Bimini Capital Management, Inc. (BMNM) Earnings Call Transcript & Summary

Good morning, and welcome to the First Quarter 2022 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, May 13, 2022. 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 that are subject to risks 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 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 would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, operator, and -- good morning, and thank you for joining us to discuss Bimini's first quarter 2022 results. I'm going to give you a very brief overview of the economic backdrop we faced during the quarter and then discuss our results. The first quarter of 2022 as a period of rapid transition for the Fed as they pivoted from reluctantly acknowledging they needed to start removing the emergency monetary policy regime in place since the COVID-19 pandemic emerged in the U.S. during the first quarter of 2020 towards a very aggressive tightening cycle. The Fed announced a 25 basis point rate hike at their March 2022 meeting and a 50 basis point rate hike at the May 4, 2022 meeting. They have indicated they plan to consider at least 2 more 50 basis point hikes in their next 2 meetings as well. The Fed also announced the details of the runoff of their balance sheet, which will begin June 1, 2022. The acceleration of rate of inflation that first emerged during the second quarter of 2021 and was deemed transitory by the Fed at the time, accelerated even further into '22 and has continued to do so in the second quarter of 2022 to date. All measures of inflation, personal consulting expenditures, the consumer price index and the producer price index reached their highest levels seen since the early 1980s. Inflation has been exacerbated both in the U.S. and globally by the war in the Ukraine and COVID-related lockdowns in China. In the U.S., the economy continues to grow and in particular, the labor market continues to tighten. The unemployment rate appears poised to drop below its pre-pandemic lows, unemployment claims are at the lowest level seen since the 1950s, and wages are growing rapidly, although still less than the rate of inflation. As the outlook for inflation changed materially to the upside and the resulting change in monetary policy by the Fed unfolded over the course of the first quarter of 2022, interest rates move much higher and the curve flattened. During the first quarter of 2022, the yield on the 2-year U.S. Treasury note increased by over 160 basis points. The yield on the 5-year treasury note increased by almost 120 basis points and the yield on 10-year U.S. Treasury note increased by 82.8 basis points. The spread between the 2- and 10-year year points, thus declined or flattened by almost 80 basis points. In early April of 2022, the yield curve actually inverted by approximately 7.5 basis points, albeit for only a brief period. Since then, the spread as re-steepened to approximately 28 to 30 basis points. When we last spoke, we hinted that the evolving market conditions were not conducive to leverage Agency RMBS investors, and this proved to be the case. Orchid Island Capital reported a first quarter 2022 loss of $148.7 million and its shareholders' equity declined from $768.1 million at the end of 2021 to $592.4 million. The market conditions described above led to the loss as Agency MBS underperformed comparable duration treasuries and Orchid's hedge position. Decline in shareholders' equity is likely to lead to reduced management fees at Bimini Advisors going forward if Orchid is unable to rebuild its shareholder base since the management fees are a function of Orchid's equity. Orchid also reduced its monthly dividend twice during the first quarter from $0.065 per month to $0.045 per month. The reduction in the dividend decreased the monthly dividend revenues to the company. The carnage in the markets year-to-date has also created many attractive investment opportunities and Orchid is poised to take advantage of these, having reined in leverage modestly and retained adequate levels of liquidity to be able to do so. The Agency RMBS portfolio at Royal Palm Capital decreased by 10% during the first quarter of 2022. The combined effect of $2.8 million of paydowns, return on investments on the structured securities portfolio of $0.2 million and a net $3.1 million mark-to-market loss. As the market has continued to be impacted by the events described above and MBS asset prices remain under pressure, we have further reduced our MBS holdings in order to preserve cash and book value. Quarter-to-date, we sold RMBS assets with a market value at the time of sale of $23.1 million, realizing a loss of $0.9 million. The RMBS portfolio has a market value as of April 30, 2022 of approximately $29.0 million. Our intention is to grow our cash position until we see clear evidence the market has stabilized before redeploying our cash to resume growing the portfolio. We may add to our Orchid shareholdings given the stock is trading at attractive levels, but we do not have unlimited capacity to do so. We currently operate under an exemption from the regulation as an investment company under the Investment Company Act of 1940 as our assets primarily consist of qualifying assets in other words, mortgage-backed securities. Because mortgage share -- because Orchid shares are not considered qualifying assets, we are limited in the amount of Orchid shares we can own and maintain our current exempt status. As of March 31, 2022, Orchid's shares represented approximately 7.5% of Bimini's total assets of approximately $112 million. The company is in the process of requesting exemption from regulation under the act from the Securities and Exchange Commission that will allow [ Orchid ] -- the company to materially increase its holdings of shares of Orchid Island Capital. However, we cannot provide any assurance to such exemption will be granted. Further, we have no control over the time it may take for the potential exemption to be granted and for how long would remain in effect. With respect to share repurchase activity, Bimini has repurchased approximately 309,000 shares through May 2, 2022, under the role 10b5-1 plan we adopted in the third quarter of 2021. The plan authorizes the purchase of up to $2.5 million of stock and has worked more efficiently than our prior plan. The prior plan was more restrictive in certain respects and repurchases were relatively limited. The current plan provides our agent with greater flexibility and has accounted for the increased share repurchase activity. Given the discount of stocks currently trading to relative to our book value, we view share repurchases as an attractive use of cash, especially in light of the current market conditions described above. In closing, the economic developments occurred during the first quarter have continued, and in many cases, accelerated so far in the second quarter of 2022. Interest rates have risen materially since the end of the quarter, and the Fed has started to aggressively remove emergency accommodation measures it put in place in response to the COVID-19 pandemic. In response, we have reduced our portfolio and thus exposure to the current turbulent market conditions in order to build dry powder that can be deployed as the market settles. Market conditions such as these, while challenging, always provide very attractive investment opportunities. The chance to take advantage of these opportunities may require us to wait out the current Fed tightening cycle for a while longer, but we suspect it will just make the opportunities that much more attractive when since the end of the year. Operator, that concludes my prepared remarks, and we now open the call up to questions.

Thank you. [Operator Instructions] There are currently no questions. [Operator Instructions] Okay. We currently have no questions being registered. So I'll hand back over to Mr. Cauley for closing remarks.

Thank you, operator, and thank you again for listening today. To the extent somebody does not have a question now, but has one later on, please feel free to call us or if you happen to listen to a replay of the call and you have a question, again, feel free to call us at our office. Our number here is (772) 231-1400. And otherwise, we look forward to talking to you next quarter. Have a good day. Thank you, everyone.

This concludes today's call. Thank you for joining. You may now disconnect your lines.