Bimini Capital Management, Inc.

Robert Cauley - Chairman, Chief Executive Officer, and Secretary G. Hunter Haas IV - President, CIO, CFO, and Treasurer

Unidentified Analyst - Unidentified Analyst -

Thank you operator. Effective with tax year 2015 Bimini is no longer a REIT for Federal income tax purposes.

Earlier this year, we announced that we would take steps to take advantage of net operating losses available at both Bimini and, our former mortgage company previously known as MortCo TRS, LLC and now Royal Palm Capital LLC or Royal Palm. This involved moving the MBS portfolio from Bimini to Royal Palm, among other things.

We initiated the process in late 2015 and completed the process during the third quarter of 2016. Going forward, the results of the MBS portfolio will continue to be presented in our financial statements as if the portfolio resided at Bimini, but this is simply because Royal Palm, as a 100% owned subsidiary, is consolidated.

Bimini strategy for harvesting the tax net operating losses available involved two overlapping efforts. First, we will manage the portfolio in operations of working out in capital and collect management fees and overhead sharing payments through our subsidiary Bimini Advisors.

We expect these operations will generate taxable income that could be used to absorb Bimini’s taxable net operating losses of approximately 19.1 million as of December 31, 2015. We refer to these operations as our advisory services.

Secondly we will manage the portfolio at Royal Palm in an effort to generate taxable income to absorb the approximately 261.3 million of taxable net operating losses as of December 31, 2015 at Royal Palm. We also have retained interest or residuals at Royal Palm that generate a modest cash flow stream overtime.

By the way the NOLs I referred to at Bimini of 19.1 million mature in years beginning in 2027 ending in 2032 and the 261.3 million at Royal Palm maturing years beginning 2024 ending in 2028. As we disclosed earlier in the year during the fourth quarter of 2015 we purchased additional shares of Orchid Island Capital at the Royal Palm level.

We only share this proxy for exposure to the MBS portfolio although we do not consider the dividends received on our Orchid shares as a component of the total return of our MBS operations. For the third quarter of 2016 the dividends on the Orchid shares were at 0.6 million and we recorded 0.2 million on mark-to-market gains on the Orchid shares.

In the future we may increase or decrease our Orchid position based on the relative attractiveness of Orchid shares versus MBS investment opportunities. All revenues in excess of our cost from the advisory services, the MBS portfolio at Royal Palm, dividends received on our Orchid shares or the residuals are available to be deployed into the MBS portfolio at Royal Palm owing to our various taxable net operating loss carry forwards.

This in turn allows us to build the portfolio and potentially increase net revenues in the future. As I mentioned one aspect of our operations is the advisory services performed by Bimini Advisors another subsidiary which is the external manager of Orchid.

The advisory services operations generated revenues of 1.4 million for the third quarter of 2016. Such revenues are a function of the size of the capital base of Orchid as adjusted in the prorated allocation of certain Bimini overhead expenses in both cases and in accordance with the terms of the management agreement between the parties.

The retained interest or residuals from the securitizations of our former mortgage company conducted in 2004 through 2006 generated cash flows of 0.9 million for the third quarter of 2016. Turning now to the portfolio operations at Royal Palm, the portfolio grew from a 110.8 million at June 30, 2016 to 133.6 million at September 30, 2016 as the capital allocated to the portfolio increased from 11.3 million at June 30, of 2016 to 13.5 million at September 30, 2016.

Net purchases were 27.3 million all pass-throughs which exceeded the 4.6 million of various forms of runoff, which would be pay downs and the associated premium loss to the paid downs on our pass-throughs and return on investment on the structured securities. Net mark-to-market gains for both our portfolios were 0.1 million.

Note premium loss due to pay downs are a component of the mark-to-market gains and losses for the pass-throughs inclusive of the premium lawsuit to pay downs on our pass-through portfolio we had a net loss of 0.3 million. During the current quarter we added a fourth repurchase agreement funding provider to the three we already at Royal Palm.

