Bimini Capital Management, Inc.

Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are subject -- excuse me, 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 and assumptions or changes in other factors affecting forward-looking statements.

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

Please go ahead, sir.

Thank you, operator. During the third quarter of 2018, Bimini generated net income of $0.9 million or $0.07 per common share.

For the period, total revenues were down 2% as compared to the second quarter of 2018. The primary development impacting our results continues to be increases in our funding costs as the Federal Reserve raises their target for the Feds Funds rate, once again in September, the eighth such 25-basis point increase in the current tightening cycle.

It does not appear that Federal Reserve has finished raising rates at the moment. 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 and our advisory services with Orchid Island Capital.

The U.S. economy grew by over 4% during the second quarter of 2018 and by 3.5% during the third quarter.

Market participants fear that continued economic growth that handily exceeds what most economists estimate as the sustainable growth rate of the economy may generate price pressures in the economy. Inflation running below the target level of Federal Reserve's target for the most of the past several years reached the Fed's 2% target level during the third quarter.

On October 5, 2018, the Bureau of Labor Statistics reported that the U3 unemployment rate reached 3.7% in September, the lowest level since December of 1969. This level was affirmed this morning with the release of the October jobs report, and the unemployment rate remains at 3.7%.

The unemployment rate appears to be headed lower, given the apparent momentum in the economy going forward.

As this quarterly meeting that concluded on September 26, 2018, the Fed acknowledged the economy was strong and the summary of economic projections reflected their optimism. The so-called dot plot, or summary of economic members' forecast for the Federal Funds rate, reflected expectations for 1 more rate hike in 2018, 3 in 2019 and possibly 1 more hike in 2020.

The Agency RMBS market was impacted by several factors during the third quarter of 2018. Two such factors were the movement in interest rates and the continued decline in the Fed's reinvestment of its monthly pay downs, which hit its cap in mid-October.

As interest move steadily higher starting in late August, prepayment expectations were not materially affected. This is because refinancing activity has already been on a steady decline and the MBA's refinance index was already at multiyear lows.

Perhaps, more significantly, as the cap on the Fed's and reinvestment of its pay downs was hit in mid-October, which limits reinvestment of monthly pay downs, only to the extent they exceed $20 billion per month, an important source of demand for Agency RMBS for the asset class is essentially gone.

To date, the rise in rates over the course of the period, and in fact the last 2 years, has mitigated this problem somewhat as the supply of Agency RMBS declined.

The third driver of the performance was the attractiveness of the asset class on a relative return basis with other asset classes. Recent production Agency RMBS has frequently had characteristics that negatively impacted the anticipated total returns of the securities.

In this case, the spread between the weighted average coupon of the underlying mortgage loans and the rate received by the investor is quite high. This spread -- or this leads to a higher prepayment activity for any given coupon versus more typical spreads.

Also, average loan balances appear to be higher than what market participants are accustomed to, and average FICO scores are higher as well.

All 3 of these factors tend to increase prepayment expectations and negatively impact expected returns for the securities. This has negatively impacted the relative attractiveness of the Agency RMBS asset.

Since the third quarter of 2018 ended, Agency MBS has suffered from a lack of sponsorship for all of these reasons, and this has been reflected in their performance.

As of October 31, 2018, the current coupon 30-year fixed-rate Fannie Mae mortgage index was trading at a spread of approximately 86 basis points above the 10-year treasury note. This compares to a spread of approximately 75 basis points on September 30, 2018, and a multiyear tight spread of 56 basis points in early January 2018.

The Royal Palm portfolio generated return of negative 1.3% for the third quarter, as the portfolio has a concentration of high coupon, fixed rate specified pools, which underperformed due to extension risk. The extension risk, which entered the markets as interest rates move higher, was exacerbated by the fact that the most notable source of demand for the securities, the Federal Reserve, is now essentially out of the market.

However, with rates in the markets fairly stable over the first 2 months of the third quarter, Royal Palm was able to replenish its cash balances in the third quarter of 2018 and resumed growing in the MBS portfolio. The size of the portfolio increased during the quarter from approximately $184.5 million at June 30, 2018, to approximately $212.2 million at September 30, 2018.

As referenced previously, with rates continuing to move higher during the third quarter of 2018, the average yield on the MBS portfolio was 4.14% for the current quarter versus 4.11% during the second quarter. However, as I had mentioned previously, the size of the import portfolio increased by approximately $27.7 million this quarter, and interest income increased 3% sequentially quarter-over-quarter.

