Orchid Island (ORC) Q1 2026 Earnings Transcript

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DATE

Friday, April 24, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Robert Cauley
• Controller — Jerry Sintes
• Portfolio Manager — Hunter Haas

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TAKEAWAYS

• Net Income (Loss) Per Share -- Net loss of $0.11 per share, down from net income of $0.62 per share in Q4.
• Book Value Per Share -- $7.08 per share at March 31, compared to $7.54 at December 31.
• Total Return -- Negative 1.3% versus a positive 7.8% in Q4.
• Dividends Declared -- $0.36 per share, unchanged from Q4.
• Portfolio Size -- Average balance of approximately $11 billion, up from $9.5 billion in Q4.
• Leverage Ratio -- Increased to 7.9 from 7.4 at year-end.
• Liquidity -- 54.5% at quarter-end, down from 57.7%.
• Three-Month Conditional Prepayment Rate (CPR) -- Ranged from 14.7% to 15.7% over the quarter.
• Capital Raised -- $108 million during the quarter and an additional $28 million in early April.
• Purchases -- $1.6 billion of agency specified pools and TBAs, with emphasis on call-protected collateral.
• Portfolio Weighted Average Coupon -- Reduced from 5.75% to 5.64%.
• Specified Pool Concentration -- 92% of the portfolio in specified pools with at least 10 ticks of pay-up.
• Funding Spread -- Current funding at 11-13 basis points over SOFR, a significant improvement from Q4.
• Hedge Coverage -- Approximately 65% of repo balance hedged, predominantly with interest rate swaps.
• Duration Gap -- 0.07 years at quarter-end, with net long DVO1 of roughly $375 thousand.
• Prepayment Speeds -- Increased from 10.9% CPR in January to 16.3% in March, with management expecting speeds to ease in coming months.
• Return on Equity Outlook -- Modeled returns for the combined portfolio and hedges projected in the 15%-17% range.
• Expense Ratio -- General and administrative ratio reduced to 1.7%, down from just under 3% in prior years.
• Stockholders’ Equity Growth -- Annualized growth rate of 18.4% over the past ten years; expenses grew 10% annualized.
• Current Book Value Progression -- CEO Cauley said, "Book is up about 2.5% as of yesterday."
• Dividend Yield Alignment -- CEO Cauley said, "the dividend yield is very much in line with what the portfolio is generating and what you can earn in the market today on marginal capital—all in that 15% to 17% yield range."

SUMMARY

Current portfolio positioning reflects a shift towards lower coupons and resilience against a rising-rate environment, as management executed a conscious extension of portfolio and hedge duration. Spread volatility was pronounced, with tightening in response to policy-driven GSE purchases, abrupt widening from geopolitical events, and a subsequent partial retracement. Funding conditions improved materially, driving lower repo spreads to SOFR and enabling capital deployment at favorable levels. The expense ratio declined further as the company’s scale increased, which management identified as a sustained driver of earnings accretion. No new risks specific to funding, portfolio liquidity, or hedging were cited, with management repeatedly underscoring positive market conditions for levered agency MBS investing.

• Management said, "Returns are still attractive. They are not as attractive as they were a year ago, but they are still quite attractive."
• Portfolio managers noted high concentrations in recent production and strong call protection, indicating deliberate insulation from prepayment volatility.
• Management indicated that future capital deployment would increasingly target production coupons at or near par, gradually reducing premium-risk asset exposure.
• "Our house view has been not quite as sanguine as the rest of the market with respect to Fed eases. We have long held that we were not going to get as many as were priced into the market—that has played out."

INDUSTRY GLOSSARY

• TBA (To-Be-Announced): Forward contracts for agency mortgage-backed securities where specific pools are not designated at trade initiation.
• Specified Pool: An actual pool of mortgages with defined characteristics selected for targeted prepayment and credit attributes, as opposed to generic TBA securities.
• Pay-Up: The price premium paid for specified mortgage pools over TBA-deliverable securities, usually due to superior characteristics or loan attributes.
• CPR (Conditional Prepayment Rate): An annualized percentage expressing the rate at which principal is prepaid on mortgage-backed securities.
• DVO1: The dollar value change in a portfolio's value for a one-basis-point parallel move in interest rates.

