate MBS
to have varying maturities and interest rate adjustment periods in order
to match the reset dates on our adjustable-rate
MBS.
|
|
§
|
actively
managing, on an aggregate basis, the interest rate indices and interest
rate adjustment periods of our mortgage related securities and comparing
them to the interest rate indices and adjustment periods of our
borrowings. Our liabilities under our repurchase agreements are all LIBOR
based, and we select our adjustable-rate MBS to favor LIBOR indexes, among
other considerations.
|
Through
the use of these procedures, we attempt to reduce the risk of differences
between interest rate adjustment periods of our adjustable-rate MBS and our
related borrowings. However, no assurances can be given that our interest rate
risk management strategies can successfully be implemented.
We may
from time to time use derivative financial instruments to hedge all or a portion
of the interest rate risk associated with our borrowings. We may enter into swap
or cap agreements, option, put or call agreements, futures contracts, forward
rate agreements or similar financial instruments to hedge indebtedness that we
may incur or plan to incur. These contracts would be intended to more closely
match the effective maturity of, and the interest received on, our assets with
the effective maturity of, and the interest owed on, its
liabilities. We may also use derivative financial instruments in an
attempt to protect our MBS portfolio against declines in the market
value of our assets that result from general trends in debt markets. The
inability to match closely the maturities and interest rates of our assets and
liabilities or the inability to protect adequately against declines in the
market value of our assets could result in losses. Derivative instruments will
not be used for speculative purposes.
We invest
in a limited universe of mortgage related securities, primarily, but not limited
to, those issued by Fannie Mae, Freddie Mac and Ginnie Mae. Payment of principal
and interest underlying securities issued by Ginnie Mae is guaranteed by the
U.S. Government. Fannie Mae and Freddie Mac mortgage related securities are
guaranteed as to payment of principal and interest by the respective entity
issuing the security.
·
|
Prepayment
Risk Management
|
A key
feature of most mortgage loans is the ability of the borrower to repay principal
earlier than scheduled. This is called a prepayment. Prepayments arise primarily
due to sale of the underlying property, refinancing, or foreclosure. Prepayments
result in a return of principal to pass-through certificate holders. This may
result in a lower or higher rate of return upon reinvestment of principal. This
is generally referred to as prepayment uncertainty. If a security purchased at a
premium prepays at a higher-than-expected rate, then the value of the premium
would be eroded at a faster-than-expected rate. Similarly, if a discount
mortgage prepays at a lower-than-expected rate, the amortization towards par
would be accumulated at a slower-than-expected rate. The possibility of these
undesirable effects is sometimes referred to as "prepayment risk."
In
general, declining interest rates tend to increase prepayments, and rising
interest rates tend to result in fewer prepayments. Like other fixed-income
securities, when interest rates rise, the value of mortgage related securities
generally declines. The rate of prepayments on underlying mortgages will affect
the price and volatility of mortgage related securities and may shorten or
extend the effective maturity of the security beyond what was anticipated at the
time of purchase. If interest rates rise, our holdings of mortgage related
securities may experience reduced returns if the borrowers of the underlying
mortgages pay off their mortgages later than anticipated. This is generally
referred to as “extension risk.”
We seek
to manage the risk of prepayments of the underlying mortgages by creating a
diversified portfolio with a variety of prepayment characteristics.
·
|
Capital
Risk Management
|
We seek
to protect our capital base through the use of a risk-based capital methodology
patterned on the general principles underlying the proposed risk-based capital
standards for internationally active banks of the Basel Committee on Banking
Supervision, commonly referred to as the Basel II Accord. The Basel II Accord
encourages banks to develop methods for measuring the risks of their banking
activities to determine the amount of capital required to support those risks.
Similarly, we use our methodology to calculate an internally generated risk
measure for each asset in our portfolio. This measure is then used to establish
a capital allocation for the asset, which in turn defines an appropriate amount
of leverage.
As with
the Basel approach, we identify components of risk associated with the assets we
employ. However, unlike typical bank loans, which may bear a significant degree
of credit risk, the risks associated with the assets that we employ are
primarily related to movements in interest rates. The elements relating to
interest rate risk that we analyze are:
·
|
the
slope of the yield curve.
|
"Effective
duration" measures the sensitivity of a security's price to movements in
interest rates. "Convexity" measures the sensitivity of a security's effective
duration to movements in interest rates. "Expected return" captures the market's
assessment of the risk of a security. We generally assume markets are efficient
with respect to the pricing of risk.
While
these three risk components primarily address the price movement of a security,
we believe the income earning potential of our portfolio-as reflected in the
slope of the yield curve-offsets potential negative price movements. We believe
the risk of our portfolio is lower when the slope of the yield curve is steep,
and thus is inversely proportional to the slope of the yield curve.
We use
these components of risk to arrive at a risk coefficient for each asset. The
product of this coefficient and the amount of the investment represents our
"risk measure" for the asset. We calculate risk measures for each asset and then
aggregate them into the risk measure for the entire portfolio, which guides us
to an appropriate amount of overall leverage. We analyze the portfolio's risk
measures on a periodic basis. Ideally, the leverage ratio will rise as the risk
level of the portfolio declines and will fall as the portfolio's risk level
increases. The goal of this approach is to ensure that our portfolio's leverage
ratio is appropriate for the level of risk inherent in the
portfolio.
POLICIES
WITH RESPECT TO CERTAIN OTHER ACTIVITIES
If our
Board of Directors determines that additional funding is required, we may raise
such funds through additional offerings of equity or debt securities or the
retention of cash flow (subject to provisions in the Code concerning
distribution requirements and the taxability of undistributed net taxable
income) or a combination of these methods. In the event that our Board of
Directors determines to raise additional equity capital, it has the authority,
without stockholder approval, to issue additional common stock or preferred
stock in any manner and on such terms and for such consideration as it deems
appropriate, at any time.
We have
authority to offer Class A Common Stock or other equity or debt securities
in exchange for property and to repurchase or otherwise reacquire shares and may
engage in such activities in the future.
Subject
to gross income and asset tests necessary for REIT qualification, we may invest
in securities of other REITs, other entities engaged in real estate activities
or securities of other issuers, including for the purpose of exercising control
over such entities.
We may
engage in the purchase and sale of investments. We do not underwrite the
securities of other issuers.
Our Board
of Directors may change any of these policies without prior notice to our
stockholders and without the approval of our stockholders.
CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion summarizes the material federal income tax considerations
regarding our qualification and taxation as a REIT. The information in this
summary is based on the Code, current, temporary and proposed Treasury
regulations promulgated under the Code, the legislative history of the Code,
current administrative interpretations and practices of the Internal Revenue
service (the "IRS") and court decisions, all as of the date hereof. The
administrative interpretations and practices of the IRS upon which this summary
is based include its practices and policies as expressed in private letter
rulings which are not binding on the IRS, except with respect to the taxpayers
who requested and received such rulings. No assurance can be given that future
legislation, Treasury regulations, administrative interpretations and practices
and court decisions will not significantly change current law, or adversely
affect existing interpretations of existing law, on which the information in
this summary is based. Even if there is no change in applicable law, no
assurance can be provided that the statements made in the following summary will
not be challenged by the IRS or will be sustained by a court if so challenged,
and we will not seek a ruling with respect to any part of the information
discussed in this summary. This summary is qualified in its entirety by the
applicable provisions of the Code, Treasury regulations, and administrative and
judicial interpretations of the Code.
INVESTORS
ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES TO THEM OF ACQUIRING, HOLDING AND DISPOSING OF OUR
CLASS A COMMON STOCK AND THE POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
General
We have
elected to be taxed as a REIT under the Code commencing with our initial taxable
period ended December 31, 2003. We believe that we have been organized and
operated, and we intend to continue to be organized and to operate, in a manner
so as to qualify as a REIT. However, no assurance can be given that we in fact
qualify or will remain qualified as a REIT.
Our
qualification and taxation as a REIT depends on our ability to meet, through
actual annual operating results, income and asset requirements, distribution
levels, diversity of stock ownership, and the various other qualification tests
imposed under the Code discussed below. While we intend to operate so that we
qualify as a REIT, given the highly complex nature of the rules governing REITs,
the ongoing importance of factual determinations and the possibility of future
changes in our circumstances or in the law, no assurance can be given that our
actual results for any particular taxable year will satisfy these requirements.
In addition, qualification as a REIT may depend on future transactions and
events that cannot be known at this time.
So long
as we qualify for taxation as a REIT, we generally will be permitted an income
tax deduction for qualifying dividends that we distribute to our stockholders.
As a result, we generally will not be required to pay federal income taxes on
our net taxable income that is currently distributed to our stockholders. This
treatment substantially eliminates the "double taxation" that ordinarily results
from investment in a corporation. Double taxation means taxation once at the
corporate level when income is earned and once again at the stockholder level
when this income is distributed. Under current law, dividends received by
non-corporate U.S. stockholders through 2010 from certain U.S. corporations and
qualified foreign corporations generally are eligible for taxation at the rates
applicable to long-term capital gains (a maximum of 15%). This substantially
reduces, but does not completely eliminate, the double taxation that has
historically applied to corporate dividends. With limited exceptions, however,
dividends paid by us or other entities that are taxed as REITs are not eligible
for the reduced rates on dividends, and will continue to be taxed at rates
applicable to ordinary income, which will be as high as 35% through
2010.
Even as a
REIT, however, we will be subject to federal taxation, as follows:
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We
will be required to pay tax at regular corporate rates on any
undistributed net taxable income, including undistributed net capital
gain.
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§
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We
may be subject to the "alternative minimum tax" on its items of tax
preference, if any.
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If
we have (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in
the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, we will be required to pay tax at the highest
corporate rate on this income. Foreclosure property is generally defined
as property acquired through foreclosure or after a default on a loan
secured by the property or on a lease of the
property.
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We
will be required to pay a 100% tax on any net income from prohibited
transactions. Prohibited transactions are, in general, sales or other
taxable dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business. Under
existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business depends on all
the facts and circumstances surrounding the particular
transaction.
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If
we fail to satisfy the 75% gross income test or the 95% gross income test
discussed below, but nonetheless maintain our qualification as a REIT
because certain other requirements are met, we will be subject to a 100%
tax on an amount equal to the greater of (i) the amount by which we
fail the 75% gross income test and (ii) the amount by which we fail
the 95% gross income test, multiplied by a fraction intended to reflect
our profitability.
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Commencing
with our taxable year beginning on January 1, 2005, if due to
reasonable cause, we fail to satisfy any of the REIT asset tests, as
described below, by more than a de minimis amount, and we nonetheless
maintain our REIT qualification because of specified cure provisions, we
will be required to pay a tax equal to the greater of $50,000 or the
highest corporate tax rate multiplied by the net taxable income generated
by the nonqualifying assets.
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Commencing
with our taxable year beginning on January 1, 2005, if we fail to
satisfy any provision of the Code that would result in our failure to
qualify as a REIT (other than a violation of the REIT gross income or
asset tests described below) and the violation is due to reasonable cause,
we may retain our REIT qualification but will be required to pay a penalty
of $50,000 for each such failure.
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We
will be required to pay a 4% excise tax on the excess of the required
distribution over the amounts actually distributed if we fail to
distribute during each calendar year at least the sum of (i) 85% of
our ordinary net taxable income for the year; (ii) 95% of our capital
gain net income for the year; and (iii) any undistributed taxable
income from prior periods. This distribution requirement is in addition
to, and different from, the distribution requirements discussed
below.
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If
we acquire any asset from a corporation which is or has been taxed as a C
corporation under the Code in a transaction in which the basis of the
asset in our hands is determined by reference to the basis of the asset in
the hands of the C corporation, and we subsequently recognize gain on the
disposition of the asset during the 10-year period beginning on the date
that the asset is acquired, then we will be required to pay tax at the
highest regular corporate tax rate on this gain to the extent of the
excess of (i) the fair market value of the asset, over (ii) our
adjusted basis in the asset, in each case determined as of the date on
which the asset is acquired. The results described in this paragraph with
respect to the recognition of gain will apply unless an election under
Treasury regulation Section 1.337(d)-7(c) is made to cause the C
corporation to recognize all of the gain inherent in the property at the
time of acquisition of the asset.
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We
will generally be subject to tax on the portion of any excess inclusion
income derived from an investment in residual interests in REMICs to the
extent our stock is held by specified tax-exempt organizations not subject
to tax on unrelated business taxable
income.
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We
could be subject to a 100% excise tax if our dealings with any of our
taxable REIT subsidiaries are not at arm's
length.
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In
addition, our subsidiary, OITRS, has elected to be treated as a taxable REIT
subsidiary, which is an entity that is subject to federal, state, and local
income taxation. OITRS’s ability to deduct interest paid or accrued
to us for federal, state and local tax purposes is also subject to certain
limitations.
Requirements
for Qualification as a REIT
The Code
defines a REIT as a corporation, trust or association:
(i) that
is managed by one or more trustees or directors;
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(ii)
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that
issues transferable shares or transferable certificates to evidence
beneficial ownership;
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(iii)
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that
would be taxable as a domestic corporation but for Sections 856 through
859 of the Code;
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(iv)
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that
is not a financial institution or an insurance company within the meaning
of the Code;
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(v)
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that
is beneficially owned by 100 or more
persons;
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(vi)
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not
more than 50% in value of the outstanding stock of which is owned,
actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities), during the last half of each
taxable year (the " 5/50
Rule"); and
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(vii)
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that
meets other tests, described below, regarding the nature of its income and
assets and the amount of its
distributions.
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The Code
provides that all of the first four conditions stated above must be met during
the entire taxable year and that the fifth condition must be met during at least
335 days of a taxable year of 12 months, or during a proportionate
part of a taxable year of less than 12 months. The fifth and sixth
conditions do not apply until after the first taxable year for which an election
is made to be taxed as a REIT.
Our
charter provides for restrictions regarding ownership and transfer of our stock.
These restrictions are intended to assist us in satisfying the share ownership
requirements described in the fifth and sixth conditions above. These
restrictions, however, may not ensure that we will, in all cases, be able to
satisfy the stock ownership rules. If we fail to satisfy any of these stock
ownership rules, and no other relief provisions apply, our qualification as a
REIT may terminate. If, however, we complied with the rules contained in the
applicable Treasury regulations that require a REIT to determine the actual
ownership of its stock and we do not know, or would not have known through the
exercise of reasonable diligence, that we failed to meet the requirement of the
5/50
Rule, we would not be disqualified as a REIT.
To
monitor our compliance with the stock ownership tests, we are required to
maintain records regarding the actual ownership of our shares of stock. To do
so, we are required to demand written statements each year from the record
holders of certain percentages of our shares of stock in which the record
holders are to disclose the actual owners of the shares (i.e., the persons required to
include our dividends in gross income). A list of those persons failing or
refusing to comply with this demand must be maintained as part of our records. A
record holder who fails or refuses to comply with the demand must submit a
statement with its tax return disclosing the actual ownership of the shares of
stock and certain other information.
In
addition, a corporation generally may not elect to become a REIT unless its
taxable year is the calendar year. Our taxable year is the calendar
year.
Tax
Effect of Subsidiaries
We own
92.5% of the outstanding membership interests of OITRS. We have made an election
to treat OITRS as a taxable REIT subsidiary. A taxable REIT subsidiary may earn
income that would be non-qualifying income if earned directly by a REIT and is
generally subject to full corporate level tax. A REIT may own up to 100% of all
outstanding stock of a taxable REIT subsidiary. However, no more than 20% of a
REIT's assets may consist of the securities of taxable REIT subsidiaries. Any
dividends that a REIT receives from a taxable REIT subsidiary will generally be
eligible to be taxed at the preferential rates applicable to qualified dividend
income and, for purposes of REIT gross income tests, will be qualifying income
for purposes of the 95% gross income test but not the 75% gross income test.
Certain restrictions imposed on taxable REIT subsidiaries are intended to ensure
that such entities will be subject to appropriate levels of federal income
taxation. First, a taxable REIT subsidiary may not deduct interest payments made
in any year to an affiliated REIT to the extent that such payments exceed,
generally, 50% of the taxable REIT subsidiary’s adjusted taxable income for that
year (although the taxable REIT subsidiary may carry forward to, and deduct in,
a succeeding year the disallowed interest amount if the 50% test is satisfied in
that year). Additionally, if a taxable REIT subsidiary pays interest, rent or
another amount to a REIT that exceeds the amount that would be paid to an
unrelated party in an arm's length transaction, an excise tax equal to 100% of
such excess will be imposed.
An
unincorporated domestic entity, such as a partnership or limited liability
company, that has a single owner, generally is not treated as an entity separate
from its parent for federal income tax purposes. If we own 100% of the interests
of such an entity, we will be treated as owning its assets and receiving its
income directly. An unincorporated domestic entity with two or more owners
generally is treated as a partnership for federal income tax purposes. In the
case of a REIT that is a partner in a partnership that has other partners, the
REIT is treated as owning its proportionate share of the assets of the
partnership and as earning its proportionate share of the gross income of the
partnership, based on its percentage of capital interests, for the purposes of
the applicable REIT qualification tests. Commencing with its taxable year
beginning on January 1, 2005, solely for purposes of the 10% value test
described below, the determination of a REIT's interest in partnership assets
will be based on the REIT's proportionate interest in any securities issued by
the partnership, excluding for these purposes, certain excluded securities as
described in the Code. Thus, our proportionate share of the assets, liabilities
and items of income of any partnership, joint venture or limited liability
company that is treated as a partnership for federal income tax purposes in
which we acquire an interest directly or indirectly will be treated as our
assets and gross income for purposes of applying the various REIT qualification
requirements.
Income
Tests
We must
satisfy two gross income requirements annually to maintain our qualification as
a REIT. First, we must derive at least 75% of our gross income, excluding gross
income from prohibited transactions, from specified real estate sources,
including rental income, interest on obligations secured by mortgages on real
property or on interests in real property, dividends or other distributions on,
and gain from the sale of, stock in other REITs, gain from the disposition of
“real estate assets" (i.e., interests in real
property, mortgages secured by real property or interests in real property, and
some other assets) and income from certain types of temporary investments.
Second, we must derive at least 95% of our gross income, excluding gross income
from prohibited transactions and qualifying hedges entered into after December
31, 2004, from the sources of income that satisfy the 75% gross income test
described above, and dividends, interest and gain from the sale or disposition
of stock or securities, and qualifying interest rate swap and cap agreements,
options, futures and forward contracts entered into before January 1, 2005 to
hedge debt incurred to acquire and own real estate assets.
For these
purposes, interest earned by a REIT ordinarily does not include any interest if
the determination of all or some of the amount of interest depends on the income
or profits of any person. An amount will generally not be excluded from the term
"interest," however, solely by reason of being based on a fixed percentage or
percentages of receipts or sales.
Any
amount includible in our gross income with respect to a regular or residual
interest in a REMIC generally is treated as interest on an obligation secured by
a mortgage on real property. If, however, less than 95% of the assets of a REMIC
consists of real estate assets (determined as if we held such assets), we will
be treated as receiving directly our proportionate share of the income of the
REMIC. In addition, if we receive interest income with respect to a mortgage
loan that is secured by both real property and other property and the highest
principal amount of the loan outstanding during a taxable year exceeds the fair
market value of the real property on the date we became committed to make or
purchase the mortgage loan, a portion of the interest income, equal to
(i) such highest principal amount minus such value, divided by
(ii) such highest principal amount, generally will not be qualifying income
for purposes of the 75% gross income test. Interest income received with respect
to non-REMIC pay-through bonds and pass-through debt instruments, such as
collateralized mortgage obligations or CMOs, however, generally will not be
qualifying income for purposes of the 75% gross income test.
We
inevitably may have some gross income from sources that will not be qualifying
income for purposes of one or both of the gross income tests. However, we intend
to maintain our qualification as a REIT by monitoring and limiting any such
non-qualifying income.
If we
fail to satisfy one or both of the 75% or 95% gross income tests for any taxable
year, we may, nevertheless, qualify as a REIT for such taxable year if we are
entitled to relief under applicable provisions of the Code. Generally, we may be
entitled to relief if:
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our
failure to meet these tests was due to reasonable cause and not due to
willful neglect
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we
attach a schedule of the sources of our income to our federal income tax
return and
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any
incorrect information on the schedule was not due to fraud with intent to
evade tax.
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Commencing
with our taxable year beginning on January 1, 2005, in order to maintain
our qualification as a REIT, if we fail to satisfy the 75% or 95% gross income
test, such failure must be due to reasonable cause and not due to willful
neglect, and, following our identification of such failure for any taxable year,
we must set forth a description of each item of our gross income that satisfies
the REIT gross income tests in a schedule for the taxable year filed in
accordance with regulations prescribed by the Treasury.
If we are
entitled to avail ourselves of the relief provisions, we will maintain our
qualification as a REIT but will be subject to certain taxes as described above.
We may not, however, be entitled to the benefit of these relief provisions in
all circumstances. If these relief provisions do not apply to a particular set
of circumstances, we will not qualify as a REIT. We may not always be able to
maintain compliance with the gross income tests for REIT qualification despite
monitoring our income.
Foreclosure
Property
Net
income realized by us from foreclosure property is generally subject to tax at
the maximum federal corporate tax rate (currently at 35%). Foreclosure property
is real property and related personal property that is acquired through
foreclosure following a default on a lease of such property or indebtedness
secured by such property and for which an election is made to treat the property
as foreclosure property.
Prohibited
Transaction Income
Any gain
realized by us on the sale of any asset other than foreclosure property, held as
inventory or otherwise held primarily for sale to customers in the ordinary
course of a trade or business, will be prohibited transaction income and subject
to a 100% excise tax. Prohibited transaction income may also adversely affect
our ability to satisfy the gross income test for qualification as a REIT.
Whether an asset is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business depends on all facts and circumstances
surrounding the particular transaction. While the Code provides a safe harbor
which, if met, would cause a sale of an asset to not be treated as a prohibited
transaction, we may not be able to meet the requirements of the safe harbor in
all circumstances. Any sales of assets made through a taxable REIT subsidiary,
such as OITRS, will not be subject to the prohibited transaction tax but will be
subject to regular corporate income taxation.
Asset
Tests
At the
close of each quarter of its taxable year, we must satisfy four tests relating
to the nature and diversification of our assets. First, at least 75% of the
value of our total assets must be represented by real estate assets, cash, cash
items and government securities. Second, not more than 25% of our total assets
may be represented by securities, other than those securities included in the
75% asset test. Third, the value of the securities we own in any taxable REIT
subsidiaries, in the aggregate, may not exceed 20% of the value of our total
assets. Fourth, of the investments included in the 25% asset class, the value of
any one issuer's securities may not exceed 5% of the value of our total assets
and we generally may not own more than 10% by vote or value of any one issuer's
outstanding securities, in each case except with respect to securities of
qualified REIT subsidiaries or taxable REIT subsidiaries and in the case of the
10% value test except with respect to "straight debt" having specified
characteristics and other excluded securities, as described in the Code,
including, but not limited to, any loan to an individual or an estate, any
obligation to pay rents from real property and any security issued by a REIT. In
addition, (i) our interest as a partner in a partnership is not considered
a security for purposes of applying the 10% value test; (ii) any debt
instrument issued by a partnership (other than straight debt or other excluded
security) will not be considered a security issued by the partnership if at
least 75% of the partnership's gross income is derived from sources that would
qualify for the 75% gross income test, and (iii) any debt instrument issued
by a partnership (other than straight debt or other excluded security) will not
be considered a security issued by the partnership to the extent of our interest
as a partner in the partnership.
Qualified
real estate assets include interests in mortgages on real property to the extent
the principal balance of a mortgage does not exceed the fair market value of the
associated real property, regular or residual interests in a REMIC (except that,
if less than 95% of the assets of a REMIC consist of "real estate assets"
(determined as if we held such assets), we will be treated as holding directly
our proportionate share of the assets of such REMIC), and shares of other REITs.
Non-REMIC CMOs, however, generally do not qualify as qualified real estate
assets for this purpose.
We
believe that all or substantially all of the mortgage related securities that we
own are and will be qualifying assets for purposes of the 75% asset test.
However, to the extent that we own non-REMIC CMOs or other debt instruments
secured by mortgage loans (rather than by real property) or debt securities
issued by C corporations that are not secured by mortgages on real property,
those securities may not be qualifying assets for purposes of the 75% asset
test. We will monitor the status of our assets for purposes of the various asset
tests and will seek to manage our portfolio to comply at all times with such
tests.
After
initially meeting the asset tests at the close of any quarter, we will not lose
our qualification as a REIT for failure to satisfy the asset tests at the end of
a later quarter solely by reason of changes in asset values. If we fail to
satisfy the asset tests because we acquire securities during a quarter, we can
cure this failure by disposing of sufficient non-qualifying assets within
30 days after the close of that quarter. Commencing with our taxable year
beginning on January 1, 2005, if we fail to meet the 5% or 10% asset tests,
after the 30 day cure period, we may dispose of sufficient assets
(generally within six months after the last day of the quarter in which our
identification of the failure to satisfy these asset tests occurred) to cure
such a violation that does not exceed a de minimis amount equal to
the lesser of 1% of our assets at the end of the relevant quarter or
$10,000,000. For violations of any of the REIT asset tests that are due to
reasonable cause and that are larger than the de minimis amount described
above, we may avoid disqualification as a REIT after the 30 day cure period
by taking steps including the disposition of sufficient assets to meet the asset
test (generally within six months after the last day of the quarter in which our
identification of the failure to satisfy the REIT asset test occurred) and
paying a tax equal to the greater of $50,000 or the highest corporate tax rate
multiplied by the net income generated by the non-qualifying assets; provided
that we file a schedule for such quarter describing each asset that causes us to
fail to satisfy the asset test in accordance with regulations prescribed by the
Treasury.
Annual
Dividend Distribution Requirements
To
maintain our qualification as a REIT, we are required to distribute dividends,
other than capital gain dividends, to our stockholders in an amount at least
equal to the sum of: (i) 90% of our REIT taxable income, and (ii) 90%
of our after-tax net income, if any, from foreclosure property, less
(iii) the excess of the sum of certain items of our non-cash income items
over 5% of our REIT taxable income. In general, for this purpose, our REIT
taxable income is ordinary net taxable income computed without regard to the
dividends paid deduction and net capital gain.
Only
distributions that qualify for the "dividends paid deduction" available to REITs
under the Code are counted in determining whether the distribution requirements
are satisfied. We must make these distributions in the taxable year to which
they relate, or in the following taxable year, if they are declared before we
timely file our tax return for that year, paid on or before the first regular
dividend 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. For these and other purposes, dividends declared by us in October,
November or December of one taxable year and payable to a stockholder of record
on a specific date in any such month shall be treated as both paid by us and
received by the stockholder during such taxable year, provided that the dividend
is actually paid by January 31 of the following taxable year.
In
addition, dividends distributed by us must not be preferential. If a dividend is
preferential, it will not qualify for the dividends paid deduction. To avoid
being preferential, every stockholder of the class of stock to which a
distribution is made must be treated the same as every other stockholder of that
class, and no class of stock may be treated other than according to its dividend
rights as a class.
To the
extent that we do not distribute all of our net capital gain, or we distribute
at least 90%, but less than 100%, of our REIT taxable income, we will be
required to pay tax on this undistributed income at regular ordinary and capital
gain corporate tax rates. Furthermore, if we fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of the
January immediately following such year) at least the sum of (i) 85% of our
REIT ordinary income for such year, (ii) 95% of our REIT capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, we will be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. We intend to
make timely distributions sufficient to satisfy the annual distribution
requirements.
Because
we may deduct capital losses only to the extent of our capital gains, we may
have taxable net income that exceeds our economic income. In addition, we will
recognize taxable net income in advance of the related cash flow if any of our
subordinated mortgage related securities are deemed to have original issue
discount. For federal income tax purposes, we generally must accrue original
issue discount based on a constant yield method that takes into account
projected prepayments. As a result of the foregoing, we may have less cash than
is necessary to distribute all of our taxable net income and thereby avoid
corporate income tax and the excise tax imposed on certain undistributed income.
