Bimini Capital Management - Q2 2024

Transcript

Operator (participant)

Good morning and welcome to the second quarter 2024 earnings conference call. For Bimini Capital Management, this call is being recorded today, August 2nd, 2024. 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 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 long-awaited pivot on the part of the Federal Reserve may finally be at hand. Persistently strong growth of the U.S. economy and above-trend inflation appear to have moderated sufficiently that the Fed now sees the risk of the economy as balanced, implying there's equal risk of more growth or a slowdown. Because the Fed sees its current monetary policy as restrictive, the Fed may begin to reverse some of the tightening that occurred in 2022 and 2023 in these monetary policies. Economic data released for April, May, and June show a moderating inflation that appears headed toward the Fed's 2% target, as well as a labor market more in balance with supply and demand roughly equal. Should such conditions persist, the Fed should begin lowering the Fed funds rate this year, perhaps starting in September.

Agency RMBS returns for the quarter were +0.2%. That's an absolute total return. But returns versus comparable duration swaps, a proxy for hedge returns, were slightly negative, owing largely to very poor relative performance over the last week of the second quarter. When the first quarter of 2024 ended, the spread of the current coupon 30-year fixed-rate agency RMBS was trading at a spread to the five-year U.S. Treasury of approximately 138 basis points, near the low end of the prevailing range since mid-2022, shortly after the Fed began their policy firming. The same spread was just under 150 basis points at the end of the second quarter.

Orchid Island Capital reported a net loss for the second quarter of 2024 of $5 million, although its shareholders' equity increased from $481.6 million to $555.9 million. The net effect of capital raising and a 5% decrease in book value per share.

As a result, Bimini's advisory service revenues of approximately $3.2 million represented an 8% increase over the first quarter. Orchid's second quarter Form 10-Q released last week indicated Orchid had raised an additional $54.6 million of equity in July of 2024. To the extent Orchid is able to continue to increase its shareholders' equity by additional capital raising above and beyond any potential declines caused by net losses, Bimini's advisory service revenue may increase further. With the prospect of the Fed lowering interest rates on the horizon, the mortgage REIT sector may perform well and benefit from favorable capital raising opportunities. Continuing with our advisory service segment highlights, Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay us Orchid's preferred share of overhead, as defined in the management agreement. Such amounts are included in the reported advisory service revenue of $3.2 million.

As you know, we also own shares of Orchid Island Capital and include the holdings as part of our investment portfolio segment, together with our portfolio of agency RMBS. As stockholders of Orchid Island Capital, we will continue to share in distributions, if any, paid by Orchid Island Capital to its stockholders. Dividend income from Orchid Island Capital shares was $0.2 million, the same as the first quarter. Together with agency RMBS portfolio, the investment portfolio generated net interest income of $0.3 million, inclusive of dividends on our shares of Orchid Island Capital.

Our operating results are also impacted by changes in the market value of our holdings of Orchid Island Capital shares, although these market value changes do not impact our cash flows from Orchid Island Capital. Mark-to-market gains and losses on our RMBS portfolio, hedge position, and our shares of Orchid Island Capital led to a loss of $0.3 million for the quarter.

On a consolidated basis, Bimini reported a net loss before taxes for the quarter of $0.2 million versus net income before taxes of $0.6 million for the first quarter of 2024. Looking forward, the incoming economic data may finally justify the Fed taking steps to loosen policy in the near term. Current market pricing, reflected in the overnight funding levels on a forward basis, implies multiple cuts in the Fed's overnight rate this year. If these reductions come to pass, it will enhance our net interest margin. Even if these reductions do not occur, while our current net interest spread on the RMBS portfolio is narrow, our hedge positions have performed well, and absent a material widening of RMBS spreads, should continue to do so.

This type of environment is also favorable for Orchid Island Capital and its RMBS portfolio, and absent a material widening of RMBS spreads, likely to be supportive of its dividend as well. As has been the case for the last two quarters, the risk to both has been a scenario that caused longer maturity rates to increase more than short-term rates as the curve disinverts, a bear steepening of the curve. This scenario, although it appears less likely today given the data, would likely be accompanied by elevated levels of volatility and lead RMBS spreads to widen. The aftermath of such an episode, however, would be much more benign with expanded interest spreads and slow prepayment rates of RMBS generally. Thank you, operator, and that concludes the prepared remarks. We can now open up the call to questions.

Operator (participant)

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. It appears there are no questions at this time. Mr. Robert Cauley, I will turn the call back over to you.

Robert Cauley (Chairman and CEO)

Thank you, operator, and thank you this morning for joining us. To the extent any questions come up later or you did not be able to listen to the call live and have a question, please feel free to call us. The office phone number is 772-231-1400. Otherwise, we look forward to speaking with you next quarter. Thank you.

Operator (participant)

This concludes today's conference call. You may now disconnect.