Bimini Capital Management, Inc.

Thank you, operator, and good morning, everyone. I hope everyone is safe.

The first quarter of 2020 was perhaps the most devastating period ever witnessed in the United States and across the globe in terms of the impact on our health, way of life and particularly, economic activity. The steps taken to slow the spread of the virus were drastic.

As it became clear economic activity was on the verge of collapse, businesses and investors moved to raise cash as quickly as possible. The resulting selling of financial assets drove prices down quickly and margin calls became numerous, forcing leverage investors to reduce leverage.

Assets trading in the most liquid markets or in a gain position were the first to be sold.

The agency MBS market, the sole market the company invests in as well as Orchid Island, the REIT we manage through our subsidiary, Bimini Advisors, was one such market that witnessed the first wave of selling in addition to the U.S. treasury market.

These events had a significant impact on Bimini. I will discuss the impact on our portfolio operations first.

Royal Palm moved quickly to sell assets to retain leverage at good levels, meet anticipated margin calls and retain adequate liquidity levels. We sold approximately 75% of our MBS securities, more than was needed to maintain adequate cash levels.

The company was able to withstand the disruptions to the agency MBS market, although it did realize approximately $5.8 million of losses on the assets sold, $4.8 million of losses associated with our portfolio-related hedge positions, all of which were closed during the period and $0.5 million of hedge related to our trust preferred debt. Book value on a per share basis was reduced by approximately 56%.

However, in the end, we were left with enough liquidity to allow us to opportunistically redeploy our remaining capital once the market had settled.

Given the importance of the mortgage market to the U.S. economy, particularly the agency MBS market, the breakdown of the market prompted the Fed to intervene by, among other things, purchasing more U.S.

treasuries and Agency MBS in an effort to stabilize the market. While the Fed's initial steps proved inadequate, eventually on March 23, 2020, the Fed announced an essentially unlimited asset purchase program for U.S.

treasuries and agency MBS. The Fed went on to introduce many other facilities to support additional markets over the following days and weeks.

However, the action on May 23 stabilized the agency MBS market and asset prices quickly began to recover. At this time, Royal Palm was able to redeploy its remaining capital opportunistically.

Like Bimini, the share prices of all mortgage REITs were severely depressed in early April.

Royal Palm opted to purchase additional shares of Orchid Island at a substantial discount to March 31, 2020 book value. At this -- at the time, Orchid shares were trading at a dividend yield just below 20%.

The potential return on the shares exceeds returns available on the MBS markets simply because we could acquire exposure to the same markets at a price that reflects a substantial discount to Orchid's March 31, 2020 book value. This past week, Orchid announced the book value was up again modestly from their past -- from their last reported figure on April 30, 2020, and declared a $0.055 dividend.

Moving forward, we anticipate the markets to continue to recover, funding levels to be very low and MBS investments to remain attractive, either via direct investment in securities or indirectly via shares of Orchid. Prior to March and the feeling of the full impact of COVID-19, yields on our assets were generally 3.5% to 4% depending on prepayment speeds in any given month.

In its aftermath, yields were closer to 3% as the rates have fallen. However, while our weighted average book funding costs were just over 2% before March, they are now approximately 50 basis points.

With respect to prepayment speeds, recall speeds were quite elevated during the third and fourth quarter of 2019 before the typical seasonal slowing in January and February. The seasonal slowing -- slowdown was short-lived as the steep decline in interest rates starting in late February led speeds to increase in March and April.

For Royal Palm, the effect was short-lived because when we reduced the portfolio as described above, approximately 70% of our remaining portfolio was concentrated in MBS pass-throughs with loan balances less than or equal to $150,000. The benefit of this concentration was realized immediately as speeds released this month returned to the levels observed in February.

We hope this high concentration of securities less sensitive to prepayment incentives will keep our prepayment speeds contained in support of our net interest margin. As we attempt to rebuild the portfolio, we will continue to maintain a high concentration of subsecurities.

Finally, we ended the quarter with approximately $5.9 million in unrestricted cash. And despite deploying approximately $2.2 million to add to our position in ORC shares since the quarter ended, we still have approximately $4.7 million in unrestricted cash today.

As mentioned, we closed most of our hedge positions during the extreme interest rate market value in February and March. As the portfolio was rebuilt, we anticipate rebuilding our hedge positions to lock in funding at the current low levels as well as protect our book value from rising rates.

We have approximately 7% of our capital invested in IO and inverse IO securities, which also offer protection from higher rates. With respect to our advisory services segment, Orchid Island realized an approximate 18% reduction in its shareholders' equity used for management fee purposes during the first quarter, and this will lower our management fees in the coming months.

