Earnings Call Transcript - ORC Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Orchid Island Capital First Quarter 2026 Earnings Call. Operator instructions: Please be advised that today's conference is being recorded. I would now like to hand the conference over to Melissa Alfonso, Office Manager. Please go ahead.

Melissa Alfonso, Office Manager

Good morning, and welcome to the First Quarter 2026 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 24, 2026. 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 and on 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 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.

Robert Cauley, Chairman and Chief Executive Officer

Thank you, Melissa, and 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 off, I'd like to walk you through the agenda as usual. Jerry Sintes, our Controller, will walk you through the financial results. I'll then go through the market developments, briefly discuss the market variables that impact our decision-making and our performance and make a few comments on those. Hunter will then talk about the portfolio and our hedging positions, and then we will open the call up for questions. With that, I'll turn it over to Jerry.

Jerry Sintes, Controller

Thank you, Bob. If we start on Page 5, we'll 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 3/31 was $7.08 per share compared to $7.54 at December 31. Total return for the quarter was a negative 1.3% compared to 7.8% in Q4, and we declared dividends of $0.36 during both quarters. On Page 6, 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 12/31. 3-month CPR during the quarter was 14.7% compared to 15.7% and our liquidity at 3/31 was 54.5% compared to 57.7%. On Page 7 are our financial statements, which are also presented in our earnings release last night and will also be available in our 10-Q later. And with that, I'll turn it back over to Bob for a discussion of the market developments.

Robert Cauley, Chairman and Chief Executive Officer

Thanks, Jerry. All right. I will start on Slide 9. We're going to go through the market variables that impact our decision-making and our performance. On Slide 9, 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 3-month Treasury bills and 10-year Treasuries. A few general comments: in this environment, the war headlines 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've seen, it's actually been fairly resilient, although I would characterize it as mixed. We've had some strong and some weak prints. That being said, most of the data we've seen so far is really for the pre-war period, so we haven't seen a lot to gauge the impact of the war. I'd also like to point out that while the war represents a headwind to economic activity and maybe 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, and I think they help explain why the data has been so resilient. Finally, as we're 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. If you look on the left, the curve has flattened. The market is pricing out most Fed cuts that were in the market three months ago or pre-war. Now there's virtually nothing priced in terms of cuts for the balance of 2026—just a few basis points. 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—also stable with similar flattening. The difference between these two is essentially swap spreads. For some context, most spreads across the curve are at or slightly above their 12-month averages. They have been moving in Q1; I'll say a little bit about that in a moment. Moving on to the next variable, mortgage spreads and the performance of TBAs. We do not typically own a lot of TBAs. We do own specified pools, but they trade at a spread to TBAs, so the performance of TBAs matters. If you look on the top, you can see the spread of the current coupon mortgage to the 10-year Treasury. This data goes back 16 years, giving a lot of perspective. For quite a while, mortgages have been tightening. That's solid performance and notable also because one of the largest typical holders of mortgages, the large banks, have not been active in the market and yet this market has performed well. At the start of the year, you can see the tightening. Early in January, President Trump posted that the GSEs, Fannie and Freddie, would be buying up to $200 billion in mortgages this year. Mortgages gapped tighter following that announcement. As we moved into February, the sector's performance was still solid. At the end of the month, the war hit and we gapped wider. But since then we've been tightening. Our book was down about 6.1%. We've recouped a little under half of that; this week we've given back a bit, but overall we 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 to show change over the quarter. The GSE announcement in early January caused many mortgages to perform very well; the exception being higher coupon mortgages, which are more representative of higher coupons and are impacted by speeds. The rationale for the GSE buying is to drive spreads tighter, which would presumably impact refinancing and drive it higher. Higher coupons did poorly initially, then you see the impact of the war in March and performance was given up. Since quarter end we've gotten some of that back and are now pretty much back to neutral. With respect to the roll market, except for one coupon or maybe two, it has been pretty benign. Most activity there was driven by a presumed technical that float was small and GSE buying might have caused a squeeze, but that has abated. The next big variable is implied volatility in interest rates. Mortgages have a significant volatility component—when vol is high, mortgages do poorly; when vol is low, they do well. The chart goes back to April 2 of last year. After the initial spike, vol has continued to tighten. The onset of the war drove it higher, but we've come back mostly all the way. If vol stays at this type of level, this is very conducive to our business model. All of these variables—stable interest rates, low swap yields, and steady mortgage performance—are conducive for our business model. Moving on to swap spreads in particular, spreads have been moving more negative or tightening, which is adverse for our hedges because it's offsetting them, but it's creating more spread for marginal cash investments. Since quarter end, they started to wind back out. Of note, Hunter put on a trade during the quarter where after TBAs widened significantly after the war, we reduced our hedge exposure in TBAs and put them into swaps because swaps had tightened. That trade has worked well. If you look at the DV01 composition of the hedge book, swaps are a larger portion, which reflects that trade. The next 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—driven by the President's announcement and the late February dip in the 10-year Treasury below 4%—and we saw a couple of months of faster speeds. But with the backup in rates since then and mortgage rates around 6.4%, the percentage of the universe that's refinancable is higher but not high, and refinancing activity has been and we expect it to remain relatively benign. Hunter will discuss how that affects portfolio construction and our position on prepayment levels. The final variable I'd mention is the funding markets. I won't say a lot about that now; we'll talk about it later. The short answer is that the funding markets are far more stable than they've been. The Federal Reserve implemented a reserve management policy whereby 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 don't have the spikes at quarter end or year-end that we've experienced in the past. So almost all variables that impact our market—rate levels, implied vol, swap spreads, funding levels—are in a very good state right now. This is conducive and leaves us bullish on the business model and leveraged MBS investing. With that, I will turn it over to Hunter.