We will see conditional funding providers as the needs arise. The portfolio generated a 7.9% return on invested capital for the period not annualized.

The MBS pass-through portfolio generated return on invested capital of 10.3% as hedge and mark-to-market gains on our securities essentially offset line off. The structured securities portfolio generated return of 1.3%.

As we have transitioned the portfolio from Bimini to Royal Palm we’ve sold several order positions and added new securities. Most of these securities also have various forms of call protection.

This process was completed late in the third quarter. Not surprisingly prepayments on the pass-through portfolio have declined since quarter-end.

However for the third quarter speeds remained elevated increased from 7.8 CPR for the second quarter of 2016 through 9.4 CPR for the third quarter of 2016. The structured securities portfolio slowed slightly from 20.4 CPR during the second quarter through 19.7 CPR for the third quarter of 2016.

Combined the portfolios increased from 12.6 CPR in the second quarter of 2016 to 13.6 in the third quarter. The economic trends in place over the course of the first and second quarters of 2016 reversed in the third quarter and into the fourth.

The broadest measures were active on growth in United States gross domestic product rebounded back to 2.9% and year-to-date growth annualized appears to be returning to the 2% level which is widely considered to be at or certainly above credit growth in the United States in this post great recession world. Interest rates after falling precipitously over the year and again after passage of the Brexit referendum has since stabilized and early last month moved back above levels last seen just before Brexit on June 23, 2016.

Inflation especially the Fed reserves preferred measure, personal consumption expenditures which reported at 1.6% on a core level on October 28th as well. Base line effects resulted from the short drop in oil prices in late 2014 and early 2015 should cause this measure to continue to move towards 2%, that’s target level.

These conditions should allow the fed to remove a combination at a very gradual pace. To where the market now expects the Fed to raise rates before year end probably as December meeting assuming incoming economic data remains supportive in the financial conditions to not deteriorate.

We expect the Fed to move rates higher by 25 basis points at the December meeting. Nonetheless it is equally likely in the eyes of most market participants that the Fed will not raise rates aggressively in 2017 and beyond.

Accordingly we expect a level of U.S. Federal funds rate or Fed funds and funding levels generally to only move modestly higher over the next few years.

With this backdrop in the economy and the rates market, the mortgage market has performed well over the course of the third quarter of 2016. From a prepayment perspective speeds accelerated to late summer post Brexit and appear to have peaked in August based on the report issued in early September.

However, speed has moderated only modestly in September and October based on the reports issued in early October and November respectively. Going forward the combination of higher rates and the seasonal slowdown of prepayments should cost prepayment rates to decrease further.

This in turn should be supportive of mortgage valuations. Our portfolio position remains concentrated in higher coupon fixed rate securities with various forms of call protection.

Exposure to increasing rates is mitigated by interest only and inverse interest only securities coupled with funding hedges namely short positions in euro dollar futures. Going forward the exposure to the higher forms of call protection is likely to be maintained as well our use of interest only and inverse interest only securities.

We will continue to rely on your dollar futures for funding hedges at least until we have the latitude to use other instruments. Operator that concludes my prepared remarks.

We can open up the call to questions.

Good morning. With the yield curve steepening Bob how you think you’re positioned for the move over the past few weeks?

I’ll give you my answer and let Hunter talk as well. Definitely market -- suppose these pricing after Fed although the screens that I look at on Bloomberg don’t seem to imply that, that’s quite the case then the left tier is moving as if that’s a lower probability.

It’s certainly going to be a positive per payment speeds and that I would expect them to slow. It will probably be good for valuations of PBA high coupon securities because of that same reason.

Specified full pay ups could come under pressure and then of course IOs and inverse IOs should do very well. Hunter do you want to elaborate on that?

No, I think that sums it up. Inverse IOs should do very well here.

We’ve added some to the portfolio in recent weeks and so we expect the sell off on the long end to benefit those securities and not much is happening on the very short-end of the curve. So, the LIBOR exposure shouldn’t erode with the positives that are happening on the long end.