In such a situation, we may need to borrow funds or issue additional common or
preferred stock.
Under
certain circumstances, we may be able to rectify a failure to meet the
distribution requirements for a year by paying "deficiency dividends" to our
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we will be required to pay
to the IRS interest based upon the amount of any deduction taken for deficiency
dividends.
Excess
Inclusion Income
If we
acquire a residual interest in a REMIC, we may realize excess inclusion income.
In addition, if we are deemed to have issued debt obligations having two or more
maturities, the payments on which correspond to payments on mortgage loans owned
by us, such arrangement will be treated as a taxable mortgage pool for federal
income tax purposes. If all or a portion of our assets are treated as a taxable
mortgage pool, our qualification as a REIT generally should not be impaired.
However, a portion of our taxable net income derived from such a taxable
mortgage pool could be characterized as excess inclusion income. Excess
inclusion income is an amount, with respect to any calendar quarter, equal to
the excess, if any, of (i) income allocable to the holder of a residual
interest in a REMIC or a taxable mortgage pool interest over (ii) the sum
of an amount for each day in the calendar quarter equal to the product of
(a) the adjusted issue price at the beginning of the quarter multiplied by
(b) 120% of the long-term federal rate (determined on the basis of
compounding at the close of each calendar quarter and properly adjusted for the
length of such quarter). Our excess inclusion income, if any, would be subject
to the distribution requirements applicable to REITs, notwithstanding that we
may not receive current cash in respect of such amounts. Recently
issued IRS guidance indicates that any excess inclusion income recognized by us
is to be allocated among our stockholders in proportion to our dividends paid. A
stockholder's share of any excess inclusion income could not be offset by the
stockholder’s net operating losses, would be subject to tax as unrelated
business taxable income to a tax-exempt holder, and would be subject to federal
income tax withholding (without reduction pursuant to any otherwise applicable
income tax treaty) with respect to amounts allocable to non-U.S.
stockholders. In addition, to the extent our stock is held in record
name by tax-exempt entities that are not subject to unrelated business income
tax, or “disqualified organizations,” we would be taxed on our excess inclusion
income allocated to such stockholders at the highest corporate tax rate
(currently 35%). Moreover, although the law is not entirely clear,
the IRS has taken the position that, to the extent our stock owned by
disqualified organizations is held in street name by a broker/dealer or other
nominee, the broker/dealer or nominee would be liable for a tax at the highest
corporate income tax rate on our excess inclusion income, if any, allocable to
such disqualified organization. Although we do not currently generate
excess inclusion income, it is possible that we may generate excess inclusion
income in future periods.
Hedging
Transactions
From time
to time we may enter into hedging transactions with respect to one or more of
our assets or liabilities. Our hedging transactions could take a variety of
forms, including interest rate cap agreements, options, futures contracts,
forward rate agreements, or similar financial instruments. We may enter into
other hedging transactions, including rate locks and guaranteed financial
contracts. To the extent that we enter into an interest rate swap or cap
contract, option, futures contract, forward rate agreement, or any similar
financial instrument prior to January 1, 2005 to reduce our interest rate risk
on indebtedness incurred to acquire or carry real estate assets, any payment
under or gain from the disposition of hedging transactions should be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. To the extent we hedge with other types of financial instruments or for
other purposes prior to January 1, 2005, any payment under or gain from such
transactions would not be qualifying income for purposes of the 95% or 75% gross
income tests. Commencing with our taxable year beginning on January 1,
2005, except to the extent provided by Treasury regulations, any income from a
hedging transaction entered into after December 31, 2004 to manage risk of
interest rate or price changes or currency fluctuations with respect to
borrowings made or to be made, or ordinary obligations incurred or to be
incurred, by us, which is clearly identified as such before the close of the day
on which it was acquired, originated, or entered into, including gain from the
sale or disposition of such a transaction, will not constitute gross income for
purposes of the 95% gross income test, to the extent that the transaction hedges
any indebtedness incurred or to be incurred by us to acquire or carry real
estate assets. We will monitor the income generated by any such transactions in
order to ensure that such gross income, together with any other non-qualifying
income received by us, will not cause us to fail to satisfy the 95% or 75% gross
income tests.
Failure
to Qualify as a REIT
If we
fail to qualify for taxation as a REIT in any taxable year, and the relief
provisions of the Code do not apply, we will be required to pay taxes, including
any applicable alternative minimum tax, on our taxable income in that taxable
year and all subsequent taxable years at regular corporate rates. Distributions
to our stockholders in any year in which we fail to qualify as a REIT will not
be deductible by us and we will not be required to distribute any amounts to our
stockholders. As a result, we anticipate that our failure to qualify as a REIT
would reduce the cash available for distribution to our stockholders. In
addition, if we fail to qualify as a REIT, all distributions to our stockholders
will be taxable as dividends from a C corporation to the extent of our current
and accumulated earnings and profits, and U.S. individual stockholders may be
taxable at preferential rates on such dividends, and U.S. corporate stockholders
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, we would also be disqualified from taxation
as a REIT for the four taxable years following the year in which we lose our
qualification. Commencing with our taxable year beginning on January 1,
2005, specified cure provisions may be available to us in the event we violate a
provision of the Code that would result in our failure to qualify as a REIT. We
would be provided additional relief in the event that we violate a provision of
the Code that would result in our failure to qualify as a REIT (other than
violations of the REIT gross income or asset tests, as described above, for
which other specified cure provisions are available) if (i) the violation
is due to reasonable cause, and (ii) we pay a penalty of $50,000 for each
failure to satisfy the provision.
State,
Local and Foreign Taxation
We may be
required to pay state, local and foreign taxes in various state, local and
foreign jurisdictions, including those in which we transact business or make
investments, and our stockholders may be required to pay state, local and
foreign taxes in various state, local and foreign jurisdictions, including those
in which they reside. Our state, local and foreign tax treatment may not conform
to the federal income tax consequences summarized above. OITRS has elected to be
treated as a taxable REIT subsidiary, which is an entity that is subject to
federal, state and local income taxation. In addition, the ability of
OITRS to deduct interest paid or accrued to us for federal, state and local tax
purposes is subject to certain limitations.
Possible
Legislative or Other Action Affecting REITs
The rules
dealing with federal income taxation are constantly under review by persons
involved in the legislative process and by the IRS and the Treasury Department,
resulting in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. Revisions in federal tax laws and
interpretations thereof could affect the tax consequences of investing in our
stock.
AVAILABLE
INFORMATION
The
Internet address of our corporate website is http://www.biminicapital.com. We
provide copies of our periodic reports (on Forms 10-K and 10-Q) and current
reports (on Form 8-K), as well as the beneficial ownership reports filed by
our directors, executive officers and 10% stockholders (on Forms 3, 4 and
5) free of charge through our website as soon as reasonably practicable
after they are filed electronically with the Securities and Exchange Commission
(the “Commission”). We may from time to time provide important disclosures to
investors by posting them in the investor relations section of our website, as
allowed by securities rules. We also will provide any of the foregoing
information without charge upon written request to Bimini Capital Management
Inc., 3305 Flamingo Drive, Vero Beach, Florida 32963, Attention: Investor
Relations Director.
Our
filings with the Commission may be read and copied at the SEC's Public Reference
Room at 100 F Street, NE., Washington, D.C. 20549, on official business days during the hours of 10:00 am to
3:00 pm. Information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330. The Commission also
maintains an Internet website at http://www.sec.gov that contains our reports,
proxy information statements and other information that we will file
electronically with the Commission.
Also
posted on our website within the “investor relations” section under the heading
“corporate governance” are (i) our Code of Business Conduct and Ethics,
(ii) our Code of Ethics for Senior Financial Officers, (iii) our
Corporate Governance Guidelines, (iv) our Whistleblowing and Whistleblower
Protection Policy, and charters for the Audit, Compensation and Governance and
Nominating Committees. These documents also are available in print upon request
of any stockholder to our Investor Relations Director.
ITEM
1A. RISK FACTORS.
RISKS RELATED TO OUR MBS
PORTFOLIO
Interest
rate mismatches between our adjustable-rate securities and our borrowings used
to fund purchases of our mortgage-related securities may reduce net income or
result in a loss during periods of changing interest rates.
Our
portfolio of MBS includes adjustable rate MBS and hybrid adjustable rate MBS,
and the mix of these securities in the portfolio may be increased or decreased
over time. Additionally, the interest rates of these securities may vary over
time based on changes in a short-term interest rate index, of which there are
many. We finance our acquisitions of adjustable-rate securities in part with
borrowings 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 the adjustable-rate securities. Short-term interest rates are
ordinarily lower than longer-term interest rates. During periods of changing
interest rates, this interest rate mismatch between our portfolio assets and
liabilities could reduce or eliminate net income and dividend yield and could
cause us to suffer a loss. In particular, in a period of rising interest rates,
we could experience a decrease in, or elimination of, net income or a net loss
because the interest rates on our borrowings adjust faster than the interest
rates on our adjustable-rate securities.
Interest
rate fluctuations will also cause variances in the yield curve, which may reduce
our net income. The relationship between short-term and longer-term interest
rates is often referred to as the "yield curve." If short-term interest rates
rise disproportionately relative to longer-term interest rates (a flattening of
the yield curve), our borrowing costs may increase more rapidly than the
interest income earned on assets. Because our assets may bear interest based on
longer-term rates than its borrowings, a flattening of the yield curve would
tend to decrease net income and the market value of mortgage loan assets.
Additionally, to the extent cash flows from investments that return scheduled
and unscheduled principal are reinvested in mortgage loans, the spread between
the yields of the new investments and available borrowing rates may decline,
which would likely decrease our net income. It is also possible that short-term
interest rates may exceed longer-term interest rates (a yield curve inversion),
in which event our borrowing costs may exceed our interest income and we could
incur operating losses.
A
significant portion of our portfolio consists of fixed-rate MBS, which may cause
us to experience reduced net income or a loss during periods of rising interest
rates.
Our
portfolio includes or may include fixed-rate and balloon maturity MBS. Because
the interest rate on a fixed-rate mortgage never changes, over time there can be
a divergence between the interest rate on the loan and the current market
interest rates. We fund our acquisition of fixed-rate MBS with short-term
repurchase agreements and term loans. During periods of rising interest rates,
our costs associated with borrowings used to fund the acquisition of fixed-rate
assets are subject to increases while the income we earn from these assets
remains substantially fixed. This would reduce and could eliminate the net
interest spread between the fixed-rate MBS that we purchase and the borrowings
we use to purchase them, which would reduce net interest income and could cause
us to suffer a loss.
Increased
levels of prepayments on the mortgages underlying our mortgage-related
securities might decrease net interest income or result in a net
loss.
Pools of
mortgage loans underlie the mortgage-related securities that we acquire. We
generally receive payments that are made on these underlying mortgage loans.
When we acquire mortgage-related securities, 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 mortgage-related securities that are faster
than expected. Faster-than-expected prepayments could potentially harm the
results of our operations in various ways, including the following:
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We
seek to purchase some mortgage-related securities that have a higher
interest rate than the market interest rate at the time. In exchange for
this higher interest rate, we will be required to pay a premium over the
market value to acquire the security. In accordance with applicable
accounting rules, we will be required to amortize this premium over the
term of the mortgage-related security. If the mortgage-related security is
prepaid in whole or in part prior to its maturity date, however, we must
expense any unamortized premium that remained at the time of the
prepayment.
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A
portion of our adjustable-rate MBS may 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 adjustable-rate mortgage-backed
security is prepaid prior to or soon after the time of adjustment to a
fully-indexed rate, we will have held that mortgage-related security while
it was less profitable and lost the opportunity to receive interest at the
fully indexed rate over the remainder of its expected
life.
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If
we are unable to acquire new mortgage-related securities to replace the
prepaid mortgage-related securities, our financial condition, results of
operations and cash flow may suffer and we could incur
losses.
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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 adjustable-rate and fixed-rate mortgage loans.
While we seek to minimize prepayment risk, we must balance prepayment risk
against other risks and the potential returns of each investment when selecting
investments. No strategy can completely insulate us from prepayment or other
such risks.
We
may incur increased borrowing costs related to repurchase agreements that would
harm our results of operations.
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:
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the
movement of interest rates;
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the
availability of financing in the market;
and
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the
value and liquidity of our mortgage-related
securities.
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Most of
the our borrowings are collateralized borrowings in the form of repurchase
agreements. If the interest rates on these repurchase agreements increase, our
results of operations will be harmed and we may incur losses.
Interest
rate caps on our adjustable-rate MBS may reduce our income or cause us to suffer
a loss during periods of rising interest rates.
Adjustable-rate
MBS 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 a mortgage-backed security. Our borrowings
typically are not subject to similar restrictions. Accordingly, in a period of
rapidly increasing interest rates, the interest rates paid on our borrowings
could increase without limitation while caps could limit the interest rates on
our adjustable-rate MBS. This problem is magnified for adjustable-rate MBS that
are not fully indexed. Further, some adjustable-rate MBS 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 adjustable-rate MBS than necessary to pay interest on our related
borrowings. Interest rate caps on our MBS could reduce our net
interest income or cause us to suffer a net loss if interest rates were to
increase beyond the level of the caps.
We
may not be able to purchase interest rate caps at favorable prices, 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 mortgage-related
securities. This strategy potentially helps us reduce our exposure to
significant changes in interest rates. A cap contract is ultimately no benefit
to us unless interest rates exceed the target 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 would suffer losses
if interest rates later rise substantially. Our ability to engage in interest
rate hedging transactions is limited by the REIT gross income requirements. See
"Legal and Tax Risks" below.
Our
leverage strategy increases the risks of our operations, which could reduce net
income and the amount available for distributions to stockholders or cause us to
suffer a loss.
We
generally seek to borrow between eight and twelve times the amount of our
equity, although at times our borrowings may be above or below this amount. For
purposes of this calculation, we treat trust preferred securities as an equity
capital equivalent. We incur this indebtedness by borrowing against a
substantial portion of the market value of our mortgage-related securities. 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 assets at
unfavorable prices. Our use of leverage amplifies the risks associated with
other risk factors, which could reduce our net income and the amount available
for distributions to stockholders or cause us to suffer a loss. For
example:
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A
majority of our borrowings are secured by our mortgage-related securities,
generally under repurchase agreements. A decline in the market value of
the mortgage-related securities 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 mortgage-related securities 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 mortgage-related securities, we would experience
losses.
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A
default under a mortgage-related security that constitutes collateral for
a loan could also result in an involuntary liquidation of the
mortgage-related security, including any cross-collateralized
mortgage-related securities. This would result in a loss to us of the
difference between the value of the mortgage-related security upon
liquidation and the amount borrowed against the mortgage-related
security.
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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 would 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.
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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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An
increase in interest rates may adversely affect our stockholder’s equity, which
may harm the value of our Class A Common Stock.
Increases
in interest rates may negatively affect the fair market value of our
mortgage-related securities. Our fixed-rate MBS will generally be more
negatively affected by such increases. In accordance with GAAP, we will be
required to reduce the carrying value of our mortgage-related securities by the
amount of any decrease in the fair value of mortgage-related securities compared
to amortized cost. If unrealized losses in fair value occur, we will have to
either reduce current earnings or reduce stockholders' equity without
immediately affecting current earnings, depending on how we classify the
mortgage-related securities under GAAP. In either case, our stockholder’s equity
will decrease to the extent of any realized or unrealized losses in fair
value.
We
depend on borrowings to purchase mortgage-related securities 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
mortgage-related securities, which will harm our results of
operations.
We depend
on borrowings to fund acquisitions of mortgage-related securities 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. We depend on many lenders to
provide the primary credit facilities for our purchases of mortgage-related
securities. If we cannot renew or replace maturing borrowings on favorable terms
or at all, we may have to sell our mortgage-related securities under adverse
market conditions, which would harm our results of operations and may result in
permanent losses.
Possible
market developments could cause our lenders to require it to pledge additional
assets as collateral. If our assets were insufficient to meet the collateral
requirements, we might be compelled to liquidate particular assets at
inopportune times and at unfavorable prices.
Possible
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 mortgage-related securities in which our
portfolio is concentrated, might reduce the market value of our portfolio, which
might cause our lenders to require additional collateral. Any requirement for
additional collateral might compel us to liquidate our assets at inopportune
times and at unfavorable prices, thereby harming our operating results. If we
sell mortgage-related securities at prices lower than the carrying value of the
mortgage-related securities, we would experience losses.
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 mortgage-related securities at favorable times and
prices, which could cause us to suffer a loss and/or reduce distributions to
stockholders.
Although
we generally plan to hold our mortgage-related securities until maturity, there
may be circumstances in which we sell certain of these securities.
Mortgage-related securities generally experience periods of illiquidity. As a
result, we may be unable to dispose of our mortgage-related securities 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 mortgage-related securities may harm our results of operations and could
cause us to suffer a loss and/or reduce distributions to
stockholders.
Competition
might prevent us from acquiring mortgage-related securities at favorable yields,
which could harm our results of operations.
Our net
income largely depends on our ability to acquire mortgage-related securities at
favorable spreads over our borrowing costs. In acquiring mortgage-related
securities, we compete with other REITs, investment banking firms, savings and
loan associations, banks, insurance companies, mutual funds, other lenders and
other entities that purchase mortgage-related securities, many of which have
greater financial resources than we do. 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 mortgage-related securities at favorable spreads over our borrowing
costs, which would harm our results of operations.
Our
investment strategy involves risk of default and delays in payments, which could
harm our results of operations.
We may
incur losses if there are payment defaults under our mortgage-related
securities. Our mortgage-related securities will be government or agency
certificates. Agency certificates are mortgage-related securities issued by
Fannie Mae, Freddie Mac and Ginnie Mae. Payment of principal and interest
underlying securities issued by Ginnie Mae are guaranteed by the U.S.
Government. Fannie Mae and Freddie Mac mortgage-related securities are
guaranteed as to payment of principal and interest by the respective agency
issuing the security. It is possible that guarantees made by Freddie Mac or
Fannie Mae would not be honored in the event of default on the underlying
securities. Legislation may be proposed to change the relationship between
certain agencies, such as Fannie Mae or Freddie Mac, and the federal government.
This may have the effect of reducing the actual or perceived credit quality of
mortgage-related securities issued by these agencies. As a result, such
legislation could increase the risk of loss on investments in Fannie Mae and/or
Freddie Mac mortgage-related securities. We currently intend to continue to
invest in such securities, even if such agencies' relationships with the federal
government changes.
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, we may have to
reduce or delay our operations and/or increase our expenditures.
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 relationships with AVM and III Associates or we are unable to
establish successful relationships with other repurchase agreement trading,
clearing and administrative service providers, we may have to reduce or delay
our operations and/or increase our expenditures and undertake the repurchase
agreement trading, clearing and administrative services on our own.
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. 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:
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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;
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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
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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.
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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.
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 maximum federal income tax rate for “qualified dividends” paid to
individual U.S. stockholders is 15% (through 2008). 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.
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.
Recent
legislation related to corporate governance may increase our costs of compliance
and our liability.
Recently
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.
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 holds 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.
OTHER
RISKS
Hedging
transactions may adversely affect our earnings, which could adversely affect
cash available for distribution to our stockholders.
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. Our hedging activity will vary in scope based on the level and
volatility of interest rates and principal prepayments, the type of MBS 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 hedging transactions is limited
by federal income tax provisions governing
REITs;
|
|
•
|
the
credit quality of the party owing money 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
party owing money in the hedging transaction may default on its obligation
to pay.
|
Our
hedging activity may adversely affect our earnings, which could adversely affect
cash available for distribution to our stockholders.
Terrorist
attacks and other acts of violence or war may affect any market for our Class A
Common Stock, the industry in which we conduct our operations, and our
profitability.
Terrorist
attacks may harm our results of operations and the investments of 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 mortgage-related
securities 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
mortgage-related securities or the securities markets in general, which could
harm our operating results and revenues and may result in the volatility of the
market value of our Class A Common Stock.
Current
loan performance data may not be indicative of future results.
When
making capital budgeting and other decisions, we use projections, estimates and
assumptions based on our experience with mortgage loans. Actual results and the
timing of certain events could differ materially in adverse ways from those
projected, due to factors including changes in general economic conditions,
fluctuations in interest rates, fluctuations in mortgage loan prepayment rates
and fluctuations in losses due to defaults on mortgage loans. These differences
and fluctuations could rise to levels that may adversely affect our
profitability.
Changes
in interest rates may reduce our liquidity, financial condition and results of
operations resulting in a decline in the value of our Class A Common
Stock.
Our
results of operations will be derived in part from the spread between the yield
on our MBS assets and the cost of our borrowings. There is no assurance that
there will be a positive spread in either high interest rate environments or low
interest rate environments, or that the spread will not be negative as has
recently been in the case. Changes in interest rates may reduce our liquidity,
financial condition and results of operations and may cause our funding costs to
exceed income. In addition, during periods of high interest rates,
our dividend yield on our Class A Common Stock may be less attractive compared
to alternative investments of equal or lower risk. Each of these factors could
negatively affect the market value of our Class A Common Stock.
Our
financial position has deteriorated during 2007. Continued
deterioration may negatively affect our liquidity, results of operations and the
value of our Class A Common Stock.
Our
financial position deteriorated during 2007 due in part to costs associated with
the closure of our taxable REIT subsidiary’s mortgage banking
business. Although we have taken actions and are evaluating other
actions intended to improve our financial position and liquidity, there can be
no assurance that our efforts will be successful. Continued
deterioration may negatively affect liquidity, results of operations and the
value of our Class A Common Stock.
We
have guaranteed certain obligations of our taxable REIT subsidiary,
OITRS. If OITRS fails to meet its financial obligations, we may be
forced to liquidate certain of our MBS assets to satisfy these guarantees which
could negatively affect our liquidity, results of operations and the value of
our Class A Common Stock and may result in margin calls from our
lenders.
We have
guaranteed certain obligations of our taxable REIT subsidiary, OITRS, including
obligations under OITRS’s funding facilities. Although certain of
OITRS’s funding facilities are secured by collateral, if OITRS is unable to
fulfill its obligations under such facilities and the value of the collateral is
insufficient to repay OITRS’s obligations, we may be required to pay such
deficiency under our guarantees of OITRS’s obligations. To pay such
deficiency, we may be required to sell MBS portfolio assets to generate the cash
necessary to pay OITRS’s creditors and such sales may negatively affect our
liquidity, results of operations and the value of our Class A Common
Stock. These sales may also result in margin calls from our lenders
and transaction counterparties.
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 negatively and materially impact our financial position, liquidity and
results of operations.
As
described in Part I - Item 3. Legal Proceedings below, we have been named as a
defendant in two lawsuits alleging various violations of the federal securities
laws and seeking class action certification. 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 have a material adverse effect on our financial position,
liquidity or results of operations.
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. 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 could 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. We believe our properties are
adequate for our business as currently conducted.
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 period in which costs, if any, are
recognized. See also Notes 10 and 12(j) to our
accompanying consolidated financial statements.
On
September 17, 2007, a complaint was filed in the U.S. District Court for the
Southern District of Florida by William Kornfeld 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. 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. We believe the plaintiffs’ claims in these
actions are without merit, we have filed a motion to consolidate these actions
and we intend to vigorously defend the cases.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
|
|
MARKET
INFORMATION
Our Class
A common stock currently trades over the counter under the symbol
“BMNM.PK.” Prior to November 7, 2007, our Class A common stock was
listed on the NYSE Euronext.
On March
12, 2008, the last sales price of the Class A Common Stock was $0.27 per
share. The following table is a summary of historical price information and
dividends declared and paid per common share for all quarters of 2007 and
2006:
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Full
Year
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
7.61 |
|
|
$ |
5.98 |
|
|
$ |
3.19 |
|
|
$ |
1.22 |
|
|
$ |
7.61 |
|
Low
|
|
|
4.00 |
|
|
|
2.72 |
|
|
|
0.91 |
|
|
|
0.22 |
|
|
|
0.22 |
|
Close
|
|
|
4.50 |
|
|
|
2.72 |
|
|
|
1.32 |
|
|
|
0.25 |
|
|
|
0.25 |
|
Dividends
declared per share
|
|
|
0.05 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.05 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
9.94 |
|
|
$ |
9.19 |
|
|
$ |
8.95 |
|
|
$ |
8.60 |
|
|
$ |
9.94 |
|
Low
|
|
|
7.78 |
|
|
|
7.85 |
|
|
|
7.94 |
|
|
|
6.80 |
|
|
|
6.80 |
|
Close
|
|
|
8.56 |
|
|
|
9.02 |
|
|
|
8.05 |
|
|
|
7.60 |
|
|
|
7.60 |
|
Dividends
declared per share
|
|
|
0.11 |
|
|
|
0.25 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.46 |
|
As of
December 31, 2007, we had 24,861,404 shares of Class A Common Stock
outstanding, which were held by 418 holders of record. The 418 holders of record
include Cede & Co., which holds shares as nominee for The Depository
Trust Company, which itself holds shares on behalf of over 100 beneficial owners
of our Class A Common Stock.
As of
December 31, 2007, we had 319,388 shares of Class B Common Stock outstanding,
which were held by 2 holders of record and 319,388 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.
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.
Our
ability to distribute the earnings of our taxable REIT subsidiary, OITRS, is
accomplished through the payment of some or all of their after-tax net income,
if any, in the form of dividends to us. Certain contractual
agreements with OITRS’s lenders may, under certain circumstances, limit the
ability of OITRS to pay dividends to us. Such restrictions also apply
to interest on our inter-company loans to OITRS.
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, 2007,
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)
|
127,373
|
(2)
|
-
|
3,112,970
|
(3)
|
Equity
compensation plans not approved by security holders (4)
|
-
|
|
-
|
-
|
|
Total
|
127,373
|
|
-
|
3,112,970
|
|
(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 4,000,000
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, 2007.
(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, 2007, the maximum
number of shares remaining available for future issuance under the terms of the
LTI Plan as of December 31, 2007, was 1,599,110 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
Except as
described below, we have not repurchased any shares of our equity securities
during 2007. The following table shows shares of common stock deemed
to have been repurchased in connection with the withholding of a portion of
shares of Class A Common Stock to cover taxes on vested phantom shares for each
calendar month during the quarter ended December 31, 2007.
Calendar
Month
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Amount That May Yet Be Purchased Under the Plans or
Programs
|
|
October
2007
|
|
|
25,198 |
|
|
$ |
0.58 |
|
|
|
- |
|
|
|
- |
|
November
2007
|
|
|
16,864 |
|
|
|
0.29 |
|
|
|
- |
|
|
|
- |
|
December
2007
|
|
|
416 |
|
|
|
0.33 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
42,478 |
|
|
$ |
0.46 |
|
|
|
- |
|
|
|
- |
|
|
ITEM
6. SELECTED FINANCIAL
DATA
|
Not
Applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FORWARD-LOOKING
STATEMENTS
When
used in this Annual Report on Form 10-K, in future filings with the
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, discussions related 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, discussions related to Bimini Capital’s taxable REIT
subsidiary or non-REIT eligible assets refer to Opteum Financial Services, LLC
and its consolidated subsidiaries. This entity, which was previously name 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.” Discussions relating to the “Company” refer to the
consolidated entity (the combination of Bimini Capital and OITRS). Any assets
and activities that are not REIT eligible, such as mortgage origination,
acquisition and servicing activities, are conducted by 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
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 as well. On June 30, 2007, OITRS
entered into an amendment to this agreement. The proceeds of the
transactions were approximately $1.5 million plus the
assumption of certain liabilities of OITRS. The transaction, coupled
with the disposal of the conduit and wholesale origination channels, resulted in
a loss of approximately $10.5 million. Going forward, OITRS will not
operate a mortgage loan origination business and the results of the mortgage
origination business are reported as discontinued operations for the twelve
months ended December 31, 2006 and December 31, 2007.
OITRS was
acquired by the Company in November 2005. As a result of the merger, OITRS
became a wholly-owned taxable REIT subsidiary of Bimini Capital. On
December 21, 2006, Bimini Capital sold to Citigroup Global Markets Realty Corp.