Hunter, Head of Investments

The investment portfolio section of the presentation starts on Slide 16, if you're following along. 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 as spreads have retraced about 20 basis points. So it was a pretty volatile quarter in terms of spreads: first tightening sharply by 20 to 25 basis points, then blowing out 40, and then quarter-to-date so far in April, tightening 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 was deployed as spreads drifted off their tight levels and at levels similar to those we saw in December; the remainder of the capital we deployed 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. That included $182 million of loan-balance 4.5s, $624 million of 5s, $425 million of FICO and LTV 5.5s, and $138 million of 6s, mostly in the form of geo pools and FICO. We also purchased $250 million of 15-year 4.5s. As Bob alluded to, we've swapped out some of our TBA shorts that we had on in Fannie 30-year 5.5s for swaps at local wides. The net effect was a slight reduction in the weighted average coupon of the portfolio from 5.64% to 5.75%. More broadly, over the past several quarters, we've continued to refine the portfolio toward production coupons—dollar prices around 99 to 101—which encompasses roughly the 5% to 6% range where we see the best balance between carrying duration and convexity. As discussed, we've reduced exposure to lower coupons that tend to exhibit greater spread duration and can be 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 payup. Turning to the funding side, funding conditions improved 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're funding in the 11 to 13 basis point range over SOFR, a drastic improvement from the fourth quarter. From a hedging perspective, we maintain a consistent framework. Hedge coverage is approximately 65% of our repo balance, with an emphasis on interest rate swaps. At March 31, our duration gap was approximately 0.07 years, which equates to a net long DV01 of roughly $372,000. Our hedge profile remains barbelled between the 2- and 3-year part of the curve and the 7- to 10-year part of the curve. We do have activity in the middle, but skew is to the front and longer end of the curve. Prepayment speeds did pick up during the period in response to rates reaching local lows, increasing from 10.9 CPR in January to 16.3 CPR in March. Looking forward, we expect speeds to ease in the coming months; the latest Street projections are for the prepaid universe to come down by approximately 15%. We expect to see as much or greater impact on us given that we own more recent production in much of the portfolio. Rates have moved higher, and that will be the impetus for the slowdown in speeds. 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 sell-off, though they did less well in earlier parts of the quarter when rates were rallying. That said, marginal capital will continue to be allocated toward production coupons—first discount or first premium part of the stack—which will 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 our combined portfolio, inclusive of hedges and at current funding levels, were in the 15% to 17% range return on equity. We believe those returns can move higher if prepay speeds 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, Chairman and Chief Executive Officer

Thanks, Hunter. To rehash: over the course of the last four or five quarters, Orchid has more than doubled in size. There have been benefits to us. As a result of that growth, we've been able to lower our cost structure. Please turn to Slide 32. This shows 10 years of data. On the top, we show our stockholders' equity going back to 2015. This is annual data. Our shareholders' equity has grown by 442% over the last 10 years, which is an annualized growth rate of 18.4%. Our expenses have grown 159%, or at a 10% annualized rate. The benefit is shown on the next slide, Slide 33, where our expense ratio is presented for calendar year 2025. As we move through the year, we will likely show this on a rolling basis until we can fully update the graph at year end. Our expense ratio has moved from just under 3% G&A to 1.7%, which is very low relative to most peers and is only lower than that of the two largest peers. With respect to the portfolio, to summarize Hunter's points: we expect prepayments to be benign, and we still have a very well-protected portfolio with modest premium dollar price. Hunter mentioned 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 same range. Unlike last year, the yield of the portfolio in terms of the dividend divided by book and returns in the market are very much in line. So deploying new capital would not have any meaningful impact on portfolio yield. As we've grown the company, our expense ratio tends to decline, which makes growth accretive to earnings. Our outlook: the market is very appealing. Returns remain attractive—while not as attractive as a year ago, they are still attractive. All variables that matter to us—interest rate levels, swap spreads versus yields on assets, implied vol, funding markets—are in a great state. Therefore, we are quite bullish on the market going forward. The big variable is the war. Nobody knows how that's going to play out. My personal observation is that the large tail risk going into the war was a massive escalation causing meaningful and lasting damage to production capacity in the Middle East. That risk now appears much lower, which helps explain why markets have become fairly benign over the last week or two. We still react to headlines, but risk assets have generally done well, which suggests the outsized tail risk is lower. With that, we'll turn the call over to questions.