For recent public disclosures, Orchid has indicated its shareholders' equity has partially recovered from the March 31, 2020 level. We welcome this news.

To the extent Orchid recovers further and is able to continue to grow its capital base in the future, we will see our management fee revenues increase. The decline in Royal Palm's MBS portfolio and our management fee revenue from Orchid Island, necessitated we review our projections that we use to estimate the extent of our tax net operating losses that we will be able to utilize prior to their expiration.

In doing so, we estimated we needed to take an additional $11.2 million valuation allowance against our deferred tax asset associated with the net operating losses. We will continue to evaluate our projections going forward in light of developments to either the MBS portfolio at Royal Palm or advisory revenues at Bimini Advisors as they occur.

However, I want to stress that we plan to continue to execute on our strategy of organically growing our investment portfolio in an effort to utilize Royal Palm's tax NOLs that expire later this decade.

Now that we and Orchid have stabilized, it appears we will be able to generate sufficient revenues to cover our cost and resume execution of our strategy. The events related to COVID-19 -- to the COVID-19 pandemic have set us back, but have not stopped -- not precluded us from continuing on our intended path.

Thank you. And operator, we can now open up the call to questions.

Can you talk about the prospective returns in leverage mortgage investments from here? I know with the Fed having supported the agency market that's brought spreads in.

But can you just compare it to today compare it to recent history?

Sure, I mean it's certainly higher. What we have seen though, to your point, is that as the Fed has supported the market, especially the TBA market, it's done very well.

But another nuance here is that when we first came out in the midst of this crisis, the mortgage market kind of assumed, I mean, collectively, that the effects of social distancing, shelter in place and so forth, would have an impact on the loan origination process, just making it harder to originate loans. And as a result, people assumed prepayment activity would be muted.

The last 2 months have proven that that's not the case at all. Refinancing activity, both cases have surprised to the upside meaningfully so.

As a result, prepayment activity looks like it's going to remain robust, and we see this daily in the origination numbers that we -- provided by The Street. So refinancing activity is going to be robust.

As a result, spec pool pay-ups have appreciated, recovered very quickly. So in spite of -- that's really not a function of the Fed.

That's just more a function of the fact that the economy seems to be weathering the effects of these what you would assume to be impediments to originate new mortgages.

That's kind of why we -- when we did like the Orchid earnings call, at that time, the investments in the securities look to be much more attractive than, say, for instance, rebuying, repurchasing shares. Now that's kind of gone the other way.

The yields have come in. They're still attractive, but they're not quite as attractive as they were even 2 weeks ago.

And so buying shares, for instance, for Orchid, looked very attractive. Hunter, you want to add to that or chime in?

Yes. Just to sort of put some numbers on it, I guess, depending on how much risk you're willing to take, both in terms of prepayments, duration as well as just how high up in dollar price you're comfortable going above par, I would ballpark most investment opportunities in the range of $130 million over the curve to, say, $160 million and some early carry on new production might get you a little bit more than that.

But -- and so it's still attractive. If you're applying a leverage somewhere in the 8x, 9x range, you're definitely getting into approaching mid-double-digit yields.

And so it is still relatively compelling, just not quite as wise as it was a month ago, so.

Yes. And then my other question is Orchid reported a bounce in its book value in April and so far -- in April.

So -- but Bimini -- we shouldn't expect Bimini to have a similar bounce because the mortgage -- Bimini's mortgage portfolio is smaller than it was before. Is that correct?

Yes. I mean it's had a bounce, you're right.

It's just we delevered more. And so more than we needed to, but we did deploy a lot capital into shares of Orchid, and the share price has bounced some.

I mean it's -- I'm not an equity expert. I would have thought that the agency mortgage REIT sector would have recovered quicker.

The market environment is still very favorable. You have the Fed put, so to speak, on the asset class.

Funding looks like it's going to stay low for a very significant period of time.

In spite of the volatility in the equity markets, up and down 500 points a day, the rates market has been very stable. It's been within a very -- the 10-year, for instance, trading between, say, 54 and 78 bps fall and the market is lower.

Mortgages should be doing very well and they are. So I would assume that the REIT sector eventually -- and it may take time, should do well and trade at back up to book.

So from that perspective, that's a very good investment for us. We've had -- the securities we do own offer very good call protection.

So our speeds have come down quickly.

All in all, it's a very good market, and we should be recovering, not like Orchid in a sense that you're getting it through the securities. In our case, we would eventually expect to get a fair amount through our -- the price of the Orchid as that sector recovers.

So in that sense, we're not materially different than Orchid, just achieving the same thing through a different channel.

