Bimini Capital Management, Inc.

Robert Cauley - Chairman of the Board, Chief Executive Officer and Secretary

Thank you, operator. The third quarter was not boring, frustrating maybe.

The market has been on a carefully managed path toward the beginning of policy normalization by the Fed since 2013. The market fully expect the initial rate hike to occur this year.

Early in the year, it was assumed to occur around mid-year, then September. Now, no one [indiscernible] confidence when this will occur.

The market is also lost confidence in guys from the Fed officials when they speak publicly. That’s the frustration.

This, of course, was all brought about by developments in the market, especially overseas. These got started in August when China devalued yuan on unexpectedly, the move rocked all market, especially the equity markets.

Market volatility persisted for several week in the wake of this move. This is not the only major development.

The perceived weakness in China led oil and other commodity prices to set new lows. Various central banks across emerging market landscape as well as China have been selling treasuries in order to minimize the impact of these events on their currencies.

China’s economy appears to be growing at a slower pace and Europe is recovering ever so slowly. Last week, the European Central Bank or ECB indicated they may need to enhance their own QE program as some of these events calling to question growth prospects for the US going forward and pointed to depressed levels inflation for several months at least.

The August and September non-foreign payroll reports added [indiscernible] as job growth appeared to have decelerated. The effect of those events were confirmed again last Wednesday when the federal reserve opted not to raise rates at the conclusion of their meeting, although they did acknowledge albeit indirectly that events overseas may be stabilized somewhat.

That matters to us. Our primary funding hedge instruments are Eurodollar futures.

The Eurodollar market has priced out a substantial portion of Federal Reserve tightening over the next four years. This, of course, causes Eurodollar to go against us meaningfully and that was a significant contributor to our book value decline.

Making matters worse was the widening of agency MBS, both pass-throughs and IOs. The current coupon agency MBS spread at constant maturity 10 year swaps at a multiyear wide at the end of September and widened further in early October.

This is somewhat misleading as 10-year swap spreads went negative in late September, leaving spreads to 10-year treasury, albeit marginally. This deteriorated further since while the negative swap spreads were restricted to being somewhat of a quarter-end phenomenon, which is not the case on November 6.

The combination of mortgages widening in Eurodollar future short moving to the extent they did had a negative impact on our book value for the quarter. Our ownership position in Orchid Island Capital declined in value during the quarter significantly by approximately $1.9 million.

The decline during the quarter was driven primarily by the reduction of Orchid’s monthly dividend from $0.18 per share to $0.14 per share, which was announced in July. This of course reduced our dividend income as well from $0.53 million during the second quarter of 2015 to $0.41 million for the current period.

Management fees and overhead sharing revenues during the quarter ended September 30, 2015 were $1.06 million and $0.27 million, respectively. Going forward, management fees, overhead sharing revenues and dividends should continue to contribute materially to our gross revenues.

The increase in management fees revenues at our taxable REIT subsidiary, or TRS, Bimini Advisors, has increased the value of the entity in terms of its fair market value. As described more fully on our recently or our soon to be recently filed form 10-Q, we’re in the process of evaluating the value from these advisors and then gauge it firm that specializes in such work.

The purpose of this analysis is to evaluate our compliance with certain REIT tests that pertain to the aggregate value of the TRSs owned by Bimini, Bimini Advisors and [Morco] our former mortgage company relative to the gross assets of the consolidated entity. To the extent this combined TRSs exceeds the above threshold, our REIT status could be lost.

As we’ve disclosed in our public filings, we have substantial tax net operating losses both at the Bimini level and at one of our TRS’, Morco. In anticipation of the possible outcome, we’ve been evaluating various steps we could take to take advantage of these NOLs to avoid paying any Federal income taxes that might arise as a result of losing our REIT status.

We should know the result of this analysis and our REIT status by December 31, 2015. Turning back to the portfolio, prepayment speeds did not respond to lower rates we saw late in the second half of the quarter after the events described above, which drove the market.

