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spk00: Thank you for your patience, ladies and gentlemen. The Bimini Capital Third Quarter Earnings Conference Call will begin shortly. During the presentation, you have the opportunity to ask a question by pressing star 1 on the telephone keypad. Thank you for your patience. © transcript Emily Beynon Thank you. Good morning and welcome to the first quarter 2022 earnings conference call for Bimini Capital Management. This call is being recorded today, November 14, 2022. 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 security 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 difference are described in the company's filings with the Securities and Exchange Commission's including the company's most recent annual reports on the Form 10-K. 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. Now, I would like to turn the conference over to the company's chairman and chief executive officer, Mr. Robert Cawley. Please go ahead, sir.
spk02: Thank you, operator, and good morning. Good morning, and thank you for joining us to discuss Bimini's third quarter 2022 results. I'm going to give you a very brief overview of the economic backdrop we faced during the quarter and then discuss our results. Earlier this month, at the conclusion of the November meeting, the Federal Reserve raised the target range for the federal funds rate to 3.75 to 4.0%, and during the press conference that followed, the chairman stressed that they have not done raising rates. The chairman added that rates are likely to remain high for some time. The chairman's tone throughout the press conference was quite hawkish and caused financial markets to reverse positive moves that occurred when the Fed initially released their statement at the conclusion of the meeting and before the press conference started. As has been the case pretty much since the onset of COVID-19, of the COVID-19 pandemic, during the third quarter of 2022, the financial markets were extremely turbulent. Through early August of 2022, the markets perceived that while inflation was clearly not transitory, the Fed would be able to dampen demand by raising rates and cause inflation to decrease back towards the Fed's long-term target of 2%. Further, the market anticipated this would happen by early 2023 and that the Fed would pivot and start to loosen monetary policy shortly thereafter. The Fed, through their public comments, has consistently stressed that this was not going to be the case. Supporting the Fed's case, incoming economic data over the period was persistently strong. The Fed chairman referenced this data during the press conference and stated that this would likely mean that the terminal rate for Fed funds would be higher than expected at the end of the September meeting. With the 75 basis point increase this month, the Fed has now raised the Fed funds target range by 75 basis points at four consecutive meetings, and by 375 basis points since March. With the Federal Reserve raising funding rates so aggressively, term rates have also increased dramatically, and a corresponding increase in interest rate volatility, both of which negatively impact the performance of agency RMBS. For levered MBS investors like Royal Palm and Orchid Island, increases in market interest rates and volatility led to a widening in the spread that agency RMBS securities trade relative to comparable duration treasuries and swaps. The yield on the 10 year treasury rose from approximately 2.58% on August 1st to 3.83% on September 30th, 2022, and to just under 4.25% on October 24th. Short maturity rates rose even more driven by the Fed fund futures market. It implies the Fed will ultimately raise the Fed's fund rate to over 5% by the second quarter of 2023. As I just mentioned, agency RMBS spreads relative to benchmark interest rates increased to levels observed in March of 2020 by the end of the third quarter of 2022, and have exceeded those levels so far in the fourth quarter of 2022. Returns for the agency on this market for the third quarter of 2022 were negative 5.4%, and these returns were 1.7 lower than comparable duration swaps. The relative performance across the agency RMBS universe was skewed in favor of higher coupon 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large amounts by the Fed and which may eventually be sold by the Fed, performed the worst during the third quarter. It's important to note that while further aggressive hiking by the Fed may prevent the sector from performing well in the near term, if the economy does contract and enter recession, the sector could do well on a relative performance basis owing to the lack of credit exposure of agency MVS. This is consistent with the sector's high history of performing in a counter-cyclical manner, doing well in the economy soft and relatively poorly when the economy is strong. Bimini's results for the quarter were significantly impacted by these developments in the mortgage