(“Citigroup Realty”) a Class B non-voting limited liability company membership
interest in OITRS, representing 7.5% of all of OITRS’s outstanding limited
liability company membership interests, for $4.1 million. OITRS is
subject to corporate income taxes and files separate federal and state income
tax returns.
DIVIDENDS
TO STOCKHOLDERS
In
order to maintain its qualification as a REIT, Bimini Capital is required (among
other provisions) to annually distribute dividends to its stockholders in an
amount at least equal to, generally, 90% of Bimini Capital’s REIT taxable
income. REIT taxable income is a term that describes Bimini Capital’s operating
results calculated in accordance with rules and regulations promulgated pursuant
to the Internal Revenue Code.
Bimini
Capital’s REIT taxable income is computed differently from net income as
computed in accordance with generally accepted accounting principles ("GAAP net
income"), as reported in the Company’s accompanying consolidated financial
statements. Depending on the number and size of the various items or
transactions being accounted for differently, the differences between REIT
taxable income and GAAP net income can be substantial and each item can affect
several reporting periods. Generally, these items are timing or temporary
differences between years; for example, an item that may be a deduction for GAAP
net income in the current year may not be a deduction for REIT taxable income
until a later year.
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
2007 v. 2006 PERFORMANCE
OVERVIEW
Described
below are the Company’s results of operations for the twelve months ended
December 31, 2007, as compared to the Company’s results of operations for the
twelve months ended December 31, 2006. During the twelve month period
ended December 31, 2007, the Company ceased all mortgage origination business at
OITRS. As stated above, results of those operations are reported in the
financial statements as discontinued operations. As a result of these
actions, the Company’s financial statements are not comparable to prior reports
filed since the acquisition of OITRS.
Consolidated
net loss for the year ended December 31, 2007, was $247.7 million, compared to a
consolidated net loss of $49.5 million for the year ended December 31, 2006.
Consolidated net loss per basic and diluted share of Class A Common Stock
was $9.92 for the year ended December 31, 2007, compared to a consolidated net
loss per basic and diluted share of Class A Common Stock of $2.03 for the
comparable prior period. The deterioration in consolidated net loss
was driven primarily by a collapse in the operations at OITRS, and the secondary
mortgage market generally, resulting in large losses on loan
sales. As stated above this lead to the closure/sale of their
remaining operations. The second major cause for the deterioration in
operating results was a permanent impairment taken on MBS securities in the
Company’s MBS portfolio.
As of
June 30, 2007, the Company no longer had the ability and intent to hold until
recovery MBS securities whose values were impaired as of June 30,
2007. Accordingly, due to liquidity and working capital needs brought
about by the turmoil in the mortgage market, the Company no longer had the
ability to hold such assets until their amortized cost could be fully
recovered. During the three months ended June 30, 2007, the Company
sold securities with a market value at the time of sale of approximately $782.0
million that were impaired at the time of sale, realizing losses on sale of
$18.6 million. The Company recorded $55.3 million of permanent impairments on
the remaining $1.8 billion of MBS securities held as available-for-sale in the
second quarter of 2007. During the six months ended December 31,
2007, the Company sold $1.25 billion of the remaining $1.8 billion securities
that previously been classified as impaired assets, realizing gains on sale of
$1.5 million. Commencing on June 30, 2007, and for the balance of 2007, such
available securities permanently impaired were valued on a lower of cost or
market (LOCOM) basis. When such securities are valued on a LOCOM
basis, the yield at which the Company recognized interest income is adjusted to
reflect the new carrying value. As a result of these actions, the
Company’s net interest margin (or NIM) on its portfolio of MBS securities held
as available for sale increased to 45 basis points as of December 31, 2007 from
negative 54 basis points at December 31, 2006. The NIM measures the spread, in
basis points, between the weighted average yield on the MBS portfolio and the
weighted average borrowing costs on the repurchase liabilities. This
figure does not incorporate the effect of other sources of interest income or
expense nor overhead expenses. Since June 30, 2007, the Company has
acquired $396.2 million of MBS assets classified as held for
trading. Such assets have a weighted average coupon of 6.454% and the
Company does not amortize purchase premium or record quarterly retrospective
adjustments for such assets. Effective January 1, 2008, the Company
has adopted SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities (“SFAS 159”),
and, as a result, all of the Company’s MBS assets will be carried at fair value
with fluctuations in fair value reflected in earnings for the current
period. The Company will not amortize purchase premium on such assets
or will there be a quarterly retrospective adjustment for such
assets.
For the
year ended December 31, 2007, comprehensive loss was $170.9 million,
including the net unrealized gain on available-for-sale securities of $2.1
million and the reclassification during the year ended December 31, 2007 of the
other-than-temporary loss on MBS of $55.3 million. For the year ended December
31, 2007, realized loss on mortgage-backed securities sales of $19.4 million
were made to reflect the realized loss on sales of assets previously reflected
in comprehensive loss as unrealized losses on available-for-sale
securities. For the year ended December 31, 2006, comprehensive loss
was $49.8 million, including the net unrealized loss on available-for-sale
securities of $10.2 million. The factors resulting in the unrealized loss on
available-for-sale securities are described below.
Comprehensive
(loss) is as follows:
(in
thousands)
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(247,653 |
) |
|
$ |
(49,546 |
) |
Net
Realized loss on MBS
|
|
|
19,388 |
|
|
|
- |
|
Other-than-temporary
loss on MBS
|
|
|
55,250 |
|
|
|
- |
|
Reclassify
other-than-temporary loss on MBS
|
|
|
- |
|
|
|
9,971 |
|
Unrealized
gain (loss) on available-for-sale securities, net
|
|
|
2,136 |
|
|
|
(10,250 |
) |
Comprehensive
loss
|
|
$ |
(170,879 |
) |
|
$ |
(49,825 |
) |
Unrealized
gains/(losses) on available-for-sale securities is a component of accumulated
other comprehensive loss, which is included in stockholders’ equity on the
consolidated balance sheet. Accumulated other comprehensive loss is
the difference between the fair market value of the portfolio of MBS securities
and their cost basis. The unrealized gain on available-for-sale
securities for the year ended December 31, 2007 was driven by a combination of a
decrease in short term rates for the period, which tends to increase the fair
market value of the Company’s portfolio of MBS securities, and increased
amortization of net premium for the period, which lowers the cost basis in the
portfolio of MBS securities. The increased amortization for the
period was the result of the continued upward resetting of ARM securities in the
portfolio, which results in higher coupons on the securities relative to their
booked yields, and therefore greater amortization. As stated above,
effective January 1, 2008 the Company will carry all MBS assets at fair value
with fluctuation in value reflected in earnings for the period as opposed to
equity via accumulated other comprehensive income/loss.
The
Company has negative retained earnings (titled “Accumulated deficit” in the
stockholders’ equity section of the accompanying consolidated financial
statements) as of December 31, 2007, partially because of the consequences of
Bimini Capital’s tax qualification as a REIT. As is more fully described
in the “Dividends to Stockholders” section above, Bimini Capital’s
dividends are based on its REIT taxable income, as determined for federal income
tax purposes, and not on its net income computed in accordance with GAAP (as
reported in the accompanying consolidated financial
statements).
For the
year ended December 31, 2007, Bimini Capital's REIT taxable loss was
approximately $71.8 million less than Bimini Capital's net loss from REIT
activities computed in accordance with GAAP. The most significant difference was
the impairment taken on available-for-sale securities which is reflected in GAAP
earnings but is not a deduction to arrive at REIT taxable income. Other
contributors include interest on inter-company loans with OITRS as well as
timing differences in the recognition of compensation expense attributable to
phantom stock awards. In April of 2007, the Board of Directors of the
Company approved the forgiveness of up to $108.3 million of inter-company debt
with OITRS. Such action will reduce future interest income associated
with the inter-company debt. With respect to the phantom stock awards, the
future deduction of this temporary difference is uncertain as to both the timing
and the amount, as the amount of 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 deduction already taken by Bimini Capital. Since
inception through December 31, 2007, Bimini Capital's REIT taxable income is
approximately $86.7
million greater than Bimini Capital's REIT financial statement net income as
computed in accordance with GAAP, excluding the results of
OITRS. During the year ended December 31, 2007, tax capital losses
from the sale of MBS assets were realized; these capital losses are only
available to the REIT to offset future capital gains and therefore they do not
reduce REIT taxable income.
PERFORMANCE OF BIMINI
CAPITAL’S MBS PORTFOLIO
For the
year ended December 31, 2007, the REIT generated ($8.8) million of net interest
income/(loss). Included in these results were $102.5 million of
interest income offset by a $111.3 million of interest
expense. Inclusive in these results is the quarterly retrospective
adjustments of ($5.1) million for the year ended December 31, 2007. The
retrospective adjustment is described below under Critical Accounting
Policies/Income Recognition. After the adoptions of SFAS 159 the Company will no
longer record quarterly retrospective adjustments. But, instead we
reflect fluctuations in value of its MBS securities through earnings. Net
interest income decreased approximately $9.2 million compared to the year ended
December 31, 2006. The decline is mostly the result of the
approximately 75.4% reduction in the MBS investment portfolio, which exposed the
effect of leverage created by the Company’s trust preferred obligations, offset
by the wider NIM.
For the
year ended December 31, 2007, the REIT’s general and administrative costs were
$7.7 million. For the year ended December 31, 2006, the REIT’s general and
administrative costs were $8.8 million. The decrease in general and
administrative expenses was primarily the result of a reduction in employee
compensation expense. Operating expenses, which incorporate trading
costs, fees and other direct costs, were $0.8 million for the year ended
December 31, 2007 and $1.0 million for the year ended December 31,
2006.
As stated
above, the REIT recorded permanent impairment charges to various MBS securities
during the year ended December 31, 2007. In addition, certain
securities were sold that were impaired at the time of sale. As a
result, the REIT had $17.3 million in losses from the sale of securities in the
MBS portfolio during the year ended December 31, 2007. For the year
ended December 31, 2006, the Company did not report any gains/loss from the sale
of MBS.
As of
December 31, 2007, Bimini Capital’s MBS portfolio consisted of $0.7 billion of
agency or government MBS at fair value and had a weighted average yield on
available for sale assets of 5.523% ($294.4 million), a weighted average coupon
of 6.454% on held for trading assets ($396.2 million) and a net weighted average
repurchase agreement borrowing cost of 5.07%. The following tables summarize
Bimini Capital’s agency and government mortgage related securities as of
December 31, 2007 and 2006:
($
in thousands)
Asset
Category
|
|
Market
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, 2007
|
|
|
|
|
|
|
|
|
|
Adjustable-Rate
MBS
|
$
|
177,608
|
25.7%
|
6.58%
|
294
|
1-Apr-44
|
5.49
|
10.61%
|
2.47%
|
Fixed-Rate
MBS
|
|
110,297
|
16.0%
|
6.98%
|
335
|
1-Oct-37
|
n/a
|
n/a
|
n/a
|
Hybrid
Adjustable-Rate MBS
|
|
398,982
|
57.8%
|
6.11%
|
344
|
1-Sep-37
|
39.62
|
11.92%
|
3.62%
|
Fixed-Rate
CMO
|
|
3,692
|
0.5%
|
7.00%
|
233
|
18-May-27
|
n/a
|
n/a
|
n/a
|
Total
Portfolio
|
$
|
690,579
|
100.0%
|
6.37%
|
329
|
1-Apr-44
|
29.11
|
11.52%
|
3.41%
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
Adjustable-Rate
MBS
|
$
|
2,105,818
|
75.0%
|
5.12%
|
324
|
1-Apr-44
|
4.63
|
10.26%
|
1.80%
|
Fixed-Rate
MBS
|
|
585,911
|
20.9%
|
6.49%
|
250
|
1-Sep-36
|
n/a
|
n/a
|
n/a
|
Hybrid
Adjustable-Rate MBS
|
|
76,488
|
2.7%
|
4.71%
|
331
|
1-Nov-35
|
19.15
|
10.29%
|
1.98%
|
Balloon
Maturity MBS
|
|
40,517
|
1.4%
|
4.02%
|
36
|
1-Feb-11
|
n/a
|
n/a
|
n/a
|
Total
Portfolio
|
$
|
2,808,734
|
100.0%
|
5.38%
|
305
|
1-Apr-44
|
5.14
|
10.26%
|
1.80%
|
($
in thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Agency
|
|
Market
Value
|
|
|
Percentage
of
Entire
Portfolio
|
|
|
Market
Value
|
|
|
Percentage
of
Entire
Portfolio
|
|
Fannie
Mae
|
|
$ |
638,763 |
|
|
|
92.5 |
% |
|
$ |
1,887,110 |
|
|
|
67.2 |
% |
Freddie
Mac
|
|
|
46,318 |
|
|
|
6.7 |
% |
|
|
498,861 |
|
|
|
17.8 |
% |
Ginnie
Mae
|
|
|
5,498 |
|
|
|
0.8 |
% |
|
|
422,763 |
|
|
|
15.0 |
% |
Total
Portfolio
|
|
$ |
690,579 |
|
|
|
100.0 |
% |
|
$ |
2,808,734 |
|
|
|
100.0 |
% |
|
December
31,
|
|
Entire
Portfolio
|
2007
|
|
2006
|
|
Weighted
Average Purchase Price
|
|
|
102.32 |
|
|
|
102.34 |
|
Weighted
Average Current Price
|
|
|
101.94 |
|
|
|
101.04 |
|
Effective
Duration (1)
|
|
|
1.267 |
|
|
|
1.023 |
|
(1) Effective
duration of 1.267 indicates that an interest rate increase of 1% would be
expected to cause a 1.267% decline in the value of the MBS in the Company’s
investment portfolio at December 31, 2007. Effective duration of
1.023 indicates that an interest rate increase of 1% would be expected to cause
a 1.023% decline in the value of the MBS in the Company’s investment portfolio
at December 31, 2006.
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.
Bimini
Capital’s portfolio of MBS will typically be comprised of adjustable-rate MBS,
fixed-rate MBS, hybrid adjustable-rate MBS and balloon maturity 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 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 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.
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.
As of
December 31, 2007, approximately 57.8% of the REIT
portfolio is comprised of predominantly premium hybrid ARM
securities. The REIT favors such securities since they offer
attractive yields relative to alternative securities in the muted prepayment
environment such as the one the Company has been operating in
recently. Going forward, to the extent prepayment activity
accelerates; the composition of the portfolio may be changed to better take
advantage of opportunities in the market at that time.
The value
of the REIT’s MBS portfolio changes as interest rates rise or
fall. 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. Bimini Capital
primarily assesses its interest rate risk by estimating the duration of its
assets and the duration of its liabilities. Duration essentially measures the
market price volatility of financial instruments as interest rates change.
Bimini Capital generally calculates duration using various financial models and
empirical data and different models and methodologies can produce different
duration numbers for the same securities.
The
following sensitivity analysis shows the estimated impact on the fair value of
Bimini Capital's interest rate-sensitive investments as of December 31, 2007,
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
|
|
$ |
177,608 |
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
1,730 |
|
|
$ |
(1,730 |
) |
|
$ |
(3,460 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
0.97 |
% |
|
|
(0.97 |
)% |
|
|
(1.95 |
)% |
Fixed
Rate MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
113,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
1,561 |
|
|
$ |
(1,561 |
) |
|
$ |
(3,121 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.37 |
% |
|
|
(1.37 |
)% |
|
|
(2.74 |
)% |
Hybrid
Adjustable Rate MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
398,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
5,462 |
|
|
$ |
(5,462 |
) |
|
$ |
(10,924 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.37 |
% |
|
|
(1.37 |
)% |
|
|
(2.74 |
)% |
Portfolio
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
690,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
8,753 |
|
|
$ |
(8,753 |
) |
|
$ |
(17,505 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.27 |
% |
|
|
(1.27 |
)% |
|
|
(2.53 |
)% |
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
27,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
177,608 |
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
1,460 |
|
|
$ |
(1,604 |
) |
|
$ |
(3,607 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
0.82 |
% |
|
|
(0.90 |
)% |
|
|
(2.03 |
)% |
Fixed
Rate MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
113,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
1,352 |
|
|
$ |
(1,069 |
) |
|
$ |
(2,168 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.19 |
% |
|
|
(0.94 |
)% |
|
|
(1.90 |
)% |
Hybrid
Adjustable Rate MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
398,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
4,732 |
|
|
$ |
(3,742 |
) |
|
$ |
(7,589 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.19 |
% |
|
|
(0.94 |
)% |
|
|
(1.90 |
)% |
Portfolio
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
690,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair Value
|
|
|
|
|
|
$ |
7,544 |
|
|
$ |
(6,415 |
) |
|
$ |
(13,364 |
) |
Change
as a % of Fair Value
|
|
|
|
|
|
|
1.09 |
% |
|
|
(0.93 |
)% |
|
|
(1.94 |
)% |
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$ |
27,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
For
reference, the table below shows the principal balance of Bimini Capital’s
investment securities, the net unamortized premium, amortized cost of securities
held, average cost expressed as a price, the fair market value of investments
and the fair market value expressed as a price for the current quarter and each
of the previous fifteen quarters for the portfolio of MBS securities only.
Premium or discount associated with MBS securities classified as held for
trading is not amortized. Approximately $396.2 million of the
$690.6 million fair market value of MBS securities are classified as
held-for-trading as of December 31, 2007. The data in the table below does not
include information pertaining to discontinued operations at OITRS.
($
in thousands)
Quarter
Ended
|
|
Principal
Balance
of
Investment
Securities
Held
|
|
|
Unamortized
Premium
(Net)
|
|
|
Amortized
Cost of
Securities
Held
|
|
|
Amortized
Cost/Principal
Balance
Held
|
|
|
Fair
Market
Value
of
Investment
Securities
Held
|
|
|
Fair
Market
Value/Principal
Balance
Held
|
|
At
December 31, 2007
|
|
$ |
677,428 |
|
|
$ |
2,825 |
|
|
$ |
690,579 |
|
|
|
101.94 |
|
|
$ |
692,293 |
|
|
|
102.19 |
|
At
September 30, 2007
|
|
|
1,236,629 |
|
|
|
11,144 |
|
|
|
1,253,894 |
|
|
|
101.40 |
|
|
|
1,255,231 |
|
|
|
101.50 |
|
At
June 30, 2007
|
|
|
1,801,492 |
|
|
|
17,144 |
|
|
|
1,818,636 |
|
|
|
100.95 |
|
|
|
1,818,636 |
|
|
|
100.95 |
|
At
March 31,2007
|
|
|
2,893,761 |
|
|
|
109,445 |
|
|
|
3,003,206 |
|
|
|
103.78 |
|
|
|
2,931,796 |
|
|
|
101.31 |
|
At
December 31, 2006
|
|
|
2,779,867 |
|
|
|
115,612 |
|
|
|
2,895,479 |
|
|
|
104.16 |
|
|
|
2,808,734 |
|
|
|
101.04 |
|
At
September 30, 2006
|
|
|
3,055,791 |
|
|
|
122,300 |
|
|
|
3,178,091 |
|
|
|
104.00 |
|
|
|
3,080,060 |
|
|
|
100.79 |
|
At
June 30, 2006
|
|
|
3,396,910 |
|
|
|
120,769 |
|
|
|
3,517,679 |
|
|
|
103.56 |
|
|
|
3,407,288 |
|
|
|
100.31 |
|
At
March 31,2006
|
|
|
3,515,113 |
|
|
|
111,361 |
|
|
|
3,626,473 |
|
|
|
103.17 |
|
|
|
3,538,554 |
|
|
|
100.67 |
|
At
December 31, 2005
|
|
|
3,457,891 |
|
|
|
112,636 |
|
|
|
3,570,527 |
|
|
|
103.26 |
|
|
|
3,494,029 |
|
|
|
101.05 |
|
At
September 30, 2005
|
|
|
3,797,401 |
|
|
|
113,393 |
|
|
|
3,910,793 |
|
|
|
102.99 |
|
|
|
3,858,320 |
|
|
|
101.60 |
|
At
June 30, 2005
|
|
|
3,784,668 |
|
|
|
114,673 |
|
|
|
3,899,341 |
|
|
|
103.03 |
|
|
|
3,876,206 |
|
|
|
102.42 |
|
At
March 31, 2005
|
|
|
3,212,517 |
|
|
|
109,390 |
|
|
|
3,321,907 |
|
|
|
103.41 |
|
|
|
3,299,052 |
|
|
|
102.69 |
|
At
December 31, 2004
|
|
|
2,876,319 |
|
|
|
97,753 |
|
|
|
2,974,072 |
|
|
|
103.40 |
|
|
|
2,973,233 |
|
|
|
103.37 |
|
At
September 30, 2004
|
|
|
1,589,829 |
|
|
|
48,499 |
|
|
|
1,638,328 |
|
|
|
103.05 |
|
|
|
1,638,264 |
|
|
|
103.05 |
|
At
June 30, 2004
|
|
|
1,479,500 |
|
|
|
38,034 |
|
|
|
1,517,534 |
|
|
|
102.57 |
|
|
|
1,508,421 |
|
|
|
101.96 |
|
At
March 31, 2004
|
|
|
1,473,584 |
|
|
|
39,535 |
|
|
|
1,513,119 |
|
|
|
102.68 |
|
|
|
1,516,540 |
|
|
|
102.92 |
|
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, 2007, and the fifteen 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
|
|
|
Yield
on
Average
Interest
Earning
Assets
|
|
|
Average
Balance
of
Repurchase
Obligations
Outstanding
|
|
|
Interest
Expense
|
|
|
Average
Cost
of
Funds
|
|
|
Net
Interest
Income
(loss)
|
|
|
Net
Interest
Spread
|
|
December
31, 2007
|
|
$ |
972,236 |
|
|
$ |
11,364 |
|
|
|
4.68 |
% |
|
$ |
944,832 |
|
|
$ |
11,483 |
|
|
|
4.86 |
% |
|
$ |
(119 |
) |
|
|
(0.19 |
)% |
September
30, 2007
|
|
|
1,536,265 |
|
|
|
24,634 |
|
|
|
6.41 |
% |
|
|
1,497,409 |
|
|
|
21,949 |
|
|
|
5.86 |
% |
|
|
2,685 |
|
|
|
0.55 |
% |
June
30, 2007
|
|
|
2,375,216 |
|
|
|
29,009 |
|
|
|
4.89 |
% |
|
|
2,323,727 |
|
|
|
34,396 |
|
|
|
5.92 |
% |
|
|
(5,387 |
) |
|
|
(1.04 |
)% |
March
31, 2007
|
|
|
2,870,265 |
|
|
|
41,856 |
|
|
|
5.83 |
% |
|
|
2,801,901 |
|
|
|
38,357 |
|
|
|
5.48 |
% |
|
|
3,500 |
|
|
|
0.36 |
% |
December
31, 2006
|
|
|
2,944,397 |
|
|
|
35,162 |
|
|
|
4.78 |
% |
|
|
2,869,210 |
|
|
|
40,400 |
|
|
|
5.63 |
% |
|
|
(5,238 |
) |
|
|
(0.86 |
)% |
September
30, 2006
|
|
|
3,243,674 |
|
|
|
45,850 |
|
|
|
5.65 |
% |
|
|
3,151,813 |
|
|
|
42,710 |
|
|
|
5.42 |
% |
|
|
3,140 |
|
|
|
0.23 |
% |
June
30, 2006
|
|
|
3,472,921 |
|
|
|
57,027 |
|
|
|
6.57 |
% |
|
|
3,360,421 |
|
|
|
42,829 |
|
|
|
5.10 |
% |
|
|
14,198 |
|
|
|
1.47 |
% |
March
31, 2006
|
|
|
3,516,292 |
|
|
|
42,345 |
|
|
|
4.82 |
% |
|
|
3,375,777 |
|
|
|
37,661 |
|
|
|
4.46 |
% |
|
|
4,684 |
|
|
|
0.35 |
% |
December
31, 2005
|
|
|
3,676,175 |
|
|
|
43,140 |
|
|
|
4.69 |
% |
|
|
3,533,486 |
|
|
|
35,913 |
|
|
|
4.07 |
% |
|
|
7,227 |
|
|
|
0.63 |
% |
September
30, 2005
|
|
|
3,867,263 |
|
|
|
43,574 |
|
|
|
4.51 |
% |
|
|
3,723,603 |
|
|
|
33,102 |
|
|
|
3.56 |
% |
|
|
10,472 |
|
|
|
0.95 |
% |
June 30,
2005
|
|
|
3,587,629 |
|
|
|
36,749 |
|
|
|
4.10 |
% |
|
|
3,449,744 |
|
|
|
26,703 |
|
|
|
3.10 |
% |
|
|
10,045 |
|
|
|
1.00 |
% |
March 31,
2005
|
|
|
3,136,142 |
|
|
|
31,070 |
|
|
|
3.96 |
% |
|
|
2,976,409 |
|
|
|
19,842 |
|
|
|
2.67 |
% |
|
|
11,228 |
|
|
|
1.30 |
% |
December 31,
2004
|
|
|
2,305,748 |
|
|
|
20,463 |
|
|
|
3.55 |
% |
|
|
2,159,891 |
|
|
|
10,824 |
|
|
|
2.01 |
% |
|
|
9,639 |
|
|
|
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 |
% |
For the
quarter ended December 31, 2007, the yield on average interest earning assets
was distorted by sales of MBS assets which occurred early in the
quarter. As a result of these sales, and their timing, the average
investment securities held is misleadingly high. The combined effect
was to distort to the downside the yield on average interest earning
assets. The opposite is true with respect to the average cost of
funds, which was distorted to the high side. Absent the quarterly
retrospective adjustment of $(0.3) million net interest income for the quarter
would have been positive $0.2 million. For the year ended December
31, 2007, net interest income was $(8.8) million which included quarterly
retrospective adjustments of $(5.1) million. For the year ended
December 31, 2006, net interest income was $0.4 million which included quarterly
retrospective adjustments of $14.8 million. Absent the effect of the
quarterly retrospective adjustments, net interest income would have increased
from $(13.7) million for the year ended December 31, 2006 to $(3.7) million for
the year ended December 31, 2007. The increase is the result of a
steepening of the yield curve in 2007, particularly late in 2007 as the Federal
Reserve lowered interest rates, offset by a reduced portfolio size which exposed
the effects of leverage introduced by the Company’s trust preferred securities
which carry fixed interest rates greater than typical repurchase agreement
funding rates.
PERFORMANCE OF DISCONTINUED
OPERATIONS OF OITRS
As stated
above, the Company has sold or discontinued all residential mortgage origination
activities at OITRS. Going forward, all reported financial results
will reflect this decision. 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. Going forward operating results of
the discontinued operations at OITRS will consist primarily of fluctuations in
value of the retained interests in securitization, unless they are
sold. Remaining originated mortgage servicing rights and mortgage
loans held for sale are immaterial and not likely to result in meaningful income
or loss amounts. Such assets are also held for sale.
As of
December 31, 2007, OITRS owned $0.9 million of mortgage loans held for sale, net
of mark to market adjustments. Gains/(losses) realized on the
mortgage banking activities for the year ended December 31, 2007, were ($70.1)
million and for the year ended December 31, 2006, were $15.5
million. These gains/(losses) reflect the effects of the mark to
market of IRLCs and loans held for sale prior to the sale date of ($3.8) million
for the year ended December 31, 2007, and ($0.1) million for the year ended
December 31, 2006. OITRS’s gains/(losses) from
mortgage banking activities were the result of a sharp deterioration in the
secondary market for the loans OITRS originates and sells. Owing to
fears related to the credit performance of certain types of loans OITRS
originated, namely high combined loan to value (“CLTV”) and second lien
mortgages, prices obtained upon sale were depressed and OITRS also experienced
elevated levels of early payment defaults (EPDs), resulting in OITRS recording
high loan loss reserves.
Gains/(losses)
from mortgage banking activities include changes in the fair value of retained
interests in securitizations and the associated hedge gains or losses.
