Details of Fourth Quarter 2016 Results of Operations

The Company reported net income of $1.2 million, for the three month period ended December 31, 2016.  The results for the quarter included net interest income of $0.7 million, net portfolio losses of $1.9 million (which includes realized and unrealized gains (losses) on securities sold and derivative instruments), gains on retained interests of $0.3 million, advisory services revenue of $1.6 million, dividends and net unrealized gains on Orchid Island Capital, Inc. ("Orchid") common stock of $1.2 million and operating expenses of $1.7 million.

Management of Orchid Island Capital, Inc.

Orchid is managed and advised by Bimini.  As Manager, Bimini is responsible for administering Orchid's business activities and day-to-day operations.  Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel.

Bimini also maintains a common stock investment in Orchid which is accounted for under the fair value option, with changes in fair value recorded in the statement of operations for the current period.  For the three months ended December 31, 2016, Bimini's statement of operations included a fair value adjustment of $0.6 million and dividends of $0.6 from its investment in Orchid common stock.  Also during the three months ended December 31, 2016, Bimini recorded $1.6 million in advisory services revenue for managing Orchid's portfolio consisting of $1.2 million of management fees and $0.4 million in overhead reimbursement.

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Capital Allocation and Return on Invested Capital

The tables below present the allocation of capital between the respective portfolios at December 31, 2016 and September 30, 2016, and the return on invested capital for each sub-portfolio for the three month period ended December 31, 2016.   Capital allocation is defined as the sum of the market value of securities held, less associated repurchase agreement borrowings, plus cash and cash equivalents and restricted cash associated with repurchase agreements. Capital allocated to non-portfolio assets is not included in the calculation.

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Prepayments

For the fourth quarter of 2016, the Company received approximately $2.8 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 11.1% for the fourth quarter of 2016.  Prepayment rates on the two MBS sub-portfolios were as follows (in CPR):

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Financing, Leverage and Liquidity

As of December 31, 2016, the Company had outstanding repurchase obligations of approximately $121.8 million with a net weighted average borrowing rate of 0.99%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $130.1 million.  At December 31, 2016, the Company's liquidity was approximately $5.1 million, consisting of unpledged MBS and cash and cash equivalents.

We may pledge more of our structured MBS as part of a repurchase agreement funding, but retain cash in lieu of acquiring additional assets.  In this way, we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash. Below is a listing of outstanding borrowings under repurchase obligations at December 31, 2016.

Hedging

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding and also its junior subordinated notes by entering into derivative financial instrument contracts.  The Company has not elected hedging treatment under U.S. generally accepted accounting principles ("GAAP") in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election.  As such all gains or losses on these instruments are reflected in earnings for all periods presented.  As of December 31, 2016, such instruments were comprised entirely of Eurodollar futures contracts.

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Book Value Per Share

The Company's Book Value Per Share at December 31, 2016 was $5.71.  The Company computes Book Value Per Share by dividing total stockholders' equity by the total number of shares outstanding of the Company's Class A Common Stock. At December 31, 2016, the Company's stockholders' equity was $72.1 million with 12,631,627 Class A Common shares outstanding.

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Management Commentary

Commenting on the fourth quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, "The outlook for the economy, interest rates and the Federal Reserve (the "Fed") changed dramatically during the fourth quarter of 2016 as Donald Trump unexpectedly won the Presidential election.  The Republican Party retained both houses of Congress, which also surprised the markets.  The markets reacted strongly to these developments and interest rates moved significantly higher. In what is commonly referred to as a "risk on" trade, treasury securities declined in price while other assets that carry more risk – equities, commodities, riskier bonds, etc. – all increased. The market expects expansionary fiscal policy – such as tax cuts/reform, infrastructure spending, less regulation and a very pro-business administration going forward. As a result, the market expects the Fed to follow a more aggressive policy in removing accommodation from the economy, as many of the expected policy proposals should be both expansionary and inflationary.  Comments by the Fed chair at the conclusion of their December meeting, a meeting at which they increased the Fed Funds target rate by 25 basis points, were taken as quite hawkish by the market. The Summary of Economics Projections, or SEP, implied the Fed expects three Fed Funds rate increases in 2017.

"These developments adversely impacted the MBS market, especially so after the Fed rate hike on December 14th.  Up until that point our portfolio of generally higher coupon, fixed rate 30-year securities had performed reasonably well, especially given the rather high exposure to specified pools.  However, our PT RMBS portfolio generally widened in spread to comparable duration treasuries during the second leg of the market sell-off in the fixed income market that occurred after the rate hike. The rate hike was the event that really triggered convexity related selling in the MBS market.  However, the sell-off was also beneficial to our interest only securities and prepayment expectations going forward – albeit not enough to entirely off-set the widening in our PT RMBS portfolio.

"Outside of pure market developments, advisory services revenue benefited from growth at Orchid Island and has become the Company's largest source of revenue. Growth in advisory services revenue enables us to grow our portfolio operations as well, as we did during the year.

"As we move into the first quarter of 2017, the market is still waiting to see what the Trump administration will actually deliver for the economy and markets.    At this point, there is no way of predicting this outcome.  Recent public announcements by various Fed officials imply an additional rate hike at the meeting next week is a real possibility.  Incoming economic data has generally been supportive of this possibility as well. We will know what the Fed has in store for us soon enough.  In the meantime, the combination of higher rates and slower prepayment speeds should be supportive of the earnings power of the Company's portfolio. Of course, this could be offset by additional rate hikes by the Fed, especially if yields on the Company's assets do not rise in tandem."

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Summarized Financial Statements

The following is a summarized presentation of the unaudited consolidated balance sheets as of December 31, 2016, and 2015, and the unaudited consolidated statements of operations for the calendar quarters and years ended December 31, 2016 and 2015.  Amounts presented are subject to change.

 

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