Details of Second Quarter 2017 Results of Operations

The Company reported net income of $0.6 million for the three month period ended June 30, 2017.   The results for the quarter included net interest income of $0.6 million, net losses on mortgage backed securities and derivative instruments of $0.9 million, gains on retained interests of $0.5 million, advisory services revenue of $1.8 million, dividends on Orchid Island Capital, Inc. ("Orchid") common stock of $0.6 million, fair value adjustments on Orchid common stock of $(0.2) million and operating expenses of $1.4 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 June 30, 2017, Bimini's statement of operations included a fair value adjustment of $(0.2) million and dividends of $0.6 million from its investment in Orchid common stock.  Also during the three months ended June 30, 2017, Bimini recorded $1.8 million in advisory services revenue for managing Orchid's portfolio consisting of $1.4 million of management fees and $0.4 million in overhead reimbursement.

---

Capital Allocation and Return on Invested Capital

The tables below present the allocation of capital between the respective portfolios at June 30, 2017 and March 31, 2017, and the return on invested capital for each sub-portfolio for the three month period ended June 30, 2017.   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.

---

Prepayments

For the second quarter of 2017, the Company received approximately $2.6 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 9.9% for the second quarter of 2017.  Prepayment rates on the two MBS sub-portfolios were as follows (in CPR):

---

Portfolio

The following tables summarize the MBS portfolio as of June 30, 2017 and December 31, 2016:

 

 

 

Financing and Liquidity

As of June 30, 2017, the Company had outstanding repurchase obligations of approximately $134.6 million with a net weighted average borrowing rate of 1.32%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $142.4 million.  At June 30, 2017, the Company's liquidity was approximately $7.0 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 list of outstanding borrowings under repurchase obligations at June 30, 2017.

---

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 June 30, 2017, such instruments were comprised entirely of Eurodollar futures contracts.

The tables below present information related to outstanding Eurodollar futures contracts at June 30, 2017.

---

Management Commentary

Commenting on the second quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, "The developments that began to unfold during the first quarter and early second quarter of 2017 continued during the balance of the second quarter and early third quarter.  Economic data – particularly inflation data – softened significantly. The Trump administration (the "Administration") appears to have lost most, if not all, of its momentum with respect to its legislative agenda.  The Administration's attempts to repeal and replace the Affordable Care Act thus far have failed and the Administration will now likely face a political battle over the budget and debt ceiling early this fall.  The Administration momentum has been further sapped by the ongoing investigation into potential collusion with Russian officials in the 2016 presidential election.  The Federal Reserve (the "Fed"), despite the fact that it raised rates by another 25 basis points in June and may announce a tapering of its asset purchases in September, has turned more dovish of late, particularly the Chairwoman of the Fed.

"The equity markets were flush with optimism as we entered 2017, and with a pro-business administration taking the rein in Washington, risk assets generally rallied. The stock market has continued to rally into the second and early third quarter, although not for the reasons anticipated.  The economic data has been generally soft.  Inflation data has made a significant reversal, and now all measures of consumer inflation are well below levels seen at the end of 2016.  Initially the Fed, in particular the Chairwoman, discounted the softness due to short-term, transitory causes such as cellular phone and prescription drug cost declines that were viewed as unsustainable.  This rhetoric has reversed and recent comments from the Fed chair and other members of the FOMC  suggest the Fed has become quite concerned with the level and direction of inflation measures.  The market – especially the Euro Dollar and U.S. treasury futures markets, including Fed Funds futures – have priced out most future Fed rate hikes.  Current pricing implies at most one more full rate hike by the end of 2018.  This is in sharp contrast to projections published by the Fed as recently as June 14th, which call for one more rate hike this year and three next year and a terminal rate near 3 percent.  While the market still expects the Fed to announce a tapering of its re-investment of maturing U.S. treasury and MBS holdings – likely after the conclusion of its September meeting – the market views any such actions as likely to suppress already low inflation and the interest rate curve flattened. During the second quarter, the spread between the 5-year and 30-year U.S. treasuries declined from approximately 110 basis points at the beginning of the second quarter to less than 95 basis points at quarter end.  The absence of meaningful inflationary pressures is pervasive – as both Europe and Asia are experiencing subdued inflation as well.  As a result of these developments, the equity markets have rallied.  However, the factors that fueled the optimism at the end of 2016 never materialized and the market is faced with a vastly different reality.  The prospect of robust growth, fiscal stimulus, renewed inflationary pressures and higher rates have been replaced with expectations for less Fed rate hiking, low inflation, and lower long-term rates.

"During the second quarter of 2017 yields on benchmark U.S. treasury securities were slightly higher on the curve out to 4 years – reflecting the 25 basis point hike in June.  Yields beyond the 4 year point of the curve declined modestly. The mortgage market had mixed results for the second quarter.  Current coupon, 30-year mortgages traded at slightly tighter spreads to comparable duration U.S. treasuries at the end of the quarter, tightening approximately 2 basis points, and tightening another 4 basis points since the end of the quarter.  Higher coupon mortgages underperformed comparable duration U.S. treasuries and lower coupon mortgages.  Prepayment speeds remained subdued despite the rally in longer maturities of the U.S. treasury curve.  We experienced mark to market losses on our funding hedge positions as a result of this significant shift in expectations surrounding monetary policy going forward.  With the widening in higher coupon, fixed rate mortgages – our core holding – there was no offsetting price appreciation on the asset side.

---

Summarized Financial Statements

The following is a summarized presentation of the unaudited consolidated balance sheets as of June 30, 2017, and December 31, 2016, and the unaudited consolidated statements of operations for the six and three months ended June 30, 2017 and 2016.  Amounts presented are subject to change.

---

---

---