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


FORM 10‑Q

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

For the quarterly period ended June 30, 2020

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

For the transition period from __________ to ___________

Commission File Number:  001-32171

Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 
       
Maryland
 
72-1571637
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

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

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



Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
       
Large accelerated filer
Accelerated filer
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ◻  No ý
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:

Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
August 14, 2020
11,608,555
Class B Common Stock, $0.001 par value
August 14, 2020
31,938
Class C Common Stock, $0.001 par value
August 14, 2020
31,938


BIMINI CAPITAL MANAGEMENT, INC.

TABLE OF CONTENTS


   
Page
 
       
PART I. FINANCIAL INFORMATION
 
       
ITEM 1. Financial Statements
   
1
 
Condensed Consolidated Balance Sheets (unaudited)
   
1
 
Condensed Consolidated Statements of Operations (unaudited)
   
2
 
Condensed Consolidated Statement of Stockholders’ Equity (unaudited)
   
3
 
Condensed Consolidated Statements of Cash Flows (unaudited)
   
4
 
Notes to Condensed Consolidated Financial Statements
   
5
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
26
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
53
 
ITEM 4. Controls and Procedures
   
53
 
         
PART II. OTHER INFORMATION
 
         
ITEM 1. Legal Proceedings
   
54
 
ITEM 1A. Risk Factors
   
54
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
54
 
ITEM 3. Defaults Upon Senior Securities
   
54
 
ITEM 4. Mine Safety Disclosures
   
54
 
ITEM 5. Other Information
   
54
 
ITEM 6. Exhibits
   
55
 
SIGNATURES
   
56
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
(Unaudited)
       
   
June 30, 2020
   
December 31, 2019
 
ASSETS:
           
Mortgage-backed securities, at fair value
           
Pledged to counterparties
 
$
52,784,236
   
$
217,793,209
 
Unpledged
   
33,281
     
47,744
 
Total mortgage-backed securities
   
52,817,517
     
217,840,953
 
Cash and cash equivalents
   
4,669,314
     
8,070,067
 
Restricted cash
   
1,005,680
     
4,315,050
 
Orchid Island Capital, Inc. common stock, at fair value
   
11,753,131
     
8,892,211
 
Accrued interest receivable
   
194,229
     
750,875
 
Property and equipment, net
   
2,128,064
     
2,162,975
 
Real property held for sale
   
450,000
     
450,000
 
Deferred tax assets
   
24,601,800
     
33,288,536
 
Other assets
   
3,686,271
     
3,718,281
 
Total Assets
 
$
101,306,006
   
$
279,488,948
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Repurchase agreements
 
$
51,617,000
   
$
209,954,000
 
Long-term debt
   
27,623,161
     
27,481,121
 
Accrued interest payable
   
69,864
     
645,302
 
Other liabilities
   
883,812
     
1,431,534
 
Total Liabilities
   
80,193,837
     
239,511,957
 
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares
               
designated Series A Junior Preferred Stock, 9,900,000 shares undesignated;
               
no shares issued and outstanding as of June 30, 2020 and December 31, 2019
   
-
     
-
 
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 11,608,555
               
shares issued and outstanding as of June 30, 2020 and 11,608,555 shares issued
               
and outstanding as of December 31, 2019
   
11,609
     
11,609
 
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of June 30, 2020 and December 31, 2019
   
32
     
32
 
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of June 30, 2020 and December 31, 2019
   
32
     
32
 
Additional paid-in capital
   
332,642,758
     
332,642,758
 
Accumulated deficit
   
(311,542,262
)
   
(292,677,440
)
Stockholders’ Equity
   
21,112,169
     
39,976,991
 
Total Liabilities and Stockholders' Equity
 
$
101,306,006
   
$
279,488,948
 
See Notes to Condensed Consolidated Financial Statements
 

-1-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
For the Six and Three Months Ended June 30, 2020 and 2019
 
                         
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Advisory services
 
$
3,339,680
   
$
3,261,116
   
$
1,615,083
   
$
1,653,796
 
Interest income
   
2,563,281
     
4,324,093
     
523,287
     
2,133,677
 
Dividend income from Orchid Island Capital, Inc. common stock
   
753,518
     
729,617
     
388,709
     
364,809
 
Total revenues
   
6,656,479
     
8,314,826
     
2,527,079
     
4,152,282
 
Interest expense
                               
Repurchase agreements
   
(987,417
)
   
(2,652,893
)
   
(59,601
)
   
(1,340,029
)
Long-term debt
   
(631,958
)
   
(806,147
)
   
(282,457
)
   
(399,592
)
Net revenues
   
5,037,104
     
4,855,786
     
2,185,021
     
2,412,661
 
                                 
Other income (expense):
                               
Unrealized gains on mortgage-backed securities
   
27,855
     
5,276,251
     
602,136
     
2,224,016
 
Realized losses on mortgage-backed securities
   
(5,804,656
)
   
-
     
-
     
-
 
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
   
(754,792
)
   
(45,601
)
   
3,653,312
     
(334,408
)
Losses on derivative instruments
   
(5,292,421
)
   
(5,621,756
)
   
(1,690
)
   
(3,364,345
)
Gains on retained interests in securitizations
   
-
     
275,115
     
-
     
-
 
Other income
   
642
     
494
     
318
     
248
 
Total other (expense) income
   
(11,823,372
)
   
(115,497
)
   
4,254,076
     
(1,474,489
)
                                 
Expenses:
                               
Compensation and related benefits
   
2,146,667
     
2,087,625
     
1,046,623
     
1,016,844
 
Directors' fees and liability insurance
   
345,693
     
321,308
     
181,112
     
160,666
 
Audit, legal and other professional fees
   
346,641
     
284,027
     
187,348
     
145,395
 
Administrative and other expenses
   
552,045
     
526,029
     
270,005
     
275,058
 
Total expenses
   
3,391,046
     
3,218,989
     
1,685,088
     
1,597,963
 
                                 
Net (loss) income before income tax provision (benefit)
   
(10,177,314
)
   
1,521,300
     
4,754,009
     
(659,791
)
Income tax provision (benefit)
   
8,687,508
     
404,419
     
1,285,884
     
(158,069
)
                                 
Net (loss) income
 
$
(18,864,822
)
 
