Operator: Good morning, and welcome to the Second Quarter 2020 Earnings Conference Call for Bimini Capital Management. This call is being recorded August 14, 2020.

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 the future events and are subject to risk 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 described in the company's filings with 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.

Robert Cauley: Thank you, operator, and good morning, everyone. I hope everybody is safe. After suffering through the most dramatic contraction of economic activity and financial market turmoil ever witnessed during the first quarter of 2020, the second quarter was one of recovery, at least for much of the economy and markets. The financial markets are generally functioning as they did prior to the chaos that erupted this March, in large part because of the substantial intervention by the Fed and the government. Critically for us, the Fed has undertaken a quantitative easy program in which they buy U.S. Treasuries and Agency MBS securities on a scheduled basis every week and are likely to continue to doing so until the economy has substantially recovered. But most importantly, it was a period of recovery for Bimini.

Once the company had stabilized after the turmoil of late March, as the Agency RMBS market was itself stabilizing, we were able to start the process of rebuilding the investment portfolio. Recall, we had erred on the conservative side and delevered a little more than was necessary in March to ensure we had ample liquidity. This allowed us to start rebuilding quickly once the market stabilized. With shares of Orchid Island Capital trading at a significant discount to its reported book value as of March 31, 2020, we started by adding to our position in Orchid and ultimately increased it by approximately 64%. At the time, the investment returns on the shares of Orchid looked more appealing than Agency RMBS securities, given the share price is a substantial discount to book value at the time. We now own approximately 2.6 million shares of Orchid Island Capital.

Orchid generated a 15.8% return for the second quarter based on dividends paid and an increase in book value. Orchid's total return for the second quarter calculated using dividends paid and the change in stock price was 65.3%. Bimini recorded a $3.7 million mark-to-market gain on our Orchid holdings as well as $0.4 million in dividends. At some point, we will likely reduce our position in Orchid shares and reallocate the capital into RMBS securities. But given Orchid is still trading at a slight discount to book value, we intend to hold them for now.

While our portfolio has reduced materially in March, our funding costs have decreased substantially as well, and this mitigated the effect on the reduced -- of the reduced portfolio on our net interest income. Our net interest income for the second quarter of 2020 was approximately $0.5 million versus $0.8 million for the same quarter in 2019, when our portfolio was approximately 4x the size of the portfolio as of June 30, 2020. Since quarter end, we received the balance of the funds from the securitizations that were terminated in August of 2018. The funds have been withheld for tax purposes by the trustee. The $1.4 million received was redeployed into the RMBS portfolio. Combined with cash flows generated from our 2 business segments, we have increased the size of the RMBS portfolio to approximately $75 million as of today.

As I mentioned a minute ago, our funding costs have decreased materially as the Fed has reduced short-term rates in response to the COVID-19 pandemic. At this point, our funding hedges are essentially 0 as we anticipate funding costs will remain low for several more months at least. We will look to opportunistically add funding hedges as the portfolio and borrowings increase going forward. We are relying on our structured securities to hedge our exposure to the long end of the curve and are comfortable with the modeled exposure to run rate shocks at the moment.

With respect to security selection in the RMBS portfolio, projection from fast prepayments will be critical. Rates are essentially at the lowest levels ever observed in the U.S., although rates available to borrowers have yet to keep pace with the decline in treasury yields. This is likely to change as mortgage originators add capacity. We anticipate prepayment speeds to remain fast for the foreseeable future, so we need to focus on controlling premium amortization as best we can. We also intend to continue to hold our agency RMBS exclusively and will not be adding credit-sensitive RMBS assets.

Turning to the advisory services segment, Orchid Island's book value increased by over 12% during the second quarter of 2020. This increases the revenues we received as the external manager of Orchid. In fact, advisory service revenues were only down approximately 10% for the quarter versus the first quarter of the year. This is a very satisfactory outcome given the state of the financial markets in late March. The current monthly run rate of advisory service revenue is approximately 91% of the fourth quarter of 2019 level, our last full quarter before the COVID-19 pandemic emerged in late Q1 2020.

With respect to the outlook going forward, the economy is yet to fully recover from a steep contraction during the first quarter of 2020 despite massive intervention by both the Fed and the Trump administration. There remains significant uncertainty surrounding the timing of a full recovery and economic activity and return to life as it existed before the virus emerged. However, the current market environment, despite elevated levels of prepayment stemming from the low absolute level of rates available to borrowers, continues to benefit from exceptionally low funding levels and currently offers low- to mid-teen returns on levered Agency RMBS investments. This benefits Bimini both in our RMBS investment portfolio as well as our investment in Orchid Island Capital.

In closing, we are cautiously optimistic on Bimini's outlook over the balance of the year. That concludes our prepared remarks, and I will open up the call for questions. Operator?

Operator: [Operator Instructions] Your first question comes from the line of Gary Ribe with Accretive Wealth.

Gary Ribe: Good job on everything. I'm just curious, sort of with Orchid now -- the stock now kind of within shadowing distance of its stated book value, how you guys are thinking about ownership of that versus maybe taking your own portfolio up?

Robert Cauley: I kind of alluded to that. I think for now, we'll probably hold it. It's still at about a 5% discount, although we're probably -- hopefully, Orchid's shares trade above book, which is, of course, beneficial to Orchid Island itself, at which point we could look to redeploy and do the portfolio. So I would say, as I kind of alluded to, we're close, just not quite there.

Gary Ribe: Okay. Got it. And I saw that you guys filed some sort of distribution agreement with JPMorgan for $150 million worth of Orchid stock. Is that sort of an at-the-market thing? Or is that -- are you -- or would there be large blocks of it placed? Just that it...

Robert Cauley: That's an at-the-market program, although there are -- there was potential to do block trades, but that's an at-the-market program. It's our eighth one at Orchid.

Gary Ribe: Got it. And does that replace the registration statement from February? I saw you guys trying to float a pref in February.

Robert Cauley: Well, yes, 2 things. We did try to do a preferred offering in February that did not get done. But we also filed a new shelf registration. Those have a 3-year life. So whether it's the preferred in February or this ATM, they are issued off of that shelf. So that's -- so it's a $1 billion shelf that runs for 3 years. So any ATM offering, secondary offering, even a debt offering, you would do all off of that shelf.

Operator: [Operator Instructions] And there are no further questions at this time.

Robert Cauley: Thank you, operator, and thank you, everybody, for taking the time to listen. As usual, if you didn't get a chance to listen in. You're listening to the replay or if another question comes up to mind afterwards, please feel free to contact us in the office. The number is (772) 231-1400. In fact, we're all actually working remotely. So we do have someone in the office to field your questions, but they can be funneled to our cell phones as needed. Otherwise, I look forward to talking to you next quarter and be safe. Thank you.

Operator: This concludes today's conference. You may now disconnect.