Full Conference Call Transcript

Robert Cauley: Thank you, Melissa. Good morning, everyone. I hope everybody has had a chance to download our deck as usual. That will be the basis of our call today. First, I would like to walk you through the agenda. Jerry Sintes, our controller, will walk you through the financial results. I will then go through the market developments, discuss briefly the market variables that impact our decision making and our performance, and share a few comments on those. Hunter will then talk about the portfolio and our hedging positions. Then we will open the call up for questions. With that, I will turn it over to Jerry.

Jerry Sintes: Thank you, Bob. If we start on page five, we will look at the financial highlights of the first quarter. For the first quarter, we had a net loss of $0.11 per share, compared to net income of $0.62 in Q4. Our book value at March 31 was $7.08 per share compared to $7.54 at December 31. Total return for the quarter was negative 1.3% compared to 7.8% in Q4, and we declared dividends of $0.36 during both quarters. On page six, portfolio highlights. Our portfolio continued to grow during Q1; we had an average balance of approximately $11 billion compared to $9.5 billion in Q4. Our leverage ratio increased to 7.9 compared to 7.4 at December 31.

Three-month CPR during the quarter ranged from 14.7% to 15.7%. Our liquidity at March 31 was 54.5% compared to 57.7%. On page seven are our financial statements, which were also presented in our earnings release last night and will also be available in our 10-Q later. With that, I will turn it back over to Bob for a discussion of the market developments.

Robert Cauley: Thanks, Jerry. I will start on slide nine. We are going to go through the market variables and our decision making and performance. On slide nine, we have the interest rate curves on the top of the page. On the top left is the nominal or cash market curve. On the right is the swap curve. On the bottom is the spread between three-month Treasury bills and ten-year Treasuries. Just a few general comments. Obviously, in this environment, the headlines with respect to the war are driving performance of not just interest rates, but basically all risk assets. We have competing forces at play. On the one hand, you have forces that are inflationary in nature.

Others impact growth or slow growth. The ultimate outcome is yet to be seen. We could end up with both; we could end up with stagflation. With respect to the economic data we have been seeing, it has actually been fairly resilient, although I would characterize it as mixed. We have had some strong, some weak. That being said, most of the data that we have seen so far is really for the pre-war period, so we have not seen a lot to gauge the impact of the war. I would also like to point out that while the war represents a headwind to economic activity and may be supportive of inflation, there are also tailwinds impacting the economy.

The one big, beautiful bill was passed last year. The government is running a very significant fiscal deficit. Both of those factors should be supportive of the economy. I think they go a long way in explaining why the data has been so resilient, and finally, as we are fairly far into Q1 earnings, the earnings have been very strong. So at least so far, the impact of the war seems to be modest. With respect to rates, as I mentioned, rates have been very stable. You look on the left and you can see that the curve has flattened. The market is pricing out most Fed cuts that were in the market three months ago, pre-war.

Now there is virtually nothing priced in terms of cuts for the balance of 2026, a few basis points. But the curve has been very stable. The impact of inflation is driving Fed cuts out of the market, and the impact on growth is keeping longer-term rates stable. On the right-hand side, you can see the swap curve. Even more stable, same kind of flattening. I would say that the difference between these two is simply swap spreads. If you look at where swap spreads are for some context, most spreads across the curve are at or slightly above their twelve-month averages. They have been moving in Q1. I will say a little bit about that in a moment.

Moving on to the next variable for us, obviously mortgage spreads and the performance of TBAs. We do not own typically a lot of TBAs. We do own specified pools, but they trade at a spread to TBAs. So the performance of TBAs matters. On the top, you can see the spread of the current coupon mortgage to the ten-year Treasury. This data goes back sixteen years, so it gives you a lot of perspective. On the right-hand side, for quite a while, mortgages have been tightening. That is pretty solid performance, and also without the participation of one of the typically largest holders of mortgages, which are the large banks.