$
1,116,881
   
$
3,468,125
   
$
(501,722
)
                                 
Basic and Diluted Net (loss) income Per Share of:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)
CLASS B COMMON STOCK
                               
Basic and Diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)
Weighted Average Shares Outstanding:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
   
11,608,555
     
12,708,587
     
11,608,555
     
12,708,555
 
CLASS B COMMON STOCK
                               
Basic and Diluted
   
31,938
     
31,938
     
31,938
     
31,938
 
See Notes to Condensed Consolidated Financial Statements
 

-2-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(Unaudited)
 
For the Six and Three Months Ended June 30, 2020 and 2019
 
                               
         
Stockholders' Equity
     
   
Common Stock
 
Additional
 
Accumulated
     
   
Shares
   
Par Value
 
Paid-in Capital
 
Deficit
 
Total
 
Balances, January 1, 2019
   
12,773,145
   
$
12,773
   
$
334,919,265
   
$
(305,977,417
)
 
$
28,954,621
 
Net income
   
-
     
-
     
-
     
1,618,603
     
1,618,603
 
Class A common shares repurchased and retired
   
(714
)
   
-
     
(1,542
)
   
-
     
(1,542
)
Balances, March 31, 2019
   
12,772,431
   
$
12,773
   
$
334,917,723
   
$
(304,358,814
)
 
$
30,571,682
 
Net loss
   
-
     
-
     
-
     
(501,722
)
   
(501,722
)
Balances, June 30, 2019
   
12,772,431
   
$
12,773
   
$
334,917,723
   
$
(304,860,536
)
 
$
30,069,960
 
                                         
Balances, January 1, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(292,677,440
)
 
$
39,976,991
 
Net loss
   
-
     
-
     
-
     
(22,332,947
)
   
(22,332,947
)
Balances, March 31, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(315,010,387
)
 
$
17,644,044
 
Net income
   
-
     
-
     
-
     
3,468,125
     
3,468,125
 
Balances, June 30, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(311,542,262
)
 
$
21,112,169
 
See Notes to Condensed Consolidated Financial Statements
 

-3-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Six Months Ended June 30, 2020 and 2019
 
             
   
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
 
$
(18,864,822
)
 
$
1,116,881
 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Depreciation
   
34,911
     
36,716
 
Deferred income tax provision
   
8,686,736
     
599,030
 
Losses (gains) on mortgage-backed securities, net
   
5,776,801
     
(5,276,251
)
Gains on retained interests in securitizations
   
-
     
(275,115
)
Unrealized losses on Orchid Island Capital, Inc. common stock
   
754,792
     
45,601
 
Realized and unrealized losses on forward settling TBA securities
   
1,441,406
     
1,801,321
 
Changes in operating assets and liabilities:
               
Accrued interest receivable
   
556,646
     
30,342
 
Other assets
   
32,010
     
(28,261
)
Accrued interest payable
   
(575,438
)
   
140,223
 
Other liabilities
   
(489,128
)
   
(395,183
)
NET CASH USED IN OPERATING ACTIVITIES
   
(2,646,086
)
   
(2,204,696
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
   
(20,823,373
)
   
(3,285,372
)
Sales
   
171,155,249
     
-
 
Principal repayments
   
8,914,759
     
9,815,353
 
Proceeds from termination of retained interests
   
-
     
275,115
 
Net settlement of forward settling TBA contracts
   
(1,500,000
)
   
(2,559,863
)
Purchases of Orchid Island Capital, Inc. common stock
   
(3,615,712
)
   
-
 
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
154,130,923
     
4,245,233
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
   
430,466,397
     
574,564,000
 
Principal repayments on repurchase agreements
   
(588,903,397
)
   
(574,304,000
)
Net proceeds on long-term debt
   
142,040
     
-
 
Class A common shares repurchased and retired
   
-
     
(1,542
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
   
(158,194,960
)
   
258,458
 
                 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
(6,710,123
)
   
2,298,995
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
   
12,385,117
     
6,240,488
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
 
$
5,674,994
   
$
8,539,483
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
Interest expense
 
$
2,194,813
   
$
3,318,817
 
Income taxes
 
$
13,465
   
$
(46,700
)
See Notes to Condensed Consolidated Financial Statements
 
-4-

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Description

Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”) formed in September 2003, is a holding company.  The Company operates in two business segments through its principal wholly-owned operating subsidiary, Royal Palm Capital LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), are collectively referred to as "Bimini Advisors."  Bimini Advisors manages a residential mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services. Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.

Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm.   All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

Variable Interest Entities (“VIEs”)

A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 8 for a description of the accounting used for this VIE.

The Company obtains interests in VIEs through its investments in mortgage-backed securities.  The interests in these VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future.  As a result, the Company does not consolidate these VIEs and accounts for the interest in these VIEs as mortgage-backed securities.  See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities.  The maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six and three month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

-5-

The consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19 Impact

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions. In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several hedge positions. The Agency MBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of June 30, 2020, we had timely satisfied all margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through June 30, 2020.

We sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million. Substantially all of the realized losses were a direct result of the adverse MBS market conditions associated with COVID-19. We had no additional sales of MBS during the three months ended June 30, 2020.
Our MBS portfolio had a fair market value of approximately $52.8 million as of June 30, 2020, compared to $217.8 million as of December 31, 2019 and $54.4 million at March 31, 2020.
Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $51.6 million, compared to $210.0 million as of December 31, 2019 and $52.4 million as of March 31, 2020.
We recorded an additional valuation allowance against our deferred tax assets of approximately $11.2 million during the three months ended March 31, 2020. We did not record any additional valuation allowance during the three months ended June 30, 2020.
Our stockholders’ equity was $21.1 million as of June 30, 2020, compared to $40.0 million as of December 31, 2019 and $17.6 million as of March 31, 2020.

In response to the Shelter in Place order issued in Florida, management has invoked the Company’s Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.

In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has provided billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest rate loan.  The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

-6-

The CARES Act also makes technical corrections to, or modifies on a temporary basis, certain provisions of the U.S. Income Tax Code. Significant income tax impacts of the CARES Act include the ability to carry back an NOL for 5 years and an increase in the interest expense disallowance limitations from 30% to 50% of adjusted taxable income.  The Company has assessed the potential impact of the CARES Act on the Company’s 2019 income tax return to be filed later in 2020, as well as the 2020 tax provision. Those changes did not significantly impact the consolidated financial statements.

