Bimini Capital Management, Inc. (PNK:BMNM) Q2 2023 Earnings Call Transcript
Bimini Capital Management, Inc. (PNK:BMNM) Q2 2023 Earnings Call Transcript August 11, 2023
Operator: Good morning and welcome to the Second Quarter 2023 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, August 11th, 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 with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company seems 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'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.
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Robert Cauley: Thank you, operator, and good morning. Thank you for joining us today. Before I get into a discussion of our results for the quarter and outlook for the third quarter and beyond, I would like to highlight the key developments during the second quarter of 2023 that shaped our results. First and foremost, the economic backdrop consisted of continuing strong readings on inflation, particularly core services inflation and a tight labor market. The first key development occurred during May as an impasse developed between the Republican controlled House of Representatives and the Biden administration over the debt ceiling limit. As the deadline to resolve the impasse approached, risk markets suffered and the Agency RMBS market was not spared.
Spread levels on the current-coupon 30-year RMBS benchmark reached the widest levels of the cycle, at least to date. Once the impasse was resolved, the Agency RMBS market recovered and posted solid returns for the month of June. With the crisis averted, the market's attention turned back to the incoming economic data. Central bankers across the globe were all fighting the same battle, yet none seem to have been able to rein in inflation, including the Federal Reserve or the Fed. The Fed raised rates 25 basis points on May 3rd, 2023, and again on July 26, 2023, skipping the June meeting. Unless the incoming economic data presents clear evidence inflation is headed back towards the target inflation rate of 2%, the Fed and other central banks appear poised to maintain tight monetary policy with the possibility of additional firming.
The second key development that was critical for the Agency RMBS market was the ongoing FDIC liquidation auctions stemming from the failed regional banks in March. At this point, they are approximately 90% of their way through the pass-through auctions and the execution of the auctions has gone far better than feared. Now to our results. Orchid Island Capital or Orchid reported second quarter 2023 net income of $10.2 million and its shareholders' equity increased from $451.4 million to $490.1 million during the quarter. Further, Orchard raised additional equity capital of approximately $47.6 million during the second quarter of 2023. Bimini's advisory service revenues for the quarter was approximately $3.5 million, a 5.5% increase over the comparable quarter of 2022, reflecting Orchid's increased equity.
Advisory services revenue increased by approximately 4% over the first quarter of 2023. With respect to the MBS portfolio at Royal Palm, we added to the portfolio during the second quarter of 2023, increasing the market value from $45.6 million at March 31st, 2023, to $63.8 million at June 30th, 2023. With the increased portfolio, the combination of portfolio interest and dividend income from our shares of Orchid Island capital increased 13% over the comparable quarter of 2022. However, interest expense on our repurchase agreement obligations continues to rise, an increase from $73,000 for the second quarter of 2022 to $564,000 for the second quarter of 2023. The net of the increased revenue and interest expense was that net interest and dividend income for the quarter was $276,000, down from $670,000 for the same quarter of 2022.
The additions to the portfolio increased the weighted average coupon from 3.67% at March 31st, 2023, to 4.12% at June 30th, 2023. With a slightly higher coupon mix to the portfolio, prepayment speeds have increased from 5.0 CPR to 9.6 CPR across both the combined structured and pass-through portfolio into 8 CPR from 2.4 CPR during the first quarter for the pass-through portfolio. With the weighted average dollar price on our portfolio is at a discount to par, high prepayment speeds benefit Royal Pumps net interest income. However, while speeds released this last week for July were also fairly high, the combination of higher prevailing mortgage rates and slowing seasonal patterns suggest speeds are likely to slow over the near term. Mark-to-market gains and losses on our MBS portfolio, hedge position and shares of Orchid Island netted to a mark-to-market loss of $621,000.
Net income for the quarter was $286,000 versus a loss of $1.2 million for the second quarter of 2022. Market conditions continue to be volatile so far in the third quarter, but we have been able to continue to build our cash position at Royal Palm. As the third quarter unfolds, the outlook continues to evolve we are seeing a shift in interest rates in the US. The slope of the treasury curve has steepened, but with little movement in short maturity rates. The steepening has occurred as yields on longer maturity treasuries have increased. The reason appears to be that terminal short rates, i.e., the Fed funds rate after the Fed normalizes overnight funding in the future may be higher than previously expected coupled with the concession for increased borrowing levels in the part of the US Treasury.
The increase in longer maturity interest rates has driven 30-year fixed-rate mortgage rates back above 7% and slow mortgage originations even further. [indiscernible] has also reversed much of the Agency MBS sector solid performance during June. Fortunately, Royal Palm has an ample cash position, and we should be able to continue to build the portfolio although we intend to be patient until we get the sense that current movements run its course. In summary, we have been able to slowly build our MBS portfolio at Royal Palm in spite of challenging market conditions. Further, Orchid Island has been able to expand its capital base, resulting in increases in our advisory service revenue. We anticipate funding rates to normalize at some point when the effects of the considerable monetary policy taking undertaken by the Fed finally slow inflation sufficiently.
We also anticipate Agency RMBS securities currently trading at historically wide spreads to comparable duration treasuries, will also benefit from such development. Operator, that concludes my prepared remarks, and we can open up the call to questions. Operator?
Operator:
Robert Cauley: Thank you, operator, and thank you for listening to the call. To the extent you have questions that pop up during the day or you happen to listen to a replay of the call and if you have a question, please feel free to contact us at the office. The number is 772-2311400. Otherwise, we look forward to speaking to you next quarter. Thank you. .
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Operator: This will conclude today's conference call. Thank you for participating. You may now disconnect.