I’d say that’s generally true of our income earnings potential as well for the portfolio. We might see a little volatility in specified pool pay ups as we sell off and the need for that type of call protection decreases.

But that is sort of expected in this type of environment. So you can see a little book value volatility or uncertainty really more than anything at this point and an increase earning capacity of the portfolio.

So, see little curve all things else equal would be better for poor income or spread income going forward is that right?

Sure from this point right. Speeds were stubbornly fast this third and going even in the speeds that pay downs have took place in October that we’re just reporting in November.

The slowdown from the post Brexit rally in rates has not really occurred in the way that most of the Street expected. So moving to closer to 2% on the long end of the treasury curve we -- is I think beneficial for our prepayment.

So it will be from 2% on, things start to change a little bit but at this point getting the speeds to slowdown is going to probably be a benefit to the portfolio.

I would say one thing, I wouldn’t be surprised to see volatility stay a little bit high. Obviously this just happened last night.

We have to digest a lot but I mean it’s no secret that Mr. Trump made a lot of statements about things he might and might not do and now that he is the President elect we don’t know what he’ll do or what’s one of those things that will come into effect.

So I think the market is going to be kind of jittery as we go through this next couple of months before he picks office. So wouldn’t be surprised to see volatility remain elevated.

But obviously that’s generally not good for mortgages but other than that I think if anything it’s going to continue to put more long and pressure -– upward pressure on longer rates just because this huge yield graph that we have for the first half of the year. Presumably now that some of his policies are potentially inflationary you would assume that would cause a lot of back to unwind.

And that was of course pretty painful for us both at the Bimini and MortCo level throughout the year.

Right, different subject, at the Orchid level you have been issuing shares slightly below book value and book value jumped nicely in the third quarter, have you given us like an amount of dilution that you are willing to take the continuation shares at Orchid. I know the increase scale helps Orchid manage its expenses a little better but could you talk about that?

Yes, it’s kind of off topic given this is a Bimini but we just have a floor that we are going to do so and that’s a level it’s not very far below book value. So with Orchid’s book value higher that floor just moves up and so nothing is changed in terms of the issuance level relative to book.

So we just get a little more selective and 9th the stock closed at 10.82 yesterday. I know the sector opened down today.

But I suspect that maybe short lived because as we just described lot is going on at least now as quarter for mortgages. So I wouldn’t be surprised to see that level come back but we definitely kind of like to strike the balance between selling at or slightly below book, through book at the same time buying when we get to a significant discount and that’s going to be the policy going forward.

So as long as we can stay at a reasonable level in relation to book we will continue to do so.

Derrick its probably worth pointing out that Bob and I as employees really of both firms are in frequent communication with our Independent Directors at the Orchid level and present them with what we think are the sort of pros and cons of raising equity at or below book versus what you eluded to which is -- the overall growth in the company is a positive thing overtime and so we try to present them with a picture of what those breakevens look like and let them decide roughly what the level should be with our guidance. So it’s just worth pointing out since this is a Bimini call.

Sure, thanks. Bob during your prepared remarks I think you mentioned that Bimini will be willing to sell the Orchid shares if the price of Orchid was correct and you had a better opportunity investing directly in levered MBS, did I understand that comment correctly?

Yes, that’s definitely the case. We added late last year early this year, and very, very early this year and in the future if we think we can get a better yield out of the portfolio then we would.

There is no immediate plan to do that. I mean it’s still very attractive investment in our minds and very liquid one at that.

So I just think I need to maintain that stance going forward that we’re not locked into being just a buyer and that revaluate all of this when opportunities equally. And so we try to deploy capital to its best use.

I think that makes sense because then you gets you flexibility if this year is traded at a discount you could buy more at a discount if you waiver, let some go at higher valuation so that’s makes sense to me. And from a Bimini level you have the management contract with Orchid, has Bimini considered managing separate accounts for other potential clients or do you have an exclusive relationship with Orchid?

