Operator: Good morning, and welcome to the Fourth Quarter 2018 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, March 20, 2019.

At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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 the actual performance or results to differ materially from those expressed in such forward-looking statements.

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 forward-looking statements.

Now I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Robert Cauley: Thank you, operator. Good morning, everyone. While 2017 was a strong year for growth at Bimini, 2018 was more about holding on as market conditions were very challenging. With the economy growing at the fastest rate since the financial crisis, the Federal Reserve, or Fed, raised the target for the Fed funds rate 4 times in 2018. In fact, economic growth for 2018 exceeded 3% for the first time in years as the effects of the Tax Cuts and Jobs Act passed in late 2017 and the fiscal stimulus package passed early in the year added substantial fiscal stimulus to an already healthy economy. As the Fed drove short-term rates progressively higher, the rates curve flattened, suppressing earnings for levered bond funds. This impacted Bimini both directly and indirectly. The reduced net interest spread on our MBS portfolio was also felt at Orchid Island Capital, the REIT we manage via our subsidiary Bimini Advisors. Orchid reduced its dividend 3 times during the year, reducing our dividend income. The dividend cuts, along with the book value erosion at Orchid, reduced both the price of Orchid shares and the capital base that our management fee is based on.

Orchid's capital base declined by approximately 21% in 2018. Even with this decline in the capital base, Orchid's average capital base for the year was slightly higher than in 2017, and our advisory services revenues increased 5% over 2017.

Advisory service revenue was down approximately 2% in the fourth quarter of 2018 versus the prior quarter.

With the three dividend cuts by Orchid, dividend income on our Orchid shares was down 35% for the year and 4% in the fourth quarter versus the third quarter of 2018.

The Treasury curve flattened slowly over the course of 2018 and although did not rise as much as short-term rates, longer maturity rates rose over the course of the year as well, and the interest income on our MBS portfolio increased by approximately 38% in 2018 versus 2017.

The MBS portfolio at Royal Palm Capital was essentially unchanged in size from the fourth quarter of 2017, but the average yield on our MBS assets increased 32 basis points, from 3.88% to 4.20%. Compared to the third quarter of 2018, interest income in the fourth quarter increased by 8% as the yield on our MBS assets increased 6 basis points and the average MBS holdings increased by $14 million.

As the Fed raised rates 4x over the course of 2018, our average borrowing cost increased materially, from 1.41% to 2.44%, resulting in 124% increase in repo interest cost for 2018 versus 2017.

Compared to the third quarter, repo interest expense increased by 18%. The net of these developments was a 6% decrease in net interest revenues for the year and 2% for the quarter, with interest rates higher and the value of our MBS portfolio declined.

Secondly, as described above, developments at Orchid led to a $4.4 million decline in the market value of our Orchid shares for the year and $1.3 million decline for the quarter.

During the fourth quarter, interest rates declined, but our MBS securities underperformed our hedge instruments, resulting in an aggregate $2.7 million mark-to-market loss on our derivative instruments in MBS securities.

At year-end, we increased the valuation allowance on our deferred tax assets at both Royal Palm and Bimini, resulting in a tax provision of $21.1 million for the year and $21.8 million for the quarter. This was necessary since Orchid's capital base and dividend rate declined during 2018, as did the net interest margin on Royal Palm's MBS portfolio.

For purposes of setting the valuation allowance on our deferred tax assets, we project our taxable income going forward over the remaining life of our taxable loss carryforwards. These estimates are based on our then-current levels or the various components of income and expense. Given the length of the projection period, these projections are highly sensitive to changes in the underlying assumptions.

Market developments over the course of 2018, coupled with the impact that these developments had on our portfolio at both Orchid and Bimini, resulted in lower projected taxable income over the next 10 to 15 years versus our projections at the end of 2017.

Of note, the increased tax provision at both companies had no impact on the cash flows of either company's operations, as the adjustment is a noncash GAAP adjustment.

In spite of very adverse market conditions in 2018, and particularly the fourth quarter of the year, our net revenues were down only modestly in 2018 in the fourth quarter of the year. Royal Palm generated taxable income of approximately $3 million for 2018 and Bimini $0.6 million. As a result, the remaining tax net operating losses available are approximately $250.5 million at Royal Palm and $18.5 million at Bimini.

Going forward, to the extent that term structure of rates remains flat and our noninterest spread remains depressed, all earnings and dividends from Orchid Island shares will remain depressed as well. However, to the extent the Fed is at or near the end of its tightening cycle, and there are reductions to the Fed funds rate in the future, we would expect this to impact us positively in terms of our net interest spread, Orchid's net interest spread and our revenues and earnings generally.

As we entered 2019, the outlook is far different than it was at the end of the third quarter. The risks to the economic outlook, at least in the eyes of the market, are now clearly to the downside. Risks include potential hard Brexit for the United Kingdom from the European Union, very weak growth in Europe and China, the trade dispute between U.S. and China and with prospects that all of these factors will cause growth in the U.S. to slow materially. As we speak, the Fed funds futures are now pricing in a 25% to 35% probability of a rate cut by the Federal Reserve by the end of 2019. We will see if the Fed itself agrees with these projections later today when the Fed releases their latest set of dot plots at the conclusion of their meeting this afternoon.