They have not been active in the market, yet this market has performed well. If you look at the extreme right, you can see the tightening. As we all know, early January, President Trump put out a post on Truth Social indicating that the GSEs, Fannie and Freddie, would be buying up $200 billion in mortgages this year. Mortgages gapped tighter. That was in early January. As we moved into February, performance of the sector was still very solid. End of the month, the war hit; we gapped wider. But as you can see, we have been tightening since.

The way I look at that is that the tightening that we have seen in place for two years appears to be resuming. In terms of the extent of the tightening, our book was down about 6.1%. We have gotten back a little under half of that. This week we have given back a little bit, but we have basically recouped about half. With respect to the prices of TBAs on the bottom left, as we always show, these prices are normalized. For each coupon, we start at 100. I just want to show the change over the quarter.

The announcement by President Trump early in the month caused most mortgages to do very well, the exception being the orange line there. Those are higher coupon mortgages that are representative of higher coupons, and they would be impacted by speeds. The rationale for the buying by the GSEs is to try to drive spreads tighter, which would presumably impact refinancing, driving it higher. So higher coupons did poorly. Then you see the impact of the war as we move into March, and performance was all given up. Since quarter-end, we have gotten some of that back, and we are pretty much back to neutral.

With respect to the roll market, with the exception of one or maybe two instances, it has been pretty benign. Most of the activity there was just driven by a presumed technical—those mortgages’ float was small and buying by the GSEs might have caused a squeeze—but that has gone away. The next big variable for us is implied volatility in interest rates. Mortgages have a lot of vol component. When vol is high, mortgages do poorly. When vol is low, they do well. On the top, this chart goes back a year to April 2. After the initial spike, vol has continued to tighten.

The onset of the war drove it higher, and it has come pretty much all the way back. To the extent that vol stays at this level, this is very conducive for our business model. In fact, all of these variables—stable interest rates, low swap yields, and steady mortgage performance—are very conducive for our business model. Moving on to swap spreads in particular, you can see on the left of slide 12 that spreads have been moving more negative or tightening. That is bad for our hedges because it offsets the impact of them, but it creates more spread for marginal cash investments. Since quarter-end, they started to widen back out.

Of note, Hunter put on a trade during the quarter whereby, after TBAs had widened quite a bit after the war, we took a lot of our hedges out of TBAs and put them into swaps because they had tightened. Since then, that trade has worked quite well. If you look on the right-hand side, you see the DVO1 composition of the hedge book. The green areas represent swaps, so that is higher than it was prior to that. The trade has worked out quite well. The next state variable is refinancing activity. The current mortgage rate available to borrowers is around 6.4% depending on the day. As a result, refinancing activity has been fairly benign.

We did have elevated levels. As I mentioned, the President’s announcement and the ten-year Treasury dipping below 4% in late February drove a couple of months of fast speeds. But with the backup in rates since then and mortgage rates sitting around 6.4%, for instance on the bottom of the page, the gray area—the percentage of the universe that is refinanceable—while higher, is not high. Refinancing activity has been and we expect it to stay relatively benign. Hunter will have more to say about that as we talk about the current construction of the portfolio, how we see that evolving over time, and how we are positioned with respect to prepayment levels.

The final variable I will talk about would be funding markets. I am not going to say a lot about that now; we will talk about that later. The short answer is that the funding markets are far more stable than they have been. We had actions taken by the Federal Reserve, for instance, to put in place a reserve management policy whereby refund mortgages as they roll off the Fed’s balance sheet are invested in bills. Spreads available to us are at very attractive levels, and we do not have the spikes that we have had in the past at quarter-end or year-end.

Pretty much all of the variables that impact our market—whether it is the level of rates, implied vol in rates, swap spreads, funding levels—are in a very good state right now. It is very conducive and leaves us very bullish on the business model and levered MBS investing. With that, I will turn it over to Hunter.

Hunter Haas: Thanks, Bob. The investment portfolio section of the presentation starts on slide 16. Mortgage spreads continued their tightening trend that began following the volatility we saw last April, and that move accelerated meaningfully after the President’s GSE purchase announcement on January 8. This drove spreads tighter by roughly 20 to 25 basis points versus swaps almost instantaneously, within a couple of days. As we moved into February, those spreads began to drift a little bit wider, and that widening accelerated sharply around the geopolitical events in the Middle East, jumping as much as 40 basis points wider at its peak versus the tights of the quarter.