Not the latter. Yes, we would and we have made some initial steps in that direction.

Probably need a little more critical mass to be able to do so on a meaningful scale. But no that is definitely something that we would look to do when and if the opportunity is there.

And as I said that we have made some initial moves in that direction but we are kind of dealing with still pretty small entity and probably below most radar screens for now. But hopefully that won’t be the case going forward.

And that’s been a really tough business this year and last as well so you know hedge funds aren’t exactly raising large amounts of capital, that type of structures has been pretty quite in terms of capital raising activity.

And maybe we can do a loyalty index fund, that would work.

Last question before you de-REITed Bimini, once you stop your NOLs you would have to start paying dividends at Bimini to the extent that you had income but now that you’re not a REIT anymore you don’t have that requirement. So there is no forced capital return, have you guys I know it's -- the market is still small and you’re still trying to burn off the NOL but in your mind have you thought about capital return like timing or if that would happen or is that just so far in the future that you don’t really think about it?

We do think about it, one other option we have which may or may not happen but the obviously the NOLs give me much a smaller and too many advisors generate pretty substantial taxable income because it doesn’t have a high cost structure in Bimini. Actually what we did earlier in this year was we made the subsidiary that manages Orchid and LLC so that it could be a single member LLC and therefore disregarded for tax purposes.

So we absorbed all the NOL, all the income right into the Bimini level. But what we have as an option down the road if and when we absorb or harvest all of the NOLs at Bimini is that Bimini can contribute its ownership in the external manager Orchid though Royal Palm Capital at which point Royal Palm within all of Bimini Advisors and then all of the management fee revenues could be used to absorb Royal Palm NOLs which are much larger factor of 10 greater than 10.

And that therefore allows us to absorb even more taxable income going out quite far, how far who knows. In that case it will be dependent on how large those management revenues were and which in turn would be a function of how large Orchid was.

But that really maximizes our chances to use all of the NOLs before they expire. When and if that happens then if we had to Bimini could go back to being a REIT.

You have a 5 year limitation, I don’t think we’re going to get based on where we sit today. We’re going to get to all the NOLs in 5 years so presumably if it does take longer than 5 years then at that time you would have that option when and if all of the NOLs are gone.

But that could be several years. In the meantime we think we have a strategy that really maximizes our chances of using all of these NOLs and of course the associated deferred tax assets in both cases are quite sizable.

Now I would say one thing, little bit getting ahead of ourselves is the complex tax laws of section 382 when your ability to use deferred tax assets -- if you have a change of ownership you potentially can impair those. If at some point in the future issuing stock at the Bimini level for instance, such that we could accelerate the utilization of the NOLs with the additional capital made sense.

We would weigh that against the potential impact on the deferred tax assets under section 382 which in turn will be a function of at what price could you raise capital. That would be a tricky transaction to pull off probably because it would be a kind of a bizarre instance where the value of the company after the issuance of the shares would be higher than before just because of the ability to accelerate the harvesting of the NOL.

So kind of really given that serious consideration but that would be an option to consider down the road.

That’s definitely down the road at this level both book value, shareholders equity, and stock price level is not really feasible. We couldn’t raise enough capital to justify without jeopardizing the NOLs.

Great thanks for answering my questions.

Certainly thanks for your interest.

Good morning. Okay, I am calling from LA, I am a private investor, actually work at a hedge fund but I own the Bimini shares in my private accounts.

Just had a couple of questions. The income tax provision was about 55% of net income, that seemed unusually high am I missing something?

There was a catch-up because of year-end adjustment. You are right its way out of line and that was when we booked the initial provision at year-end it was based on information known at the time.

For tax purposes we don’t give information on the portfolio until several months have passed typically. When that occurred this year it required an adjustment to the value of the portfolio and the income booked for the calendar year 2015.

And it then resulted in an adjustment to the tax provision for 2015, it was recorded in the third quarter. So it makes it look like it is much higher than it really was.

