Bimini Capital Management, Inc.

Robert Cauley - Chairman and CEO George Haas - President, CFO, CIO and Treasurer

Richard Spencer - Westcliff

Thank you, Operator. And as a point of clarification, the earnings call today is for the fourth quarter of 2017, versus the first quarter of 2018.

The fourth quarter of 2017 was another strong growth quarter for Bimini. This kept the strong year as we continue to take advantage of our tax net operating loss carryforwards to organically grow our RMBS portfolio at our subsidiary, Royal Palm Capital.

While the Tax Cuts and Jobs Act, passed late in the year, lowered the corporate tax rate from 35% to 21% and therefore caused us to record a significant tax provision of $18.1 million, more on this in a minute. We continue to generate positive net cash flows to deploy into our RMBS portfolio.

As the external manager of Orchid Island Capital, our management fees increase as Orchid Island is able to grow its capital base. During the fourth quarter of 2017 Orchid grew its capital base by approximately 12% and approximately 39% for all of 2017.

This caused our advisory services revenue to increase by 5% in the fourth quarter of 2017 and 35% for the year. The incremental revenues enabled us to grow the RMBS portfolio at Royal Palm by 6% for the fourth quarter of 2017 and 61% for all of 2017.

As the portfolio grows, our net interest income typically grows as well, depending on changes in the average yield of our assets in relation to our funding costs. For the fourth quarter of 2017, our net interest income grew by 28% and the sum of our net interest income and dividends on our Orchid Island shares increased by 22%.

For the year the comparable figures are 22% and 30%. More about the significant tax expense in Q4.

The Tax Cuts and Jobs Act passed in December lowered the corporate rate from 35% to 21%. Generally accepted accounting principles require us to revalue our differed tax asset for the new lower rates.

Our differed tax asset is primarily comprised of a future value of our net operating loss carryovers and since rates are lower, the tax savings in the future derived from these NOLs is less. Therefore, we recorded a tax adjustment of $25.9 million during the fourth quarter just to lower the value of our deferred tax asset.

It should be noted that the tax NOLs are still the same amount and these NOLs still will offset the same amount of taxable income in the future. Also, this deferred tax adjustment had no impact on our cash balances, as no cash taxes were due as a result of this tax rate change.

As Orchid Island management fees and/or the Royal Palm portfolio grow, the potential net interest income generated by the RMBS portfolio grows. With the tax net operating losses we are able to retain any net income and increase the size of our portfolio further.

We intend to use this organic growth model to utilize our available loss carryovers. We estimate these loss carryovers to be $19.1 million at Bimini and $253.5 million at Royal Palm as of December 31, 2017 Looking back at the macroeconomic developments, the fourth quarter of 2017 marked a reversal of the trend in place for the first nine months of the year.

Two noteworthy events occurred to reverse this strength. The most significant from a long term perspective was the surprise success to Trump administration had in passing a substantive tax package the Tax Cuts and Jobs Acts of 2017 or the Act.

The significance of the Act was two-fold. On the one hand its passage ended the Trump administration string of legislative failures and on the other we believe the legislation should be stimulative for the economy.

The effect of the passage of the Act was reinforced by strong economic data that bolstered the risk on sentiment in the markets. The second significant event that affected the markets during the fourth quarter occurred late in the third quarter.

Following the September 2017 meeting of the Federal Reserve Open Market Committee, then Federal Reserve Chairman Yellen stated the Fed Reserve the Fed viewed recent soft inflation data as owing to transitory factors that they remain confident that inflation would trend towards the 2% target level over the medium term. This acknowledgment by the Fed that they would look past soft inflation data in the near-term and continue to remove a combination forced the market to reprice the expectations for additional interest rate hikes.

Just prior to the September's 2017 meeting, the market was pricing at approximate one rate hike by the Fed by the end of 2018. In contrast, the Fed September dot plot implied one more hike in 2017 and three additional rate hikes in 2018.

The Fed hiked rates another 25 basis points in December and currently the market is pricing at approximately three hikes in 2018. The gap in Fed rate hike expectation that existed in early 2017 has been closed.

Further, the yield on the 10-year U.S. Treasury note reached 2.406% by December 29, 2017 and surpassed 2.9% in February of this year.

This represents a significant movement from August of 2017 when the 10-year U.S. Treasury note was threatening to break below 2%.

These two events drove the yield curve flatter during the fourth quarter of 2017 as the yield spread between the five year U.S. Treasury note and the 30-year treasury bond reached the lowest levels since late 2007 at a little over 53 basis points.

Since the turn of the year the markets have become more volatile. The Federal Reserve has a new Chair, Jerome Powell and the government avoided a shutdown in early February by passing a budget resolution that in addition to dealing with the debt ceiling increased projected government deficits by approximately 300 billion over the 2018/2019 fiscal years.