The Company has evaluated the other provisions of the CARES Act and does not believe it will have a material effect on the Company’s business, results of operations and financial condition. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. During the forbearance period the Company will continue to receive scheduled principal and interest each month on its Agency RMBS securities. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates affecting the accompanying consolidated financial statements include determining the fair values of MBS, investment in Orchid common shares and derivatives, determining the amounts of asset valuation allowances, the impairment for the real property held for sale, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period. Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information available as of June 30, 2020, however uncertainty over the ultimate impact that COVID-19 will have on the global economy generally, and on our business in particular, makes any estimates and assumptions as of June 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.

Segment Reporting

The Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance.  The accounting policies of the operating segments are the same as the Company’s accounting policies with the exception that inter-segment revenues and expenses are included in the presentation of segment results.  For further information see Note 15.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments.  The following table presents the Company’s cash, cash equivalents and restricted cash as of June 30, 2020 and December 31, 2019.

(in thousands)
           
 
June 30, 2020
 
December 31, 2019
 
Cash and cash equivalents
 
$
4,669,314
   
$
8,070,067
 
Restricted cash
   
1,005,680
     
4,315,050
 
Total cash, cash equivalents and restricted cash
 
$
5,674,994
   
$
12,385,117
 

-7-

The Company maintains cash balances at several banks and excess margin with an exchange clearing member. At times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash balances are uninsured, but are held in separate accounts that are segregated from the general funds of the counterparty.  The Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.

Advisory Services

Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement.  Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are recognized over the period of time in which the service is performed.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through (“PT”) mortgage backed certificates issued by Freddie Mac, Fannie Mae or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans. We refer to MBS and CMOs as PT MBS. We refer to IO and IIO securities as structured MBS. The Company has elected to account for its investment in MBS under the fair value option.  Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.

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

Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.  The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third-party broker quotes, when available.

Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized.  Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains on MBS in the consolidated statements of operations.  For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting periods based on the new estimate of prepayments and the contractual terms of the security.  For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.  Changes in fair value of MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. The amount reported as unrealized gains or losses on mortgage backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period.
-8-


Orchid Island Capital, Inc. Common Stock

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

Retained Interests in Securitizations

Retained interests in the subordinated tranches of securities created in securitization transactions were initially recorded at their fair value when issued by Royal Palm. These retained interests currently have a recorded fair value of zero, as the prospect of future cash flows being received is very uncertain, but they may generate cash flows in the future. Any cash received from the retained interests is reflected in the consolidated statement of cash flows. Realized gains and subsequent adjustments to fair value are reflected in the consolidated statements of operations.

Derivative Financial Instruments

The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Treasury Note (“T-Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities transactions, but it may enter into other derivative instruments in the future.

The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

Derivative instruments are carried at fair value, and changes in fair value are recorded in the consolidated operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities.

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

Financial Instruments

The fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the financial statements or in the accompanying notes. MBS, Orchid common stock and derivative assets and liabilities are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 14 of the consolidated financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of June 30, 2020 and December 31, 2019, due to the short-term nature of these financial instruments.

-9-

It is impractical to estimate the fair value of the Company’s junior subordinated notes.  Currently, there is a limited market for these types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. Further information regarding these instruments is presented in Note 8 to the consolidated financial statements.

Property and Equipment, net

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

Repurchase Agreements

The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

Share-Based Compensation

For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings over the vesting period based on the fair value of the award.  The Company applies a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal.  A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate.

Earnings Per Share

Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

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

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

Income Taxes

Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it is more likely than not that they will not be realized.

-10-

The Company’s U.S. federal income tax returns for years ended on or after December 31, 2016 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm, and its includable subsidiaries, file as separate tax paying entities.

The Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period.  The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.

Recent Accounting Pronouncements

On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss model). The Company’s adoption of this ASU did not have a material impact on its consolidated financial statements as its financial assets were already measured at fair value through earnings.

In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”  ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.

NOTE 2. ADVISORY SERVICES

Bimini Advisors serves as the manager and advisor for Orchid pursuant to the terms of a management agreement.  As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:

One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.

-11-


Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 20, 2021 and provides for automatic one-year extension options thereafter. Should Orchid terminate the management agreement without cause, it will be obligated to pay Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.

The following table summarizes the advisory services revenue from Orchid for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                       
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Management fee
 
$
2,645
   
$
2,611
   
$
1,268
   
$
1,327
 
Allocated overhead
   
695
     
650
     
347
     
327
 
Total
 
$
3,340
   
$
3,261
   
$
1,615
   
$
1,654
 

At June 30, 2020 and December 31, 2019, the net amount due from Orchid was approximately $0.6 million and $0.6 million, respectively. These amounts are included in “other assets” in the consolidated balance sheets.

NOTE 3.   MORTGAGE-BACKED SECURITIES

The following table presents the Company’s MBS portfolio as of June 30, 2020 and December 31, 2019:

(in thousands)
           
   
June 30, 2020
   
December 31, 2019
 
Fixed-rate MBS
 
$
52,345
   
$
216,231
 
Interest-Only MBS
   
442
     
1,024
 
Inverse Interest-Only MBS
   
31
     
586
 
Total
 
$
52,818
   
$
217,841
 

NOTE 4.   REPURCHASE AGREEMENTS

The Company pledges certain of its MBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of June 30, 2020, the Company had met all margin call requirements.
-12-


As of June 30, 2020 and December 31, 2019, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)
                             
    
OVERNIGHT
   
BETWEEN 2
   
BETWEEN 31
   
GREATER
       
    
(1 DAY OR
   
AND
   
AND
   
THAN
       
   
LESS)
   
30 DAYS
   
90 DAYS
   
90 DAYS
   
TOTAL
 
June 30, 2020
                             
Fair value of securities pledged, including accrued
                             
interest receivable
 
$
-
   
$
41,868
   
$
-
   
$
11,108
   
$
52,976
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
-
   
$
40,972
   
$
-
   
$
10,645
   
$
51,617
 
Net weighted average borrowing rate
   
-
     
0.27
%
   
-
     
0.30
%
   
0.28
%
December 31, 2019
                                       
Fair value of securities pledged, including accrued
                                       
interest receivable
 
$
-
   
$
137,992
   
$
80,550
   
$
-
   
$
218,542
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
-
   
$
132,573
   
$
77,381
   
$
-
   
$
209,954
 
Net weighted average borrowing rate
   
-
     
2.02
%
   
1.92
%
   
-
     
1.98
%

In addition, cash pledged to counterparties for repurchase agreements was approximately $1.0 million and $3.8 million as of June 30, 2020 and December 31, 2019, respectively.

