Bimini Capital Management - Q1 2024

Transcript

Operator (participant)

Good morning and welcome to the first quarter 2024 earnings conference call for Bimini Capital Management. This call is being recorded today, May 3, 2024. At this time, the company would like to remind the listeners that statements made during today's conference call relating to the matters that are not historical facts are forward-looking statements subject to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on the information currently available to 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 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.

Robert Cauley (Chairman and CEO)

Thank you, operator, and good morning. The current economic and interest rate cycle that began with the onset of the COVID-19 pandemic in 2020 was supposed to end in early 2024 as the Fed pivoted and started to remove their tight monetary policy. After meeting Wednesday, the Federal Reserve, or Fed, signaled we will have to wait a little longer. The economy and inflation are simply too strong for this to occur, at least not yet. While market participants still expect some easing of monetary policy over the course of 2024, the starting point continues to get pushed out further and further into the future, and the magnitude of eases continues to decrease. Incoming economic data so far in 2024 is consistent with firming inflation and a solid economy, and the labor market shows no signs of weakness.

Stimulus of fiscal policy out of Washington is working against restrictive monetary policy from the Fed, and while inflation has decreased significantly from the peak seen in 2022, it still remains far above the Fed's target level of 2%. So the odds of monetary policy and funding rates remaining higher for longer look very high. Despite the ongoing strength of the economy and interest rates retracing much of the decline seen over the last two months of 2023, Agency MBS securities performed fairly well during the first quarter of 2024. When the first quarter of 2024 ended, the 30-year fixed-rate Agency MBS was trading in a spread to comparable duration Treasuries near the low end of the prevailing range since mid-2022, shortly after the Fed began their policy firming.

This was approximately the same spread level as the beginning of the quarter. As with the economy, inflation, and interest rates, the outlook for the performance of Agency MBS is unclear, and there is the possibility the sector could underperform in the near term if the current trends discussed above continued. Thus far, during the second quarter of 2024, mortgages have underperformed hedges slightly, although they still remain far from levels seen last fall when interest rates were at their highest levels since the 2008 financial crisis. Orchid Island Capital reported net income for the first quarter of 2024 of $19.7 million, and its shareholders' equity increased from $469.9 million to $481.6 million. Advisory services revenues were approximately $2.9 million for the quarter, down approximately 5% from the fourth quarter of 2023.

Orchid Island Capital is obligated to reimburse us for direct expenses paid on its behalf and to pay us Orchid Island Capital's pro rata share of overhead as defined in the management agreement. Overhead reimbursement payments of $0.6 million are included in the $2.9 million revenue figure. As a stockholder of Orchid, we also continue to share in its distributions, if any, paid by Orchid to its stockholders. We received $0.2 million of dividends during the first quarter of 2024, the same as the fourth quarter of 2023. Our operating results are also impacted by changes in the market value of our holdings of Orchid common shares, although these market value changes do not impact our cash flows from Orchid. We recorded an unrealized gain on our Orchid shares of $0.3 million during the first quarter.

The investment portfolio generated interest revenue of $1.4 million, and we incurred interest expense on our repurchase agreement borrowings of $1.2 million, resulting in net interest income of $0.2 million. The realized yield on the portfolio increased slightly from 6.08% to 6.15% for the fourth quarter of 2023 to the first quarter of 2024. Similarly, our average borrowing rate on repurchase agreement funding increased marginally from 5.60% to 5.63% for the fourth quarter of 2023 to the first quarter of 2024. Our hedge positions generated unrealized mark-to-market gains of $1.2 million versus unrealized losses on our MBS assets of $0.5 million. We did not add to the MBS portfolio during the first quarter, although we expect to do so during the current quarter.

Looking forward, incoming economic data does not appear to justify the Fed taking any steps to loosen monetary policy in the near term. We agree with current market pricing reflected in overnight funding levels on a forward basis that imply at most one cut in the Fed's overnight rate this year. This implies a relatively stable interest rate environment, and this will not be a bad outcome for Bimini if it comes to pass. While our net interest spread on our MBS portfolio is narrow, our hedge positions have performed well, and, absent a material widening of MBS spreads, should continue to do so. This type of environment is also favorable for Orchid Island and its MBS portfolio, likely to lead to a stable dividend, again, absent a material widening of MBS spreads.

A deterioration in the economic outlook that leads the Fed to lower overnight rates would likely be beneficial to both Bimini and Orchid, as it would likely lead to an expansion of our net interest margins. The risk to both is a scenario that causes longer maturity rates to increase more than short-term rates as the curve disinverts, a Bear Steepening of the curve. This scenario would likely be accompanied by elevated levels of volatility and lead MBS spreads to widen. The aftermath of such an episode, however, would be much more benign, with expanded net interest spreads and slow prepayment rates on MBS generally. Operator, that concludes my prepared remarks and will take any questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press star one again. If you are called upon to ask a question and listening via loudspeaker on your device, please pick up your handset and make sure that your phone is not on mute when asking a question. Again, please press star one to join the queue. There are no questions. I will now turn the conference back over to Hunter Haas, Chief Financial Officer and Chief Investment Officer, for the closing remarks.

Hunter Haas (CFO and CIO)

Thank you for joining us this morning. To the extent any of you decide you do have a question after all, or for those of you listening to the replay or the webcast, feel free to call us at the office, 772-231-1400. Speak to you next quarter.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.