The President also outlined plans for an extensive 1.5 trillion infrastructure plan. Together with the Tax Reform Act the government faces significantly wider budget deficits going forward.

This will lead to expanded auctions by the treasury to fund these deficits. Inflation and economic data has also strengthened in early 2018 and public comments by Fed officials including the new Chairman indicate the Fed sees the economic outlook is having improved since their last meeting in December of 2017, and there may be a need for a fourth rate hike in 2018 versus three.

The market has yet to price in the expectation for four hikes this year, but this could change. The mortgage market was impacted by these events that occurred during the fourth quarter of 2017 in a positive way but developments during the first quarter of 2018 if unwound most of the strong performance in Q4.

In early January 2018, the spread of the 30-year, fixed rate conventional mortgage to the 10-year U.S. Treasury Note hit its tightest level since early 2013.

This spread has since widened back to near 70 basis points, the level last seen in early September of 2017. Increasing rates and volatility the potential for reduced hedge-adjusted carry as the Fed continues to raise rates and less Fed purchases going forward are to blame.

There are few investors willing to step in and buy mortgages at the moment hardly surprising given the development year-to-date. Until there is clear evidence that interest rates have peaked and volatility has settled down yielded oriented buyers are likely to stay away from the market and mortgage performance will not improve.

The effect of the economic development discussed above have also impacted the prices of REIT stocks, which now generally trade at 80% to 90% of trailing book value. The market expects dividends and book values to be under pressure as the Fed continues to raise rates.

To the extent this continues, Orchid Island Capital will not likely experience the growth we have seen over the last few years and therefore the management fees we receive will not increase until Orchid Island can resume growing. However, Royal Palm will continue to grow its RMBS portfolio assumingly remain cash flow positive and therefore will continue to utilize our NOLs.

Yet federal tax NOLs do not begin to expire until 2025 at Royal Palm Capital and are available through 2029. And at Bimini, they begin to expire in 2028 and are available through 2036.

Operator that concludes my prepared remarks, we can open up the call for questions.

Given the change in the tax rates and your production in the tax benefit and the current market environment you just described, what do you forecast as the rate at which you’re going to be able to utilize those NOLs in both Bimini and both entities?

Well they're obviously lower although for purposes of doing our analysis, we assume that Orchid Island does not grow. That's been the case every year that we've done this.

And so based on a zero growth rate assumption at Orchid Island, the only source of growth is just the retention of cash earnings. And our current valuation allowance versus the value of deferred tax asset is about 37%.

So in other words, the deferred tax asset net of the valuation allowance is about 63% of the asset. So we expect to use 63% of those NOLs.

At the Royal Palm level, at the Bimini level those expire much later. As I mentioned 2036 so while we expect to fully utilize those NOLs they are of course much, much smaller but for purposes of analysis we assume no growth at Orchid Island.

So, and of course to the extent it does we have to revise our analysis every year but it just - you can't conclude it's more likely than not you’re going to always grow Orchid. So we feel that’s much more prudent approach take.

Just kind of taken a different jump, the advisory services revenue for the fourth quarter was just a little over $2 million interest and dividend income was $2.6 million. And interest expense was $1 million.

So you’re looking at net revenues of little more than $3.6 million. The portfolio was growing over the quarter so too were the advisory services revenue.

So I’d say that from a revenue standpoint $3.6 million is a good run rate per quarter. And assuming the portfolio doesn’t shrink anything like that and then we had expenses of 1.8.

So I think you can sort of extrapolate that out and get a reasonable idea of the utilization rate.

And again as it grows since we don’t have to distribute any of the earnings, they just get plowed back in to grow the portfolio. So those quarterly numbers grow over time.

Anything you can do between the two companies to accelerate the user, increase the benefits from those NOLs?

There is one step we can take which would be for Bimini to contribute its ownership stake in the asset manager to Royal Palm which would then -- and then those revenues instead of getting used to offset Bimini's NOLs could be used to offset Royal Palms. That would be - that's one step - that's really the only meaningful step we can take.

Under what circumstances would it make sense to do that?

Well it’s always been a case of risk, it’s a valuable asset. The Royal Palm is the former mortgage company which had a lot of litigation risk stemming from the crisis to the extent that’s entirely behind us and we feel comfortable that someone wouldn't want to come after that asset we would do so that's what has kept us from doing so up till now.

Thank you, Operator. Thank you everybody for your time.

To the extent you have additional questions or you happen to listen to replay versus the live version of the call, please feel free to contact us at our office, our number is 772-231-1400, look forward to taking your calls. To the extent you have them, or otherwise we look forward to speaking with you next quarter.

Thank you.