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Edited Transcript of BMNM earnings conference call or presentation 9-Aug-19 2:00pm GMT

Q2 2019 Bimini Capital Management Inc Earnings Call

VERO BEACH Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Bimini Capital Management Inc earnings conference call or presentation Friday, August 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert E. Cauley

Bimini Capital Management, Inc. - Chairman, CEO & Secretary

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Conference Call Participants

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* Gary Christopher Ribe

Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer

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Presentation

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Operator [1]

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Good morning, and welcome to the Second Quarter 2019 Earnings Conference Call for Bimini Capital Management. This call is being recorded today, August 9, 2019.

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 under 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 effects -- and 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.

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [2]

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Thank you, operator, and good morning, everyone. It's been a very interesting last 4 months, 4-plus months. The latter half of the second quarter was when it all started. The first event, and the first of many, was related to international trade tensions. According to a tweet issued over the weekend in early in May by President Trump, negotiations between the U.S. And China had broken down. It appeared the deal was near at the time, but an agreement was not reached. At the G20 meeting in late June, an effort was made to resurrect the talks, but there was no meaningful progress. Later in May, tensions erupted between the U.S. and Mexico. In this case, President Trump announced 5% tariffs would go in place on all goods imported from Mexico beginning June 10, unless there was meaningful progress on the immigration issue at the country's border. The tariffs would increase to 25% unless Mexico agree to do more to help with the situation.

Fortunately, the 2 sides reached an agreement quickly, and tariffs never went into effect. However, damage was done. Risk premiums in the markets increased due to the new uncertainties surrounding previously settled trade agreements introduced by the announcement.

Federal Reserve reduced the fed fund target range at the July meeting as the market expected. The Fed has changed their policy outlook completely since their last hike in December of 2018.

The Fed's tightening cycle ended last December and quickly transitioned to easing in a little over 6 months, quite quick by historical standards.

The next development was President Trump's tweet on August 1 that an additional 10% tariff would go into effect September 1 on another $300 billion of goods imported from China. The Chinese government quickly retaliated by announcing the suspension of Chinese imports of the U.S. agricultural goods and the yuan broke through the psychologically important $7 level. Markets were rattled. Interest rates in the U.S. and elsewhere declined and other central banks across the globe lowered their policy rate over the last few days. Pricing in the futures markets in the U.S. now imply substantial more eases by the Federal Reserve and the yield curve of the U.S. Treasury Securities has flattened. Market fear that the trade war could get out of control and slow global growth is high. As of today, the markets are quite volatile and the risk sentiment was meaningfully worsened.

Bimini has grown a balanced business for this troubled period and several meaningful developments occurred. On July 1, Bimini closed on our modified Dutch auction for 1.1 million shares at a purchase price of $2. This decreased outstanding share count by approximately 8.7%.

Note, under our previously authorized share repurchase program, we have a little under 430,000 shares of the original 500,000 shares authorized remaining. This program is in effect through November 15 of this year and can be extended.

In order to fund the shares repurchased under the tender offer, Royal Palm's MBS portfolio was decreased by approximately $44 million. The sales occurred in July. We hope to use free cash flow over the time to replenish the assets sold. I have more to say about the result on the MBS portfolio for the quarter in a moment.

The second development affecting Bimini was the secondary offering of common equity executed by Orchid Island, which closed on August 2. The added capital should increase ministered fee revenues to Bimini Advisors going forward. Coupled with the reported shares issues by Orchid's ATM program since July, Orchid has increased its capital base by approximately $79 million or approximately 23% year-to-date, plus or minus any unreported changes in its capital base caused by market developments since the end of the second quarter.

Turning to the results for the quarter. The most meaningful driver of our performance was the underperformance of Royal Palm's agency MBS portfolio versus our hedge positions. Agency MBS securities usually underperform in periods of high interest rate volatility, and this is what occurred during the second quarter, especially June.

For the second quarter mark-to-market gains on our MBS assets were approximately $2.3 million, with mark-to-market losses on our associated hedge positions were approximately $3.2 million, resulting in a $0.9 million underperformance, and negative $0.5 million or 0.5% return for the passive portfolio, inclusive of net interest income of $0.8 million.

The structured securities portfolio also generated negative return. In this case, 2.9%, as lower levels of prevailing interest rates and prepayment fears were reflected in mark-to-market losses on our interest-only securities. Combined, the MBS portfolio of Royal Palm generated a return of negative 0.8% for the quarter.