If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any.  At June 30, 2020 and December 31, 2019, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $2.3 million and $11.8 million, respectively.  The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at June 30, 2020 and December 31, 2019.

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Liabilities, at Fair Value

The table below summarizes fair value information about our derivative liabilities as of June 30, 2020 and December 31, 2019.

(in thousands)
           
Derivative Instruments and Related Accounts
Balance Sheet Location
 
June 30, 2020
   
December 31, 2019
 
Liabilities
           
TBA Securities
Other liabilities
 
$
-
   
$
59
 
Total derivative liabilities, at fair value
   
$
-
   
$
59
 
                   
Margin Balances Posted To (From) Counterparties
                 
Futures contracts
Restricted cash
 
$
2
   
$
537
 
Total margin balances on derivative contracts
   
$
2
   
$
537
 

-13-



Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar and T-note futures positions at June 30, 2020 and December 31, 2019.

($ in thousands)
                       
As of June 30, 2020
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2021
 
$
1,000
     
1.02
%
   
0.19
%
 
$
(8
)
Total / Weighted Average
 
$
1,000
     
1.02
%
   
0.19
%
 
$
(8
)

($ in thousands)
                       
As of December 31, 2019
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2020
 
$
120,000
     
2.90
%
   
1.67
%
 
$
(1,480
)
2021
   
80,000
     
2.80
%
   
1.57
%
   
(984
)
Total / Weighted Average
 
$
102,500
     
2.86
%
   
1.63
%
 
$
(2,464
)
Treasury Note Futures Contracts
                               
March 2020- 5-year T-Note futures(2)
                               
(Mar 2020 - Mar 2025 Hedge Period)
 
$
20,000
     
1.96
%
   
2.06
%
 
$
88
 

($ in thousands)
                       
As of December 31, 2019
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2020
 
$
19,500
     
1.92
%
   
1.68
%
 
$
(46
)
Total / Weighted Average
 
$
19,500
     
1.92
%
   
1.68
%
 
$
(46
)

(1)
Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
(2)
T-Note futures contracts were valued at a price of $118.61 at December 31, 2019.  The notional contract values of the short positions were $23.7 million.
-14-


The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019. There were no outstanding TBA securities at June 30, 2020.

($ in thousands)
           
     
Notional
         
Net
     
Amount
 
Cost
 
Market
 
Carrying
     
Long (Short)(1)
 
Basis(2)
 
Value(3)
 
Value(4)
December 31, 2019
               
30-Year TBA Securities:
               
 
3.5%
$
(50,000)
$
(51,414)
$
(51,438)
$
(24)
 
4.5%
 
(50,000)
 
(52,621)
 
(52,656)
 
(35)
   
$
(100,000)
$
(104,035)
$
(104,094)
$
(59)

(1)
Notional amount represents the par value (or principal balance) of the underlying Agency MBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying Agency MBS.
(3)
Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) as of period-end.
(4)
Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our consolidated balance sheets.

Losses on Derivative Instruments

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Eurodollar futures contracts (short positions)
                       
Repurchase agreement funding hedges
 
$
(2,328
)
 
$
(2,831
)
 
$
-
   
$
(1,860
)
Junior subordinated debt funding hedges
   
(517
)
   
(409
)
   
(2
)
   
(189
)
T-Note futures contracts (short positions)
                               
Repurchase agreement funding hedges
   
(1,006
)
   
(581
)
   
-
     
(581
)
Net TBA securities
   
(1,441
)
   
(1,801
)
   
-
     
(734
)
Losses on derivative instruments
 
$
(5,292
)
 
$
(5,622
)
 
$
(2
)
 
$
(3,364
)

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk in several ways.  For instruments which are not centrally cleared on a registered exchange, the Company limits its counterparties to major financial institutions with acceptable credit ratings, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty recovering its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company’s derivative instruments are included in restricted cash on the consolidated balance sheets. It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
-15-


NOTE 6. PLEDGED ASSETS

Assets Pledged to Counterparties

The table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of June 30, 2020 and December 31, 2019.

($ in thousands)
                                   
   
June 30, 2020
   
December 31, 2019
 
   
Repurchase
   
Derivative
         
Repurchase
   
Derivative
       
Assets Pledged to Counterparties
 
Agreements
   
Agreements
   
Total
   
Agreements
   
Agreements
   
Total
 
PT MBS - at fair value
 
$
52,345
   
$
-
   
$
52,345
   
$
216,231
   
$
-
   
$
216,231
 
Structured MBS - at fair value
   
439
     
-
     
439
     
1,562
     
-
     
1,562
 
Accrued interest on pledged securities
   
192
     
-
     
192
     
749
     
-
     
749
 
Restricted cash
   
1,004
     
2
     
1,006
     
3,778
     
537
     
4,315
 
Total
 
$
53,980
   
$
2
   
$
53,982
   
$
222,320
   
$
537
   
$
222,857
 

Assets Pledged from Counterparties

The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements and derivative agreements as of June 30, 2020 and December 31, 2019. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements or other liabilities in the consolidated balance sheets.

($ in thousands)
           
Assets Pledged to Bimini
 
June 30, 2020
   
December 31, 2019
 
Repurchase agreements
 
$
204
   
$
-
 
Total
 
$
204
   
$
-
 

NOTE 7. OFFSETTING ASSETS AND LIABILITIES

The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions.  The Company reports its assets and liabilities subject to these arrangements on a gross basis.  The following tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30, 2020 and December 31, 2019.