That concludes my prepared remarks, and we will now open the call to questions, operator. Thank you.

Operator: [Operator Instructions] Our first question is from Gary Ribe from Accretive Health -- Wealth.

Gary Ribe: Hello?

Robert Cauley: Sorry, good morning, I was on mute. Sorry.

Gary Ribe: Oh, no worries. Yes, I just had a question. Your share repurchase authorization expired in November, is that correct?

Robert Cauley: Expired in November, yes.

Gary Ribe: Okay. How many shares did you guys wind up repurchasing out of the 500,000 that were authorized?

Robert Cauley: I want to say 37,000. It was not a particularly high number. The act -- we're doing it under 10B-18 and 10B-18 has a fair amount of restrictions in terms of when we can buy, the time of day, where we can buy and the activity in the stock was, just as you know, quite low. So it's -- we're out there, but it's been a challenge.

In spite of the pattern, we set it up under the -- under that plan so that our agent could be in the market even when we would typically be in blackout period, so we just give them very general instructions and we don't -- we sort of set it and let them buy all they can, and they're just unfortunately aren't unable to buy very much.

Gary Ribe: Got it. I mean, I found some blocks and I think there's more out there. I mean, are you guys considering reupping the plan or maybe doing a tender?

Robert Cauley: I don't think we will do a tender, but we will keep the plan out there. We'll keep extending it. The tender, it's just -- the issue there is -- as you saw this quarter, this year, we had to increase the valuation allowance on the deferred tax assets. You're trying to generate as much taxable income as you can so that you can harvest all these NOLs, and they have expiration dates. They go out, in the case of Royal Palm, 'til 2029. In the case of Bimini to 2035.

But the reason we're taking an increase in that valuation allowance is because projections show that we're not going to use all of those NOLs. So if you really want to increase your chances, maximize your chances of harvesting those NOLs, you need all the money you can to deploy into the portfolio to generate as much taxable income as you can.

If we do a tender, it means you're taking that out. You're taking cash out and using it to get maybe a short-term bump in the stock, but you're lowering the chances you'll harvest those NOLs. So we really want to try to focus all the capital on trying to achieve that objective, because to the extent we do, do that, it's going to have a much greater long-term benefit in our eyes than in a initial short-term bump in the stock that reduces what we ultimately harvest in the NOLs.

Gary Ribe: I mean, would you agree that the earnings power on the Royal Palm portfolio and the ability to raise capital at Orchid are at somewhat of a trough?

George Haas: Yes, I would [ center ].

George Haas: Oh, I mean, generally, with interest rate cycle, when you -- when the Fed gets close to the end of a tightening cycle, the curve is usually very flat, which it's been -- steepened a little bit in the first quarter. But yes, you saw -- we got our ninth hike in December of '18. And at one point, 2s, 10s got inside 20 basis points. If you look today, that's [indiscernible] here, but 3- and 5-year trading right on top of Fed funds, looks like you're at the trough in all respects. And that really had a big impact on the NOL adjustments. So Orchid dividends were down, Orchid's capital base was down, Royal Palm's are down. And you hope -- you expect at some point we'll hit a -- an easing cycle and that will be good for everything. But you still want to try to -- we don't have -- the clock's ticking. We don't have that much time to get through these NOLs. $250 million, and we generated $3 million taxable income at Royal Palm last year, so time is running out.

Gary Ribe: Yes, I understand that. I guess my pushback on that is, if you're trading at -- if you're generating, sort of, trough level earnings right now, $1 that you spend on purchasing a share is buying a much higher dollar value of future earnings and -- versus saving some federal taxes at a 21% rate. I mean, there's maximizing the value of the NOL and there's maximizing the value -- the per-share value of the company, and those aren't necessarily the same thing.

Robert Cauley: Yes. Yes, I guess [indiscernible]

Gary Ribe: So if you would agree you're at trough earnings, I would say that it's probably a very good time for you guys to be active in buying stock. Like, if I had a block of stock right -- about 100,000 shares right now, can I call you up and sell them to you? Would you buy them?

George Haas: I don't think we can under the planning, per se. But yes, we can certainly look into it.

Robert Cauley: Yes, I mean, we can [indiscernible].

Gary Ribe: You guys are allowed to buy blocks. I mean, if you -- my point is, look, if you're trading at such trough-level earnings, the right thing to do to maximize the per-share value of the company might be to do a tender at $2.20 or something. Like, it's -- you're buying at a trough output. So I mean, I'm kind of glad you didn't buy back as much stock last year, given how difficult it was for the strategy and everything, but if the environment is going to improve for this type of thing, I mean, you're buying your future earnings on the cheap.

Robert Cauley: Right, at the expense of low earnings. The cost per unit of earnings is lower, but the ultimate earnings would be lower also.

Gary Ribe: But on a per share basis they would be higher.

Robert Cauley: Yes, we'll evaluate it. I mean, that's simple math.