We closed the quarter near those wides and have begun seeing some stabilization since then. Spreads have retraced about 20 basis points. So we had a pretty volatile quarter in terms of spreads—first tightening sharply by 20 to 25 basis points before blowing out 40, and then quarter to date so far in April we have tightened back in around 20 basis points. Against that backdrop, we remain focused on maintaining a highly liquid 100% agency portfolio and deploying capital opportunistically through this volatility. We raised approximately $108 million in the quarter and an additional $28 million in early April.

Importantly, we were able to deploy that capital at attractive levels—roughly half the capital as spreads drifted off their tight levels and at levels similar to those we saw in December, and the remainder of the capital after the big geopolitical shock. In total, we purchased approximately $1.6 billion of agency specified pools and TBAs with a focus on call-protected collateral, including loan balance stories, borrower credit attributes, and structures that we expect to perform well across the recent rate range. The net impact was a modest reduction in the weighted average coupon of the portfolio, reflecting a slight shift toward lower coupons.

Purchases included $182 million of loan balance 4.5s, $624 million of 5s, $425 million of FICO and LTV 5.5s, $138 million of 6s (mostly in the form of geo pools and FICO), and $250 million of fifteen-year 4.5s. As Bob alluded to, we swapped out some of our TBA shorts that we had on in Fannie thirty-year 5.5s for swaps at the local wides. The net effect, as I mentioned, was a slight reduction in the weighted average coupon of the portfolio from 5.75% to 5.64%. More broadly, over the past several quarters, we have continued to refine the portfolio toward production coupons, with dollar prices around $99 to $101.

This encompasses the 5% to 6% range of coupon buckets, where we see the best balance between carry, duration, and convexity. As we have discussed, we reduced our exposure to lower coupons that tend to exhibit greater spread duration and can become a source of volatility during risk-off periods, particularly when money managers are actively selling. At the same time, we remain disciplined around prepayment risk. The portfolio continues to be heavily concentrated in specified pools with strong call protection. At quarter-end, approximately 92% of the portfolio was backed by specified pools with at least 10 ticks of pay-up.

Turning to the funding side of the equation (slide 19 if you are following along), our funding conditions continued to improve over the quarter, allowing us to more fully realize the benefit of the December 10 rate cut. Both SOFR relative to Fed funds and our observed repo funding spreads to SOFR continued to grind tighter as reserve management operations helped stabilize the funding market. At present, we are currently funding in the 11 to 13 basis point range over SOFR, which is quite a drastic improvement from what we saw in the fourth quarter. Turning to the hedge positions, from a hedging perspective we maintained a pretty consistent framework.

Hedge coverage is approximately 65% of our repo balance, and we continue to put an emphasis on interest rate swaps. At March 31, our duration gap was approximately 0.07 years, which equates to a net long DVO1 of roughly $375 thousand (I think $372 thousand from the deck in the earlier slides). In terms of partial durations, our hedge profile remains barbelled between the two- to three-year part of the curve and the seven- to ten-year part of the curve. We do have a lot of swaps on in the middle, but if there were a skew, it is to the front and longer end of the curve—by long end, I mean to ten years.

Prepayment speeds did pick up during the period in response to rates reaching local lows. Speeds increased from 10.9 CPR in January to 16.3 CPR in March. Looking forward, we expect speeds to ease in the coming months. Street projections are for the prepaid universe to come down by approximately 15%. We expect to see as much, if not an even greater impact on us, owing to the fact that we own more recent production through most of the portfolio. Rates have moved higher, so that is really going to be the emphasis for that slowdown in speed. From a positioning standpoint, the portfolio remains somewhat defensive against the risk of inflation reaccelerating.