Further, we anticipate a combination of seasonal factors and burn-offs that keeps fees subdued for the next few months, in fact that was what we observed last [indiscernible] for the prior month. This will be a beneficial development as construction of our portfolio and our hedges are as always designed to affect against declining book values.

Since early 2014, we’ve had a bias towards higher coupon, fixed rate call-protected securities. This bias in conjunction to our structure portfolio of IOs and inverse IOs subjects the portfolio of repayment risk in exchange for attractive carryover income.

We will maintain this bias for now. Since the end of the third quarter, rates have increased.

In spite of this, premiums for call-protected securities are quite high for the best forms of call protection, namely low loan balance and distressed credit. The lesser forms of call protection are still available in coupons we desire and at reasonable levels.

For the lower forms call protection, such as securities backed by loans to low FICO, high LTV or investor properties, the call protection does not persist for long and these securities must be replaced more frequently. We added to the [indiscernible] portfolio during the quarter, adding both higher quality loan-bound securities, various sizes, as well as securities collateralized by loans to borrowers with FICO scores and newly-originated loans.

We did not make any changes to the structured portfolio during the quarter. We expect these additions to bring the weighted average prepayment speeds of the portfolio down as our speeds have remained in the low double digits.

Not far off the highs of the year we saw in the second quarter. The net effect of these changes to the portfolio was to slightly increase the allocation of pass-through securities from 59.4% at June 30, 2015 to 61.7% at September 30, 2015.

The increase would have been more pronounced [indiscernible] high at June 30, 2015 because of the payment that was due in early July in connection with the settlement of a litigation matter. As in the effect of this payment, the capital allocation of the past strategy at June 30 would have been approximately 52.7% and the increase 9%.

Note this change also reflects the fact we did not add to the structured portfolio and a decrease due to the combination of paydowns, return on investment and negative mark to market adjustments. These two items reduced the size of the structured portfolio by approximately 98% and exacerbated the shift in the capital allocation.

Our funding hedges, both our repo funding and our trust preferred debt remain in Eurodollar futures only in the notional balances have not changed since the end of the second quarter. Our agents represent 100% of the trust preferred debt balance and just under 50% of our repo balances.

We’re comfortable at these levels of coverage. Looking ahead, we continue to anticipate the Federal Reserve will begin the process of policy normalization probably in December.

This will entail, among other measures, increases to the Fed Funds target range. When this occurs is another story.

September [indiscernible] statements stated recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term. Since then, domestic economic data has been somewhat weaker on balance, but news from China point to some stabilization.

The Peoples Bank of China announced their rate decrease [two Fridays] ago, plus various economic stimulus measures announced previously suggest this even more likely. After meeting last month, ECB is going to add either an expansion in the size and/or extension related to their QE program.

These steps are likely the reason the Fed has removed the language mentioned above and their statement last week. Their statement also exclusively reference the next meeting, which will be held in December as a potential date for this policy normalization probably commencing in conjunction with the economic data that have been consistent with growth trends observed year-to-date that reinforce the notion that the Federal Reserve is prepared to move at their next meeting.

From the perspective of our portfolio positioning, this would be – this would not be a bad development, given the high premium pre-payment sensitive bias of the portfolio. The risk to our positioning with being lower rate and increased prepayment feed.

The most likely cause of such development would be an aggressive expansion of the ECB QE program, as we saw that initial plan was announced earlier this year, the relative price spread between US treasury rates and various European sovereign rates, particularly Germany, matters. As addition QE from the ECB causes rates across Europe to decline, we could see more downward pressure on rates in the US.

This could be enough to get primary rates below 3.5% for 30-year fixed rate mortgages and stimulate another refi wave. But of course, this development also tend to suppress funding levels as well some Fed lift-off were delayed to.

We will see. Operator, that concludes my prepared remarks.

We’ll open up to questions.

Thank you, everybody. Thank you for your time.

To the extent anybody does show up with a question after the call, we will be in the office all day next week. So please feel free to call.

The office number is 772-231-1400. Otherwise, we look forward to talking to you next quarter.

Thank you.