Gary Ribe: I mean, if I know people that have blocks, should they call you?

Robert Cauley: Yes, yes. I mean, if you do. I mean, that's the first time anybody said that. If you do, yes.

Gary Ribe: I just want to know, like, I know that you guys are active on the Orchid side, I see you buying and selling shares for that entity all the time. I just -- at where we are now, it would be -- in my eyes it would make sense to be more aggressive.

Robert Cauley: Well, yes, you're talking about blocks. This is the first time anybody has mentioned that to us. I mean, yes, we -- like I said, the reason is 10B-18, shares trade in less than 100 share blocks. There is nothing out there. So nobody has ever contacted us with a block to sell. So this is the first we heard of such a thing.

George Haas: I think we need to evaluate where the stock settles in here now that the book value is more in line with where the stock has been trading, and that was always a point of contention. There seem to be this idea that if the book value is higher, just -- I guess, just applying maybe oversimplified rules that if your book value is much higher than your stock price is, you're supposed to be buying shares back. But at the same time we don't realize that value to the extent that we're able to put more capital back into the portfolio and actually consume the deferred tax asset. So if there's blocks available, I guess, we can certainly take it up and look into it, just not something that we have evaluated. We don't know where the stock is going to settle here in after this earnings release.

Gary Ribe: Yes, makes sense. I just -- if I look at the objectives, it should be to maximize the per share value of the company and the earnings per share that you guys have on the back end. So that would be my two cents on the matter. And it's -- you've got 37,000 shares and close to a million changed hands last year, you could get a tender offer 250,000 shares and get that built up. I don't -- it's $0.5 million of capital, I don't think it's that -- I just -- kind of run that and see how it goes, I mean, [indiscernible] valuation where it is.

Operator: [Operator Instructions] And our next question is from Chris Hurst from Oak Mountain Advisors.

Unknown Analyst: Alternatively, would you -- and while I'm sympathetic to the prior caller's line of questioning, would you consider also a dividend as a -- one, creates a positive signaling effect and also generates some return for shareholders? And while I am conscious of retaining capital to grow earnings, I think you may get a bigger bang for your buck by paying a modest dividend?

Robert Cauley: That's something we consider quite often, and I have my personal views, we're not to that point yet. One of the things we've considered also at other times, what if you just raise capital, brought in some new capital and used that to enhance your ability to harvest the NOLs, but the problem is the stock is trading at $2 a share. At some point, assuming we have some success and traction in eating up bigger chunks of these NOLs, and we're getting to a point where it looks like the chances we'll be able to harvest all or most of them is now higher, hopefully, the stock would rise accordingly to reflect that increased probability, maybe then, given the stock price wouldn't be as cheap in our eyes, it might make sense to do that and maybe a way to enhance our ability to do that and maybe do it -- do what you say with respect to the dividend to try to get liquidity and traction in the stock. And the idea that it could trade up to reflect the increased probability of releasing -- realizing a higher extent of NOL, I don't think we're there yet. I think that point could come. I just don't think we're there yet.

George Haas: We're at the -- at or near the top of this tightening cycle, which start to -- what that's going to do. And I think when we get a little bit more clarity, certainly, if we are at the top and we're getting ready to roll over into a stable rate environment or easing scenario, these things get -- there's a lot more room to breathe I think in that type of situation from the standpoint of liquidity management and our ability to put money to work and have better earnings in the portfolio. So maybe it's best to kind of wait and see how that -- this plays out before we consider those types of things.

Unknown Analyst: Okay. Just one other question. What are the constraints for you on buying Orchid Island stock? Like, particularly, at the end of December, it seemed like buying Orchid Island at a 20% plus discount to book value would have been a better investment than buying some Fannie or Freddie mortgage-backed security?

Robert Cauley: Well, it was a -- it's attractive investment nor there are restrictions, per se. And yes, it was attractive. But we also had reduced cash flows as well. I mean it was a -- in the fourth quarter, we caught what happened. So early October, Chairman Powell says, "We're a long way from neutral," and by January he's saying, "We're at neutral." So you had a material movement in the front end of the curve in the euro/dollar market, and we have a lot of exposure to that market. So we had, as I mentioned on the call, net margin call activity, it was very negative. So we really didn't have a lot of cash to deploy for that purpose.

George Haas: We did look into it. I think we were in -- at that point in the quarter enough had happened at both Orchid and Bimini that it probably wouldn't have been prudent for us to be in buying stock through in possession of nonpublic information.

Robert Cauley: Yes, because even though the discount to trailing book was high, as Hunter just alluded to you, we kind of know what current is and it was not 20%. So it was -- our auditors are very -- mostly very cautious about transacting in Orchid stock when it's particularly in a volatile quarter.

Operator: [Operator Instructions] At this time I'm showing no further questions. I would like to turn the call back over to Robert Cauley for closing remarks.

Robert Cauley: Thank you, operator, and thank everybody for your time period. To the extent anybody has additional questions or did not get a chance to listen to the call live and wants to call us later, we'll be here. Our number in the office here is (772) 231-1400. Thank you, and goodbye.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.