market. The agency RMES portfolios of Orkin and Bimini recorded realized and unrealized mark-to-market net losses, predominantly unrealized losses. For Royal Palm, the net unrealized losses were approximately 1.73 million. The losses related to Orchid's portfolio, coupled with a 29% decrease in Orchid's monthly dividend, drove the share price of Orchid from $14.25 at June 30, 2022, to $8.20 at September 30, 2022. The share price decline resulted in an unrealized loss on our Orchid shareholdings of $3.14 million. Note Orchid's share price has since recovered to $10.77 as of last Friday, November 11. The combined mark-to-market losses of Royal Palm's portfolio in our ORCID shares totaled $4.89 million and resulted in a quarterly loss of $3.43 million before our tax provision. Otherwise, Bimini recorded net revenues of $3.45 million and expenses of $2.08 million. Turning now to our advisory services segment for the quarter, Oregon Island reported a loss of $84.5 million and its shareholders' equity declined from $506.4 million to $404.0 million during the third quarter. The market conditions described above drove the loss as agency MDS underperformed comparable duration treasuries and ORCID's hedge positions. The decline in shareholders' equity may lead to reduced management fees at BIM advisors in the near term, since the management fees are a function of ORCID's equity. For the third quarter of 2022, advisory service revenues were $3.31 million versus $3.33 million for the second quarter of 2022 and $2.55 million for the third quarter of 2021. ORCID reduced its monthly dividend during the third quarter, so monthly dividend revenues on the company's approximately 519,000 shares declined from approximately 350.4 thousand to approximately 289 82.9 million versus the second quarter. As for Royal Palm's agency RMBS portfolio, as we discussed at the end of the second quarter, our intention was to grow our cash position until we saw clear evidence the market had stabilized before redeploying our cash to resume growing the portfolio. The agency MBS market did in fact stabilize during July and early August of 2022, and we took initial steps to rebuild the portfolio by purchasing approximately 10.2 million of pass-through MBS. As a result of paydowns of approximately $1.8 million and mark-to-market declines of approximately $2.6 million, the past year portfolio only increased by approximately $5.8 million. The structured portfolio was essentially unchanged during the quarter. Given the developments that occurred over the balance of the quarter and into the fourth quarter, we are again willing to let our cash position resume building. Before we resume growing the portfolio, we need to see clear evidence the current rate cycle is nearing its conclusions. The primary evidence of this will be rate volatility rolling over and declining. Given how poorly agency RMBS have performed of late, potential returns for the sector are extremely attractive. The timing of the turn is critical. Keeping as much stride powder as possible until then will be our objective. Share repurchase activity at BIMI for the third quarter tapered off since we last spoke. For the quarter, we repurchased approximately 226,000 shares through although only 7,000 since our second quarter earnings call on August 3rd of 2022. Total repurchases are just over 1 million now, and the plan authorization is 2.5 million, so we have utilized approximately 40% of our capacity. Recall that the prior repurchase plan we used was more restrictive in certain respects, and repurchases were relatively limited. The current plan provides our agent with greater flexibility, and that has accounted for the increased share of repurchase activity. Given the discount the stock is currently trading to relative to our book value, we view share repurchases as an attractive use of capital. That concludes my prepared remarks. If we now open up the call to questions, I'll prayer.
spk00: Thank you. Ladies and gentlemen, if you would like to ask a question, please press the follow-up button on your telephone keypad now. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, ladies and gentlemen, to ask any further questions, you can press star, followed by one on the headphone keypad now. When preparing to ask your question, please ensure your phone is unmuted locally.
spk01: Dr. Tom, if there are no questions, we can conclude the call then.
spk00: Thank you. We have no questions on the line.
spk02: All right. Thank you, operator. Thank you for taking the time to listen to the call today. To the extent you do have a question or you get a chance to listen to the replay and you have a question, please feel free to reach out and contact us at the office. Our number is 772-231-1400. Otherwise, we look forward to speaking to you again at the end of the fourth quarter. Thank you and goodbye.
spk00: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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