Yes, we're -- like Bob mentioned earlier, even as we speak, after Orchid had a tremendous day yesterday in terms of stock price performance, but even still, we can buy a slice of a portfolio that we manage at $0.70 on the $1 and collected a 17% to 20% yield on it, what we're doing so. So the price conversions in addition -- the yield alone on a dividend is more attractive than alternative investments for us.

And when you throw in the kicker of the potential for price convergence towards book, it makes it even more compelling.

Yes. And there's another element to that is the hedge cost.

It's lessened, right, because we don't really hedge Orchid shares like we would in the portfolio, like hedging our funding cost. We don't have to fund that position.

It's just a -- we own it outright. There's no leverage applied to it.

In Bimini's history, has Bimini ever sold shares of Orchid outright?

I don't think we've ever sold shares. There may be -- come a time when we want to.

If these things converge and the investment opportunities look better in securities and that would have to be, I wouldn't say, financed, it would have to be managed, depending on circumstances, it may be the case that Orchid was selling shares through their ATM, so there would have to be some level of coordination there. But for now, it's a very attractive investment.

And so it's, in our minds, worth adding to.

Yes. I would just add to that this additional capital that we've put into purchasing Orchid stock, we did so with the intention of this being a trade that we ultimately get out of if and when investment opportunities, alternative investment opportunities in the MBS space look more attractive.

So I think we're fully prepared to do that. And we may have to jump through some hoops to make sure we do it by the books.

But that was our intention going into this.

I appreciate that answer because I was worried that money you guys used buying Orchid shares gets trapped. So thanks for expounding on that answer.

Appreciate it.

I guess, first of all, sorry, just congratulating you guys on making it through the other side of this. I don't know that everybody did, so.

It was challenging there for a few days. It was bizarre the way it unfolded as quickly as it did.

Hopefully, we don't do that again.

Let's hope not. You had mentioned the dividend at Orchid sort of in your response to Derek and sort of the attractiveness of the shares.

Given that you guys are on the Board, you control Orchid, have you considered the trade-off between the dividend policy at Orchid and deploying some of that attractive investment returns that Orchid is generating back into Orchid stock at Orchid?

Do you mean repurchasing shares? Yes.

We -- I really can't address that, but we talked about that on Orchid's call because at the time, in late April, the returns on the securities market were better than repurchasing shares, but that can change. So for instance, since then, the value of securities have appreciated.

I mentioned it in Derek's answer that prepayments have gone up, all right, so spec pools have done very well, which is good for book value, say, in the case of Orchid. But it also means that as Orchid's book value increases, it just so happened since late April that Orchid's share price decreased.

So it became a bigger discount to book. So while I'm here -- not here to talk about Orchid, there's the obvious implication of that, right?

I mean -- so we're always looking at these types of things, returns, expected returns going forward. And these -- and it can change.

It's dynamic. It's kind of ironic that when the securities market was doing very well and book values were increasing, I believe Agency just reported their book value was up 11% in April that the stocks languished.

I don't know if that reflects broader market risk off sentiment or what, but the REIT sector, the agency REITs, the ones that have survived, they're doing fine in this environment, so.

Yes. I just might -- to give you some historical context, I think we've -- to date, we haven't repurchased shares in a number of months prior to coming into all of this.

But back then when the opportunity presented itself, we were definitely aggressive about doing so. And I think at one point, we bought back almost 10% of the shares.

10.5%, almost 10.5%.

10.5% of the shares we've ever issued opportunistically. So I don't think that our investment management style has changed any.

And so that's, I guess, as far as I'd like to go into that.

Sure. So you -- but you had a pretty decent loss in Orchid in the first quarter.

So I don't know that you'd necessarily be required to pay out $0.055 or whatever it is. Maybe you could revisit the dividend policy to prioritize share repurchases for even just a short period of time while this gap persists.

I see what you're saying, so at Orchid, yes, I mean there -- some of our peers have suspended dividends and you're saying it'd be better use of capital to repurchase shares.

Even if you just knock it to $0.01 or something and you use the remaining $0.045 to buy stock, you're generating an immediate 40% return for Orchid shareholders. So including yourself at Bimini, and you might be able to drive some of that convergence.

So that's just something I would be remiss if I didn't point out. I don't think you're going to have net income that you're required to pay out.

So you might have a little bit more flexibility on that capital allocation front. And maybe you can help be the catalyst for the convergence.

Yes, that's a good point. Thanks.

So anyway, I -- congratulations on doing a good job and making it through the other side. And I -- that was the only thing I wanted to at least ask about and point out.

All right. Thanks, Gary.

All right. Thank you, operator, and thank you, everyone.

I appreciate you taking the time to listen. To the extent you listen to the replay and you want to ask a question, please feel free to call us at the office.

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

Thank you, everyone. Goodbye.