Bimini Capital Management, Inc.

Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent Annual Report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting the forward-looking statement.

Now I would like to turn the conference over to company's Chairman and Chief Executive Officer, Mr. Robert Cauley.

Please go ahead, sir.

Thank you, operator. Good morning, everyone.

During the second quarter of 2018, revenues for Bimini were down modestly as compared to the first quarter of 2018. Advisory services revenues were down 6% as Orchid Island's capital base contracted slightly due to the share repurchase program and a decline in book value of 2.8% during the second quarter of 2018.

Interest income declined 4% as the MBS portfolio declined during the quarter as cash levels needed to be replenished following net negative margin call activity, predominantly during the first quarter. Including dividends received from our Orchid Island shares, total revenues declined by 6%.

Bigger story for the quarter in 2018 generally was the continued increases in our funding cost as the Federal Reserve raised their target for the fed funds rate once again in June, the 7th such 25 basis point increase in the current tightening cycle. It does not appear the Federal Reserve has finished raising rates at the moment.

However, in spite of these modest declines in revenue, Bimini continues to generate taxable income that can be retained through utilization of our tax net operating losses to be redeployed into the MBS portfolio of Royal Palm.

At this point, I would like to review macroeconomic developments during the quarter before going into the performance of the MBS investment portfolio at Royal Palm. The U.S.

economy appears to be very strong. Growth in the second quarter of 2018 exceeded 4% on an annualized basis and given the extent of fiscal stimulus introduced by the Tax Cuts and Job Act of 2017 and the Bipartisan Budget Act of 2018 is likely to remain strong for the next few quarters.

The Fed expects to continue to remove accommodation by raising the target range for the Fed's fund rate 2 more times in 2018 and 3 more times in 2019. By any measure, economic activity is robust and the employment market in particular appears to be overheating.

Importantly, while inflation has returned to or near the Fed target level of 2%, it does not appear to be at risk of meaningfully exiting this level in the near term. This should keep the Fed from raising rates beyond their current gradual pace.

One threat to the economy the market fears is a meaningful trade war. The Trump administration appears determined to reverse what the President sees as years of unfair trade that have weakened the United States.

The administration has aggressively introduced tariffs in an apparent attempt to force our various trading counter-parties to agree to more even trade terms.

It remains to be seen if the administration's tactics will work and market fears of a protracted trade war will likely remain until a resolution is found, if indeed a resolution is found. Developments with our trading partners have also impacted the flattening of the yield curve that has taken place over the last few quarters.

Fear of a trade war and the anticipated negative impact it would have on economic activity has kept longer-term rates from rising meaningfully and coupled with consistent rate increases by the Federal Reserve, driven the spread between long and short rates lower.

This trend abated somewhat in late July, but it remains to be seen if this is a temporary correction or something more lasting. The agency MBS market generated a modest positive return of 24 basis points for the second quarter and negative 100 basis points for 2018 to date.

The reduction in asset purchases by the Fed has been offset by reduced supply of agency MBS , negating the negative effects of the former on the performance of the asset class.

A continuing slowing of prepayment behavior has benefited higher coupon mortgages as well, further negating the effect of reduced purchases by the Fed. Going forward, the continued compression of the yield curve could put downward pressure on both returns for Agency MBS as well as demand for the asset class.

The performance of the Royal Palm portfolio trailed the Agency MBS market as the portfolio has a higher concentration of high coupon fixed rate specified pools, which underperformed as extension risk was paramount and prepayment fears abated. This drove the mark-to-market losses on our 30-year 4% and 4.5% securities, which comprise nearly 79% of that pass-through portfolio at March 31, 2018.

The portfolio was also negatively impacted by elevated speeds, generally owing to the preponderance of smaller pools that are prone to inconsistent prepayment behavior.

With rates continuing to move higher during the second quarter of 2018, the average yield on the MBS portfolio was 411 basis points for the current quarter versus 401 basis points during the first quarter. However, as I mentioned previously, the size of the portfolio declined by approximately $20 million this quarter, which offset the increase in yields and interest income declined 4% sequentially quarter-over-quarter.

Reflecting our hedge cost, interest expense rose as well from 196 basis points during the first quarter of 2018 to 227 basis points in the second quarter of 2018. This resulted in a contraction then to spread to 184 basis points this quarter versus 205 in the first quarter of 2018.

However, starting with the December 2018 contract and running through the December 2021 contract, 3 years, Royal Palm has euro/dollar interest rate hedges in place of $100 million each, with weighted average implied 3-month LIBOR rates between 2.2% and 2.8%. 3-month LIBOR is currently 2.34% and a $100 million represents approximately 57% of our June 30, 2018 repurchase agreement balance of approximately $175.4 million.

For the September 2018 contract, the euro/dollar position is $60 million with an implied rate of 1.96%. To the extent 3-month LIBOR continues to rise, these hedge positions should mitigate to some extent further compression on our net interest margin going forward.

With rates in the market stabilizing over the last 2 months, Royal Palm has been able to replenish its cash balances in the third quarter of 2018, and we have resumed growing the MBS portfolio.

Developments in the market just described above were felt by Orchid Island as well as Orchid introduced its dividend to $0.09 for April of 2018 from $0.11 in March of 2018. As a result, we had a 30% reduction in dividend income for the current quarter versus the first quarter of 2018.

And finally as you all know, we introduced the share repurchase program in March of this year and to date, we have repurchased a little under 42,000 shares at a weighted average purchase price of $2.37. While the number of shares repurchased is modest, volume in the stock has picked up of late as we hope to [ avoid ] by this case when the share repurchase program was introduced.

Further, rules governing share repurchase programs restrict repurchase activity somewhat, but we have been acquiring shares to the full extent the rules allow. Thank you all and we'll now open up the call to questions.

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

To the extent anybody dials into the replay or has any questions that come up after the call, please feel free to contact us. Our number is 772-231-1400.

Otherwise, we look forward to talking to you next quarter. Thank you.