Speaking of prepays, Royal Palm's portfolio did experience an increasing speeds for the quarter, from 6.8 CPR in the aggregate for the first quarter of 2019 to 10.5 CPR for the second. While that was a meaningful increase for the period, we continue to insulate the portfolio from excessive prepayment speeds through our security selection, and the speeds we experienced are well below the experience by the MBS market as a whole. This was the case again this week when speeds for July were released Tuesday night.

The size of Royal Palm's MBS portfolio was essentially unchanged for the quarter, declining in market value by approximately $0.5 million.

For the quarter, purchases of new MBS and mark-to-market gains essentially equaled principal paydowns. We added 2 low-loan balance fixed rate securities as we continue to insulate the portfolio from elevated levels of prepayment activity caused by recent market developments.

As mentioned previously, the MBS portfolio was reduced by approximately $44 million in July to fund the shares repurchased through our modified Dutch auction and closed on July 1.

We anticipate starting to rebuild the portfolio shortly, and will do so even more, over time, through the deployment of free cash flow from our advisory services segment and the portfolio itself.

Revenues for the advisory services segment increased slightly during the second quarter by 3%, which should continue to increase as Orchid Island's capital has increased its capital base. To date, Orchid's capital base has increased by approximately 23% as previously mentioned.

Finally, for the first 6 months of the year, Bimini has generated approximately $1.5 million of pretax income and utilized approximately $0.4 million of our combined deferred tax assets.

Going forward, the interest rate outlook is quite uncertain. Trade tension, as mentioned, are escalating and the spillover effects to economic activity is growing.

The negative effect of our market sentiment is even more pronounced. Central banks across the globe are uniformly increasing in combination and currency wars appear to be escalating as well, as international trade is always impacted by relative currency values.

Whether the Federal Reserve eases its monetary policy more remains to be seen. But market pricing certainly implies they will. For Bimini, the Royal Palm portfolio benefits from the increases in the spread between our assets yields and our funding curves -- costs, so we certainly would benefit from more accommodation from the Fed.

For our advisory services segment, Orchid Island's ability to raise its capital base is key, and since Orchid's ability to raise its capital base is dependent on the performance of its own portfolio and stock price, Orchid 2 will benefit from additional steepening of the yield curve. So steeper curves is good for Bimini from either perspective.

That concludes my prepared remarks, and we can turn the call now to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Gary Ribe with Accretive Wealth.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [2]

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First, I just want to say, I appreciated you guys executing on a tender. That was good to see. Were you guys surprised by the level of participation?

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [3]

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I would say yes, yes. I would say definitely yes. It was -- we actually had a pool in the office. I was definitely -- I did not win, I was on the low side, but yes, it was a very good turnout.

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Gary Christopher Ribe, Accretive Wealth Partners, LLC - Managing Partner, CIO & Chief Compliance Officer [4]

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Excellent. Is that something that maybe you would entertain doing again if -- as long as it doesn't affect your NOL, whenever that -- whenever that time line expires for sort of...

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [5]

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The NOLs for Royal Palm is about 10 more years running. And we could, but we have about a $210 million portfolio before we did that, and we had to reduce it by almost 1/4. And we don't have unlimited amounts of capital, granted, we can try to build it over time due to retention of earnings, but it takes a big chunk out of the portfolio. So we may -- certainly not in the near term given how much we had to reduce the size of the portfolio. So we'll see how things play out over time. And if at some point, it seems an opportunity -- a chance to do something that's accretive to earnings, we will but we'll have the balance that against the desire and goal of utilizing these NOLs, which rely on capital. Our tangible capital is just not that large. Most of the capital is really tied up in that deferred tax asset.

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Operator [6]

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And I'm not showing any further questions. I will now turn the call back over to Mr. Robert Cauley for closing remarks.

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Robert E. Cauley, Bimini Capital Management, Inc. - Chairman, CEO & Secretary [7]

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Thank you, operator. Thank you, everyone. Thank you for your time. We appreciate you listening. If you don't have any questions at this moment, but something comes up, feel free to call us in the office. Or if you listen to the replay, we're always here and available to take your calls. Our number is (772) 231-1400. I look forward to speaking with you, and if not sooner, then the next call. Have a good weekend. Thank you.

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Operator [8]

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Ladies and gentlemen, this does conclude the program. You may now disconnect.