The 6% and higher coupon portion of the portfolio, which represents over 40% of total mortgage assets, performed very well during the most recent selloff, though it did less well in the earlier part of the quarter when rates were rallying. That said, for marginal capital we expect to continue allocating toward production coupons—as I alluded to, the first discount or first premium part of the stack—and this will serve to gradually reduce our exposure to higher premium assets over time. Looking forward, while spreads have retraced from their recent wides, we continue to see an attractive environment for agency mortgages.

At quarter-end, the modeled returns for a combined portfolio inclusive of hedges and current funding levels were in the 15% to 17% range (return on equity). We believe those returns can move higher if prepay speeds do in fact trend lower or if the outlook for additional Fed easing reemerges. With that, I will turn it back over to Bob for his concluding remarks.

Robert Cauley: Thanks, Hunter. To give you a quick rehash over the course of the last four or five quarters, Orchid Island Capital, Inc. has more than doubled in size. There have been benefits to us as a result of doing that. We have been able to lower our cost structure. I would like to turn your attention to slide 32. This is ten years of data. On the top, we show our stockholders’ equity going back to 2015. This is annual data, not annualized—the change year over year for both equity and our expenses.

Our stockholders’ equity has grown by 402% over the last ten years, which is an annualized growth rate of 18.4%, and our expenses have grown 159%, or at a 10% annualized rate. The offshoot is on the next slide, slide 33, where you can see our expense ratio for calendar year 2025. As we move through the year, we will probably start to show this on a four-month rolling average until we get to the end of the year when we can fully update the graph. Our expense ratio has moved from just under 3%—our G&A load—to 1.7%, which is very low relative to most of our peers and actually only lower than all but the two largest peers.

With respect to the portfolio, to summarize what Hunter said, we expect prepayments to be benign, but we still have a very well call-protected portfolio with a very modest premium dollar price. Hunter mentioned that returns in the sector are approximately mid-teens, call it 15% to 17%. The current yield on the portfolio—with a $0.10 per month dividend and the current book value—is very much in that exact same range. Unlike last year, the yield of the portfolio in terms of the dividend divided by the book and returns in the market are very much in line. To the extent that we deploy new capital, it would not have any meaningful impact on the yield of the portfolio.

As we have grown the portfolio and the company, our expense ratio tends to come down. The bottom line is that growth is accretive to earnings. With respect to our outlook, the market is very appealing to us. Returns are still attractive. They are not as attractive as they were a year ago, but they are still quite attractive. All of the variables that matter to us—the level of interest rates, the level of swap spreads versus yields on assets, the level of implied vol, and the funding markets—are in a very good state, and therefore, we are quite bullish on the market going forward. The big variable, of course, is the war.

Nobody knows how that is going to play out, but my personal observation is that the big tail risk going into the war was a massive escalation and meaningful and lasting damage to production capacity in the Middle East. It seems that risk is now much lower. I think that explains why the markets have become pretty benign over the last week or two. While we still react to headlines from the war, generally risk assets have done well, and I presume that is because we think that the big outsized tail risk is quite low. We will now open the call for questions.

Operator: To ask a question, please press 11 on your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Jason Weaver with Jones Trading. Your line is now open.

Jason Weaver: Hey, Bob. Hey, Hunter. Thanks for taking my question. First, I noticed it looks like the effective duration of the portfolio extended a bit to about three as of March 31. Was that an intentional tactical decision around the GSE purchase announcement, or maybe just a consequence of adding those belly coupons?

Hunter Haas: Yeah, a little bit of both, and rates have drifted higher. So the portfolio extended a little bit, and we are trying to not add too much hedge at the local highs. We do not mind if the portfolio duration drifts a little bit higher as we approach higher rates. In the beginning of the first quarter, when rates were pushing much lower in January and early February, we noticed underperformance in higher coupons and wanted to make a strategic shift into some more 4.5s and 5s to have a little bit more balance, particularly when we are at local highs in rates.

Robert Cauley: I would just add to that. I agree with everything Hunter said. If you look on slide 21, we did move more of the hedge book to swaps, and if you look at the average maturity, it did go out a little bit, coinciding with what Hunter just said. We moved the average life of the hedge book out about three-tenths of a year—further out the curve. That was a conscious decision in response to the movements in the portfolio.