(in thousands)
                                   
Offsetting of Liabilities
 
                   
Gross Amount Not Offset in the
       
             
Net Amount
 
Consolidated Balance Sheet
       
     
Gross Amount
 
of Liabilities
 
Financial
         
 
Gross Amount
 
Offset in the
 
Presented in the
 
Instruments
 
Cash
     
 
of Recognized
 
Consolidated
 
Consolidated
 
Posted as
 
Posted as
 
Net
 
 
Liabilities
 
Balance Sheet
 
Balance Sheet
 
Collateral
 
Collateral
 
Amount
 
June 30, 2020
                                   
Repurchase Agreements
 
$
51,617
   
$
-
   
$
51,617
   
$
(50,613
)
 
$
(1,004
)
 
$
-
 
   
$
51,617
   
$
-
   
$
51,617
   
$
(50,613
)
 
$
(1,004
)
 
$
-
 
December 31, 2019
                                               
Repurchase Agreements
 
$
209,954
   
$
-
   
$
209,954
   
$
(206,176
)
 
$
(3,778
)
 
$
-
 
TBA securities
   
59
     
-
     
59
     
-
     
-
     
59
 
   
$
210,013
   
$
-
   
$
210,013
   
$
(206,176
)
 
$
(3,778
)
 
$
59
 

-16-

The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero.  The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented.  See Note 6 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.

NOTE 8.  LONG-TERM DEBT

Long-term debt at June 30, 2020 and December 31, 2019 is summarized as follows:

(in thousands)
           
   
June 30, 2020
   
December 31, 2019
 
Junior subordinated debt
 
$
26,804
   
$
26,804
 
Note payable
   
667
     
677
 
Paycheck Protection Plan ("PPP") loan
   
152
     
-
 
Total
 
$
27,623
   
$
27,481
 

Junior Subordinated Debt

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

As of June 30, 2020 and December 31, 2019, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million.  The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate.  As of June 30, 2020, the interest rate was 3.81%. 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. Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in right of payment to all present and future senior indebtedness.

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

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

Note Payable

On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
-17-


Paycheck Protection Plan Loan

On April 13, 2020, the Company received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan.  As discussed in Note 1, PPP loans may be forgiven, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met.  These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part.  Payments are deferred for the first six months of the loan. The Company believes that all of the proceeds were used for eligible purposes and the outstanding principal and accrued interest will ultimately be forgiven.

The table below presents the future scheduled principal payments on the Company’s long-term debt.

(in thousands)
     
Last six months of 2020
 
$
10
 
2021
   
22
 
2022
   
175
 
2023
   
24
 
2024
   
25
 
After 2024
   
27,367
 
Total
 
$
27,623
 

NOTE 9.  COMMON STOCK

There were no issuances of Bimini Capital's Class A Common Stock, Class B Common Stock or Class C Common Stock during the six months ended June 30, 2020 and 2019.

Stock Repurchase Plan

On March 26, 2018, the Board of Directors of Bimini Capital Management, Inc. (the “Company”) approved a Stock Repurchase Plan (“Repurchase Plan”).  Pursuant to Repurchase Plan, the Company may purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934.  Share repurchases may be executed through various means, including, without limitation, open market transactions.  The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020.  The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.

From the inception of the Repurchase Plan through June 30, 2020, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share. There were no shares repurchased during the six months ended June 30, 2020.

Tender Offer

In July 2019, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of Bimini Capital’s Class A common stock at a price of $2.00 per share.
-18-



NOTE 10.    STOCK INCENTIVE PLANS

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

Performance Units

The Compensation Committee of the Board of Directors of Bimini Capital (the "Committee") has issued, and may in the future issue additional, Performance Units under the 2011 Plan to certain officers and employees.  “Performance Units” represent the participant’s right to receive an amount, based on the value of a specified number of shares of common stock, if the terms and conditions prescribed by the Committee are satisfied.  The Committee will determine the requirements that must be satisfied before Performance Units are earned, including but not limited to any applicable performance period and performance goals.  Performance goals may relate to the Company’s financial performance or the participant’s performance or such other criteria determined by the Committee, including goals stated with reference to the performance measures discussed below.  If Performance Units are earned, they will be settled in cash, shares of common stock or a combination thereof.  There were no performance units issued or outstanding during the six months ended June 30, 2020 and 2019.

NOTE 11.  COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination operations ceased in 2007.  The demand is based on Royal Palm’s alleged breaches of certain representations and warranties in the related MLPA’s.  The Company believes the demands are without merit and intends to defend against the demand vigorously.  No provision or accrual has been recorded as of June 30, 2020 related to the Citigroup demand.

Management is not aware of any other significant reported or unreported contingencies at June 30, 2020.

NOTE 12.  INCOME TAXES

The total income tax provision recorded for the six and three months ended June 30, 2020 was $8.7 million and $1.3 million, respectively, on consolidated pre-tax book (loss) income of $(10.2) million and $4.8 million in the six and three months ended June 30, 2020, respectively. The total income tax provision (benefit) recorded for the six and three months ended June 30, 2019 was $0.4 million and $(0.2) million, respectively, on consolidated pre-tax book income (loss) of $1.5 million and $(0.7) million in the six and three months ended June 30, 2019, respectively.

-19-


The Company’s tax provision is based on a projected effective rate based on annualized amounts applied to actual income to date and includes the expected realization of a portion of the tax benefits of federal and state net operating losses carryforwards (“NOLs”). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The Company currently provides a valuation allowance against a portion of the NOLs since the Company believes that it is more likely than not that some of the benefits will not be realized in the future. The Company will continue to assess the need for a valuation allowance at each reporting date.

As a result of adverse economic impacts of COVID-19 on its business, the Company performed an assessment of the need for additional valuation allowances against existing deferred tax assets as of March 31, 2020. Following the more-likely-than-not standard that benefits will not be realized in the future, the Company determined an additional valuation allowance of approximately $11.2 million was necessary for the net operating loss carryforwards and capital loss carryforwards during the three months ended March 31, 2020. With the rapidly evolving and changing landscape caused by the pandemic, the Company will continue to closely monitor the impacts of COVID-19 on the Company’s ability to realize its deferred tax assets, and it may increase valuation allowances in the future as new information becomes available.

NOTE 13.   EARNINGS PER SHARE

Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. The Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at June 30, 2020 and 2019.

Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at June 30, 2020 and 2019.

The table below reconciles the numerator and denominator of EPS for the six and three months ended June 30, 2020 and 2019.

(in thousands, except per-share information)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Basic and diluted EPS per Class A common share:
                       
(Loss) income attributable to Class A common shares:
                       
Basic and diluted
 
$
(18,813
)
 
$
1,114
   
$
3,458
   
$
(501
)
Weighted average common shares:
                               
Class A common shares outstanding at the balance sheet date
   
11,609
     
12,709
     
11,609
     
12,709
 
Weighted average shares-basic and diluted
   
11,609
     
12,709
     
11,609
     
12,709
 
(Loss) income per Class A common share:
                               
Basic and diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)

-20-


(in thousands, except per-share information)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Basic and diluted EPS per Class B common share:
                       
(Loss) income attributable to Class B common shares:
                       
Basic and diluted
 
$
(52
)
 
$
3
   
$
10
   
$
(1
)
Weighted average common shares:
                               
Class B common shares outstanding at the balance sheet date
   
32
     
32
     
32
     
32
 
Weighted average shares-basic and diluted
   
32
     
32
     
32
     
32
 
(Loss) income per Class B common share:
                               
Basic and diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)

NOTE 14.   FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:

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

MBS, Orchid common stock, retained interests and TBA securities were all recorded at fair value on a recurring basis during the six and three months ended June 30, 2020 and 2019. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets.  When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.  Fair value measurements for the retained interests are generated by a model that requires management to make a significant number of assumptions, and this model resulted in a value of zero at both June 30, 2020 and December 31, 2019.

-21-


The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets, spread pricing techniques (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

(in thousands)
                       
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
   
Fair Value
   
Assets
   
Inputs
   
Inputs
 
   
Measurements
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
June 30, 2020
                       
Mortgage-backed securities
 
$
52,818
   
$
-
   
$
52,818
   
$
-
 
Orchid Island Capital, Inc. common stock
   
11,753
     
11,753
     
-
     
-
 
December 31, 2019
                               
Mortgage-backed securities
 
$
217,841
   
$
-
   
$
217,841
   
$
-
 
Orchid Island Capital, Inc. common stock
   
8,892
     
8,892
     
-
     
-
 
TBA securities
   
(59
)
   
-
     
(59
)
   
-
 

The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2020 and 2019:

(in thousands)
           
   
Retained Interests in Securitizations
 
   
Six Months Ended June 30,
 
   
2020
   
2019
 
Balances, January 1
 
$
-
   
$
-
 
Gain included in earnings
   
-
     
275
 
Collections
   
-
     
(275
)
Balances, June 30
 
$
-
   
$
-
 

During the six months ended June 30, 2020 and 2019, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
-22-


NOTE 15.   SEGMENT INFORMATION

The Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment.

The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid.  Total revenues received under this management agreement for the six months ended June 30, 2020 and 2019, were approximately $3.4 million and $3.3 million, respectively, accounting for approximately 50% and 39% of consolidated revenues, respectively.

The investment portfolio segment includes the investment activities conducted by Royal Palm.  The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.

Segment information for the six months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
3,340
$
-
$
-
$
-
$
3,340
Advisory services, other operating segments(1)
 
84
 
-
 
-
 
(84)
 
-
Interest and dividend income
 
-
 
3,317
 
-
 
-
 
3,317
Interest expense
 
-
 
(988)
 
 (632)(2)
 
-
 
(1,620)
Net revenues
 
3,424
 
2,329
 
(632)
 
(84)
 
5,037
Other
 
-
 
(11,307)
 
 (516)(3)
 
-
 
(11,823)
Operating expenses(4)
 
(1,690)
 
(1,701)
 
-
 
-
 
(3,391)
Intercompany expenses(1)
 
-
 
(84)
 
-
 
84
 
-
Income (loss) before income taxes
$
1,734
$
(10,763)
$
(1,148)
$
-
$
(10,177)
                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
3,261
$
-
$
-
$
-
$
3,261
Advisory services, other operating segments(1)
 
137
 
-
 
-
 
(137)
 
-
Interest and dividend income
 
-
 
5,053
 
1
 
-
 
5,054
Interest expense
 
-
 
(2,653)
 
 (806)(2)
 
-
 
(3,459)
Net revenues
 
3,398
 
2,400
 
(805)
 
(137)
 
4,856
Other
 
-
 
18
 
 (134)(3)
 
-
 
(116)
Operating expenses(4)
 
(1,272)
 
(1,947)
 
-
 
-
 
(3,219)
Intercompany expenses(1)
 
-
 
(137)
 
-
 
137
 
-
Income (loss) before income taxes
$
2,126
$
334
$
(939)
$
-
$
1,521

-23-


Segment information for the three months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
1,615
$
-
$
-
$
-
$
1,615
Advisory services, other operating segments(1)
 
26
 
-
 
-
 
(26)
 
-
Interest and dividend income
 
-
 
912
 
-
 
-
 
912
Interest expense
 
-
 
(60)
 
 (282)(2)
 
-
 
(342)
Net revenues
 
1,641
 
852
 
(282)
 
(26)
 
2,185
Other
 
-
 
4,256
 
 (2)(3)
 
-
 
4,254
Operating expenses(4)
 
(1,067)
 
(618)
 
-
 
-
 
(1,685)
Intercompany expenses(1)
 
-
 
(26)
 
-
 
26
 
-
Income (loss) before income taxes
$
574
$
4,464
$
(284)
$
-
$
4,754
                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
1,654
$
-
$
-
$
-
$
1,654
Advisory services, other operating segments(1)
 
69
 
-
 
-
 
(69)
 
-
Interest and dividend income
 
-
 
2,498
 
-
 
-
 
2,498
Interest expense
 
-
 
(1,340)
 
 (400)(2)
 
-
 
(1,740)
Net revenues
 
1,723
 
1,158
 
(400)
 
(69)
 
2,412
Other
 
-
 
(1,286)
 
 (188)(3)
 
-
 
(1,474)
Operating expenses(4)
 
(642)
 
(956)
 
-
 
-
 
(1,598)
Intercompany expenses(1)
 
-
 
(69)
 
-
 
69
 
-
Income (loss) before income taxes
$
1,081
$
(1,153)
$
(588)
$
-
$
(660)

(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services.
(2)
Includes interest on long-term debt.
(3)
Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations.
(4)
Corporate expenses are allocated based on each segment’s proportional share of total revenues.