Excluding changes in fair value of retained interests in securitizations net of
hedge gains and losses, OITRS had gains/(losses) from sales of mortgages held
for sale of ($36.5)
million for the year ended December 31, 2007, and $27.4 million for the year
ended December 31, 2006.
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 $69.3 million as
of December 31, 2007. 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. Due to increased
loss assumptions on the underlying mortgage loans, the market value of the
retained interests decreased by $34.9 million for the year ended December 31,
2007.
The table
below provides details of OITRS’s gain/(loss) on mortgage banking activities for
the years ended December 31, 2007 and 2006. OITRS recognizes a gain
or loss on sale of mortgages held for sale only when the loans are actually
sold.
GAINS/(LOSSES)
ON MORTGAGE BANKING ACTIVITIES
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Fair
Value adjustment of retained interests, trading
|
|
$ |
(29,119 |
) |
|
$ |
(6,324 |
) |
Gain/(loss)
on sales of mortgage loans
|
|
|
(6,012 |
) |
|
|
86,124 |
|
Fees
on brokered loans
|
|
|
1,749 |
|
|
|
5,731 |
|
Gain/(loss)
on derivatives
|
|
|
(4,473 |
) |
|
|
(5,630 |
) |
Direct
loan origination expenses, deferred
|
|
|
(7,122 |
) |
|
|
(95 |
) |
Gain/(loss)
on Residual Hedge
|
|
|
- |
|
|
|
(6,204 |
) |
Write
off purchased pipeline (Purchase accounting Adjustment)
|
|
|
- |
|
|
|
(534 |
) |
Fees
earned, brokering
|
|
|
887 |
|
|
|
2,385 |
|
Direct
loan origination expenses, reclassified
|
|
|
(22,181 |
) |
|
|
(59,895 |
) |
Net
gain/(loss) on sale of mortgage loans
|
|
|
(66,271 |
) |
|
|
15,558 |
|
Change
in market value of IRLC’s
|
|
|
14 |
|
|
|
626 |
|
Change
in market value of mortgage loans held for sale
|
|
|
(3,811 |
) |
|
|
(726 |
) |
Gain/(loss)
on mortgage banking activities
|
|
$ |
(70,068 |
) |
|
$ |
15,458 |
|
For the
years ended December 31, 2007 and 2006, OITRS originated mortgage loans of $1.5
billion and $6.3 billion, respectively. For the year ended December
31, 2007, OITRS sold $2.1 billion of originated mortgage loans. For the year
ended December 31, 2006, OITRS sold $6.2 billion of originated mortgage loans.
Of the originated mortgage loans sold during the year ended December 31, 2007,
$0.8 billion of the $2.1 billion were sold on a servicing retained basis. Of the
originated mortgage loans sold during the year ended December 31, 2006, $3.8
billion of the $6.2 billion were sold on a servicing retained
basis.
For the
year ended December 31, 2007 and 2006, OITRS had net servicing income/ (loss) of
($13.2) million and ($12.2) million. The
results for the year were driven primarily by negative fair value adjustments to the MSRs
(inclusive of run-off of the servicing portfolio).
As of
December 31, 2007, OITRS held originated MSRs on approximately $0.6 billion in
mortgages with a fair market value of approximately $3.1 million. For
the year ended December 31, 2007 and 2006, additions to the MSRs were $7.7
million and $43.2 million, respectively. In turn, the net fair value
adjustments for the year ended December 31, 2007, reflect declines in fair value
due to run-off of $9.4 million and adjustments
due to decreases in fair value due to changes in market conditions of $3.9
million. The net fair value adjustments for the year ended December
31, 2006 reflect declines in fair value due to run-off of $20.1 million and adjustments
due to decreases in fair value of $13.5 million due to changes in market
conditions. Changes in valuation assumptions for the year ended December 31,
2007 reduced the fair market value by $2.6 million. Changes in valuation
assumptions and early adoption of SFAS 156 in January of 2006 increased fair
market value for the year ended December 31, 2006, by $3.2 million.
Liquidity
and Capital Resources
As of
December 31, 2007, Bimini Capital had master repurchase agreements in place with
19 counterparties and had outstanding balances under 7 of these
agreements. None of the counterparties to these agreements are
affiliates of Bimini Capital. These agreements are secured by Bimini Capital’s
MBS and bear interest rates that are based on a spread to LIBOR.
As of
December 31, 2007, Bimini Capital had obligations outstanding under its
repurchase agreements totaling $678.2 million with a net weighted average
borrowing cost of 5.07%. All of Bimini Capital’s outstanding repurchase
agreement obligations are due in less than 9 months with $0.0 million maturing
overnight, $244.4 million maturing between two and 30 days, $35.6 million
maturing between 31 and 90 days and $396.2 million maturing in more than
90 days. Securing these repurchase agreement obligations as of
December 31, 2007, were MBS with an estimated fair value of $689.9 million and a
weighted average maturity of 329 months.
As of
December 31, 2007, Bimini Capital had amounts at risk greater than 10% of the
equity of the Company with the following counterparties:
($
in thousands)
Repurchase
Agreement Counterparties
|
|
Amount
at
Risk(1)
|
|
|
Weighted
Average
Maturity
of
Repurchase
Agreements
in
Days
|
|
Deutsche
Bank Securities, Inc.
|
|
$ |
8,823 |
|
|
|
193 |
|
Goldman
Sachs & Co.
|
|
|
2,931 |
|
|
|
19 |
|
(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.
Bimini
Capital has entered into contracts and paid commitment fees to one counterparty
providing for $300.0 million in committed
repurchase agreement facilities at pre-determined borrowing rates and haircuts
for a 364 day period following the commencement date of each
contract. The facility’s capacity expiration date is April 23,
2008. Bimini Capital has no obligation to utilize these repurchase
agreement facilities.
In
addition, Bimini Capital has two agreements which are available to provide
financing for up to $150 million to cover margin
requirements associated with monthly principal payments on the MBS
portfolio.
It is the
Company’s present intention to seek to renew its various committed and
uncommitted repurchase agreements as they become due or
expire. However, market conditions could change making the renewal of
these contractual arrangements more expensive or
unattainable. Further, as discussed above, increases in short-term
interest rates could negatively impact the valuation of Bimini Capital’s MBS
portfolio. Should this occur, Bimini Capital’s ability to enter into
new repurchase agreements or extend its existing repurchase agreements could be
limited and may cause Bimini Capital’s repurchase agreement counterparties to
initiate margin calls. Under this scenario, Bimini Capital would
likely seek alternative sources of financing which could include additional debt
or equity financing or sales of assets.
Given the
current turmoil in the mortgage market, such alternative sources of financing
are not readily available to the Company. Further, owing to the wind
down of the mortgage origination operations at OITRS the Company has had to
amortize the financing line associated with retained interest in securitizations
and meet the advancing obligations associated with the remaining mortgage
servicing rights. Also related to the financing line associated with
the retained interests in securitizations, the Company, as guarantor, is exposed
to margin calls. Accordingly, during the year ended December 31, 2007, the
Company undertook a series of assets sales intended to raise funds necessary to
support the cash needs of OITRS and maintain adequate liquidity during the
disruptions in the mortgage market that occurred and are
continuing.
The
Company has obtained a committed funding arrangement that provides specified
advance rates and funding levels and is available to finance the Company’s MBS
portfolio. Should the Company’s financing be withdrawn and the
Company’s committed funding agreements be insufficient to finance all of the
Company’s MBS investments, the Company may be forced to sell such assets, which
may result in losses upon such sales. While the financing in place for the
Company’s retained interests in securitizations held by OITRS is committed
through May 26, 2008, the lender on the financing facility has and may continue
to request additional margin be posted in connection with the facility. If the
Company is unable to meet such requests in the future, the Company may be forced
to sell the assets or seek alternative financing. At present, such
alternative financing arrangements for the residual interests, trading may not
be available or only available at substantially higher cost to OITRS. If
cash resources are, at any time, insufficient to satisfy the Company’s liquidity
requirements, such as when cash flow from operations were 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. Any sale of mortgage-related securities or other assets
held for sale at prices lower than the carrying value of such assets would
reduce the Company’s income. The Company presently believes that its
equity and junior subordinated debt capital, combined with the cash flow from
operations and the utilization of borrowings, will be sufficient to enable the
Company to meet its anticipated liquidity requirements. Continued disruptions in
market conditions could, however, adversely affect the Company’s liquidity,
including the lack of available financing for the Company’s MBS assets beyond
the capacity of the Company’s committed facility (currently $300 million),
increases in interest rates, increases in prepayment rates substantially above
expectations and decreases in value of assets held for sale. Therefore, no
assurances can be made regarding the Company's ability to satisfy its liquidity
and working capital requirements.
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. The
interest rate payable by Bimini Capital on the BCTI junior subordinated notes is
fixed for the first five years at 7.61% and then floats at a spread of 3.30%
over three-month LIBOR for the remaining 25 years. However, the BCTI junior
subordinated notes and the corresponding BCTI trust preferred securities are
redeemable at Bimini Capital’s option at the end of the first five year period
and at any subsequent date that Bimini Capital chooses.
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. The interest rate on the BCTII junior
subordinated notes and the corresponding BCTII trust preferred securities is
fixed for the first five years at 7.8575% and then floats at a spread of 3.50%
over three-month LIBOR for the remaining 25 years. However, the BCTII junior
subordinated notes and the corresponding BCTII trust preferred securities are
redeemable at Bimini Capital’s option at the end of the first five year period
and at any subsequent date that Bimini Capital chooses.
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
As
discussed above, the Company's results of operations for the year ended December
31, 2007 continued to be impacted by disruptions in the residential mortgage
market, the mortgage backed securities market and a general tightening of credit
conditions brought about by adverse actions taken by ratings agencies,
liquidations of various investment funds and substantial losses incurred by
various market participants. As a result of these events, the Federal
Reserve Open Market Committee adjusted their target for overnight lending rates
in January 2008 which has positively impacted the Company’s borrowing
rates.
The
funding costs of the MBS portfolio have decreased and the yield on the MBS
assets now exceeds the funding costs through the combination of Federal Reserve
actions mentioned above and as a result of the impairment charge taken. The need
to fund negative cash flow operations at OITRS precluded the Company from
reinvesting monthly pay-downs and also required the Company to sell MBS assets
to generate funds throughout much of 2006 and 2007. Further, OITRS
had exposure to early payment default claims that were received from buyers of
mortgage loans sold in the past. The settlement of the remaining
claims will also need to be funded. The Company believes that
adequate reserves have been recorded for such exposure.
Going
forward, the reduced cash flow needs for OITRS and resulting halt to asset sales
should allow the NIM of the MBS portfolio to remain
positive. However, 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.
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:
LONG-LIVED
ASSETS
The
Company makes judgments and estimates about the carrying value of long-lived
assets, comprising of property and equipment, including amounts to be
capitalized, depreciation methods and useful lives. The Company also reviews
these assets for impairment on a periodic basis or whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. The
impairment test consists of a comparison of an asset’s fair value with its
carrying value; if the carrying value of the asset exceeds its fair value, an
impairment loss is recognized in the Consolidated Statement of Operations in an
amount equal to that excess. When an asset’s fair value is not readily apparent
from other sources, management’s determination of an asset’s fair value requires
it to make long-term forecasts of future net cash flows related to the asset.
These forecasts require assumptions about future demand, future market
conditions and regulatory developments. Significant and unanticipated changes to
these assumptions could require a provision for impairment in a future
period.
In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets (“SFAS 144”), the closure and/or sale of
mortgage loan origination channels (discussed in Note 12) required management to
test the associated long lived assets for recoverability. In
connection with the testing of recoverability of the long lived assets, OITRS
recorded an impairment charge of $8.9 million for the year ended December 31,
2007. Further, in accordance with SFAS 144, such long lived assets
were reported by OITRS as held for use as of March 31, 2007, and have been
included in discontinued operations for the remainder of 2007.
GOODWILL AND OTHER
INTANGIBLE ASSETS
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill of a reporting unit (OITRS) and other intangible assets
(the “Opteum” trade
name) not subject to amortization shall be tested for impairment on an annual
basis and between annual tests if an event occurs or circumstances change that
indicate the intangible asset might be impaired, which, in the case of goodwill
of a reporting unit, is when such event or circumstances would more likely than
not reduce the fair value of that reporting unit below its carrying
amount. The closure and or sale of the mortgage loan origination
channels constituted such an event that would require impairment analyses on the
goodwill and other intangibles not subject to
amortization. Accordingly, OITRS recorded impairment charges of both
goodwill and other intangible assets not subject to amortization of
approximately $3.4 million for the year
ended December 31, 2007.
MORTGAGE BACKED
SECURITIES
The
Company’s investments in MBS are classified as available-for-sale securities or
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
managements 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 SFAS No. 107, Disclosures about the Fair Value of
Financial Instruments.
When the
fair value of an available-for-sale security is less than amortized cost,
management considers whether there is an other-than-temporary impairment in the
value of the security. The decision is based on the credit quality
of the issue (agency versus non-agency and for non-agency, the credit
performance of the underlying collateral), the security prepayment speeds, the
length of time the security has been in an unrealized loss position and the
Company's ability and intent to hold securities. As of December 31, 2007, the
Company did not hold any non-agency securities in its portfolio. If, in
management's judgment, an other-than-temporary impairment exists, the cost basis
of the security is written down in the period to fair value and the unrealized
loss is recognized in current period earnings. Such an event occurred
in the period ended June 30, 2007 and as a consequence the cost basis of all MBS
securities was written down to fair value and the previously unrealized loss
recognized in earnings. As of June 30, 2007, all
available-for-sale securities
would then be valued as a lower of cost or market basis.
RETAINED INTEREST, TRADING
(CLASSIFIED AS HELD FOR SALE)
Retained
interest, trading is the subordinated interests retained by the Company from the
Company’s various securitizations and includes the over-collateralization and
residual net interest spread remaining after payments to the Public Certificates
and NIM Notes (see Note 12). Retained interest, trading represents the present
value of estimated cash flows to be received from these subordinated interests
in the future. The subordinated interests retained are classified as
“trading securities” and are reported at fair value with unrealized gains or
losses reported in earnings. In order to value these unrated and
unquoted retained interests, the Company utilizes either pricing available
directly from dealers or calculates their present value by projecting their
future cash flows on a publicly-available analytical system. When a
publicly-available analytical system is employed, the Company uses the following
variable factors in estimating the fair value of these assets:
Interest Rate Forecast. LIBOR
interest rate curve.
Discount Rate. The present
value of all future cash flows utilizing a discount rate assumption established
at the discretion of the Company to represent market conditions and
value.
Prepayment Forecast. The
prepayment forecast may be expressed by the Company in accordance with one of
the following standard market conventions: Constant Prepayment Rate (“CPR”) or
Percentage of a Prepayment Vector. Prepayment forecasts are made utilizing
Citigroup Global Markets Yield Book and/or management estimates based on
historical experience. Conversely, prepayment speed forecasts could have been
based on other market conventions or third-party analytical systems. Prepayment
forecasts may be changed as OITRS observes trends in the underlying collateral
as delineated in the Statement to Certificate Holders generated by the
securitization trust’s Trustee for each underlying security.
Credit Performance Forecast.
A forecast of future credit performance of the underlying collateral pool will
include an assumption of default frequency, loss severity and a recovery lag. In
general, the Company will utilize the combination of default frequency and loss
severity in conjunction with a collateral prepayment assumption to arrive at a
target cumulative loss to the collateral pool over the life of the pool based on
historical performance of similar collateral by the originator. The target
cumulative loss forecast will be developed and noted at the pricing date of the
individual security but may be updated by the Company consistent with
observations of the actual collateral pool performance.
As of
December 31, 2007 and 2006, key economic assumptions and the sensitivity of the
current fair value of retained interests to the immediate 10% and 20% adverse
change in those assumptions are as follows:
($
in thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Balance
sheet carrying value of retained interests – fair value
|
|
$ |
69,301 |
|
|
$ |
104,199 |
|
Weighted
average life (in years)
|
|
|
4.09 |
|
|
|
4.26 |
|
Prepayment
assumption (annual rate)
|
|
|
26.37 |
% |
|
|
37.88 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(6,908 |
) |
|
$ |
(8,235 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(12,577 |
) |
|
$ |
(14,939 |
) |
Expected
Credit losses (annual rate)
|
|
|
1.22 |
% |
|
|
0.56 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(6,409 |
) |
|
$ |
(3,052 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(13,633 |
) |
|
$ |
(6,098 |
) |
Residual
Cash-Flow discount rate
|
|
|
20.00 |
% |
|
|
16.03 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(4,138 |
) |
|
$ |
(4,575 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(7,907 |
) |
|
$ |
(8,771 |
) |
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
|
|
$ |
(14,906 |
) |
|
$ |
(18,554 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(28,225 |
) |
|
$ |
(39,292 |
) |
These
sensitivities are entirely hypothetical and should be used with caution. As the
figures indicate, changes in fair value based upon 10% and 20% variations in
assumptions generally cannot be extrapolated to greater or lesser percentage
variations 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 subordinated interest is
calculated without changing any other assumption. In reality, changes
in one factor may result in changes in another that may magnify or counteract
the sensitivities. To estimate the impact of a 10% and 20% adverse change of the
forward LIBOR curve, a parallel shift in the forward LIBOR curve was assumed
based on the forward LIBOR curve as of December 31, 2007 and 2006.
MORTGAGE SERVICING RIGHTS
(CLASSIFIED AS HELD FOR SALE)
The
Company recognizes mortgage servicing rights (“MSRs”) as assets when separated
from the underlying mortgage loans in connection with the sale of such loans.
Upon sale of a loan, the Company measures the retained MSRs by allocating the
total cost of originating a mortgage loan between the loan and the servicing
right based on their relative fair values. Gains or losses on the sale of MSRs
are recognized when title and all risks and rewards have irrevocably passed to
the purchaser of such MSRs and there are no significant unresolved
contingencies.
In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. The Company elected to early adopt SFAS 156
as of January 1, 2006, and to measure all mortgage servicing assets at fair
value (and as one class).
To
facilitate hedging of the MSRs, management has elected to utilize an internal
model for valuation purposes. Accordingly, fair value is estimated
based on internally generated expected cash flows considering market prepayment
estimates, historical prepayment rates, portfolio characteristics, interest
rates and other economic factors.
As of
December 31, 2007 and 2006, key economic assumptions and the sensitivity of the
current fair value of MSR cash flows to the immediate 10% and 20% adverse change
in those assumptions are as follows:
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of period (at cost)
|
|
$ |
98,859 |
|
|
$ |
86,082 |
|
Adjustment
to fair value upon adoption of SFAS 156 at January 1, 2006
|
|
|
- |
|
|
|
4,298 |
|
Additions
|
|
|
7,718 |
|
|
|
43,175 |
|
Sales,
net of reserve for prepayment protection
|
|
|
(87,603 |
) |
|
|
- |
|
Changes
in fair value:
|
|
|
|
|
|
|
|
|
Due
to changes in market conditions and run-off
|
|
|
(13,351 |
) |
|
|
(33,551 |
) |
Due
to change in valuation assumptions
|
|
|
(2,550 |
) |
|
|
(1,145 |
) |
Balance
at end of period
|
|
$ |
3,073 |
|
|
$ |
98,859 |
|
These
sensitivities are entirely hypothetical and should be used with caution. As the
figures indicate, changes in fair value based upon 10% and 20% variations in
assumptions generally cannot be extrapolated to greater or lesser percentage
variations 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 MSRs 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.
INCOME
RECOGNITION
Interest
income on available-for-sale MBS is accrued based on the actual coupon rate and
the outstanding principal amount of the underlying mortgages. Premiums and
discounts are amortized or accreted into interest income over the estimated
lives of the MBS using the effective yield method adjusted for the effects of
estimated prepayments based on SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases - an amendment of FASB Statements No. 13, 60 and 65 and a
rescission of FASB Statement No. 17. Adjustments are made using the
retrospective method to the effective interest computation each reporting period
based on the actual prepayment experiences to date and the present expectation
of future prepayments of the underlying mortgages. To make assumptions as to
future estimated rates of prepayments, the Company currently uses actual market
prepayment history for the securities it owns and for similar securities that
the Company does not own and current market conditions. If the estimate of
prepayments is incorrect, the Company is required to make an adjustment to the
amortization or accretion of premiums and discounts that would have an impact on
future income.
For
securities classified as held for trading interest income is based on the stated
interest rate and the outstanding principal balance, premium or discount
associated with the purchase of the MBS are not amortized.
With
respect to mortgage loans held for sale, interest income and interest expense
are recognized as earned or incurred. Loans are placed on a non-accrual status
when concern exists as to the ultimate collectability of principal or interest.
Loans return to accrual status when principal and interest become current and
are anticipated to be fully collectible. The Company recognizes gain (or loss)
on the sale of these loans. Gains or losses on such sales are recognized
at the time legal title transfers to the purchaser of such loans based upon the
difference between the sales proceeds from the purchaser and the allocated basis
of the loan sold, adjusted for net deferred loan fees and certain direct costs
and selling costs. The Company defers net loan origination costs and fees as a
component of the loan balance on the balance sheet. Such costs are not amortized
and are recognized into income as a component of the gain or loss upon sale.
Accordingly, salaries, commissions, benefits and other operating expenses of
$22.2 million and $59.9 million, respectively, during the years ended December
31, 2007 and 2006, respectively, were capitalized as direct loan origination
costs included in loss from discontinued operations.
Servicing
fee income is generally a fee based on a percentage of the outstanding principal
balances of the mortgage loans serviced by the Company (or by a sub-servicer
where the Company is the master servicer) and is recorded as income as the
installment payments on the mortgages are received by the Company or the
sub-servicer.
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 SFAS No. 109,
Accounting for Income Taxes. All of the consequences of OITRS’s income
tax accounting is 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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. 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
previously discussed OITRS, formerly pooled loans originated or purchased and
then sold them or securitized them to obtain long-term financing for its assets.
Securitized loans are transferred to a trust where they serve as collateral for
asset-backed bonds, which the trust primarily issues to the public. During 2007,
OITRS did not execute a securitization, and is not expected to do so in the
future. However, OITRS held approximately $69.3 million of retained interests
from securitizations as of December 31, 2007.
The cash
flows associated with OITRS’s securitization activities for the years ended
December 31, 2007 and 2006, were as follows:
(in
thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
Proceeds
from securitizations
|
|
|
|
$
|
-
|
|
$
|
1,436,838
|
Servicing
fees received
|
|
|
|
|
11,744
|
|
|
17,878
|
Servicing
advances
|
|
|
|
|
4,812
|
|
|
662
|
Cash
flows received on retained interests
|
|
|
|
|
5,779
|
|
|
4,356
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index
to Financial Statements
|
Page
|
|
|
Management’s
Report on Internal Control over Financial Reporting
|
47
|
Reports
of Independent Registered Public Accounting Firm
|
48
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
50
|
Consolidated
Statements of Operations for the years ended December 31, 2007 and
2006
|
51
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2007 and 2006
|
52
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007 and
2006
|
53
|
Notes
to Consolidated Financial Statements
|
54
|
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:
|
(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, 2007. 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, 2007.
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/
Jeffrey J. Zimmer
Jeffrey
J. Zimmer
Chairman,
President and Chief Executive Officer
/s/
Robert E. Cauley
Robert E.
Cauley
Vice
Chairman, Senior Executive Vice President,
Chief
Financial Officer, Chief Investment
Officer and Treasurer
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Bimini
Capital Management, Inc.
We have
audited Bimini Capital Management, Inc.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Bimini Capital Management Inc.’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, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and 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, 2007,
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 as of December
31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2007 of Bimini Capital Management, Inc. and our report dated
March 12, 2008 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Certified
Public Accountants
Miami,
Florida
March 12,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Bimini
Capital Management, Inc.
We have
audited the accompanying consolidated balance sheets of Bimini Capital
Management, Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 2007. 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. An audit also includes 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Bimini Capital
Management, Inc. at December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Bimini Capital Management,
Inc.’s internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 12, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public
Accountants
Miami,
Florida
March 12,
2008
BIMINI
CAPITAL MANAGEMENT, INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
Available-for-sale,
pledged to counterparties; 2007 at LOCOM, 2006 at fair
value
|
|
$ |
293,729,451 |
|
|
$ |
2,803,019,180 |
|
Held
for trading, pledged to counterparties, at fair value
|
|
|
396,175,157 |
|
|
|
- |
|
Unpledged,
at fair value
|
|
|
674,326 |
|
|
|
5,714,860 |
|
Total
mortgage-backed securities
|
|
|
690,578,934 |
|
|
|
2,808,734,040 |
|
Cash
and cash equivalents
|
|
|
27,284,760 |
|
|
|
82,751,795 |
|
Restricted
cash
|
|
|
8,800,000 |
|
|
|
- |
|
Principal
payments receivable
|
|
|
99,089 |
|
|
|
12,209,825 |
|
Accrued
interest receivable
|
|
|
3,637,302 |
|
|
|
14,072,078 |
|
Property
and equipment, net
|
|
|
4,181,813 |
|
|
|
4,372,997 |
|
Prepaids
and other assets
|
|
|
5,315,835 |
|
|
|
6,168,736 |
|
Assets
held for sale
|
|
|
96,619,615 |
|
|
|
1,009,324,465 |
|
Total
Assets
|
|
$ |
836,517,348 |
|
|
$ |
3,937,633,936 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$ |
678,177,771 |
|
|
$ |
2,741,679,650 |
|
Junior
subordinated notes due to Bimini Capital Trust I & II
|
|
|
103,097,000 |
|
|
|
103,097,000 |
|
Accrued
interest payable
|
|
|
3,872,101 |
|
|
|
17,776,464 |
|
Dividends
payable
|
|
|
- |
|
|
|
1,266,937 |
|
Accounts
payable, accrued expenses and other
|
|
|
644,858 |
|
|
|
692,469 |
|
Minority
interest in consolidated subsidiary
|
|
|
- |
|
|
|
770,563 |
|
Liabilities
related to assets held for sale
|
|
|
27,842,174 |
|
|
|
879,916,024 |
|
Total
Liabilities
|
|
|
813,633,904 |
|
|
|
3,745,199,107 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
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, 2007 and
2006
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Class
A common stock, $0.001 par value; 98,000,000 shares designated; 24,861,404
shares issued and outstanding at December 31, 2007 and 24,515,717 shares
issued and outstanding at December 31, 2006
|
|
|
24,861 |
|
|
|
24,516 |
|
|
|
|
|
|
|
|
|
|
Class
B common stock, $0.001 par value; 1,000,000 shares designated, 319,388
shares issued and outstanding at December 31, 2007 and
2006
|
|
|
319 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
Class
C common stock, $0.001 par value; 1,000,000 shares designated, 319,388
shares issued and outstanding at December 31, 2007 and
2006
|
|
|
319 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
338,241,582 |
|
|
|
335,646,460 |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(76,773,610 |
) |
Accumulated
deficit
|
|
|
(315,383,637 |
) |
|
|
(66,463,175 |
) |
Stockholders’
Equity
|
|
|
22,883,444 |
|
|
|
192,434,829 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
836,517,348 |
|
|
$ |
3,937,633,936 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated
financial statements.