Inclusive of our hedging cost, interest expense rose slightly as well from 2.27% during the second quarter of 2018 to 2.29% in the third quarter of 2018. Net interest spread was essentially flat versus the second quarter at 1.85% for this quarter versus 1.84% the second quarter of 2018.

Royal Palm has Eurodollar interest rate hedges in place of a $100 million each, covering 2019 through 2021. The hedge instruments have weighted average of implied 3-month LIBOR rates between 2.41% and 2.80%.

3-month LIBOR is currently just over 2.59% and a $100 million represents approximately 49% of our September 30, 2018, repurchase agreement balance of approximately $203.7 million.

Since the end of the third quarter, we have added to the notional balances of certainties contracts covered in the years 2019 and 2020 by an additional $50 million. The step was in response to events occurring around return of the quarter mentioned above and expectations for more hikes in the Fed Funds rate over the same period.

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.

Prepayment speeds moderated during the quarter with aggregate speeds for the portfolio back into single digits. So far in the fourth quarter speeds have moderated further with rate hikes -- with rates higher still from the end of the third quarter.

Speeds may continue to moderate as we enter the fall/winter months when prepayment activity tends to decline.

The developments in the market were felt by Orchid Island as well, as Orchid Island Capital space declined by approximately 3.8%, resulting in a decline of 5% in our advisory services revenue. Also, with interest rates higher and its net interest margin down slightly in the third quarter of 2018 versus the second quarter, Orchid reduced its dividend to $0.08 to the August 2018 period versus $0.09 in July of 2018.

As a result, we had a 7% reduction in dividend income for the current quarter versus the second 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 approximately 62,000 shares at a weighted average purchase price of $2.39. The number of shares repurchased was modest, as activity has been hampered by a low trading volume in the stock during the quarter.

Thank you. Now I will turn the call open to questions.

Operator?

It seems that the discounts to current book value throughout the residential mortgage REIT space are widening quite a bit. What can you make of that?

What's driving that issue?

Well, it's definitely -- reflects expectations of Fed rate hikes going forward, as I kind of alluded to in the call. Certainly later in the third quarter and today, expectations of hikes have increased.

If you look, for instance, I'm referencing the dot plot, in other words, what the Fed anticipates will be their path of Feds Funds rate over the next 2 years. If you look at that versus say Fed Fund's futures, which is a proxy for market expectations of Fed hikes, that's been rising so there used to be significant gap between what the Fed expected and what the market expected.

Though with the data strong and getting stronger, the Trump administration had some success with the replacement for NAFTA. Who knows what's going to happen with the rest of our trading partners, but there's a little bit more optimism but less pessimism, and as a result, the market started to think that the Fed was going to be able to raise rates more, and that's just going to put more downward pressure on our -- both our net interest margin and potentially book value.

And I think the market's just pricing in a more significant discount to reflect the fact that there's probably going to be downward pressure on earnings and book value.

All right. Are we looking more at a flattening scenario or a steepening scenario going forward?

Well, that one implied flattening, certainly seeing that -- although in the last couple of weeks, you've kind of had a odd situation where the 2s 10s spread has flattened, while the 5 30 spread has steepened, not really sure what to make of that. But generally speaking, I would expect as the Fed continues to raise rate the curve will flatten, you would get a steepening to the extent the market thought the Fed was behind the curve, inflation that was evident -- and inflation was starting to get out of control, but since the market really doesn't believe that Fed's going to hike as much as they say they are, it's hard to make the argument that the market thinks the Fed's behind the curve, and that will probably be consistent with a steepening.

So I think we could just -- it's a better flattener, which means rates are moving higher adjusted the curve, and it really can't get much flatter, whether you pick your point or whether it's 2s 10s or 5s 30, they're still at very level -- low level certainly compared to where they were a couple of years ago when they were in the 100s of basis points. So I don't think you'll see an inversion until the market's convinced that a recession's on the horizon and we're certainly not there at this point.

Thanks, operator. Thanks, everybody for your time.

As always, to the extent you didn't have a chance to get a question asked, you can listen to the replay or so forth, please feel free to contact us in the office. The number is (772) 231-1400.

Otherwise, we look forward to speaking with you in the next quarter. Thank you.