Assets in each reportable segment as of June 30, 2020 and December 31, 2019 were as follows:

(in thousands)
                       
 
Asset
 
Investment
         
 
Management
 
Portfolio
 
Corporate
 
Total
 
June 30, 2020
 
$
1,500
   
$
84,913
     
14,893
   
$
101,306
 
December 31, 2019
   
1,457
     
263,223
     
14,809
     
279,489
 

NOTE 16. RELATED PARTY TRANSACTIONS

Relationships with Orchid

At June 30, 2020 and December 31, 2019, the Company owned 2,495,357 and 1,520,036 shares of Orchid common stock, respectively, representing approximately 3.8% and 2.4% of Orchid’s outstanding common stock on such dates.  The Company received dividends on this common stock investment of approximately $0.8 million and $0.4 million during the six and three months ended June 30, 2020, respectively, and $0.7 million and $0.4 million during the six and three months ended June 30, 2019, respectively.

-24-

Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation from Orchid, and owns shares of common stock of Orchid.  In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors, receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our independent directors, each own shares of common stock of Orchid.
-25-

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

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 2003. The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital, LLC. We operate in two business segments: the asset management segment, which includes (a) the investment advisory services provided by Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which includes the investment activities conducted by Royal Palm.

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), are collectively referred to as “Bimini Advisors.”  Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and expense reimbursements.  As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations.  Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it.

Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as “Royal Palm”) maintains an investment portfolio, consisting primarily of residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS. In addition, Royal Palm receives dividends from its investment in Orchid common shares.

Impact of the COVID-19 Pandemic

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions.  In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several of our hedge positions. The Agency MBS market largely stabilized after the Federal Reserve (the “Fed”) announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of June 30, 2020, we had timely satisfied all margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through June 30, 2020.

We sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million. Substantially all of the realized losses were a direct result of the adverse MBS market conditions associated with COVID-19. We had no additional sales of MBS during the three months ended June 30, 2020.
Our MBS portfolio had a fair market value of approximately $52.8 million as of June 30, 2020, compared to $217.8 million as of December 31, 2019 and $54.4 million at March 31, 2020.
Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $51.6 million, compared to $210.0 million as of December 31, 2019 and $52.4 million as of March 31, 2020.
We recorded an additional valuation allowance against our deferred tax assets of approximately $11.2 million during the three months ended March 31, 2020. We did not record any additional valuation allowance during the three months ended June 30, 2020.
Our stockholders’ equity was $21.1 million as of June 30, 2020, compared to $40.0 million as of December 31, 2019 and $17.6 million as of March 31, 2020.

-26-

Largely as a result of actions taken by the Federal Reserve (the “Fed”) in late March, Agency MBS valuations have increased and the market for these assets has stabilized.

In response to the Shelter in Place order issued in Florida, management has invoked the Company’s Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.

In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest loan.  The Company has evaluated the other provisions of the CARES Act and does not believe it will have material effect on our financial statements. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. During the forbearance period the Company will continue to receive scheduled principal and interest each month on its Agency RMBS securities. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

Stock Repurchase Plan

On March 26, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan (“Repurchase Plan”).  Pursuant to Repurchase Plan, we may purchase up to 500,000 shares of the Company’s Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934.  Share repurchases may be executed through various means, including, without limitation, open market transactions.  The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020.  The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.

Through June 30, 2020, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.

-27-


Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors (in addition to those related to the COVID-19 pandemic) may impact our results of operations and financial condition. These factors include:


interest rate trends;

the difference between Agency MBS yields and our funding and hedging costs;

competition for, and supply of, investments in Agency MBS;

actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Open Market Committee (the “FOMC”), the Federal Housing Finance Agency (the “FHFA”) and the U.S. Treasury;

prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; and

the equity markets and the ability of Orchid to raise additional capital; and

other market developments.

In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:


our degree of leverage;

our access to funding and borrowing capacity;

our borrowing costs;

our hedging activities;

the market value of our investments;

the requirements to qualify for a registration exemption under the Investment Company Act;

our ability to use net operating loss carryforwards and net capital loss carryforwards to reduce our taxable income;

the impact of possible future changes in tax laws or tax rates; and

our ability to manage the portfolio of Orchid and maintain our role as manager.

Results of Operations

Described below are the Company’s results of operations for the six and three months ended June 30, 2020, as compared to the six and three months ended June 30, 2019.

Net (Loss) Income Summary

Consolidated net loss for the six months ended June 30, 2020 was $18.9 million, or $1.62 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net income of $1.1 million, or $0.09 basic and diluted income per share of Class A Common Stock, for the six months ended June 30, 2019.

Consolidated net income for the three months ended June 30, 2020 was $3.5 million, or $0.30 basic and diluted income per share of Class A Common Stock, as compared to consolidated net loss of $0.5 million, or $0.04 basic and diluted loss per share of Class A Common Stock, for the three months ended June 30, 2019.

-28-


The components of net (loss) income for the six and three months ended June 30, 2020 and 2019, along with the changes in those components are presented in the table below:

(in thousands)
                                   
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
Change
   
2020
   
2019
   
Change
 
Advisory services revenues
 
$
3,340
   
$
3,261
   
$
79
   
$
1,615
   
$
1,654
   
$
(39
)
Interest and dividend income
   
3,317
     
5,054
     
(1,737
)
   
912
     
2,498
     
(1,586
)
Interest expense
   
(1,620
)
   
(3,459
)
   
1,839
     
(342
)
   
(1,740
)
   
1,398
 
Net revenues
   
5,037
     
4,856
     
181
     
2,185
     
2,412
     
(227
)
Other (expense) income
   
(11,823
)
   
(116
)
   
(11,707
)
   
4,254
     
(1,474
)
   
5,728
 
Expenses
   
(3,391
)
   
(3,219
)
   
(172
)
   
(1,685
)
   
(1,598
)
   
(87
)
Net (loss) income before income tax provision (benefit)
   
(10,177
)
   
1,521
     
(11,698
)
   
4,754
     
(660
)
   
5,414
 
Income tax provision (benefit)
   
8,688
     
404
     
8,284
     
1,286
     
(158
)
   
1,444
 
Net (loss) income
 
$
(18,865
)
 
$
1,117
   
$
(19,982
)
 
$
3,468
   
$
(502
)
 
$
3,970
 

GAAP and Non-GAAP Reconciliation

Economic Interest Expense and Economic Net Interest Income

We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.