|
|
BIMINI
CAPITAL MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Interest
income, net of amortization of premium and discount
|
|
$ |
102,502,182 |
|
|
$ |
169,712,703 |
|
Interest
expense
|
|
|
(102,901,468 |
) |
|
|
(160,943,261 |
) |
Net
interest (expense) income, before interest on trust preferred
debt
|
|
|
(399,286 |
) |
|
|
8,769,442 |
|
Interest
expense on trust preferred debt
|
|
|
(8,361,727 |
) |
|
|
(8,361,727 |
) |
Net
interest (expense) income
|
|
|
(8,761,013 |
) |
|
|
407,715 |
|
Fair
value adjustment - available for sale securities
|
|
|
(2,680,252 |
) |
|
|
- |
|
Fair
value adjustment - held for trading securities
|
|
|
2,163,708 |
|
|
|
- |
|
Loss
on sale of mortgage-backed securities, net
|
|
|
(17,291,032 |
) |
|
|
- |
|
Other
expense, net
|
|
|
- |
|
|
|
(135,000 |
) |
Gain
on sale of a 7.5% interest in a consolidated subsidiary
|
|
|
- |
|
|
|
2,785,776 |
|
Other
than temporary loss on mortgage backed securities
|
|
|
(55,250,278 |
) |
|
|
(9,971,471 |
) |
Deficiency
of revenues, net
|
|
|
(81,818,867 |
) |
|
|
(6,912,980 |
) |
|
|
|
|
|
|
|
|
|
Direct
REIT operating expenses
|
|
|
824,747 |
|
|
|
987,409 |
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses:
|
|
|
|
|
|
|
|
|
Compensation
and related benefits
|
|
|
4,828,089 |
|
|
|
5,654,942 |
|
Directors'
fees and liability insurance
|
|
|
771,486 |
|
|
|
827,142 |
|
Audit,
legal and other professional fees
|
|
|
1,343,777 |
|
|
|
1,521,587 |
|
Other
administrative
|
|
|
704,590 |
|
|
|
815,653 |
|
Total
general and administrative expenses
|
|
|
7,647,942 |
|
|
|
8,819,324 |
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
8,472,689 |
|
|
|
9,806,733 |
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before minority interest
|
|
|
(90,291,556 |
) |
|
|
(16,719,713 |
) |
Minority
interest in consolidated subsidiary
|
|
|
770,563 |
|
|
|
48,912 |
|
Loss
from continuing operations
|
|
|
(89,520,993 |
) |
|
|
(16,670,801 |
) |
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
(158,131,824 |
) |
|
|
(32,875,061 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(247,652,817 |
) |
|
$ |
(49,545,862 |
) |
|
|
|
|
|
|
|
|
|
Basic
And Diluted Net Loss Per Share Of:
|
|
|
|
|
|
|
|
|
CLASS
A COMMON STOCK
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(3.58 |
) |
|
$ |
(0.68 |
) |
Discontinued
operations
|
|
|
(6.34 |
) |
|
|
(1.35 |
) |
Total
basic and diluted net loss per Class A share
|
|
$ |
(9.92 |
) |
|
$ |
(2.03 |
) |
CLASS
B COMMON STOCK
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(3.56 |
) |
|
$ |
(0.67 |
) |
Discontinued
operations
|
|
|
(6.28 |
) |
|
|
(1.32 |
) |
Total
basic and diluted net loss per Class B share
|
|
$ |
(9.84 |
) |
|
$ |
(1.99 |
) |
Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
CLASS
A COMMON STOCK
|
|
|
24,818,537 |
|
|
|
24,066,018 |
|
CLASS
B COMMON STOCK
|
|
|
319,388 |
|
|
|
319,388 |
|
Cash
dividends declared per share of:
|
|
|
|
|
|
|
|
|
CLASS
A COMMON STOCK
|
|
$ |
0.05 |
|
|
$ |
0.46 |
|
CLASS
B COMMON STOCK
|
|
$ |
0.05 |
|
|
$ |
0.46 |
|
|
|
See
Notes to Consolidated Financial Statements
|
|
BIMINI
CAPITAL MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Common
Stock,
Amounts
at par value
|
|
|
Class
A Preferred
|
|
|
Treasury
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
C
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
Balances,
January 1, 2006
|
|
$ |
24,129 |
|
|
$ |
319 |
|
|
$ |
319 |
|
|
$ |
1,223 |
|
|
$ |
(5,236,354 |
) |
|
$ |
342,230,342 |
|
|
$ |
(76,494,378 |
) |
|
$ |
(8,037,260 |
) |
|
$ |
252,488,340 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49,545,862 |
) |
|
|
(49,545,862 |
) |
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on available for sale securities, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,250,703 |
) |
|
|
- |
|
|
|
(10,250,703 |
) |
Other-than-temporary
loss on mortgage-backed-securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,971,471 |
|
|
|
- |
|
|
|
9,971,471 |
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,825,094 |
) |
Fair
value adjustment upon adoption of SFAS No. 156
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,621,918 |
|
|
|
2,621,918 |
|
Issuance
of Class A common shares for board compensation and equity plan share
exercises, net
|
|
|
253 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
978,055 |
|
|
|
- |
|
|
|
- |
|
|
|
978,308 |
|
Conversion
of Class A Redeemable Preferred Stock into Class A Common
Stock
|
|
|
1,223 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,223 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Treasury
stock purchases
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,500,326 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,500,326 |
) |
Retirement
of treasury stock
|
|
|
(1,089 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,736,680 |
|
|
|
(9,735,591 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash
dividends declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,501,971 |
) |
|
|
(11,501,971 |
) |
Amortization
of equity plan compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,881,935 |
|
|
|
- |
|
|
|
- |
|
|
|
2,881,935 |
|
Equity
plan shares withheld for statutory minimum withholding
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(579,897 |
) |
|
|
- |
|
|
|
- |
|
|
|
(579,897 |
) |
Stock
issuance costs, and other adjustments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(128,384 |
) |
|
|
- |
|
|
|
- |
|
|
|
(128,384 |
) |
Balances,
December 31, 2006
|
|
|
24,516 |
|
|
|
319 |
|
|
|
319 |
|
|
|
- |
|
|
|
- |
|
|
|
335,646,460 |
|
|
|
(76,773,610 |
) |
|
|
(66,463,175 |
) |
|
|
192,434,829 |
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(247,652,817 |
) |
|
|
(247,652,817 |
) |
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassify
net realized loss on mortgage backed securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,388,377 |
|
|
|
- |
|
|
|
19,388,377 |
|
Unrealized
gain on available for sale securities, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,134,955 |
|
|
|
- |
|
|
|
2,134,955 |
|
Other-than-temporary
loss on mortgage-backed securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55,250,278 |
|
|
|
- |
|
|
|
55,250,278 |
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,879,207 |
) |
Issuance
of Class A common shares for board compensation and equity plan share
exercises, net
|
|
|
345 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
132,013 |
|
|
|
- |
|
|
|
- |
|
|
|
132,358 |
|
Cash
dividends declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,267,645 |
) |
|
|
(1,267,645 |
) |
Amortization
of equity plan compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,733,668 |
|
|
|
- |
|
|
|
- |
|
|
|
2,733,668 |
|
Equity
plan shares withheld for statutory minimum withholding
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(270,559 |
) |
|
|
- |
|
|
|
- |
|
|
|
(270,559 |
) |
Balances,
December 31, 2007
|
|
$ |
24,861 |
|
|
$ |
319 |
|
|
$ |
319 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
338,241,582 |
|
|
$ |
- |
|
|
$ |
(315,383,637 |
) |
|
$ |
22,883,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
BIMINI
CAPITAL MANAGEMENT, INC.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
2007
|
|
2006
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
Loss
from continuing operations
|
$
|
(89,520,993)
|
$
|
(16,670,801)
|
Adjustments
to reconcile loss from continuing operations
to
net cash used in operating activities:
|
|
|
|
|
Other-than-temporary
loss on mortgage backed securities
|
|
55,250,278
|
|
9,971,471
|
Amortization
of premium and discount on mortgage backed securities
|
|
9,007,515
|
|
(1,983,240)
|
Stock
compensation
|
|
2,866,026
|
|
3,860,243
|
Depreciation
and amortization
|
|
822,350
|
|
750,406
|
Loss
on sale of mortgage-backed securities, net
|
|
17,291,032
|
|
-
|
Fair
value adjustments, net on mortgage-backed securities
|
|
516,544
|
|
-
|
From
trading securities:
|
|
|
|
|
Purchases
|
|
(638,727,988)
|
|
-
|
Sales
|
|
232,117,373
|
|
-
|
Principal
repayments
|
|
13,421,301
|
|
-
|
Loss
on disposal of property and equipment
|
|
780
|
|
29,150
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Decrease
in accrued interest receivable
|
|
10,434,776
|
|
1,668,397
|
Decrease
in prepaids and other assets
|
|
225,412
|
|
551,524
|
(Decrease)
in accrued interest payable
|
|
(13,904,363)
|
|
(12,456,255)
|
(Decrease)
increase in accounts payable, accrued expenses and other
|
|
(318,170)
|
|
(310,114)
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
(400,518,127)
|
|
(14,589,219)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
From
available-for-sale securities:
|
|
|
|
|
Purchases
|
|
(834,671,775)
|
|
(716,951,195)
|
Sales
|
|
2,441,516,832
|
|
-
|
Principal
repayments
|
|
911,318,340
|
|
1,344,987,891
|
Purchases
of property and equipment, and other
|
|
(10,558)
|
|
(779,881)
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
2,518,152,839
|
|
627,256,815
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
(Increase)
decrease in restricted cash
|
|
(8,800,000)
|
|
2,310,000
|
Proceeds
from repurchase agreements
|
|
15,518,125,432
|
|
22,284,528,415
|
Principal
payments on repurchase agreements
|
|
(17,581,627,311)
|
|
(22,880,447,127)
|
Stock
issuance and other costs
|
|
-
|
|
(128,384)
|
Purchase
of treasury stock
|
|
-
|
|
(4,500,326)
|
Cash
dividends paid
|
|
(2,534,582)
|
|
(10,235,031)
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
(2,074,836,461)
|
|
(608,472,453)
|
CASH
FLOWS FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
Net
cash provided by operating activities
|
|
732,852,870
|
|
75,475,619
|
Net
cash provided by investing activities
|
|
1,195,582
|
|
908,425
|
Net
cash used in financing activities
|
|
(832,313,738)
|
|
(119,899,557)
|
NET
CASH USED IN DISCONTINUED OPERATIONS
|
|
(98,265,286)
|
|
(43,515,513)
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(55,467,035)
|
|
(39,320,370)
|
CASH
AND CASH EQUIVALENTS, Beginning of the period
|
|
82,751,795
|
|
122,072,165
|
CASH
AND CASH EQUIVALENTS, End of the period
|
$
|
27,284,760
|
$
|
82,751,795
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
Cash
paid during the period for interest
|
$
|
125,167,558
|
$
|
173,399,516
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
Cash
dividends declared and payable, not yet paid
|
$
|
-
|
$
|
1,266,937
|
See
notes to consolidated financial
statements.
|
BIMINI
CAPITAL MANAGEMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
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 as Bimini Mortgage Management, Inc. (“Bimini
Mortgage”) for the purpose of creating and managing a leveraged investment
portfolio consisting of residential mortgage backed securities (“MBS”). Bimini
Capital’s website is located at http://www.biminicapital.com. On February 10,
2006, Bimini Mortgage changed its name to Opteum Inc. (“Opteum”). On September
28, 2007, Opteum changed its name to Bimini Capital Management,
Inc.
On
November 3, 2005, Bimini Mortgage acquired Opteum Financial Services,
LLC. This entity, which was previously 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.” Upon closing of the transaction,
OITRS became a wholly-owned taxable REIT subsidiary of Bimini
Mortgage. Under the terms of the transaction, Bimini Mortgage issued
3.7 million shares of Class A Common Stock and 1.2 million shares of Class A
Redeemable Preferred Stock to the former members of OITRS.
At Bimini
Capital’s 2006 Annual Meeting of Stockholders, the shares of Class A Redeemable
Preferred Stock issued to the former members of OITRS were converted into shares
of Bimini Capital’s Class A Common Stock on a one-for-one basis following the
approval of such conversion by Bimini Capital’s stockholders.
On
December 21, 2006, Bimini Capital sold to Citigroup Global Markets Realty Corp.
(“Citigroup Realty”) a Class B non-voting limited liability company membership
interest in OITRS, representing 7.5% of all of OITRS’s outstanding limited
liability company membership interests, for $4.1 million. Immediately
following the transaction, Bimini Capital held Class A voting Limited Liability
Company membership interests in OITRS representing 92.5% of all of OITRS’s
outstanding limited liability company membership interests. In
connection with the transaction, Bimini Capital also granted Citigroup Realty an
option to acquire additional Class B non-voting limited liability company
membership interests in OITRS representing 7.49% of all of OITRS’s outstanding
limited liability company membership interests. This option expired unexercised
on December 20, 2007.
On April 18, 2007, the Board of
Managers of OITRS, at the recommendation of the Board of Directors of
Bimini Capital, approved the closure of OITRS’
wholesale and conduit mortgage loan origination channels in the second quarter
of 2007. Also, during the second and third quarters of 2007,
substantially all of the other operating assets of OITRS were
sold. Therefore, all OITRS’s assets are considered as
held for sale, and OITRS is reported as a discontinued operation for all periods
presented following applicable accounting standards. For financial
statement presentation purposes, Bimini Capital is now operating in a single
business segment, as a REIT.
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. OITRS has elected to be
treated as a taxable REIT subsidiary and, as such, is subject to federal, state
and local income taxation. In addition, the ability of OITRS to
deduct interest paid or accrued to Bimini Capital for federal, state and local
tax purposes is subject to certain limitations.
As used
in this document, discussions related 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, 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). The assets and activities
that are not REIT eligible, such as mortgage origination, acquisition and
servicing activities, were formerly conducted by OITRS and are now reported as
discontinued operations.
Liquidity
The
financing market utilized by the Company to fund its MBS portfolio, as well as
the market for MBS securities itself, have been extremely turbulent
recently. The volatility in the market prompted intervention on the
part of the Federal Reserve in an effort to restore stability. There can be no
assurance such actions will be sufficient to achieve the desired result, or that
market conditions may not deteriorate further. The Company has existing
repurchase agreements with maturities through September 2008 for approximately
$400 million of its $678 million total as well as committed funding arrangements
(that provide specified advance rates and funding levels) available to finance
the Company’s MBS portfolio through April 23, 2008. Should the balance of the
Company’s financing be withdrawn and/or the Company’s committed funding
agreements, while never utilized in the past, not be renewed, the Company may be
forced to sell assets, which may result in losses upon such sales. While
the financing in place for the Company’s retained interests, trading held by
OITRS is committed through May 26, 2008, the lender on the financing facility
has and may continue to request additional margin be posted in connection with
the facility. If the Company is unable to meet such requests in the future, the
Company may be forced to sell the assets or seek alternative financing. At
present, such alternative financing arrangements for the residual interests may
not be available or only available at substantially higher cost to OITRS.
If cash resources are, at any time, insufficient to satisfy the Company’s
liquidity requirements, such as when cash flow from operations were 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. Any sale of mortgage-related securities or other
assets held for sale at prices lower than the carrying value of such assets
would reduce the Company’s income. The Company presently believes that its
equity and junior subordinated debt capital, combined with the cash flow from
operations and the utilization of borrowings, will be sufficient to enable the
Company to meet its anticipated liquidity requirements. Continued disruptions in
market conditions could, however, adversely affect the Company’s liquidity,
including the lack of available financing for the Company’s MBS assets beyond
the capacity of the Company’s committed facilities ($0.3 billion as of December
31, 2007), increases in interest rates, increases in prepayment rates
substantially above expectations and decreases in value of assets held for sale.
Therefore, no assurances can be made regarding the Company's ability to satisfy
its liquidity and working capital requirements.
Management
is currently pursuing all cost saving opportunities to maximize future earnings,
including strategic options designed to increase the efficiency with which the
Company manages its operations.
Basis
of Presentation and Use of Estimates
The
accompanying consolidated financial statements are prepared on the accrual basis
of accounting in accordance with generally accepted accounting principals
(“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. 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 the deferred tax asset valuation allowance, the valuation allowance on
mortgage loans held for sale, the valuation of retained interests, trading and
the fair value of mortgage servicing rights.
The
accompanying consolidated financial statements include the accounts of Bimini
Capital and its majority-owned subsidiary, OITRS, as well as the wholly-owned
and majority-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.
Bimini
Capital owned 100% of OITRS until December 21, 2006, when a Class B non-voting
interest representing 7.5% of OITRS’s then outstanding limited liability company
membership interest was sold to Citigroup Realty. Citigroup Realty’s
proportionate share in the after-tax results of OITRS’s operations, are included
in the accompanying statements of operation. During the three month period ended
March 31, 2007, Citigroup Realty’s proportionate share of OITRS’s loss exceeded
the net investment attributable to Citigroup Realty. Therefore, the portion of
the net loss of OITRS that is attributable to Citigroup Realty’s interest that
is in excess of their investment is charged against the
Company. Citigroup Realty’s net investment balance on December 31,
2006 was $0.8 million. During the year ended December 31, 2007,
Citigroup Realty’s interest in the net loss of OITRS was limited to their $0.8
million net investment, and the remainder was charged against the Company. The
losses absorbed by the Company which are in excess of Citigroup Realty’s
investment totaled approximately $12.0 million for the year ended December 31,
2007. In future periods, the Company will be credited first for these
absorbed losses before Citigroup Realty’s investment is reinstated.
As
further described in Note 6, Bimini Capital has a common share investment in two
trusts used in connection with the issuance of Bimini Capital’s junior
subordinated notes. Pursuant to the accounting guidance provided in
Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46,
Consolidation of Variable
Interest Entities, Bimini Capital’s common share investments in the
trusts are not consolidated in the financial statements of Bimini Capital, and
accordingly, these investments are accounted for on the equity
method.
Discontinued
Operations
During
the second quarter of 2007, the Company closed OITRS’ wholesale and conduit
mortgage loan origination channels and sold substantially all of the operating
assets of OITRS. All remaining assets and liabilities are reported as
held for sale on the consolidated financial statements. Accordingly,
all current and prior financial information related to OITRS and the mortgage
banking business has been presented as discontinued operations in the
accompanying consolidated financial statements. Refer to Note 12 - Discontinued
Operations.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand and highly liquid investments with
original maturities of three months or less. The carrying amount of cash
equivalents approximates its fair value at December 31, 2007 and 2006.
Restricted cash represents cash held on deposit as collateral with certain
repurchase agreement counterparties (i.e. lenders). Such amounts may be used to
make principal and interest payments on the related repurchase
agreements.
Valuation
of Mortgage Backed Securities
The
valuation of the Company's investments in MBS is governed by Statement of
Financial Accounting Standards (“SFAS”) No. 107, Disclosures about Fair Value of
Financial Instruments. SFAS No. 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. All REIT securities are reflected in the
Company's financial statements at their estimated fair value as of December 31,
2007 and December 31, 2006. 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 SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, the Company classifies its investments in
MBS as either trading investments, available-for-sale investments or
held-to-maturity investments. Management determines the appropriate
classification of the securities at the time they are acquired and evaluates the
appropriateness of such classifications at each balance sheet date. Although the
Company generally intends to hold its MBS until maturity, it may, from time to
time, sell any of its MBS as part of the overall management of the business
and/or to meet liquidity needs. The Company classifies all of its securities
acquired prior to June 30, 2007 as available-for-sale. All securities
acquired after June 30, 2007 are classified as held for trading.
When the
fair value of an available-for-sale security is less than amortized cost,
management considers whether there is an other-than-temporary impairment in the
value of the security. The decision is based on the credit quality of the
issue (agency versus non-agency and for non-agency, the credit performance of
the underlying collateral), the security prepayment speeds, the length of time
the security has been in an unrealized loss position and the Company's ability
and intent to hold securities. As of December 31, 2007, the Company did not hold
any non-agency securities in its portfolio. If, in management's judgment, an
other-than-temporary impairment exists, the cost basis of the security is
written down in the period to fair value and the unrealized loss is recognized
in current period earnings. During the six month period ended June
30, 2007, due to liquidity and working capital needs, the Company determined, at
June 30, 2007, that it no longer had the ability to hold such assets until their
amortized cost could be fully recovered. Accordingly, the cost
basis of all MBS classified as available-for-sale were written down to fair
value as of June 30, 2007 and the previously unrealized loss was recognized in
current period earnings. The measurement basis for other-than-temporarily
impaired (OTTI) MBS is the lower of cost or market (LOCOM) method. An
impairment loss is recognized in earnings equal to the difference between the
MBS’ cost and its fair value at the balance sheet date of the reporting period
for which the assessment is made. The LOCOM method generally
recognizes the net decrease in value but not the net appreciation in the value
of those securities. The fair value of impaired MBS then becomes the
new cost basis of the MBS and is not adjusted for subsequent recoveries in fair
value.
Property
and Equipment, net
Property
and equipment, net, consisting primarily of computer equipment with a
depreciable life of 3 to 5 years, office furniture with a depreciable life of 5
to 12 years, leasehold improvements with a depreciable life of 5 to 15 years,
land which has no depreciable life and building with a depreciable life of 30
years, is recorded at acquisition cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Asset lives range from
three years to thirty years depending on the type of asset.
Repurchase
Agreements
The
Company finances the acquisition of its portfolio of MBS through the use of
repurchase agreements. Under these repurchase agreements, the Company sells
securities to a repurchase counterparty and agrees to repurchase the same
securities in the future for a price that is higher than the original sales
price. The difference between the sales price that the Company receives and the
repurchase price that the Company pays represents interest paid to the
repurchase counterparty. Although structured as a sale and repurchase
obligation, a repurchase agreement operates as a financing under which the
Company pledges its securities as collateral to secure a loan which is equal in
value to a specified percentage of the estimated fair value of the pledged
collateral. The Company retains beneficial ownership of the pledged collateral.
At the maturity of a repurchase agreement, the Company is required to repurchase
the underlying MBS and concurrently receives back its pledged collateral from
the repurchase counterparty or, with the consent of the repurchase counterparty,
the Company may renew such agreement at the then prevailing rate. These
repurchase agreements may require the Company to pledge additional assets to the
repurchase counterparty in the event the estimated fair value of the existing
pledged collateral declines. As of December 31, 2007 and 2006, the Company did
not have any margin calls on its repurchase agreements that it was not able to
satisfy with either cash or additional pledged collateral.
Original
terms to maturity of the Company's repurchase agreements generally, but not
always, range from one month to twelve months; however, the Company is not
precluded from entering into repurchase agreements with shorter or longer
maturities. Repurchase agreement transactions are reflected in the financial
statements at their cost, which approximates their fair value because of the
short-term nature of these instruments. 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 this obligation. If, during the term of
a repurchase agreement, a counterparty files for bankruptcy, the Company could
experience difficulty recovering its pledged assets and may have an unsecured
claim against the counterparty's assets for the difference between the amount
received by the Company and the estimated fair value of the collateral pledged
to such counterparty.
Interest
Income Recognition on MBS
MBS are
recorded at cost on the date the MBS are purchased or sold, which is generally
the trade date. Realized gains or losses from MBS transactions are determined
based on the specific identified cost of the MBS. Interest income is accrued
based on the outstanding principal amount of the MBS and their stated
contractual terms.
All
securities acquired after June 30, 2007 have been classified as held for
trading. Income on held for trading securities is based on the stated interest
rate 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. Premium
or discount present at the date of purchase is not amortized.
With
respect to securities classified as available-for-sale, premiums and discounts
associated with the purchase of the MBS are amortized or accreted into interest
income over the estimated lives of the MBS adjusted for estimated prepayments
using the effective interest method. Adjustments are made using the
retrospective method to the effective interest computation each reporting
period. The adjustment is based on the actual prepayment experiences to date and
the present expectation of future prepayments of the underlying mortgages and/or
the current value of the indices underlying adjustable rate mortgage securities
versus index values in effect at the time of purchase or the last adjustment
period.
Comprehensive
Income (Loss)
In
accordance with SFAS No. 130, Reporting Comprehensive
Income, the Company is required to separately report its comprehensive
income (loss) each reporting period. Other comprehensive income refers to
revenue, expenses, gains and losses that, under GAAP, are included in
comprehensive income but are excluded from net income, as these amounts are
recorded directly as an adjustment to stockholders' equity. Other comprehensive
income (loss) arises from unrealized gains or losses generated from changes in
market values of securities classified as
available-for-sale. Comprehensive (loss) income is as
follows:
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(247,653 |
) |
|
$ |
(49,546 |
) |
Net
Realized loss on MBS
|
|
|
19,388 |
|
|
|
- |
|
Other-than-temporary
loss on MBS
|
|
|
55,250 |
|
|
|
- |
|
Reclassify
other-than-temporary loss on MBS
|
|
|
- |
|
|
|
9,971 |
|
Unrealized
gain (loss) on available-for-sale securities, net
|
|
|
2,136 |
|
|
|
(10,250 |
) |
Comprehensive
loss
|
|
$ |
(170,879 |
) |
|
$ |
(49,825 |
) |
Stock-Based
Compensation
The
Company adopted SFAS No. 123(R), Share-Based Payment, on
January 1, 2006, and this adoption did not have an impact on the Company, as the
Company had previously accounted for stock-based compensation using the fair
value based method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation. For stock and stock-based awards issued to employees, a
compensation charge is recorded against earnings based on the fair value of the
award. 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. Bimini's stock-based
compensation transactions resulted in an aggregate of $2.9 million and $3.2
million of compensation expense for the years ended December 31, 2007 and 2006,
respectively.
Earnings
Per Share
The
Company follows the provisions of SFAS No. 128, Earnings per Share, and the
guidance provided in the FASB's Emerging Issues Task Force (“EITF”) Issue No.
03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings
Per Share, which requires companies with complex capital structures,
common stock equivalents or two (or more) classes of securities that participate
in the declared dividends to present both basic and diluted earnings per share
(“EPS”) on the face of the consolidated statement of operations. Basic EPS is
calculated as income available to common stockholders divided by the weighted
average number of common shares outstanding during the period. Diluted EPS is
calculated using the “if converted” method for common stock equivalents.
However, the common stock equivalents are not included in computing diluted EPS
if the result is anti-dilutive.
Outstanding
shares of Class B Common Stock, participating and convertible into Class A
Common Stock, are entitled to receive dividends in an amount equal to the
dividends declared on each share of Class A Common Stock if, as and when
authorized and declared by the Board of Directors. Following the provisions of
EITF 03-6, 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 319,388 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.
Income
Taxes
Bimini
Capital has elected to be taxed as a REIT under the Code. As further described
in Note 12, Discontinued Operations, OITRS is 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.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, 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 revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation, including the restatement to present discontinued
operations.
Recent
Accounting Pronouncements
On
February 20, 2008, the FASB issued FSP FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions. The FSP addresses
whether there are circumstances that would permit a transferor and a transferee
to evaluate the accounting for the transfer of a financial asset separately from
a repurchase financing when the counterparties to the two transactions are the
same. The FSP presumes that the initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (a linked
transaction) under FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(Statement 140). However, if certain criteria specified in the FSP are met, the
initial transfer and repurchase financing may be evaluated separately under
Statement 140. The FSP is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Earlier
application is not permitted. The Company did not have any repurchase
financing transactions at December 31, 2007 that fell within the scope of
the FSP.
In
December 2007, the FASB issued statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”), amendment to ARB No.
51. This standard establishes accounting and reporting standards that
require: (1) the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity; (2) the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of the
consolidated statement of income; (3) changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently; (4) when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be initially
measured at fair value; and (4) entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is effective as of
the beginning of the fiscal year that begins on or after December 15,
2008. The Company currently reports minority interests as a liability
on the balance sheet and a separate line item on the income statement.
Management is currently evaluating the effects, if any, that SFAS 160 will
have upon adoption as this standard.
In June
2007, the FASB ratified the consensus reached in EITF 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards. EITF 06-11 applies to
entities that have share-based payment arrangements that entitle employees to
receive dividends or dividend equivalents on equity-classified nonvested shares
when those dividends or dividend equivalents are charged to retained earnings
and result in an income tax deduction. Entities that have share-based payment
arrangements that fall within the scope of EITF 06-11 will be required to
increase capital surplus for any realized income tax benefit associated with
dividends or dividend equivalents paid to employees for equity classified
nonvested equity awards. Any increase recorded to capital surplus is required to
be included in an entity’s pool of excess tax benefits that are available to
absorb potential future tax deficiencies on share-based payment awards. The
Corporation adopted EITF 06-11 on January 1, 2008 for dividends
declared on share-based payment awards subsequent to this date. The impact of
adoption is not expected to have a material impact on financial condition or
results of operations.
