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

Good morning, and welcome to the Fourth Quarter 2022 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, March 10, 2023. 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 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, 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. Thank you for joining us to discuss Bimini's fourth quarter 2022 results. I'm going to give you a brief overview of the economic backdrop we faced during the quarter and then discuss our results. As we approach the end of 2022, economic data was as usual, driving the Federal Reserve's monetary policy in the market, always trying to discern the Fed's reaction to the data with adjusting pricing levels accordingly. However, market pricing was not necessarily consistent with the Fed public pronouncements regarding the outlook for monetary policy. The consumer pricing mix for October and November were much lower than previous months, although this data was revised higher in early February 2023. At the time of its release, the market interpreted these developments as evidence that inflation had peaked and was coming down quite quickly, as incoming economic data over the course of the fourth quarter of 2022 appear to be consistent with the market thesis that inflation had peaked and the economy was slowing. Confidence grew that the Fed would need to pivot and start to loosen its tight monetary policy later in 2023. This led to a material change in risk sentiment during the fourth quarter and risk assets performed very well. The Agency MBS market returns for the full year of 2022 were negative on 11.9%. However, the sector posted positive returns for the fourth quarter of 2.1%, which was 110 basis points higher than comparable duration swaps. The performance of the Agency MBS sector was not uniformly positive for the fourth quarter. By late October, U.S. treasury yields reached their highest levels in many years. The Agency MBS spreads to comparable duration U.S. treasuries also reached their widest levels since the financial crisis, easily surpassing the levels observed in March 2020. As market sentiment turned mid-quarter and risk appetite improved, Agency MBS, like most other asset classes, were viewed as very attractive. The sector's rebound was likely triggered by these extreme spread levels reaching late October, and the rebound continued into early 2023. At this point, the market and the Fed's outlook for the economy, inflation and the path of monetary policy had clearly diverged because the market perceived that Fed was going to be successful at slowing inflation, the market began to look beyond this step in the process and instead focus on the ramifications of such policy reversal, namely a slowing of the economy. As I mentioned, the change of focus or pivot on the part of the market occurred in late October, early November, due to slowing inflation data and further evidence of a slowing economy. However, as January rolled into February and now March, the data has again shifted and inflation no longer appears to be slowing, in fact, may be accelerating. Growth, especially employment growth, has accelerated materially higher, breaking sharply with the steady slowing trends evident throughout all of 2022. The Fed's public pronouncements recognize these trends by indicating the need to take rates even higher than the increases anticipated at the end of '22, likely resulting in a restrictive monetary policy for a considerable period. Reacting to these pronouncements, the market has pivoted and market pricing in the various rates in future markets is back into alignment with the Fed. In effect, the market has done a round trip, initially expecting the Fed was nearing a pivot towards lower rates and now back to anticipating additional tightening and restrictive monitoring policy for the balance of 2023. In summary, the last quarter of 2022 and the first quarter of 2023 have been quite volatile with risk assets delivering poor results in October 2022, solid returns from November '22 through January '23 only to give much of the performance back in February and early March. So that's the operating environment we faced since we last spoke. For the fourth quarter of 2022, Orchid Island reported net income of $34.9 million and its shareholders' equity increased from $40.4 million at September 30, 2022, to $438.8 million at December 31, 2022. Orchid's share price increased during the quarter from $8.20 per share to $10.50 per share resulting in a $1.2 million unrealized gain. Orchid's dividend was unchanged for the quarter, although dividend income for the quarter was down slightly as the dividend rate at the beginning of the third quarter '22 was slightly higher than the rate in effect for the balance of the year. Finally, advisory service revenues related to Bimini Advisors management of Orchid Island were essentially unchanged from the third quarter at approximately $3.3 million. For the year, advisory service revenues were approximately $13.0 million versus $9.8 million in all of '21, reflecting the significant share issuance and shareholder equity increase at Orchid Island during 2021. With respect to the MBS portfolio at Royal Palm, as was the case throughout most of the year, our intention was to grow our cash position until we saw clear evidence the market has stabilized before redeploying our cash to resume growing the portfolio. The Agency MBS market did, in fact, stabilize during the latter half of the fourth quarter, and we did add modestly to the portfolio. For the fourth quarter, we added approximately $2.2 million in new MBS, recorded a $0.7 million of unrealized mark-to-market gains, which were offset by paydowns of approximately $1.2 million. The net of these was a $1.6 million increase in the pass-through portfolio. The structured portfolio was essentially unchanged during the quarter. We added further, early in the first quarter of '23, although the recent reemergence of elevated expectations to Fed policy tightening and the subsequent softness in the Agency MBS market has caused us to pause our growth plans for now. With respect to the results of the MBS portfolio at Royal Palm, interest income was approximately $0.53 million for the quarter versus $0.44 million in the third quarter. Interest expense on our repurchase agreement funding, however, increased from $0.21 million to $0.42 million. Net interest income on the portfolio was therefore down from $0.23 million for the third quarter to $0.13 million for the fourth quarter of 2022. As mentioned, dividend income from our shares of Orchid Island declined by approximately 25,000 from the third quarter into the fourth quarter of 2022. Finally, the 3-month prepayment speeds remain very subdued in this high interest rate environment, declining from 10.8% CPR to 8.3% CPR for the third and fourth quarters, respectively. Looking forward, we will continue to watch the incoming economic data and how the Fed responds with respect to monetary policy. We all know that monetary policy works with long and variable lags. And while the Fed has removed considerable accommodation from the economy, funding rates are well into restrictive territory, it has not yet been a year since the process began. Eventually, the effects of the tightening will take hold and the economy will slow as inflation pools. At that time, the market will become far more accommodative for both Bimini and Orchard Island. In such a scenario, we would expect both our advisory services sector by potential capital raising at Orchid into our MBS portfolio at Royal Palm by an expanding net interest margin and potential price appreciation of our assets to do well. In the interim, we remain cash flow positive and continue to generate taxable income at Royal Palm, enabling us to continue to harvest our tax net operating losses. That concludes my prepared remarks, and we can now open the call up to questions.

[Operator Instructions] At this time, we currently have no registered questions, so I'll hand back to Robert Cauley for any further remarks.

Thank you, operator, and thank you for listening to our call today. If you were unable to listen live and have a call after listening to the replay or if a question comes to mind after listening to the call live, in either case, just give us a call at the office. The number here is (772) 231-1400. We always look forward to taking your calls. Otherwise, we look forward to talking to you at the end of the first quarter. Have a good day. Thank you.

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