We have not designated our derivative financial instruments as hedge accounting relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.

For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period.  Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period.

For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.

We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.

-29-

Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.

The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter in 2020 and 2019.

Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
 
(in thousands)
                 
   
Recognized in
             
   
Statement of
   
TBA
       
   
Operations
   
Securities
   
Futures
 
Three Months Ended
 
(GAAP)
   
Loss
   
Contracts
 
June 30, 2020
 
$
(2
)
 
$
-
   
$
(2
)
March 31, 2020
   
(5,291
)
   
(1,441
)
   
(3,850
)
December 31, 2019
   
287
     
(192
)
   
479
 
September 30, 2019
   
(483
)
   
(204
)
   
(279
)
June 30, 2019
   
(3,364
)
   
(734
)
   
(2,630
)
March 31, 2019
   
(2,258
)
   
(1,067
)
   
(1,191
)
                         
(in thousands)
                       
   
Recognized in
                 
   
Statement of
   
TBA
         
   
Operations
   
Securities
   
Futures
 
Six Months Ended
 
(GAAP)
   
Loss
   
Contracts
 
June 30, 2020
 
$
(5,292
)
 
$
(1,441
)
 
$
(3,851
)
June 30, 2019
   
(5,622
)
   
(1,801
)
   
(3,821
)

Gains (Losses) on Derivative Instruments - Attributed to Current Period (Non-GAAP)
 
(in thousands)
                                         
 
Attributed to Current Period (Non-GAAP)
 
Attributed to Future Periods (Non-GAAP)
       
   
Repurchase
   
Long-Term
         
Repurchase
   
Long-Term
         
Statement of
 
Three Months Ended
 
Agreements
   
Debt
   
Total
   
Agreements
   
Debt
   
Total
   
Operations
 
June 30, 2020
 
$
(456
)
 
$
(40
)
 
$
(496
)
 
$
456
   
$
38
   
$
494
   
$
(2
)
March 31, 2020
   
(456
)
   
(40
)
   
(496
)
   
(2,879
)
   
(475
)
   
(3,354
)
   
(3,850
)
December 31, 2019
   
510
     
56
     
566
     
(50
)
   
(37
)
   
(87
)
   
479
 
September 30, 2019
   
(124
)
   
61
     
(63
)
   
(155
)
   
(61
)
   
(216
)
   
(279
)
June 30, 2019
   
(226
)
   
43
     
(183
)
   
(2,215
)
   
(232
)
   
(2,447
)
   
(2,630
)
March 31, 2019
   
5
     
65
     
70
     
(976
)
   
(285
)
   
(1,261
)
   
(1,191
)
                                                         
(in thousands)
                                                       
 
Attributed to Current Period (Non-GAAP)
 
Attributed to Current Period (Non-GAAP)
         
           
Junior
                   
Junior
                 
   
Repurchase
   
Subordinated
           
Repurchase
   
Subordinated
           
Statement of
 
Six Months Ended
 
Agreements
   
Debt
   
Total
   
Agreements
   
Debt
   
Total
   
Operations
 
June 30, 2020
 
$
(912
)
 
$
(80
)
 
$
(992
)
 
$
(2,422
)
 
$
(437
)
 
$
(2,859
)
 
$
(3,851
)
June 30, 2019
   
(221
)
   
108
     
(113
)
   
(3,191
)
   
(517
)
   
(3,708
)
 
$
(3,821
)


-30-

Economic Net Portfolio Interest Income
 
(in thousands)
 
         
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
               
Effect of
         
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
523
   
$
60
   
$
(456
)
 
$
516
   
$
463
   
$
7
 
March 31, 2020
   
2,040
     
928
     
(456
)
   
1,384
     
1,112
     
656
 
December 31, 2019
   
1,899
     
948
     
510
     
438
     
951
     
1,461
 
September 30, 2019
   
1,646
     
1,002
     
(124
)
   
1,126
     
644
     
520
 
June 30, 2019
   
2,134
     
1,340
     
(226
)
   
1,566
     
794
     
568
 
March 31, 2019
   
2,190
     
1,313
     
5
     
1,308
     
877
     
882
 
                                                 
(in thousands)
 
           
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
                   
Effect of
           
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
2,563
   
$
988
   
$
(912
)
 
$
1,900
   
$
1,575
   
$
663
 
June 30, 2019
   
4,324
     
2,653
     
(221
)
   
2,874
     
1,671
     
1,450
 

(1)
Reflects the effect of derivative instrument hedges for only the period presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income.

Economic Net Interest Income
 
(in thousands)
 
   
Net Portfolio
   
Interest Expense on Long-Term Debt
             
   
Interest Income
         
Effect of
         
Net Interest Income (Loss)
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
June 30, 2020
 
$
463
   
$
7
   
$
282
   
$
(40
)
 
$
322
   
$
181
   
$
(315
)
March 31, 2020
   
1,112
     
656
     
350
     
(40
)
   
390
     
762
     
266
 
December 31, 2019
   
951
     
1,461
     
376
     
56
     
320
     
575
     
1,141
 
September 30, 2019
   
644
     
520
     
390
     
61
     
329
     
254
     
191
 
June 30, 2019
   
794
     
568
     
400
     
43
     
357
     
394
     
211
 
March 31, 2019
   
877
     
882
     
406
     
65
     
341
     
471
     
541
 
                                                         
(in thousands)
 
   
Net Portfolio
   
Interest Expense on Junior Subordinated Notes
                 
   
Interest Income
           
Effect of
           
Net Interest Income (Loss)
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
June 30, 2020
 
$
1,575
   
$
663
   
$
632
   
$
(80
)
 
$
712
   
$
943
   
$
(49
)
June 30, 2019
   
1,671
     
1,450
     
806