On
February 15, 2007, the FASB issued statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement
No. 115 (“SFAS 159”). This standard permits an entity to
measure financial instruments and certain other items at estimated fair value.
Most of the provisions of SFAS No. 159 are elective; however, the amendment
to SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option is generally applied instrument by instrument, is irrevocable
unless a new election date occurs, and must be applied to the entire instrument
and not to only a portion of the instrument. SFAS 159 is effective as of
the beginning of the first fiscal year that begins after November 15,
2007. On January 1, 2008, the Company elected the fair value
option for its available-for-sale portfolio of mortgage-backed securities.
Previously, these securities were considered to be other than temporarily
impaired and carried at lower-of-cost or market. As of the adoption date, the
carrying value of the existing mortgage-backed securities classified as
available-for-sale will be adjusted to fair value through a cumulative-effect
adjustment to the beginning balance of retained earnings as of January 1, 2008.
This adjustment represented an increase in the carrying value of the securities
of approximately $1.7 million.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to
eliminate the diversity in practice that exists due to the different definitions
of fair value that are dispersed among the many accounting pronouncements that
require fair value measurements, and the limited guidance for applying those
definitions. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company adopted SFAS 157 on
January 1, 2008, and the adoption did not have a material impact on
financial condition or results of operations.
In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes — an interpretation of FASB Statement No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. This Interpretation requires that the Company recognize in its
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The provisions of FIN 48 are effective as of the beginning
of the 2007 fiscal year, with the cumulative effect, if any, of the change
in accounting principle recorded as an adjustment to opening retained earnings.
The Company adopted FIN 48 on January 1, 2007, and such adoption did not have
any impact on the Company’s consolidated financial position and results of
operations.
In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB Statements No. 133 and
140. SFAS 155 (i) permits an entity to measure at fair value any
financial instrument that contains an embedded derivative that otherwise would
require bifurcation; (ii) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; and (iii) contains other provisions that are
not germane to the Company. SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entity’s first fiscal
year beginning after September 15, 2006. A scope exception under SFAS
155 where by securitized interests that only contain an embedded derivative that
is tied to the prepayment risk of the underlying prepayable financial asset, and
for which the investor does not control the right to accelerate the settlement
was adopted by the FASB. The MBS securities owned in the REIT
portfolio fall under this scope exception. However, in the future,
the Company may own securities that may not fall under the exception or the FASB
may repeal the exception, in which case the Company would be subject to the
provisions of SFAS 155. Should securities owned by the Company fall
under the provisions of SFAS 155 in the future, the Company’s results of
operations may exhibit volatility as certain of its future investments may be
marked to market through the income statement.
NOTE
2. MORTGAGE-BACKED
SECURITIES
As of
December 31, 2007 and 2006, all of Bimini Capital's MBS were classified as
either held for trading or available-for-sale. The measurement basis for
other-than-temporarily impaired available-for-sale MBS is the LOCOM
method. An impairment loss is recognized in earnings equal to the
difference between the MBS’ cost and its fair value at the balance sheet date of
the reporting period for which the assessment is made. The LOCOM
method recognizes the net decrease in value but not the net appreciation in the
value of those securities. The fair value of impaired MBS would then
become the new cost basis of the MBS and should not be adjusted for subsequent
recoveries in fair value. Estimated fair value was determined based
on the average of third-party broker quotes received and/or independent pricing
sources when available.
The
following are the carrying values of Bimini's MBS portfolio at December 31,
2007 and 2006:
(in
thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Adjustable
Rate Mortgages
|
|
$ |
177,608 |
|
|
$ |
2,105,818 |
|
Fixed
Rate Mortgages
|
|
|
113,989 |
|
|
|
626,428 |
|
Hybrid
Arms and Balloons
|
|
|
398,982 |
|
|
|
76,488 |
|
Totals
|
|
$ |
690,579 |
|
|
$ |
2,808,734 |
|
The
following table presents the components of the carrying value of Bimini
Capital's MBS portfolio of securities as of December 31, 2007 and
2006:
(in
thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Available-for-Sale
Securities
|
|
|
|
|
|
|
Principal
balance
|
|
$ |
291,579 |
|
|
$ |
2,779,867 |
|
Unamortized
premium
|
|
|
3,134 |
|
|
|
116,114 |
|
Unaccreted
discount
|
|
|
(309 |
) |
|
|
(502 |
) |
Gross
unrealized gains
|
|
|
- |
|
|
|
422 |
|
Other-than-temporary
losses
|
|
|
- |
|
|
|
(9,971 |
) |
Gross
unrealized losses
|
|
|
- |
|
|
|
(77,196 |
) |
Held
for Trading Securities
|
|
|
396,175 |
|
|
|
- |
|
Carrying
value
|
|
$ |
690,579 |
|
|
$ |
2,808,734 |
|
There
were no unrealized gains or losses at December 31, 2007 owing to the other than
temporary impairment taken during the year and the resulting subsequent change
to carrying MBS on a LOCOM basis. The following table presents for
Bimini Capital's MBS investments with gross unrealized losses, the estimated
fair value and gross unrealized losses aggregated by investment category, as of
December 31, 2006:
(in
thousands)
|
|
Loss
Position More than 12 Months
|
|
|
Loss
Position Less than 12 Months
|
|
|
Total
|
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
Unrealized
Losses
|
|
Hybrid
Arms and Balloons
|
|
$ |
67,437 |
|
|
$ |
(1,858 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
67,437 |
|
|
$ |
(1,858 |
) |
Adjustable
Rate Mortgages
|
|
|
1,232,644 |
|
|
|
(46,715 |
) |
|
|
348,901 |
|
|
|
(2,591 |
) |
|
|
1,581,545 |
|
|
|
(49,306 |
) |
Fixed
Rate Mortgages
|
|
|
515,067 |
|
|
|
(25,662 |
) |
|
|
48,604 |
|
|
|
(370 |
) |
|
|
563,671 |
|
|
|
(26,032 |
) |
|
|
$ |
1,815,148 |
|
|
$ |
(74,235 |
) |
|
$ |
397,505 |
|
|
$ |
(2,961 |
) |
|
$ |
2,212,653 |
|
|
$ |
(77,196 |
) |
As of
December 31, 2007, 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.
The
overall decline in fair value of MBS was considered other-than-temporary as of
June 30, 2007. Accordingly, the adjustment of $55.3 million to reduce MBS
to fair value was recorded in earnings. Generally, the factors considered in
making this determination include: the expected cash flow from the MBS
investment, the general quality of the MBS owned, any credit protection
available, current market conditions, and the magnitude and duration of the
historical decline in market prices as well as Bimini Capital's ability and
intention to hold the MBS owned. As of June 30, 2007, the Company no
longer had the ability and intent to hold such securities until their value
could be recovered due to the Company’s liquidity and working capital
requirements caused by the turmoil in the mortgage market.
NOTE 3. PROPERTY
AND EQUIPMENT
|
|
The
composition of properties and equipment follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$ |
2,247 |
|
|
$ |
2,247 |
|
Buildings
and leasehold improvements
|
|
|
1,816 |
|
|
|
1,816 |
|
Equipment
|
|
|
392 |
|
|
|
402 |
|
Furniture
|
|
|
71 |
|
|
|
71 |
|
Software
|
|
|
45 |
|
|
|
46 |
|
|
|
|
4,571 |
|
|
|
4,582 |
|
Less
accumulated depreciation and amortization
|
|
|
389 |
|
|
|
209 |
|
Net
property and equipment
|
|
$ |
4,182 |
|
|
$ |
4,373 |
|
Depreciation
and amortization of property and equipment totaled $194,000 in 2007 and $128,000
in 2006.
NOTE
4.
|
EARNINGS
PER SHARE
|
The
Company follows the provisions of SFAS No. 128, Earnings per Share, and the
guidance provided in the FASB's Emerging Issues Task Force (“EITF”) Issue No.
03-6, Participating Securities
and the two-class method under FASB Statement No. 128, Earnings Per
Share, which requires companies with complex capital structures, common
stock equivalents, or two classes of participating securities to present both
basic and diluted earnings per share (“EPS”) on the face of the 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.
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. Following the provisions of
EITF 03-6, 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
totaling 319,388 are not included in the computation of diluted Class A EPS
as the conditions for conversion to Class A shares were not
met.
Effective
November 3, 2005, the Company issued 1,223,208 shares of Class A
Redeemable Preferred Stock, pursuant to the acquisition of OITRS. Holders of
shares of the preferred stock could not receive or accrue dividend payments
prior to January 1, 2006; therefore, these preferred shares were not
included in the basic EPS computation for the year ended December 31, 2005 as
these shares did not have participation rights during the period from their
issuance through December 31, 2005. The shares of the Class A Redeemable
Preferred Stock were only eligible to convert into shares of Class A Common
Stock at such time as such conversion was approved by a majority number of
stockholders; therefore, since this conversion was not approved prior to
December 31, 2005 the shares were not included in the computation of diluted
Class A Common Stock EPS as of December 31, 2005.
After
January 1, 2006, and prior to March 31, 2006, holders of Class A Redeemable
Preferred Stock were entitled to receive dividends according to the formula
described in the Company's amended Articles of Incorporation. For the Company's
first quarter 2006 dividend declared on March 10, 2006, the shares of Class A
Redeemable Preferred Stock, although considered to be participating securities,
did not receive a dividend pursuant to the formula. Following the provisions of
EITF 03-6, the Class A Redeemable Preferred Stock, a participating security
prior to conversion on April 28, 2006, was excluded in the computation of basic
EPS using the two-class method.
The
conversion of the Class A Redeemable Preferred Stock into shares of Class A
Common Stock was approved by the stockholders at the Company's 2006 Annual
Meeting of Shareholders on April 28, 2006, and the shares of Class A Redeemable
Preferred Stock were converted into shares of Class A Common Stock on that date.
For purposes of the EPS computation, the conversion of the shares of Class A
Redeemable Preferred Stock into shares of Class A Common Stock has been
accounted for as of April 28, 2006, and is included in the computation of basic
EPS for the Class A Common Stock as of that date.
As
a result of the conversion of the Class A Redeemable Preferred Stock into Class
A Common Stock, the EPS presentation for these securities is no longer
presented.
The
Company has dividend eligible stock incentive plan shares that were outstanding
during the years ended December 31, 2007 and 2006. These stock incentive plan
shares have dividend participation rights, but no contractual obligation to
share in losses. Since there is no such obligation, these incentive plan shares
are not included, pursuant to EITF 03-6, in the twelve months ended December 31,
2007 and 2006, basic EPS computations for the Class A Common Stock, even though
they are participating securities. For the computation of diluted EPS for the
Class A Common Stock for the periods ended December 31, 2007 and 2006, 126,873
and 503,644 phantom shares, respectively, are excluded as their inclusion
would be anti-dilutive.
The table
below reconciles the numerators and denominators of the basic and diluted
EPS.
(in
thousands, except per share data)
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
Basic
and diluted EPS per Class A common share:
|
|
|
|
|
|
|
Numerator:
net loss allocated to the Class A common shares
|
|
|
$
|
(244,512)
|
$
|
(48,909)
|
Denominator:
basic and diluted:
|
|
|
|
|
|
|
Class
A common shares outstanding at the balance sheet date
|
|
|
|
24,861
|
|
24,516
|
Dividend
eligible equity plan shares issued as of the balance sheet
date
|
|
-
|
|
-
|
Effect
of weighting
|
|
|
|
(205)
|
|
(450)
|
Weighted
average shares-basic and diluted
|
|
|
|
24,656
|
|
24,066
|
Basic
and diluted EPS per Class A common share
|
|
|
$
|
(9.92)
|
$
|
(2.03)
|
Basic
and diluted EPS per Class B common share:
|
|
|
|
|
|
|
Numerator:
net loss allocated to Class B common shares
|
|
|
$
|
(3,141)
|
$
|
(637)
|
Denominator:
basic and diluted:
|
|
|
|
|
|
|
Class
B common shares outstanding at the balance sheet date
|
|
|
|
319
|
|
319
|
Effect
of weighting
|
|
-
|
|
-
|
Weighted
average shares-basic and diluted
|
|
|
|
319
|
|
319
|
Basic
and diluted EPS per Class B common share
|
|
|
$
|
(9.84)
|
$
|
(1.99)
|
NOTE
5.
|
REPURCHASE
AGREEMENTS
|
Bimini
Capital has entered into repurchase agreements to finance most of its MBS
security purchases. The repurchase agreements are short-term borrowings that
bear interest at rates that have historically moved in close relationship to the
forward London Interbank Offered Rate (“LIBOR”) interest rate curve. As of
December 31, 2007, Bimini Capital had an outstanding amount of approximately
$678.2 million with a net weighted average borrowing rate of 5.07% and these
agreements were collateralized by MBS with a fair value of $683.9
million. As of December 31, 2006, Bimini Capital had an
outstanding amount of $2.7 billion with a net weighted average borrowing rate of
5.31%, and these agreements were collateralized by MBS with a fair value of $2.8
billion.
As of
December 31, 2007 and 2006, Bimini Capital's repurchase agreements had remaining
maturities as summarized below:
($
in thousands)
|
|
OVERNIGHT
(1
DAY OR LESS)
|
|
|
BETWEEN
2 AND
30
DAYS
|
|
|
BETWEEN
31 AND
90
DAYS
|
|
|
GREATER
THAN
90
DAYS
|
|
|
TOTAL
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency-Backed
Mortgage Backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost of securities sold, including accrued interest
receivable
|
|
$ |
- |
|
|
$ |
249,124 |
|
|
$ |
37,559 |
|
|
$ |
397,260 |
|
|
$ |
683,943 |
|
Fair
market value of securities sold, including accrued interest
receivable
|
|
$ |
- |
|
|
$ |
249,124 |
|
|
$ |
35,559 |
|
|
$ |
397,260 |
|
|
$ |
683,943 |
|
Repurchase
agreement liabilities associated with these securities
|
|
$ |
- |
|
|
$ |
244,379 |
|
|
$ |
35,577 |
|
|
$ |
396,222 |
|
|
$ |
678,178 |
|
Net
weighted average borrowing rate
|
|
|
- |
|
|
|
5.21 |
% |
|
|
5.34 |
% |
|
|
4.96 |
% |
|
|
5.07 |
% |
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency-Backed
Mortgage Backed Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost of securities sold, including accrued interest
receivable
|
|
$ |
- |
|
|
$ |
859,344 |
|
|
$ |
807,488 |
|
|
$ |
1,149,309 |
|
|
$ |
2,816,141 |
|
Fair
market value of securities sold, including accrued interest
receivable
|
|
$ |
- |
|
|
$ |
833,436 |
|
|
$ |
793,702 |
|
|
$ |
1,106,228 |
|
|
$ |
2,733,366 |
|
Repurchase
agreement liabilities associated with these securities
|
|
$ |
- |
|
|
$ |
842,094 |
|
|
$ |
805,595 |
|
|
$ |
1,093,991 |
|
|
$ |
2,741,680 |
|
Net
weighted average borrowing rate
|
|
|
- |
|
|
|
5.31 |
% |
|
|
5.33 |
% |
|
|
5.29 |
% |
|
|
5.31 |
% |
The
following summarizes information regarding the Company’s amounts at risk with
individual counterparties greater than 10% of the Company’s equity at December
31, 2007. The Company did not have an amount at risk greater than 10%
of the equity of the Company with any counterparties as of December 31,
2006.
($
in thousands)
Repurchase
Agreement Counterparties
|
|
Amount
at
Risk(1)
|
|
|
Weighted
Average
Maturity
of
Repurchase
Agreements
in
Days
|
|
Deutsche
Bank Securities, Inc.
|
|
$ |
8,823 |
|
|
|
193 |
|
Goldman
Sachs & Co.
|
|
|
2,931 |
|
|
|
19 |
|
(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, 2007, Bimini Capital sponsored two statutory trusts, of which
100% of the common equity is owned by the Company, 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 the Company. The debt securities held by each
trust are the sole assets of that trust. Obligations related to these statutory
trusts are presented below.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Junior
subordinated notes owed to Bimini Capital Trust I (BCTI)
|
|
$ |
51,550 |
|
|
$ |
51,550 |
|
Junior
subordinated notes owed to Bimini Capital Trust II (BCTII)
|
|
$ |
51,547 |
|
|
$ |
51,547 |
|
The BCTI
trust preferred securities and Bimini Capital's BCTI Junior Subordinated Notes
have a fixed rate of interest until March 30, 2010, of 7.61% and
thereafter, through maturity in 2035, the rate will float at a spread of 3.30%
over the prevailing three-month LIBOR rate. The BCTI trust preferred
securities and Bimini Capital's BCTI Junior Subordinated Notes require quarterly
interest distributions and are redeemable at Bimini Capital's option, in whole
or in part and without penalty, beginning March 30, 2010 and at any date
thereafter. Bimini Capital's BCTI Junior Subordinated Notes are
subordinate and junior in right of payment of all present and future senior
indebtedness.
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, and at any date thereafter.
Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in
right of payment of all present and future senior indebtedness.
Each
trust is a variable interest entity pursuant to FIN No. 46 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 pursuant to FIN No. 46. Since
Bimini Capital's common share investments in BCTI and BCTII are not a variable
interest, Bimini Capital is not the primary beneficiary of the trusts.
Therefore, Bimini Capital has not consolidated the financial statements of BCTI
and BCTII into its financial statements. Based on the aforementioned
accounting guidance, 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, consisting of 100,000,000 shares of common stock having a
par value of $0.001 per share and 10,000,000 shares of preferred stock having a
par value of $0.001 per share. 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.
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.
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 $15.00 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 $15.00 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.
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.
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
15.00 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
15.00 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
2007, Bimini issued 263,533 shares 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
2007, Bimini issued for payment of Director fees a total of 82,154 shares of
Class A Common Stock, and Bimini also paid to its directors $331,000 of cash
compensation.
During
2006, Bimini retired 1,089,100 shares of Class A Common Stock that were held in
treasury
On July
17, 2006, Bimini granted 79,725 restricted shares of its Class A Common Stock to
certain key employees of the Company's subsidiary pursuant to the terms of the
Bimini Capital Management, Inc. 2003 Long Term Incentive Compensation Plan. The
shares were subject to forfeiture prior to the November 3, 2006, vesting
date. On the vesting date 4,650 total shares were forfeited and 75,075
total shares were issued.
On April
28, 2006, Bimini issued a total of 1,223,208 shares of Class A Common Stock in
conjunction with the conversion of the Class A Redeemable Preferred
Stock.
During
2006, Bimini issued 140,490 shares 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
2006, Bimini issued for payment of Director fees a total of 37,001 shares of
Class A Common Stock, and Bimini also paid to its directors $205,000 of cash
compensation.
Dividends
On March
9, 2007, the Company's Board of Directors declared a $0.05 per share cash
dividend to the holders of its dividend eligible securities on the record date
of March 26, 2007. Dividends were payable on 24,556,219 shares of Class A
Common Stock, 477,290 phantom shares granted under the Company's stock incentive
plan (see Note 8) and 319,388 shares of Class B Common Stock. The
distribution totaling $1,267,645 million was paid on April 13,
2007.
On
December 20, 2006, the Company's Board of Directors declared a $0.05 per share
cash dividend to the holders of its dividend eligible securities on the record
date of January 3, 2007. Dividends were payable on 24,515,717 shares of
Class A Common Stock, 503,644 phantom shares granted under the Company's
stock incentive plan (see Note 8) and 319,388 shares of Class B Common
Stock. The distribution totaling $1,266,937 was paid on January 19,
2007.
On
September 7, 2006, the Company's Board of Directors declared a $0.05 per share
cash dividend to the holders of its dividend eligible securities on the record
date of September 22, 2006. Dividends were payable on 24,396,940 shares of
Class A Common Stock, 562,018 phantom shares and 76,375 restricted shares
granted under the Company's stock incentive plan (see Note 8) and 319,388
shares of Class B Common Stock. The distribution totaling $1,267,736 was
paid on October 13, 2006.
On May
31, 2006, the Company's Board of Directors declared a $0.25 per share cash
dividend to the holders of its dividend eligible securities on the record date
of June 21, 2006. Dividends were payable on 24,354,114 shares of Class A
Common Stock, 612,268 phantom shares granted under the Company's stock incentive
plan (see Note 8) and 319,388 shares of Class B Common Stock. The
shares of Class A Common Stock include the shares of Class A Redeemable
Preferred Stock that were converted on April 28, 2006. The distribution totaling
$6,321,444 was paid on July 7, 2006.
On March
10, 2006, the Company's Board of Directors declared a $0.11 per share cash
dividend to the holders of its dividend eligible securities. Dividends were
payable on 23,083,498 shares of Class A Common Stock, 650,320 phantom shares
granted under the Company's stock incentive plan (see Note 8) and 319,388 shares
of Class B Common Stock. No dividends were paid on the Class A Redeemable
Preferred Stock as the provisions of a formula in the Company's amended Articles
of Incorporation were not met. The distribution totaling $2,645,853 was paid on
April 7, 2006.
Preferred
Stock
General
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.
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.
There was
no change in the number of issued and outstanding shares of the Company's Class
B Common Stock and Class C Common Stock. The conversion of the outstanding
shares of Class A Redeemable Preferred Stock into Class A Common Stock was
approved by the Company's stockholders at the Company's 2006 Annual Meeting of
Stockholders on April 28, 2006, and the outstanding shares of Class A Redeemable
Preferred Stock were converted into 1,223,208 shares of Class A Common Stock on
that date
No shares
of the Class B Redeemable Preferred Stock have been issued as of December 31,
2007.
Ownership
Limitations
Bimini’s
amended charter, subject to certain exceptions, contains certain restrictions on
the number of shares of stock that a person may own. Bimini’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’s common stock, whichever is more restrictive, or
Bimini’s stock in the aggregate. Bimini’s amended charter further prohibits
(i) any person from beneficially or constructively owning shares of
Bimini’s stock that would result in Bimini being "closely held" under
Section 856(h) of the Code or otherwise cause Bimini to fail to qualify as
a REIT, and (ii) any person from transferring shares of Bimini’s stock if
such transfer would result in shares of Bimini’s stock being owned by fewer than
100 persons. Bimini’s board of directors, in its sole discretion, may exempt a
person from the stock ownership limit. However, Bimini’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’s stock (whichever is more restrictive) would result in Bimini 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’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’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’s board of directors in its sole
discretion, to determine or ensure Bimini’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’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’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 and provide Bimini with such other information as Bimini may request
in order to determine the effect of such transfer on the Company.
If any
transfer of shares of Bimini’s stock occurs which, if effective, would result in
any person beneficially or constructively owning shares of Bimini’s stock in
excess or in violation of the above transfer or ownership limitations, then that
number of shares of Bimini’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’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 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 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
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 that shares of Bimini’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’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’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 that shares of Bimini’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.
Pursuant
to a letter dated November 2, 2006 from the Company to Mr. Norden, the Alyssa
Blake Norden Trust of 1993, the Michael Jared Norden Trust of 1993 and the Amy
Suzanne Trust of 1993, and based on representations from such persons, the
Company increased the ownership limit for the foregoing stockholders to ensure
that they would be able to acquire and own the shares of Company Class A Common
Stock and Class A Preferred issued to them in connection with the Company's
acquisition of OITRS. The Company also agreed to monitor its
outstanding share ownership, including the extent to which it repurchases its
stock, and to use its best efforts to enable the foregoing stockholders to be
able to acquire and own any additional Company shares issuable to them in
connection with the Company's acquisition of OITRS, as well as any Company
shares issuable to Mr. Norden pursuant to any present or future employment or
other compensation agreement between the Company and Mr. Norden, in each case,
with respect to the Company's ownership limits.
In
addition, shares of Bimini’s stock held in the trust shall be deemed to have
been offered for sale to Bimini, or Bimini’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, or Bimini’s designee, accept such offer. Bimini 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, 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.
All
certificates representing shares of Bimini’s common stock and preferred stock,
if issued, will bear a legend referring to the restrictions described
above.
Every
record holder of 0.5% or more (or such other percentage as required by the Code
and the related Treasury regulations) of all classes or series of Bimini’s
stock, including shares of Bimini’s common stock on any dividend record date
during each taxable year, within 30 days after the end of the taxable year,
shall be required to give written notice to Bimini stating the name and address
of such record holder, the number of shares of each class and series of Bimini’s
stock which the record holder beneficially owns and a description of the manner
in which such shares are held. Each such record holder shall provide to Bimini
such additional information as Bimini may request in order to determine the
effect, if any, of such beneficial ownership on Bimini’s qualification as a REIT
and to ensure compliance with the stock ownership limits. In addition, each
record holder shall upon demand be required to provide to Bimini such
information as Bimini may reasonably request in order to determine Bimini’s
qualification as a REIT and to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance. Bimini may
request such information after every sale, disposition or transfer of Bimini’s
common stock prior to the date a registration statement for such stock becomes
effective.
These
ownership limits could delay, defer or prevent a change in control or other
transaction of Bimini that might involve a premium price for the Class A
Common Stock or otherwise be in the best interest of the
stockholders.
NOTE
8. STOCK INCENTIVE PLANS
On
December 18, 2003, Bimini Capital adopted the 2003 Long Term Incentive
Compensation Plan (the “2003 Plan”) to provide Bimini with the flexibility to
use stock options and other awards as part of an overall compensation package to
provide a means of performance-based compensation to attract and retain
qualified personnel. The 2003 Plan was amended and restated in March 2004.
Key employees, directors and consultants are eligible to be granted stock
options, restricted stock, phantom shares, dividend equivalent rights and other
stock-based awards under the 2003 Plan. Subject to adjustment upon certain
corporate transactions or events, a maximum of 4,000,000 shares of the Class A
Common Stock (but not more than 10% of the Class A Common Stock outstanding on
the date of grant) may be subject to stock options, shares of restricted stock,
phantom shares and dividend equivalent rights under the 2003 Plan.
Phantom
share awards represent a right to receive a share of Bimini's Class A
Common Stock. These awards do not have an exercise
price and are valued at the fair value of Bimini Capital’s Class A Common
Stock at the date of the grant. The grant date value is being amortized to
compensation expense on a straight-line basis over the vesting period of the
respective award. The phantom shares vest, based on the employees’
continuing employment, following a schedule as provided in the grant
agreements, for periods through December 15, 2009. The Company recognizes
compensation expense over the vesting period. Compensation expense recognized
for phantom shares during the years ended December 31, 2007 and 2006 totaled
$2.7 million and $2.9 million, 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, 2007 and 2006 is presented
below:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested
at January 1
|
|
|
339,862 |
|
|
$ |
12.60 |
|
|
|
343,644 |
|
|
$ |
15.10 |
|
Granted
|
|
|
25,607 |
|
|
|
7.61 |
|
|
|
215,389 |
|
|
|
9.15 |
|
Vested
|
|
|
(221,547 |
) |
|
|
13.02 |
|
|
|
(216,390 |
) |
|
|
13.18 |
|
Forfeited
|
|
|
(16,550 |
) |
|
|
8.78 |
|
|
|
(2,781 |
) |
|
|
8.99 |
|
Nonvested
at December 31
|
|
|
127,372 |
|
|
$ |
11.36 |
|
|
|
339,862 |
|
|
$ |
12.60 |
|
As of
December 31, 2007, there was $1.4 million of total unrecognized compensation
cost related to nonvested phantom share awards. That cost is expected
to be recognized over a weighted-average period of 12.7 months.