Jason Weaver: Got it. That makes sense. And then on the dividend—I know you are methodical about this, and it is never easy to make a cut—but can you talk about the sort of level of core spread income coverage as a floor that you need to establish the run rate going forward?

Robert Cauley: I am glad you asked that. I know everybody is concerned with that. A couple of things in mind. We have a distribution obligation. In 2024 and 2025, we were paying a $0.12 dividend, which at the end of the year was 95% covered by taxable income. A lot of that was driven by hedges—the performance of our hedges during the tightening cycle—where we had a lot of equity in those hedges. When you close them and they have significant positive equity, which was the case, that basically creates a liability of future taxable income that has to be distributed over the remaining life of those hedges.

For that reason, we had a dividend yield on a tax basis that was slightly above the GAAP earnings of the portfolio. As we mentioned in the last call, as we move into the new calendar year, we reevaluate. We have seen the effect of those closed hedges wear off and be diluted because of the growth of the company and the portfolio—shares outstanding. Now, when we appraise the current run rate, that is what drove us to move the dividend where it is. In terms of where that is in relation to what the portfolio is generating, they are very much in line.

Right now, the dividend yield is very much in line with what the portfolio is generating and what you can earn in the market today on marginal capital—all in that 15% to 17% yield range. They are all pretty much in line. Next year, I will tell you sometime in the first quarter, we will again be reevaluating where we see taxable earnings running for 2027, and to the extent necessary, we will adjust. We do not have any insight into that at the moment, but based on where we see things running, it would seem like the prudent thing to do. As I said, they are all in line now.

Our earnings of the portfolio, our dividend yield, and the marginal return on capital should all be pretty much in line.

Jason Weaver: That is great color. I appreciate you.

Operator: As a reminder, to ask a question at this time, please press 11 on your touch-tone telephone. Our next question comes from the line of Mikhail Goberman with Citizens JMP. Your line is now open.

Mikhail Goberman: Hey, good morning, guys. Hope everyone is doing well. Just a quick one first. Could you update us on current book value? And if I can squeeze in one more—assuming rates on MBS continue to creep higher, how does that look for your portfolio construction of your premium portfolio going forward?

Robert Cauley: Book is up about 2.5% as of yesterday. We have given back some this week. If you had asked me the same question last Friday, it was a little higher than that, but this week we have given back some of that. So we are up about 2.5% from where we were. On your second question, when you say “rates,” do you mean mortgage rates available to borrowers?

Mikhail Goberman: Yes.

Robert Cauley: That would be beneficial. That improves carry. We have a slight premium in the portfolio—about a $1.00 to $1.50 dollar price. We have call protection, which Hunter alluded to. In fact, Hunter should take over.

Hunter Haas: As I said in my prepared remarks, over 40% of the portfolio is in that 6% and higher coupon cohort, and as mortgage rates have risen and spreads have blown out a little bit with respect to rates available to borrowers, we expect to see a corresponding slowdown in prepay speeds. We have intentionally skewed both the portfolio and the hedge book to guard against a rising-rate environment. Our house view has been not quite as sanguine as the rest of the market with respect to Fed eases. We have long held that we were not going to get as many as were priced into the market—that has played out.

Now that we are at the higher end of the range, we are looking to restack the deck a bit with a skew toward lower coupons as we add additional capital and to the extent that we have paydowns. We will probably buy more 5s and first-discount-type coupons because of where we are with respect to the recent range in rates.

Mikhail Goberman: Got it. Thank you very much, guys. Best of luck going forward.

Operator: I am currently showing no further questions at this time. I would now like to hand the call back over to Robert Cauley for closing remarks.

Robert Cauley: Thank you, operator, and thank you, everyone. We very much appreciate you listening in on the call. To the extent you have another question that comes up, or you did not listen to the call live and have a question after listening to the replay, as always, feel free to call. The number here in the office is (772) 231-1400. Otherwise, we look forward to speaking to you at the end of the second quarter. Everybody, have a good day. Thank you.

Operator: This concludes today’s conference. Thank you for your participation. You may now disconnect.

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