Operator, Operator

Operator instructions: Our first question comes from the line of Jason Weaver with JonesTrading.

Jason Weaver, Analyst, JonesTrading

First, I noticed it looks like the effective duration of the portfolio extended a bit to about 3 as of 3/31. Was that an intentional tactical decision around the GSE purchase announcement or maybe just a consequence of adding those belly coupons? And then on the dividend, I know you're methodical about this. Can you talk about the level of core spread income coverage or a floor that you need to establish the run rate going forward?

Robert Cauley, Chairman and Chief Executive Officer

Yes, a little bit of both. Rates have drifted higher and the portfolio extended a little bit. We're trying not to add too much hedge at local highs, so we don't mind the portfolio duration drifting a bit higher as we approach higher rates. In the beginning of the first quarter, when rates pushed much lower, particularly 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 bit more balance. That is particularly true whenever we are at local lows in rates. In terms of the dividend, I'm glad you asked. I know everyone is concerned about that. A couple of things to keep 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 hedges that have significant positive equity, that 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 GAAP earnings of the portfolio. As we mentioned in the last call, as we move into the new calendar year, we reevaluate. We've seen the effect of those closed hedges wear off and be diluted because of growth in the company and the portfolio and shares outstanding. When we appraise the current run rate, that drove us to move the dividend where it is. In terms of where that stands relative to what the portfolio is generating, they are very much in line. Right now the dividend yield aligns with what the portfolio is generating and what you can earn in the market today on marginal capital—in that 15% to 17% return range. We'll reevaluate taxable earnings for 2027 sometime in the first quarter of next year and adjust if necessary. Based on where we see things running now, the move was prudent. Our earnings of the portfolio, our dividend yield and the marginal return on capital should be pretty much in line.

Jerry Sintes, Controller

I would just add to that on the duration question. If you look on Slide 21, we did move more of the hedge book to swaps. The average maturity of the hedge book did go out a little bit, coinciding with what Hunter described. We moved the average life of the hedge book out about 0.3 years, so the hedge book is a bit further out the curve. That was a conscious decision in response to movements in the portfolio.

Operator, Operator

Our next question comes from the line of Mikhail Goberman with Citizens JMP.

Mikhail Goberman, Analyst, Citizens JMP

Just a quick one first. Could you update us on current book value? And if I can squeeze in one more: you talked about investment opportunities being attractive at the moment. Assuming mortgage rates continue to creep higher, how does that look for your portfolio construction of your premium portfolio going forward?

Robert Cauley, Chairman and Chief Executive Officer

Book is up about 2.5% as of yesterday. We've given back some this week; if you had asked me last Friday it was a bit higher, but we're up about 2.5% from where we were. Regarding mortgage rates rising: that would be beneficial. It improves carry. We have a slight premium in the portfolio—Hunter mentioned about $1 to $1.50 price. We have call protection, which Hunter alluded to. I'll turn it over to Hunter to expand on the portfolio construction question.

Hunter, Head of Investments

As I said in my prepared remarks, the portfolio is over 40% in that 6% and 6.5% bucket; we have a couple of 7s. Those assets have been paying. Speeds were elevated, particularly in March, and as mortgage rates have risen and spreads have widened a bit relative to rates available to borrowers, we expect a corresponding slowdown in prepayment speeds. We've intentionally skewed both the portfolio and the hedge book to guard against a rising rate environment. Our house view has been more cautious than some of the market regarding the number of Fed eases priced in, and that has played out. Now that we're at the higher end of the recent range, we're looking to restack the deck a little bit with a skew toward lower coupons as we add incremental capital, and if we need to pay down exposure. So we'll probably buy more 5s and first-discount type coupons given where we are in the recent rate range.

Operator, Operator

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

Robert Cauley, Chairman and Chief Executive Officer

Thank you, operator, and thank you everyone. We very much appreciate you listening in on the call. If another question comes up after listening to the replay, 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. Have a good day. Thank you.

Operator, Operator

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