On July
17, 2006, the Company granted 79,725 restricted shares of its Class A common
Stock to certain key employees of the Company’s subsidiary pursuant to the terms
of the 2003 Plan. Such share grants were initially recorded by OITRS
prior to the merger with the Company. However, these awards
were cancelled when the Company and the subject employees agreed to forego the
award in contemplation of a new grant under the Company’s 2003
Plan. The restricted shares were valued at the fair value of
Bimini’s Class A Common Stock at the date of grant, which totaled $0.7 million
for the July 2006 awards, and this amount was amortized to compensation through
November 3, 2006, the vesting date of the award, net of any
forfeitures. The restricted shares do not have an exercise
price. Dividends paid on the restricted shares were charged to
retained earnings when declared by the Company’s Board of
Directors. The shares were subject to forfeiture, based on
continued employment through the vesting date of November 2,
2006. During 2006, 4,650 shares were forfeited.
Bimini
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. In 2007 and 2006 no stock-based
awards were made under and no shares of the Company’s stock have been issued
under the Performance Bonus Plan.
NOTE
9.
|
SAVINGS
INCENTIVE PLAN
|
Bimini’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’s sole discretion, Bimini can
match the employees’ contributions. For the years ended December 31, 2007 and
2006, Bimini made 401(k) matching contributions of approximately $56,000 and
$63,000, 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.
On
September 17, 2007, a complaint was filed in the U.S. District Court for the
Southern District of Florida by William Kornfeld against the Company, certain of
the Company’s current and former officers and directors, Flagstone Securities,
LLC and BB&T Capital Markets alleging various violations of the federal
securities laws and seeking class action certification. On October 9,
2007, a complaint was filed in the U.S. District Court for the Southern District
of Florida by Richard and Linda Coy against the Company, certain of the
Company’s 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 Company
believes the plaintiffs’ claims in these actions are without merit, has filed a
motion to consolidate these actions and intends to vigorously defend the
cases.
No
accrual for any losses that may result from the Company’s outstanding litigation
have been recorded on the Company’s financial statements.
Guarantees. Bimini
Capital has guaranteed the obligations of OITRS and OITRS’s wholly-owned
subsidiary, HS Special Purpose, LLC, under their respective financing facilities
with Citigroup described in Note 12. These guarantees will remain in effect so
long as the applicable financing facilities remain in effect. If an
Event of Default occurs under these financing facilities that are not cured or
waived, Bimini Capital may be required to perform under its
guarantees. There is no specific limitation on the maximum potential
future payments under these guarantees. However, Bimini Capital’s
liability under these guarantees would be reduced in an amount equal to the
amount by which the collateral securing such obligations exceeds the amounts
outstanding under the applicable facilities.
NOTE
11. INCOME TAXES
REIT
taxable income (loss), as generated by Bimini Capital’s qualifying REIT
activities, is computed differently from Bimini Capital’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 Bimini Capital’s REIT financial statement net income (loss) can be
substantial and each item can affect several years. Since Bimini
Capital’s inception in 2003 through December 31, 2007, cumulative REIT taxable
income is approximately $86.7 million greater than Bimini Capital's total REIT
financial statement net income (loss) as reported in its financial statements as
prepared on a GAAP basis.
Year
2007
For the
year ended December 31, 2007, Bimini Capital's REIT taxable loss was
approximately $7.0 million. This is approximately $71.8 million less
than Bimini Capital's REIT financial statement net loss. During 2007,
Bimini Capital's most significant differences between the financial statements
and the tax computations include: the $55.3 million other-than-temporary loss on
MBS recorded at June 30, 2007; interest on inter-company loans with OITRS;
equity plan stock awards; depreciation of property and equipment; the accounting
for debt issuance costs; and $17.3 million of losses realized on certain MBS
sales.
The $55.3
million other-than-temporary loss on MBS is not recognized for tax purposes, as
it does not represent an actual sale of any MBS securities by Bimini
Capital. For tax purposes, the gain or loss on MBS sales are
recognized only when the actual sale transaction is completed. During
the year ended December 31, 2007, book losses of approximately $17.3 million on
MBS sales were realized; the tax capital losses for these MBS sales are only
available to the REIT to offset future realized capital gains, and therefore
they do not reduce REIT taxable income. The debt issuance costs are
being amortized, and property and equipment are being 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 Bimini Capital.
The year
2007 REIT net operating loss (NOL) of approximately $7.0 million is available to
offset future REIT taxable income, and this NOL expires in 2027. The
realized tax capital losses from MBS sales total approximately $27.3 million;
they are only available to the REIT to offset future realized capital gains, and
they expire in 2012.
Year
2006
For the
year ended December 31, 2006, Bimini Capital's REIT taxable income was
approximately $12.0 million greater than Bimini Capital's financial statement
net income from REIT activities. During 2006, Bimini Capital's most significant
items and transactions being accounted for differently include the
other-than-temporary impairment losses on the MBS portfolio of approximately
$10.0 million, interest on inter-company loans with OITRS, equity plan stock
awards, depreciation of property and equipment and the accounting for debt
issuance costs. The impairment losses on the MBS portfolio were recognized for
tax purposes in 2007 as tax capital losses as the actual sales of the securities
was completed. 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 both as to the year and as to the amount, because the tax impact is
measured at the fair value of the shares as of a future date.
NOTE
12. 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 ability to recover from recent large operating losses. Due to
this decision, all OITRS assets are considered as held for sale, and have been
accounted for as discontinued operations under applicable accounting standards
for all periods presented.
The
impact of these decisions included OITRS recording impairment charges on
goodwill and other intangible assets and on certain fixed assets. In
accordance with SFAS No. 144, the closure and/or sale of mortgage loan
origination channels resulted in an impairment charge of $6.0 million during the
three months ended March 31, 2007. In addition, accordance with SFAS No.
142, OITRS recorded impairment charges for both goodwill and other
intangible assets not subject to amortization of approximately $2.8 million as
of March 31, 2007.
On April
18, 2007, the Board of Managers of OITRS approved the closure of OITRS’s
wholesale and conduit mortgage origination channels. On April 20, 2007, the
wholesale and conduit mortgage loan origination channels ceased accepting
applications for new mortgages from borrowers.
On April
26, 2007, OITRS entered into a binding agreement to sell a majority of its
private-label and agency mortgage servicing portfolio, which had an aggregate
unpaid principal balance of approximately $5.9 billion as of March 31, 2007. The
aggregate sales proceeds were used to repay debt that was secured by OITRS’s
mortgage servicing portfolio. All servicing was transferred to the buyer on or
before July 2, 2007. The transaction resulted in a loss of $2.8
million.
On May 7,
2007, OITRS signed a binding agreement to sell its retail mortgage loan
origination channel to a third party. On June 30, 2007, OITRS entered
into an amendment to this agreement. The sales price was $1.5 million plus the
assumption of certain liabilities, including the assumption of certain future
operating lease obligations of OITRS.
The
closure of the wholesale and conduit mortgage loan origination channels, coupled
with sale of the retail channel, resulted in charges totaling $7.6 million
associated with severance payments to employees and operating lease termination
costs, among other less significant costs.
On July
25, 2007, OITRS entered into a binding agreement to sell a majority of its
remaining private-label and agency mortgage servicing portfolio, which had an
aggregate unpaid principal balance of approximately $3.0 billion as of June 30,
2007. The aggregate sales proceeds were used to repay the debt
that secured OITRS’s mortgage servicing portfolio. The
transaction, which was subject to various closing conditions, was completed on
September 4, 2007. The transaction resulted in a loss of $0.1
million.
The
results of discontinued operations of OITRS included in the accompanying
consolidated statements of operations for the years ended December 31, 2007 and
2006 were as follows:
(in
thousands)
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
Interest
income, net
|
|
$ |
22,477 |
|
|
$ |
85,296 |
|
Interest
expense
|
|
|
17,561 |
|
|
|
72,178 |
|
Net
interest income
|
|
|
4,916 |
|
|
|
13,118 |
|
Gain
(Loss) on mortgage banking activities
|
|
|
(70,068 |
) |
|
|
15,458 |
|
Other
income and expenses, net of non-recurring items
|
|
|
(15,693 |
) |
|
|
7,533 |
|
Net
servicing income (loss)
|
|
|
(13,171 |
) |
|
|
(12,185 |
) |
Other
interest expense and loss reserves
|
|
|
(23,950 |
) |
|
|
(20,897 |
) |
Total
net revenues (deficiency of revenues)
|
|
|
(117,966 |
) |
|
|
3,027 |
|
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
32,985 |
|
|
|
63,119 |
|
Loss
before benefit (provision) for income taxes
|
|
|
(150,951 |
) |
|
|
(60,092 |
) |
Benefit
(provision) for income taxes and valuation allowance
|
|
|
(7,181 |
) |
|
|
27,218 |
|
Total
loss from discontinued operations, net of taxes
|
|
$ |
(158,132 |
) |
|
$ |
(32,874 |
) |
Loss from
discontinued operations includes interest expense on related to OITRS’ warehouse
lines of credit and its line of credit to finance the investment in retained
interests. Intercompany interest expense of $11.6 million and $10.2
million for the years ended December 31, 2007 and 2006, respectively, has been
eliminated in consolidation.
Loss from
discontinued operations for the year ended December 31, 2007 includes impairment
charges of approximately $3.4 million and $8.9 million related to goodwill and
property and equipment, respectively.
The
assets and liabilities of OITRS included in the consolidated balance sheet as of
December 31, 2007 and 2006 were as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
705 |
|
|
$ |
9,754 |
|
Mortgage
loans held for sale
|
|
|
983 |
|
|
|
749,834 |
|
Retained
interests, trading
|
|
|
69,301 |
|
|
|
104,199 |
|
Securities
held for sale
|
|
|
173 |
|
|
|
858 |
|
Originated
mortgage servicing rights
|
|
|
3,073 |
|
|
|
98,859 |
|
Receivables
|
|
|
10,372 |
|
|
|
5,958 |
|
Property
and equipment, net
|
|
|
285 |
|
|
|
11,415 |
|
Prepaids
and other assets
|
|
|
11,728 |
|
|
|
28,447 |
|
Assets
held for sale
|
|
$ |
96,620 |
|
|
$ |
1,009,324 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Warehouse
lines of credit and drafts payable
|
|
$ |
- |
|
|
$ |
734,879 |
|
Other
secured borrowings
|
|
|
18,000 |
|
|
|
121,977 |
|
Accounts
payable, accrued expenses and other
|
|
|
9,842 |
|
|
|
23,060 |
|
Liabilities
related to assets held for sale
|
|
$ |
27,842 |
|
|
$ |
879,916 |
|
(a)
|
–
Significant accounting policies of
OITRS
|
The
following accounting policies were applicable prior to the discontinuation of
the residential mortgage origination operations. Going forward such
policies generally will not be applicable to OITRS as it no longer originates
residential mortgage loans. OITRS will continue to actively market for sale
originated mortgage servicing rights and retained interests in securitizations,
but will not generate any such assets in the future.
Mortgage Loans Held for
Sale. Mortgage loans held for sale represent mortgage loans
originated and held by the Company pending sale to investors. The mortgages are
carried at the lower of cost or market as determined by outstanding commitments
from investors or current investor yield requirements calculated on the
aggregate loan basis. Deferred net fees or costs are not amortized during the
period the loans are held for sale, but are recorded when the loan is sold. The
Company generally, but not always, sells or securitizes loans with servicing
rights retained. These transfers of financial assets are accounted for as sales
for financial reporting purposes when control over the assets has been
surrendered. Control over transferred assets is surrendered when (i) the assets
have been isolated from the Company; (ii) the purchaser obtains the right, free
of conditions that constrain such purchaser from taking advantage of that right,
to pledge or exchange the transferred assets and (iii) the Company does not
maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity. These transactions are treated as sales
in accordance with SFAS No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. Gains or
losses on such sales are recognized at the time legal title transfers to the
purchaser and are based upon the difference between the sales proceeds from the
purchaser and the allocated basis of the loan sold, adjusted for net deferred
loan fees and certain direct costs and selling costs. A valuation allowance is
recorded to adjust mortgage loans held for sale to the lower of cost or
market.
Retained Interest,
Trading. The Company uses warehouse loan arrangements to
finance the origination and purchase of pools of fixed and adjustable-rate
residential mortgage loans (the “Mortgage Loans”). Subsequent to their
origination or purchase, OITRS either sells these Mortgage Loans to third-party
institutional investors through bulk sale arrangements or through securitization
transactions. The Company generally makes several representations and warranties
regarding the performance of the Mortgage Loans in connection with each sale or
securitization.
In a
securitization, the Company accumulates the desired amount of Mortgage Loans and
securitizes them in order to create marketable securities. First, pursuant to a
Mortgage Loan Purchase Agreement (“MLPA”), the Company sells Mortgage Loans to
OMAC, the Company's wholly-owned special purpose entity created for the
execution of these securitizations. Under this MLPA, the Company makes general
representations and warranties for the Mortgage Loans sold by the Company to
OMAC.
OMAC then
deposits the Mortgage Loans purchased from the Company into a Real Estate
Mortgage Investment Conduit (“REMIC”) trust where, pursuant to a Pooling and
Servicing Agreement (“P&S Agreement”), the rights to the cash flows
associated with such Mortgage Loans are sold to investors in the form of
marketable debt securities. These securities, issued by the REMIC trust, are
divided into different classes of certificates (the “Certificates”) with varying
claims to payments received on the Mortgage Loans.
Certain
of these Certificates are offered to the public (the “Public Certificates”)
pursuant to a prospectus. These Public Certificates are sold to underwriters on
the closing date pursuant to an underwriting agreement. The proceeds from the
sale of the Public Certificates to the underwriters (less an underwriting
discount) are ultimately transferred to the Company as partial consideration for
the Mortgage Loans sold to OMAC pursuant to the MLPA.
Finally,
subsequent to a securitization transaction as described above, the Company
typically executes an additional net interest margin (“NIM”) securitization, or
“resecuritization” of the non-publicly offered Certificates, representing
prepayment penalties and over-collateralization fundings (the “Underlying
Certificates”). This NIM securitization is typically transacted as
follows:
OMAC
first deposits the Underlying Certificates into a trust (the “NIM Trust”)
pursuant to a deposit trust agreement. The NIM Trust, pursuant to an indenture,
then issues (i) notes (the “NIM Notes”) representing interests in the Underlying
Certificates and (ii) an owner trust certificate (the “Owner Trust Certificate”)
representing the residual interest in the NIM Trust. The NIM Notes are sold to
third parties via private placement transactions. The net proceeds from the sale
of the NIM Notes and the Owner Trust Certificate are then transferred from OMAC
to the Company. The Owner Trust Certificates from the Company's various
securitizations represent the retained interest, trading on the consolidated
balance sheet and are carried at fair value with changes in fair value reflected
in earnings.
Mortgage Servicing
Rights. The Company recognizes mortgage servicing rights
(“MSRs”) as an asset when separated from the underlying mortgage loans in
connection with the sale of such loans. Upon sale of a loan, the Company
measures the retained MSRs by allocating the total cost of originating a
mortgage loan between the loan and the servicing right based on their relative
fair values. The estimated fair value of MSRs is determined by obtaining a
market valuation from a specialist who brokers MSRs. The broker,
Interactive Mortgage Advisors, LLC (IMA), is 50% owned by OITRS. To
determine the market valuation, the broker uses a valuation model that
incorporates assumptions relating to the estimate of the cost of servicing the
loan, a discount rate, a float value, an inflation rate, ancillary income of the
loan, prepayment speeds and default rates that market participants use for
acquiring similar servicing rights. Gains or losses on the sale of MSRs are
recognized when title and all risks and rewards have irrevocably passed to the
purchaser of such MSRs and there are no significant unresolved
contingencies.
In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. SFAS 156 amends SFAS 140 with respect to the accounting
for separately-recognized servicing assets and liabilities. SFAS 156 requires
all separately-recognized servicing assets and liabilities to be initially
measured at fair value and permits companies to elect, on a class-by-class
basis, to account for servicing assets and liabilities on either a lower of cost
or market value basis or a fair value measurement basis. The Company elected to
early adopt SFAS 156 as of January 1, 2006, and to measure all mortgage
servicing assets at fair value (and as one class). Servicing assets and
liabilities at December 31, 2005 were accounted for at the lower of amortized
cost or market value. As a result of adopting SFAS 156, the Company recognized a
$2.6 million after-tax ($4.3 million pre-tax) increase in retained earnings as
of January 1, 2006, representing the cumulative effect adjustment of
re-measuring all servicing assets and liabilities that existed at December 31,
2005, from a lower of amortized cost or market basis to a fair value
basis.
Goodwill and Other Intangible
Assets. Goodwill represents the excess of the purchase price
over the fair value of net assets acquired in a business combination. The
Company's goodwill all arose from the OITRS merger. Contingent consideration
paid in subsequent periods under the terms of the OITRS merger agreement, if
any, would be considered acquisition costs and classified as goodwill. In
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company subjects its goodwill
to at least an annual assessment for impairment by applying a fair value-based
test. If the carrying value exceeds the fair value, goodwill is impaired. During
the year ended December 31, 2007, the Company recorded an impairment charge of
approximately $3.4 million to reduce the carrying value to zero.
Derivative Assets and Derivative
Liabilities. Prior to the suspension of the mortgage
origination operations, the Company's mortgage committed pipeline included
interest rate lock commitments (“IRLCs”) that had been extended to borrowers who
had applied for loan funding and met certain defined credit and underwriting
criteria. Effective with the adoption of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, the Company classified
and accounted for the IRLCs as derivatives. Accordingly, IRLCs were recorded at
their fair value with changes in fair value recorded to current earnings.
Changes in fair value of IRLCs were determined based on changes in value of
similar loans observed over the period in question. The Company used other
derivative instruments to economically hedge the IRLCs, which were also
classified and accounted for as derivatives.
The
Company's risk management objective for its mortgage loans held for sale
included use of mortgage forward delivery contracts designed as fair value
derivative instruments to protect earnings from an unexpected change due to a
decline in value. Effective with the adoption of SFAS No. 133, the Company's
mortgage forward delivery contracts were recorded at their fair value with
changes in fair value recorded to current earnings. The value of mortgage
forward delivery contracts were obtained from readily available market sources.
The Company also evaluated its contractual arrangements, assets and liabilities
for the existence of embedded derivatives.
Derivative
assets or liabilities arising from the Company's derivative activities were
reported as separate line items in the accompanying consolidated financial
statements in “Derivative Asset” or Derivative Liability.” IRLCs were included
in Mortgage loans held for sale. Fluctuations in the fair market value of IRLCs
and other derivatives employed were reflected in the consolidated statement of
operations under the caption “Gains on mortgage banking
activities.”
Gain on Sale of
Loans. Gains or losses on the sale of mortgage loans are
recognized at the time legal title transfers to the purchaser of such loans
based upon the difference between the sales proceeds from the purchaser and the
allocated basis of the loan sold, adjusted for net deferred loan fees and
certain direct costs and selling costs. The Company defers net loan origination
costs and fees as a component of the loan balance on the balance sheet. Such
costs are not amortized and are recognized into income as a component of the
gain or loss upon sale. Accordingly, salaries, commissions, benefits and other
operating expenses of $22.2 million and $59.9 million, respectively, were
capitalized as direct loan origination costs during the years ended December 31,
2007 and 2006 and reflected in the basis of loans sold for gain on sale
calculation purposes. Loan fees related to the origination and funding of
mortgage loans held for sale which were also capitalized, were $7.5 million
during the year ended at December 31, 2006. The net gain on sale of loans for
the year ended December 31, 2006 was $15.5 million. The net gain on sale of
loans is included with changes in fair market value of IRLCs and mortgage loans
held for sale and reported as “Gains on mortgage banking activities” on the
consolidated statement of operations.
Servicing Fee
Income. Servicing fee income is generally a fee based on a
percentage of the outstanding principal balances of the mortgage loans serviced
by the Company (or by a subservicer where the Company is the master servicer)
and is recorded as income as the installment payments on the mortgages are
received by the Company or the subservicer.
Income Taxes. OITRS
and its activities are subject to corporate income taxes and the applicable
provisions of SFAS No. 109,
Accounting for Income Taxes. 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. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. To the extent management believes deferred tax assets
will not be fully realized in future periods, a provision will be recorded so as
to reflect the net portion, if any, if the deferred tax asset management expects
to realize in the consolidated balance sheet of the Company.
(b)
– Mortgage loans held for sale, net
Prior to
ceasing operations, upon the closing of a residential mortgage loan or shortly
thereafter, OITRS would sell or securitize the majority of its mortgage loan
originations. OITRS also sold mortgage loans insured or guaranteed by various
government-sponsored entities and private insurance agencies. The insurance or
guaranty is provided primarily on a nonrecourse basis to OITRS, except where
limited by the Federal Housing Administration and Veterans Administration and
their respective loan programs. Mortgage loans held for sale consist
of the following as of December 31, 2007 and 2006:
(in
thousands)
|
December
31,
|
|
|
2007
|
|
|
2006
|
Mortgage
loans held for sale, and other, net
|
$
|
4,780
|
|
$
|
741,545
|
Deferred
loan origination costs and other-net
|
|
-
|
|
|
9,188
|
Valuation
allowance
|
|
(3,797)
|
|
|
(899)
|
|
$
|
983
|
|
$
|
749,834
|
Included
in mortgage loans held for sale at December 31, 2006 above are
IRLCs. Fluctuations in the fair market value of IRLCs and other
derivatives employed are reflected in the consolidated statement of operations
under the discontinued operations.
(c)
– Retained interest, trading
Retained
interest, trading is the subordinated interests retained by OITRS resulting from
securitizations and includes the over-collateralization and residual net
interest spread remaining after payments to the Public Certificates and NIM
Notes. Retained interest, trading represents the present value of estimated cash
flows to be received from these subordinated interests in the future. The
subordinated interests retained are classified as “trading securities” and are
reported at fair value with unrealized gains or losses reported in
earnings.
All of
OITRS’s securitizations were structured and are accounted for as sales in
accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Generally, to meet the sale treatment
requirements of SFAS No. 140, the REMIC trust is structured as a “qualifying
special purpose entity” or QSPE, which specifically limits the REMIC trust's
activities, and OITRS surrenders control over the mortgage loans upon their
transfer to the REMIC trust.
Valuation of Investments.
OITRS classifies its retained interests as trading securities and
therefore records these securities at their estimated fair value. In order to
value the unrated, unquoted, investments, OITRS will record these assets at
their estimated fair value utilizing pricing information available directly from
dealers and the present value calculated by projecting the future cash flows of
an investment on a publicly available analytical system. When a publicly
available analytical system is utilized, OITRS will input the following variable
factors which will have an impact on determining the market value:
Interest Rate Forecast. LIBOR
interest rate curve.
Discount Rate. The present
value of all future cash flows utilizing a discount rate assumption established
at the discretion of OITRS to represent market conditions and value of similar
instruments with similar risks. Discount rates used will vary over
time. Management observes discount rates used for assets with similar
risk profiles. In selecting which assets to monitor for variations in
discount rates, management seeks to identify assets that share most, if not all
of the risk attributes of the Company’s retained interests,
trading. Such assets are typically traded between market participants
whereby the discount rate is the primary variable.
Prepayment Forecast. The
prepayment forecast may be expressed by OITRS in accordance with one of the
following standard market conventions: 1) Constant Prepayment Rate (CPR) or 2)
Percentage of a Prepayment Vector (PPV). Prepayment forecasts may be changed as
OITRS observes trends in the underlying collateral as delineated in the
Statement to Certificate Holders generated by the REMIC trust’s Trustee for each
underlying security. Prepayment forecast will also vary over time as
the level of interest rates change, the difference between rates available to
borrowers on adjustable rate versus fixed rate mortgages change and non-interest
rate related variables fluctuate such as home price appreciation, among
others.
Credit Performance Forecast.
A forecast of future credit performance of the underlying collateral pool
will include an assumption of default frequency, loss severity, and a recovery
lag. In general, OITRS will utilize the combination of default frequency and
loss severity in conjunction with a collateral prepayment assumption to arrive
at a target cumulative loss to the collateral pool over the life of the pool
based on historical performance of similar collateral by the originator. The
target cumulative loss forecast will be developed and noted at the pricing date
of the individual security but may be updated by OITRS consistent with
observations of the actual collateral pool performance. The Company
utilizes a third party source to forecast credit performance.
Default
Frequency may be expressed by OITRS in accordance with any of three standard
market conventions: 1) Constant Default Rate (CDR) 2) Percentage of a Standard
Default Assumption (SDA) curve, or 3) a vector or curve established to meet
forecasted performance for specific collateral pools.
Loss
Severity will be expressed by OITRS in accordance with historical performance of
similar collateral and the standard market conventions of a percentage of the
unpaid principal balance of the forecasted defaults lost during the foreclosure
and liquidation process.
During
the first year of a new issue OITRS may balance positive or adverse effects of
the prepayment forecast and the credit performance forecast allowing for
deviation between actual and forecasted performance of the collateral pool.
After the first year OITRS will generally adjust the Prepayment and Credit
Performance Forecasts to replicate actual performance trends without balancing
adverse and positive effects.
The
following table summarizes OITRS’s residual interests in securitizations as of
December 31, 2007 and 2006:
(in
thousands)
|
|
|
December
31,
|
|
Series
|
Issue
Date
|
|
2007
|
|
|
2006
|
|
HMAC
2004-1
|
March
4, 2004
|
|
$ |
2,460 |
|
|
$ |
2,948 |
|
HMAC
2004-2
|
May
10, 2004
|
|
|
1,408 |
|
|
|
1,939 |
|
HMAC
2004-3
|
June
30, 2004
|
|
|
880 |
|
|
|
362 |
|
HMAC
2004-4
|
August
16, 2004
|
|
|
1,506 |
|
|
|
1,544 |
|
HMAC
2004-5
|
September
28, 2004
|
|
|
3,043 |
|
|
|
4,545 |
|
HMAC
2004-6
|
November
17, 2004
|
|
|
5,181 |
|
|
|
9,723 |
|
OMAC
2005-1
|
January
31, 2005
|
|
|
6,948 |
|
|
|
13,331 |
|
OMAC
2005-2
|
April
5, 2005
|
|
|
7,046 |
|
|
|
14,259 |
|
OMAC
2005-3
|
June
17, 2005
|
|
|
10,736 |
|
|
|
16,091 |
|
OMAC
2005-4
|
August
25, 2005
|
|
|
9,752 |
|
|
|
12,491 |
|
OMAC
2005-5
|
November
23, 2005
|
|
|
7,717 |
|
|
|
8,916 |
|
OMAC
2006-1
|
March
23, 2006
|
|
|
10,835 |
|
|
|
13,219 |
|
OMAC
2006-2
|
June
26, 2006
|
|
|
1,789 |
|
|
|
4,831 |
|
Total
|
|
|
$ |
69,301 |
|
|
$ |
104,199 |
|
There
were no securitizations completed during the year ended December 31,
2007. Key economic assumptions used in measuring the fair value of
retained interests at the date of securitization resulting from securitizations
completed during 2006 were as follows:
Prepayment
speeds (CPR)
|
36.25%
|
Weighted-average-life
|
4.18
|
Expected
credit losses
|
0.74%
|
Discount
rates
|
16.81%
|
Interest
rates
|
Forward
LIBOR Yield curve
|
At
December 31, 2007 and 2006, 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,
|
|
|
|
2007
|
|
|
2006
|
|
Balance
sheet carrying value of retained interests – fair value
|
|
$ |
69,301 |
|
|
$ |
104,199 |
|
Weighted
average life (in years)
|
|
|
4.09 |
|
|
|
4.26 |
|
Prepayment
assumption (annual rate)
|
|
|
26.37 |
% |
|
|
37.88 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(6,908 |
) |
|
$ |
(8,235 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(12,577 |
) |
|
$ |
(14,939 |
) |
Expected
Credit losses (annual rate)
|
|
|
1.22 |
% |
|
|
0.56 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(6,409 |
) |
|
$ |
(3,052 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(13,633 |
) |
|
$ |
(6,098 |
) |
Residual
Cash-Flow discount rate
|
|
|
20.00 |
% |
|
|
16.03 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(4,138 |
) |
|
$ |
(4,575 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(7,907 |
) |
|
$ |
(8,771 |
) |
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
|
|
$ |
(14,906 |
) |
|
$ |
(18,554 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(28,225 |
) |
|
$ |
(39,292 |
) |
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, 2007 and
2006.