Otherwise we make that [Multiple Speakers]

Yes, it was really a great quarter and do you have a pre-cash flow figure for the quarter, it’s certainly much higher than the $0.09?

We don’t, I know in the REIT space they like to talk about our core earnings number. We don’t publish that because we can’t get there using the allowed guidance under SEC regs in terms of non-GAAP financial disclosures.

But we don’t amortize premium on our pass-through securities. We have this line item in our press release which we refer to as premium loss due to pay downs, that is akin not exactly equal to but akin to premium amortization.

That kind of helps you get to that core number but you are right it is higher than the earnings per share. And of course I mentioned in my prepared remarks we have these retained interest that are left over from our mortgage company and those throw off cash flows.

I think it was 0.9 million this quarter. That’s not really a source of taxable earnings per say.

That’s a case of an asset, almost like a receivable that’s running off and then we mark to market at the end of the quarter. So that’s an item of cash flow that really doesn’t show up anywhere in the income statement per say.

Well, that seems to be gift that keeps on giving. So it’s nice to see it.

You guys have talked a lot about the 263 million of NOLs at Royal Palm and you guys have booked something around 65 million so far. Okay, and do you have plans on increasing that amount of deferred tax assets on your balance sheet?

Under the GAAP guidance you have to make projections based on what you know at the time. And based on projected cash flows over the lives of the remaining NOLs that was our educated guess as to what percent of the NOLs we’ll be able to utilize to the extent the portfolio is bigger and generates more projected taxable income.

You could take back more of the deferred tax asset to the extent Orchid was substantially bigger. And in fact we are going to get meaningfully larger management fee revenues, you could.

It’s just a question of when you are doing it what are the assumption at that time.

No I understand that and well you guys this morning have really surprised me because you talked a lot about utilizing all the 263 million in NOLs which was a complete surprise to me and you weren’t quite as ebullient on your last call about that possibility.

Well, I mean we’re just telling you how we would attempt to do so. I can’t tell you with any certainty whatsoever that we can do that.

All I am telling you is we’re taking the steps to maximize our chances of doing so. And that second step that I described earlier -- that second step of moving the advisor there that could happen in a year and it could happen in 8 years or never.

I mean it’s just something that’s an option. We don’t know when and if it will happen but it would almost increase our chances of using the NOLs.

the growth of the management fee revenue stream is such a question mark that the last thing we want to do is book a number on this deferred tax asset that we have to turn around and eat at some point because we made assumptions that were too aggressive.

And also as Derrick said other asset management services, away from market that’s another one.

Well, and this may have been a what kind of like a little joke that on a prior call I think it was Mr. Haas who said that you guys could buy a pizza parlor if you wanted to.

Are there any plans for you guys, I think it gives some leeway for you to have non-mortgage assets in Bimini, do you have any plans to do that?

No, he may have been being facetious but we do have latitude and just like the question, do you own Orchid shares, what is the best use of capital and where do you generate your greatest return that’s how we look at it.

Okay.

The plan is to focus on the growth of Orchid and the growth of the portfolio at Royal Palm because that’s what we do and we can take advantage of the compound interest that will occur when we’re able to utilize the deferred tax assets so we can really get the portfolio scaled up to a much larger size which will in turn accelerate the rate at which we use those NOLs.

Yes please, never pay a dividend. I mean please don’t ever pay a dividend until NOLs are gone?

Yes, I agree. I mean it’s not a good use of capital that's for sure because every dollar you retain has the ability to generate a nice stream of revenues over time that use all that NOL up.

Yeah, well thank you and I really appreciate what you are doing and I think you had a great quarter and keep it up. Thanks very much.

Thank you.

Thank you, operator. Appreciate everybody’s time and interest in Bimini.

To the extent anybody has a question that comes up in the future or listeners to the replay has a question feel free to call us in our office, we’re always available and willing to take your calls. The number is 772-231-1400; always willing to take your calls otherwise we will talk to you at year end.

Thank you.