Bimini Capital Management Q4 2023 Earnings Call Transcript

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March 8, 2024

There are 2 speakers on the call.

Operator

Good morning, and welcome to the 4th Quarter 2023 Earnings Conference Call for Bini Capital Management.

Operator

This call is being recorded today, March 8, 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 reports on Form 10 ks. The company assumes no obligations to update such forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward looking statements.

Operator

Now, I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Culley. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning. The Q4 of 2023 appeared to be the turning point in the current interest rate cycle and may still prove to be so. As the Q4 began in October, every sign pointed to progressively higher interest rates and Federal Reserve monetary policy remaining higher for longer. Not only did the incoming economic data consistently exceed expectations, especially readings on the labor market and inflation, but projected federal government deficits and related borrowing needs increased materially, fueling fears of even higher rates as the market was forced to cope with an increased supply of treasuries going forward. This changed dramatically as we moved into November.

Speaker 1

The primary reason was the inflation data. While inflation readings were still above economists' forecasts, they were nonetheless still falling and the 3 6 month annualized rates for both headline and core inflation dropped below 3% and appeared headed toward 2%, the Fed's target. Fed Governor Waller stated that if the inflation data trend continued, the Fed would likely lower rates soon. Finally, at the December FLMC meeting, the Chairman at post meeting news conference strongly hinted the Fed was done raising rates and the focus of their discussions had turned to removing restrictive monetary policy. The market reaction to these developments was dramatic.

Speaker 1

Interest rates declined by over 100 basis points in the case of maturities of 5 years or more and market pricing reflected approximately 6, 25 basis point cuts by the Fed by the end of 2024. Risk assets rallied strongly. As we enter 2024, the market has once again reversed and the data along with the Fed has led the market to expect 3 cuts at most in 2024, although I wrote this script before today's non farm payroll number, now we're up to 4th. And in any way, the pricing of these cuts is mid year to the second half of the year. Orchid Island Capital reported Q4 2023 net income of $27,100,000 and its shareholders' equity increased slightly from $466,800,000 at September 30, 2023 to $469,900,000 at December 31, 2023.

Speaker 1

The market conditions in the last 2 months of Q4 described above led Orkin to report mark to market gains on its MBS assets of $205,600,000 exceeding mark to market losses of and $49,000,000 on derivative hedge instruments. Bimini's advisory services revenue for the quarter was approximately 3,100,000 dollars a 6% decrease from the comparable quarter of 2023. Orchid is also obligated to reimburse us for direct expenses paid on its behalf and to pay us Orbit's pro rata share of overhead as defined in the management agreement. With respect to the MBS portfolio at Royal Palm, we added to the MBS portfolio during the Q4 of 2023, increasing the market value from $84,900,000 at September 30, 2023 to $92,700,000 at December 31, 2023. In response to evolving market conditions during the quarter described above, we repositioned the pass through portfolio by selling lower quality spec bowls with 4% coupons and redeploying the proceeds into similar quality spec bowls with 7% coupons, albeit in larger size, thus leading to the increase in the portfolio for the quarter.

Speaker 1

While the portfolio has increased during the quarter and the combination of portfolio interest and dividend income from our shares of Orchid increased by 96% over the comparable quarter of 2020. 2, interest expense on our repurchase obligations continued to rise and increased significantly from $402,000 for the Q4 of 'twenty two to $1,178,000 for the Q4 of 2023. As a result, net interest and dividend income of the quarter of $376,000 was down slightly from $390,000 for the same quarter of last year. Mark to market gains and losses on our MBS portfolio, hedge instruments and shares of Orkin netted to a net gain of $600,000 and we recorded a net loss before taxes for the quarter of $400,000 versus net income of $1,450,000 for the Q4 of 2022. We updated our projected utilization of our deferred tax asset and increased the valuation allowance, resulting in a tax provision of 4,100,000 and a net loss for the Q4 of 2023 of $4,500,000 For the year, Bimini reported net income before taxes of $150,000 versus a loss $7,970,000 for 2022.

Speaker 1

Due to the revisions to the deferred tax asset allowance I mentioned, Bimini reported after tax net loss of $3,580,000 for 2023 versus an after tax loss of $19,820,000 for 20.22. The improvements in our pre tax and post tax results was primarily driven by other income items such as unrealized gains and losses on our RMBS assets and shares of Orkin Island and unrealized gains and losses on our derivative hedge instruments. Such items netted a loss of 1.8 $7,000,000 for 2023 versus $12,150,000 for 2022. In both years, the Federal Reserve was actively raising overnight funding rates and interest rates generally were increasing, accompanied by elevated levels of volatility. As described above, the improvements in our results occurred predominantly during the 4th quarter of 2023.

Speaker 1

Net revenues declined in 2023 to $12,510,000 from $14,020,000 in 20.22. Total revenues actually increased by 11% from $16,150,000 in 2022 to $17,930,000 in 2023, but interest expense related to our repurchase agreement funding and trust referred debt increased materially from $2,130,000 in 20.22 to $5,420,000 in 2023. Expenses for the year increased 7%, driven by a 5% increase in compensation and related benefits and a 13% increase in direct advisory services costs, predominantly systems related costs. Market conditions so far in the Q1 of 2024 are generally less volatile than what we experienced through most of 2023 and 2022 for that matter. However, incoming economic data remains solid and public comments from various Fed officials consistently point to the need for continued diligence on the inflation front, and we suspect we will not see interest rate cuts from the Fed in the near term.

Speaker 1

Even absent such an outcome, a continuation of current market conditions is desirable as it allows us to accumulate cash only to our NOLs and continue to grow our RMBS portfolio slowly over time. If the Federal Reserve is done raising funding rates, we do not anticipate further deterioration in our net interest spread on our RMBS portfolio at Royal Palm. Advisory service revenue will be driven by Orchid's activities, specifically to the extent Orchid is willing and able to grow its capital base. Should these conditions persist, we should be able to grow our revenues as the portfolio grows. The risk to this outcome would be further upward movements in funding rates and or increasing long term rates resulting in pressure on our asset prices.

Speaker 1

Alternatively, if funding rates do decrease, our MBS portfolio operations would benefit from increased net interest income margins as would Orchids, potentially enhancing the chance they would be able to grow their capital baseportfolio and in turn our advisory services revenues. Operator, that's it for the prepared remarks. We can now open up the call to questions.

Operator

Thank And we have no questions in our queue at this time. I will now turn the call back over to Mr. McAuley for closing remarks.

Speaker 1

Thank you, operator, and thank you everybody for joining us. To the extent you do have questions or you listen to a replay and have a question, please feel free to call us at the office. The number is 772-231-1400. Otherwise, we look forward to talking to you next quarter. Thank you.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Bimini Capital Management Q4 2023
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