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 December31, 2007
|
|
|
Projected
Future
Credit
Losses as of December 31, 2007
|
|
|
Projected
Total Credit Losses as of December 31, 2007
|
|
HMAC
2004-1
|
March
4, 2004
|
|
$ |
309,710 |
|
|
|
0.26 |
% |
|
|
0.24 |
% |
|
|
0.50 |
% |
HMAC
2004-2
|
May
10, 2004
|
|
|
388,737 |
|
|
|
0.59 |
% |
|
|
0.25 |
% |
|
|
0.85 |
% |
HMAC
2004-3
|
June
30, 2004
|
|
|
417,055 |
|
|
|
0.34 |
% |
|
|
0.20 |
% |
|
|
0.55 |
% |
HMAC
2004-4
|
August
16, 2004
|
|
|
410,123 |
|
|
|
0.25 |
% |
|
|
0.33 |
% |
|
|
0.58 |
% |
HMAC
2004-5
|
September
28, 2004
|
|
|
413,875 |
|
|
|
0.42 |
% |
|
|
0.33 |
% |
|
|
0.75 |
% |
HMAC
2004-6
|
November
17, 2004
|
|
|
761,027 |
|
|
|
0.63 |
% |
|
|
0.54 |
% |
|
|
1.17 |
% |
OMAC
2005-1
|
January
31, 2005
|
|
|
802,625 |
|
|
|
0.26 |
% |
|
|
0.77 |
% |
|
|
1.03 |
% |
OMAC
2005-2
|
April
5, 2005
|
|
|
883,987 |
|
|
|
0.27 |
% |
|
|
0.78 |
% |
|
|
1.05 |
% |
OMAC
2005-3
|
June
17, 2005
|
|
|
937,117 |
|
|
|
0.25 |
% |
|
|
0.75 |
% |
|
|
1.00 |
% |
OMAC
2005-4
|
August
25, 2005
|
|
|
1,321,739 |
|
|
|
0.16 |
% |
|
|
1.19 |
% |
|
|
1.35 |
% |
OMAC
2005-5
|
November
23, 2005
|
|
|
986,277 |
|
|
|
0.08 |
% |
|
|
1.47 |
% |
|
|
1.54 |
% |
OMAC
2006-1
|
March
23, 2006
|
|
|
934,441 |
|
|
|
0.15 |
% |
|
|
1.44 |
% |
|
|
1.59 |
% |
OMAC
2006-2
|
June
26, 2006
|
|
|
491,572 |
|
|
|
0.10 |
% |
|
|
2.79 |
% |
|
|
2.89 |
% |
Total
|
|
|
$ |
9,058,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table
below summarizes certain cash flows received from and paid to securitization
trusts for the years ended December 31, 2007 and 2006:
(in
thousands)
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Proceeds
from securitizations
|
|
$ |
- |
|
|
$ |
1,436,838 |
|
Servicing
fees received
|
|
|
11,744 |
|
|
|
17,878 |
|
Servicing
advances
|
|
|
4,812 |
|
|
|
662 |
|
Cash
flows received on retained interests
|
|
|
5,779 |
|
|
|
4,356 |
|
The
following information presents quantitative information about delinquencies and
credit losses on securitized financial assets as of December 31, 2007 and
2006:
(in
thousands)
As
of Date
|
|
Total
Principal Amount of Loans
|
|
|
Principal
Amount of Loans 60 Days or more
|
|
|
Net
Credit Losses
|
|
December
31, 2007
|
|
$ |
4,528,481 |
|
|
$ |
457,872 |
|
|
$ |
23,639 |
|
December
31, 2006
|
|
$ |
5,849,013 |
|
|
$ |
138,205 |
|
|
$ |
5,210 |
|
|
(d)
– Mortgage servicing rights, net
|
The
Company elected to account for all originated MSRs as one class and, therefore,
all MSRs are carried at fair value. As a result of the early adoption of SFAS
156, the carrying value of the MSRs were increased by approximately $4.3 million
(pre-tax) as of January 1, 2006. As required by the provisions of SFAS 156, the
net of tax effect was recorded as a cumulative effect adjustment to retained
earnings of OITRS as of January 1, 2006. In addition, changes in value due to
run-offs of the portfolio are recorded as valuation adjustments instead of
amortization.
The fair
value of MSRs is determined using discounted cash flow techniques based on
market assumptions. Changes in fair value are the result of changes in market
conditions, changes in valuation assumptions and run-off of the underlying
mortgage loans. Changes in fair value due to run-off of the underlying mortgage
loans and changes in value due to changes in market conditions are grouped
together above. When the underlying assumptions used for valuation purposes are
changed, the effect on fair value is presented separately.
Activities
for MSRs are summarized as follows for the years ended December 31, 2007 and
2006:
(in
thousands)
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
Balance
at beginning of period (at cost)
|
|
|
|
$
|
98,859
|
|
$
|
86,082
|
Adjustment
to fair value upon adoption of SFAS 156 at January 1, 2006
|
|
|
|
|
-
|
|
|
4,298
|
Additions
|
|
|
|
|
7,718
|
|
|
43,175
|
Sales,
net of reserve for prepayment protection
|
|
|
|
|
(87,603)
|
|
|
-
|
Changes
in fair value:
|
|
|
|
|
|
|
|
|
Due
to changes in market conditions and run-off
|
|
|
|
|
(13,351)
|
|
|
(33,551)
|
Due
to change in valuation assumptions
|
|
|
|
|
(2,550)
|
|
|
(1,145)
|
Balance
at end of period
|
|
|
|
$
|
3,073
|
|
$
|
98,859
|
Estimates
of fair value involve several assumptions, including the key valuation
assumptions about market expectations of future prepayment rates, interest rates
and discount rates. Prepayment rates are projected using a prepayment model. The
model considers key factors, such as refinance incentive, housing turnover,
seasonality and aging of the pool of loans. Prepayment speeds incorporate
expectations of future rates implied by the forward LIBOR/swap curve, as well as
collateral specific information
At
December 31, 2007 and 2006, key economic assumptions and the sensitivity of the
current fair value of MSR rights cash flows to the immediate 10 percent and 20
percent adverse change in those assumptions are as follows: (Note -
base case prepayment and discount rate assumptions are a weighted average of the
values applied to the various mortgage loans).
($
in thousands)
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Prepayment
assumption (annual rate) (PSA)
|
|
|
557.3 |
|
|
|
424.6 |
|
Impact
on fair value of 10% adverse change
|
|
$ |
(129 |
) |
|
$ |
(3,923 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(242 |
) |
|
$ |
(7,557 |
) |
MSR
Cash-Flow Discount Rate
|
|
|
13.46 |
% |
|
|
14.50 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(105 |
) |
|
$ |
(3,505 |
) |
Impact
on fair value of 20% adverse change
|
|
$ |
(201 |
) |
|
$ |
(6,727 |
) |
These
sensitivities are entirely hypothetical and should be used with caution. As the
figures indicate, changes in fair value based upon 10% and 20% variations in
assumptions generally cannot be extrapolated to greater or lesser percentage
variation 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 MSR 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.
(e)
- Warehouse Lines of Credit and Drafts Payable
OITRS
issues drafts or wires at loan settlement in order to facilitate the closing of
mortgage loans held for sale. Drafts payable represent mortgage loans on which a
closing has occurred prior to year end but the related drafts have not cleared
the respective bank. Upon clearing the bank, the drafts are funded by the
appropriate warehouse line of credit. Warehouse and aggregate lines of credit
and loans sale agreements accounted for as financing consisted of the following
at December 31, 2007 and 2006:
(in
thousands)
|
|
December
31,
|
|
|
2007
|
|
2006
|
Warehouse
lines of credit:
|
|
|
|
|
A
committed warehouse line of credit for $100 million between OITRS and
Residential Funding Corporation ("RFC"). The agreement expired on February
28, 2007 and was not renewed.
|
$
|
-
|
$
|
6,172
|
|
|
|
|
|
A
syndicated committed warehouse line of credit for $850 million between
OITRS and JP Morgan Chase (“JPM”). The agreement expired on July 31,
2007.
|
|
-
|
|
409,609
|
|
|
|
|
|
An
aggregation facility for $1.5 billion for the whole loan and servicing
rights facility, collectively, (of which no more than $100 million may be
allocated to the servicing rights facility) between HS Special Purpose,
LLC, a wholly-owned subsidiary of OITRS, and Citigroup Global
Markets Realty Corp. (“Citigroup”) to aggregate loans pending
securitization. The agreement expired on December 20,
2007.
|
|
-
|
|
5,358
|
|
|
|
|
|
A
$750 million purchase and security agreement between OITRS and UBS Warburg
Real Estate Securities, Inc. (“UBS Warburg”)
|
|
-
|
|
3,283
|
|
|
|
|
|
Drafts
payable
|
|
-
|
|
6,542
|
Loans
sales agreements accounted for as financings:
|
|
|
|
|
An
uncommitted $700 million purchase agreement between OITRS and Colonial
Bank.
|
|
-
|
|
303,915
|
Total
Warehouse lines and drafts payable
|
$
|
-
|
$
|
734,879
|
In
addition to the RFC, JPM, Citigroup, UBS Warburg, and Colonial Bank facilities,
OITRS has purchase and sale agreements with Fannie Mae. These additional
agreements allow OITRS to accelerate the sale of its mortgage loan inventory,
resulting in a more effective use of its warehouse facilities. OITRS has a
combined capacity of $100 million under these purchase and sale agreements.
There were no amounts sold and being held under these agreements at December 31,
2006. The agreements are not committed facilities and may be terminated at the
discretion of either party.
(f)
- Other Secured Borrowings
Other
secured borrowings consisted of the following at December 31, 2007 and
2006:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
A
committed warehouse line of credit for $150.0 million between OITRS and JP
Morgan Chase, that allows for a sublimit for originated Mortgage Servicing
Rights. The agreement expired September 28, 2007.
|
|
$ |
- |
|
|
$ |
71,657 |
|
|
|
|
|
|
|
|
|
|
Citigroup
Global Markets Realty Corp., line of credit for $80.0 million secured by
the retained interests in securitizations OMAC 2005-1 through OPMAC
2006-1. The facility was extended on December 19, 2007 through February
26, 2008 and the limit reduced in stages, ultimately to $11.0
million. The facility was extended again through May 26, 2008
and the limit further reduced in stages, initially to $8.0 million through
March 26, 2008, $5.0 million through April 30, 2008 and $0.0 million as of
May 26, 2008. The agreement provides for interest rate based on
LIBOR plus 3.00%.
|
|
|
18,000 |
|
|
|
50,320 |
|
|
|
$ |
18,000 |
|
|
$ |
121,977 |
|
The Citigroup Global Realty Inc.
facility contains financial covenants pertaining to tangible net worth and total
indebtedness. The Company was in compliance with such covenants at
December 31, 2007.
(g)
– Savings Incentive Plan
OITRS’s
employees have the option to participate in the Company Savings and Incentive
Plan (the “Plan”). Under the terms of the Plan, eligible employees can make
tax-deferred 401(k) contributions, and at OITRS’s sole discretion, OITRS can
match the employees’ contributions as well as make annual profit-sharing
contributions to the Plan. For the years ended December 31, 2007 and 2006, OITRS
made 401(k) matching contributions of $272,769 and $241,056,
respectively.
(h)
– 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 provision for
the year ended December 31, 2007 differs from the amount determined by applying
the statutory Federal rate of 35% to the pre-tax loss due primarily to the
recording of and adjustments to the deferred tax asset valuation
allowances. The net deferred tax assets generated by the net loss incurred
during the year ended December 31, 2007 are offset in their entirety by a
deferred tax asset valuation allowance. The amount of the gross tax
benefit generated by this loss is reduced by an offsetting valuation allowance
of the same amount. The deferred tax asset and offsetting valuation allowance at
December 31, 2007 was $93.9 million.
OITRS
recorded a tax provision for the year ended December 31, 2007 as a result of the
following. OITRS recorded a deferred tax asset valuation allowance of
approximately $37.4 million during the three month period ended March 31, 2007;
there was no allowance recorded previously. At December 31, 2006, OITRS
had recorded net deferred tax assets of approximately $7.1 million. The
recording of the valuation allowance (among other items) during the three months
ended March 31, 2007 resulted in OITRS recording an income tax provision of
$11.5 million, and reduced the December 31, 2006 net deferred tax asset to a net
deferred tax liability at March 31, 2007 of approximately $4.3 million.
As part of the recording of this allowance, the State tax NOLs at
March 31, 2007 were fully allowanced, as their availability to fully offset
recorded deferred tax liabilities was not assured at that date. The losses
incurred by OITRS post-March 31, 2007 are sufficient to ensure that the State
tax NOLs will be available to offset recorded deferred tax liabilities and any
realized gains on sales of OITRS assets; therefore the net deferred tax
liability of $4.3 million was offset by the deferred tax assets related to the
State tax NOLs expected to be realized, and a $4.3 million reduction in the
deferred tax asset valuation allowance was recorded during the three months
ended September 30, 2007. Therefore, the provision for income taxes
for OITRS for the year ended December 31, 2007 is $7.2 million.
The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income within OITRS. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment, including the
impact related to the closing of the operations of OITRS. At December 31,
2007, management believes it is 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. In
addition, OITRS has abandoned the tax NOLs in certain states as operations have
closed, and OITRS has ceased activities in those tax
jurisdictions. Consequently, the Company has recorded a valuation
allowance against all of the net deferred tax assets of OITRS. As of
December 31, 2007, OITRS has an estimated federal tax net operating loss
carryforward of approximately $226.6 million, and estimated available State tax
NOLs of $94.1 million, which begin to expire in 2025, and are fully available to
offset future taxable income.
The
effective income tax benefit for the year ended December 31, 2006 differs from
the amount determined by applying the statutory Federal rate of 35% to the
pre-tax loss due primarily to permanent differences, the state tax benefit (net
of the Federal tax effect) and valuation allowances.
|
(i)
- Transactions with Related Parties
|
During
the years ended December 31, 2007 and 2006, OITRS received aggregate payments of
approximately, $0.4 million and $1.6 million, respectively from Southstar
Funding, LLC (“Southstar Funding”) primarily in exchange for the performance of
certain interim loan servicing functions. Southstar Funding is fifty
percent owned by Southstar Partners, LLC (“Southstar
Partners”). Certain former officers of OITRS, one of whom is also a
former director of the Company, own membership interests in Southstar
Partners. In addition, an officer of OITRS as well as a former
director of the Company serves on the Board of Managers of Southstar
Funding. As of December 31, 2007, there were no amounts due from or
owed to Southstar Partners or Southstar Funding. As of December 31,
2006, amounts due from Southstar Funding totaled $0.3 million and no amounts
were owed to Southstar Funding In addition, no amounts were due or owing to
Southstar Partners as of December 31, 2006. Amounts paid for interim
loan servicing were determined on an arms-length basis and are comparable to
amounts charged to other, non-related parties. On
April 11, 2007, Southstar Funding filed a voluntary petition under Chapter 7 of
the U.S. Bankruptcy Code.
|
(j)
- Commitments and Contingencies
|
Loans Sold to Investors.
Generally, OITRS is not exposed to significant credit risk on its loans sold to
investors. In the normal course of business, OITRS provides certain
representations and warranties during the sale of mortgage loans which obligate
it to repurchase loans which are subsequently unable to be sold through the
normal investor channels. The repurchased loans are 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
recognizes 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. The liability is recorded as a reduction of the gain
on sale of mortgage loans and included as part of other liabilities in the
accompanying financial statements.
Changes
in the liability during 2007 and 2006 are presented below:
(in
thousands)
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
Balance—Beginning
of period
|
|
|
$
|
7,136
|
$
|
2,038
|
Provision
|
|
|
|
16,029
|
|
8,499
|
Charge-Offs
|
|
|
|
(17,905)
|
|
(3,401)
|
Balance—End
of period
|
|
|
$
|
5,260
|
$
|
7,136
|
Net Worth Requirements. OITRS
is required to maintain certain specified levels of minimum net worth to
maintain its approved status with Fannie Mae, HUD, and other investors. At
December 31, 2006, the highest minimum net worth requirement applicable to OITRS
was approximately $1.9 million. OITRS had excess net worth of approximately $2.1
million at December 31, 2006. Such minimum net worth requirements also
existed at December 31, 2007, however OITRS had negative net worth of
approximately $71.1 million. Because OITRS does not meet the minimum net worth
requirements necessary to maintain its approved status as of December 31, 2007,
OITRS will not be able to originate new loans under such programs unless it
cures such non-compliance. Effective June 30, 2007, however, OITRS ceased
originating new mortgages in connection with its exit from the mortgage
origination business.
Outstanding Litigation. OITRS
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 OITRS’s business as previously conducted.
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 OITRS will not have a material effect on the Company’s
consolidated financial position or liquidity; however, any such outcome may be
material to the results of operations of any particular period in which costs,
if any, are recognized.
On 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, formerly known as Opteum Financial Services, LLC, seeking specific
performance and alleging breach of contract for allegedly failing to repurchase
certain loans. OITRS believes the plaintiff’s claim is without merit and
intends to vigorously defend the case.
As part
of the November 3, 2005 merger pursuant to which OITRS became a wholly-owned
subsidiary of Bimini, the parties to the Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”) agreed to special resolution procedures
concerning certain litigation matters in which OITRS was a party and that was
pending at the time of the merger. Certain provisions of the Merger
Agreement specified the manner in which four separate litigation matters would
be treated for purposes of determining the rights and obligations of the parties
to the Merger Agreement. In two of these matters, OITRS is the
plaintiff and is seeking money damages from third parties. In the
other two matters, OITRS is a defendant and is defending itself against claims
for money damages. The two matters in which OITRS was the plaintiff and one of
the two matters in which OITRS was a defendant have been
concluded. The net proceeds received by OITRS as a result of the
conclusion of these matters are being held in escrow and will be used to satisfy
amounts, if any, paid in connection with the resolution of the other matter in
which OITRS is a defendant.
Pursuant
to the terms of the Merger Agreement, the former owners of OITRS must indemnify
the Company for any liabilities arising from the two matters in which OITRS is a
defendant. In addition, the former owners of OITRS are entitled to
receive any amounts paid to the Company upon the settlement or final resolution
of the two matters in which OITRS is the plaintiff.
Guarantees. OITRS has
guaranteed the obligations of OITRS’s wholly-owned subsidiary, HS Special
Purpose, LLC, under its financing facility with Citigroup described in Note 12. This guaranty will
remain in effect so long as the applicable financing facility remains in
effect. If an Event of Default occurs under this financing facility
that is not cured or waived, OITRS may be required to perform under its
guaranty. There is no specific limitation on the maximum potential
future payments under this guaranty. However, OITRS’s liability under
this guaranty would be reduced in an amount equal to the amount by which the
collateral securing such obligations exceeds the amounts outstanding under the
applicable facility.
NOTE
13. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The
following is a presentation of the quarterly results of operations for the years
ended December 31, 2007 and 2006.
(in
thousands, except per share data)
|
|
|
Quarters
Ended,
|
|
|
|
|
March
31
|
|
|
June
30
|
|
|
September
30
|
|
|
December
31
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,634 |
|
|
$ |
27,524 |
|
|
$ |
24,635 |
|
|
$ |
11,709 |
|
Interest
expense
|
|
|
(37,552 |
) |
|
|
(33,591 |
) |
|
|
(21,144 |
) |
|
|
(10,614 |
) |
Net
interest income (expense), before trust preferred interest
|
|
|
1,082 |
|
|
|
(6,067 |
) |
|
|
3,491 |
|
|
|
1,095 |
|
Interest
expense on trust preferred debt
|
|
|
(2,090 |
) |
|
|
(2,090 |
) |
|
|
(2,090 |
) |
|
|
(2,092 |
) |
Net
interest income (expense)
|
|
|
(1,008 |
) |
|
|
(8,157 |
) |
|
|
1,401 |
|
|
|
(997 |
) |
Other
income (expense)
|
|
|
(821 |
) |
|
|
(73,818 |
) |
|
|
(2,530 |
) |
|
|
4,111 |
|
Total
net revenues (deficiency of revenues)
|
|
|
(1,829 |
) |
|
|
(81,975 |
) |
|
|
(1,129 |
) |
|
|
3,114 |
|
Direct
REIT operating expenses
|
|
|
228 |
|
|
|
223 |
|
|
|
181 |
|
|
|
193 |
|
General
and administrative expenses
|
|
|
1,880 |
|
|
|
1,862 |
|
|
|
1,915 |
|
|
|
1,991 |
|
Total
expenses
|
|
|
2,108 |
|
|
|
2,085 |
|
|
|
2,096 |
|
|
|
2,184 |
|
Minority
interest
|
|
|
771 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) from continuing operations
|
|
|
(3,166 |
) |
|
|
(84,060 |
) |
|
|
(3,225 |
) |
|
|
930 |
|
Discontinued
operations (net of tax)
|
|
|
(74,904 |
) |
|
|
(78,407 |
) |
|
|
(1,498 |
) |
|
|
(3,323 |
) |
Net
loss
|
|
$ |
(78,070 |
) |
|
$ |
(162,467 |
) |
|
$ |
(4,723 |
) |
|
$ |
(2,393 |
) |
Basic
and Diluted Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.13 |
) |
|
$ |
(3.38 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.04 |
|
|
Discontinued
operations (net of tax)
|
|
|
(3.01 |
) |
|
|
(3.15 |
) |
|
|
(0.06 |
) |
|
|
(0.13 |
) |
|
Total
|
|
$ |
(3.14 |
) |
|
$ |
(6.53 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.09 |
) |
Class
B Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.13 |
) |
|
$ |
(3.37 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.04 |
|
|
Discontinued
operations (net of tax)
|
|
|
(3.01 |
) |
|
|
(3.15 |
) |
|
|
(0.06 |
) |
|
|
(0.13 |
) |
|
Total
|
|
$ |
(3.14 |
) |
|
$ |
(6.52 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.09 |
) |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
39,996 |
|
|
$ |
54,825 |
|
|
$ |
43,051 |
|
|
$ |
31,841 |
|
Interest
expense
|
|
|
(36,790 |
) |
|
|
(41,732 |
) |
|
|
(42,828 |
) |
|
|
(39,593 |
) |
Net
interest income, before trust preferred interest
|
|
|
3,206 |
|
|
|
13,093 |
|
|
|
223 |
|
|
|
(7,752 |
) |
Interest
expense on trust preferred debt
|
|
|
(2,090 |
) |
|
|
(2,090 |
) |
|
|
(2,090 |
) |
|
|
(2,092 |
) |
Net
interest income (expense)
|
|
|
1,116 |
|
|
|
11,003 |
|
|
|
(1,867 |
) |
|
|
(9,844 |
) |
Other
income (expense)
|
|
|
- |
|
|
|
70 |
|
|
|
(166 |
) |
|
|
(7,225 |
) |
Total
net revenues (deficiency of revenues)
|
|
|
1,116 |
|
|
|
11,073 |
|
|
|
(2,033 |
) |
|
|
(17,069 |
) |
Direct
REIT operating expenses
|
|
|
319 |
|
|
|
227 |
|
|
|
196 |
|
|
|
245 |
|
General
and administrative expenses
|
|
|
2,130 |
|
|
|
3,027 |
|
|
|
1,877 |
|
|
|
1,786 |
|
Total
expenses
|
|
|
2,449 |
|
|
|
3,254 |
|
|
|
2,073 |
|
|
|
2,031 |
|
Minority
interest
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
49 |
|
Income
(loss) from continuing operations
|
|
|
(1,333 |
) |
|
|
7,819 |
|
|
|
(4,106 |
) |
|
|
(19,051 |
) |
Discontinued
operations (net of tax)
|
|
|
(6,639 |
) |
|
|
(9,214 |
) |
|
|
(2,150 |
) |
|
|
(14,872 |
) |
Net
loss
|
|
$ |
(7,972 |
) |
|
$ |
(1,395 |
) |
|
$ |
(6,256 |
) |
|
$ |
(33,923 |
) |
Basic
and Diluted Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.06 |
) |
|
$ |
0.32 |
|
|
$ |
(0.16 |
) |
|
$ |
(0.77 |
) |
|
Discontinued
operations (net of tax)
|
|
|
(0.28 |
) |
|
|
(0.38 |
) |
|
|
(0.09 |
) |
|
|
(0.60 |
) |
|
Total
|
|
$ |
(0.34 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.25 |
) |
|
$ |
(1.37 |
) |
Class
B Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(0.06 |
) |
|
|
0.32 |
|
|
|
(0.16 |
) |
|
|
(0.77 |
) |
|
Discontinued
operations (net of tax)
|
|
|
(0.28 |
) |
|
|
(0.37 |
) |
|
|
(0.09 |
) |
|
|
(0.60 |
) |
|
Total
|
|
$ |
(0.34 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.25 |
) |
|
$ |
(1.37 |
) |
Quarterly
results in the table above for 2006 and the first quarter of 2007 have been
restated to reflect the results of OITRS as discontinued
operations. Beginning with the second quarter of 2007 the results of
OITRS have been reported as discontinued operations. However, prior
to the second quarter of 2007 the results of OITRS had been consolidated with
those of the Company. Further, results for the second quarter of 2007
have been restated to adjust for the elimination of interest income and interest
expense on inter-company debt reflected in the results of operations as
originally filed. Interest income and interest expense of $2.038
million has been eliminated from the results previously reported on August 14,
2007, which resulted in no change in net loss for the second quarter of
2007.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A.
|
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.
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 8. See also the Report of Independent Registered Public
Accounting Firm in Item 8. for Ernst & Young LLP’s attestation report on
management’s assessment of internal control over financial
reporting.
ITEM
9A (T). CONTROLS AND PROCEDURES.
Not
applicable.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. 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 2008 Annual Meeting of Stockholders to be held on
April 25, 2008, 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, 2007 (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
11. Executive
Compensation.
The
information required by this Item 11 is incorporated herein by reference to the
Proxy Statement.
ITEM
12. Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters.
The
information required by this Item 12 is incorporated herein by reference to the
Proxy Statement and to Part II, Item 5 of this Form 10-K.
ITEM
13. Certain
Relationships And Related Transactions, and director independence.
The
information required by this Item 13 is incorporated herein by reference to the
Proxy Statement.
ITEM
14. Principal
Accountant Fees And Services.
The
information required by this Item 14 is incorporated herein by reference to the
Proxy Statement.
PART
IV
ITEM
15. 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 8 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
|
47
|
Reports
of Independent Registered Public Accounting Firm
|
48
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
50
|
Consolidated
Statements of Operations for the years ended December 31, 2007 and
2006
|
51
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2007 and 2006
|
52
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007 and
2006
|
53
|
Notes
to Consolidated Financial Statements
|
54
|
b. Financial Statement Schedules.
Not
applicable.
c. Exhibits.
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 Ernst & Young 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.
|
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 on March 13,
2008.
|
|
BIMINI
CAPITAL MANAGEMENT, INC.
(Registrant)
|
|
By
|
/s/
Robert E. Cauley
|
|
|
Robert
E. Cauley
Vice
Chairman, Senior Executive Vice President,
Chief
Financial Officer, Chief Investment Officer and
Treasurer
(Principal
Financial Officer and Principal Accounting
Officer)
|
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 13, 2008.
Signature
|
Capacity
|
|
|
/s/
Jeffrey J Zimmer
|
|
|
|
Jeffrey
J. Zimmer
|
Director,
Chairman of the Board,
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
/s/
Robert E. Cauley
|
|
|
|
Robert
E. Cauley
|
Director,
Vice Chairman of the Board,
Senior
Executive Vice President,
Chief
Financial Officer, Chief Investment Officer and
Treasurer
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|
|
|
|
|
|
Kevin
L. Bespolka
|
Director
|
|
|
Robert
J. Dwyer
|
Director
|
|
By /s/
Robert E. Cauley
Robert E. Cauley,
Attorney-in-Fact
|
|
|
|
|
W.
Christopher Mortenson
|
Director
|
|
|
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 Ernst & Young 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.
|