Orchid Island Capital Q1 2026 Earnings Call - Resilience Amidst Geopolitical Volatility and Shifting Rate Expectations

Operator: Good day, and thank you for standing by. Welcome to the Orchid Island Capital first quarter 2026 earnings call. At this time, all participants are on a listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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, Orchid Island Capital: 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 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 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, Orchid Island Capital: Thank you, Melissa. Good morning, everyone. I hope everybody’s had a chance to download our deck as usual. That will be kind of the basis of our call today. First off, I’d just 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, basically discuss briefly the market variables that impact our decision-making and our performance, and have a few comments on those. Hunter then will 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, Orchid Island Capital: 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.

Three-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 is our financial statements, which are also presented in our earnings release last night and will also be available in our 10-Q later. With that, I’ll turn it back over to Bob for a discussion of the market development.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Thanks, Jerry. All righty. I will start on slide number 9. As I mentioned, we’re just 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 a swap curve, and on the bottom is just the spread between three-month Treasury bills and 10-year Treasuries. Just a few general comments. Obviously, in this environment, the war headlines with respect to the war are driving performance of not just interest rates, but basically all risk assets. We kind of have competing forces at play. On the one hand, you have forces that are inflationary in nature. Others kind of 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 been seeing, it’s actually been fairly resilient, although I would characterize it as mixed. We’ve had some strong, some weak. But that being said, most of the data that we’ve seen so far is really from 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 kind of represents a headwind to economic activity and may be supportive of inflation, there are also tailwinds impacting the economy. The One Big Beautiful Bill Act was passed last year. The government is running a very significant fiscal deficit. Both of those factors should be kind of supportive of the economy, and I think they go a long way in explaining why the data has been so resilient.

Kind of finally, as we’re fairly far into Q1 earnings, the earnings have been very strong. 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, you can see that 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 in terms of cuts for the balance of 2026, 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, even more stable, same kind of flattening.

I would say that the difference between these two is simply just swap spreads. If you look at where swap spreads are 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 kind of variable for us, obviously, mortgage spreads and the performance of TBAs. We do not own typically a lot of TBAs. We do own spec pools, but they trade at a spread to TBAs, so obviously the performance of this matters. If you look on the top, you can see the spread of a current coupon mortgage to the 10-year Treasury. This data goes back 16 years, so it gives you a lot of perspective.

As you can see on the right-hand side, for quite a while, mortgages have been tightening. I think it’s noteworthy to note, that’s pretty solid performance. Without the participation of one of the largest holders of mortgages, which are the large banks. They have not been active in the market, and 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 GSE, Fannie and Freddie, would be buying up to $200 billion in mortgages this year. Mortgages gapped tighter. That was early January. As we moved into February, the performance of the sector was still very solid. At the end of the month, the war hit, we gapped wider. As you can see, we’ve been tightening since.

The way I look at that is that the tightening that we’ve 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’ve gotten back a little under half of that. This week we’ve given back a little bit, but we’ve 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 basically want to show the change over the quarter. Obviously, the announcement by President Trump early in the month caused most mortgages to do very, very well. The exception being the orange line there, those are higher coupon mortgages and representative of higher coupons, and they would be impacted by speeds.

The rationale for the buying of the GSEs is to try to drive spreads tighter, which would presumably impact refinancing, driving it higher. Higher coupons did poorly. You see the impact of the war as we move into March and performance was all given up. Since quarter end, we’ve gotten some of that back and we’re pretty much back to neutral. With respect to the rural market, it’s really, with the exception of one coupon or maybe two, it’s been pretty benign. Most of the activity there was just driven by a presumed technical thing that those mortgages that float was small and buying by the GSEs might have caused a squeeze, but that’s actually gone away. The next big variable for us, obviously, is implied volatility and interest rates. Obviously, mortgages have a lot of vol component. When vol is high, mortgages do poorly.

When vol is low, they do well. As you can see on the top, this chart really basically goes back a year or Liberation Day, April 2nd of last year. You can see after the initial spike, vol has continued to tighten. The onset of the war drove it higher, but we’ve come pretty much all the way back. To the extent that vol stays at this type of level, this is very conducive for our business model. In fact, all of these variables, stable interest rates, low swap yields, and mortgage performance that’s steady, all these 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’s bad for our hedges because it’s offsetting the impact of them, but then it’s creating more spread for marginal cash investments. As you see 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, and since then that trade’s worked quite well. If you look on the right-hand side, you see the DV01 composition of the hedge book. The green areas, it represents swaps. So that’s higher than it was prior to that. So that trade has worked out quite well. The next state variable, if you will, 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, President Trump’s announcement, ultimately the yield on the 10-year Treasury dipped below 4% in late February, and we did see a couple of months of fast speeds. 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’s refinanceable, while it’s higher, it’s not high. Refinancing activity has been, and we expect it to stay relatively benign. Hunter will have a lot more to say about that when we talk about the current construction of the portfolio, how we see that evolving over time, and how we’re positioned with respect to prepayment levels. The final variable that I would talk about would be the funding markets.

I’m not going to say a lot about that now. We’ll talk about that later. The short answer is that the funding markets are far more stable than they’ve been. We had actions taken by the Federal Reserve, for instance, to put in place 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 that we’ve had in the past at quarter-end or year-end. Pretty much all of the variables that impact our market, whether it’s the level of rates, implied vol in rates, swap spreads, funding levels, everything is in a very good state, if you will, right now. It’s 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, Portfolio Manager, Orchid Island Capital: Thanks, Bob. 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 8th. This drove spreads tighter by roughly 20-25 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. Had a pretty volatile quarter in terms of spreads.

First tightening sharply by 20-25 basis points before blowing out 40. Then quarter to date so far in April, we’ve tightened back in around 20 basis points. Against that backdrop, we remain focused on maintaining a highly liquid 100% agency portfolio and deploying capital optimistically 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. 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 strips, 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 shift towards slightly lower coupons. That included $182 million of loan balance four and a halves, $624 million of fives, $425 million of FICO and LTV five and a halves, and $138 million of sixes, mostly in the form of geo pools and FICO. We also purchased $250 million of 15-year four and a halves. As Bob alluded to, we’ve swapped out some of our TBA shorts that we had on in Fannie 30-year five and a halves for swaps at the kind of local wides.

The net effect, as I mentioned, 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 towards production coupons, say at dollar prices around 99-101. This encompasses the kind of 5%-6% range of coupon buckets, and that’s where we see the best balance between carry duration and convexity. As we’ve discussed, we’ve 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’ve remained 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’re following along. Our funding conditions continued to improve over the quarter, allowing us to more fully realize the benefit of the December 10th 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 currently funding in the 11-13 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. The hedge coverage is approximately 65% of our repo balance, and we continue to put an emphasis on interest rate swaps.

At March 31st, our duration gap was approximately 0.07 years, which equates to a net long DV01 of roughly $375,000. I think $372,000 from the deck in the earlier slides. In terms of partial durations, our hedge profile remains a barbelled between the 2- and 3-year part of the curve and the 7- to 10-year part of the curve. We do have a lot of swaps on in the middle, but if I were to suggest there’s a skew, it’s to the front and longer end of the curve. By long end, I mean 7- to 10 years. Prepayment speeds did pick up during the period, during the quarter 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.

I think the latest street projections are for the prepay universe to come down by approximately 15%. Expect it to see as much, if not even a greater impact on us, owing to the fact that we own more recent production in most of the portfolio. Rates have been higher, so that’s really going to be the impetus for that slowdown in speeds. From a positioning standpoint, the portfolio remains somewhat defensive against the risk of inflation re-accelerating. The 6% and higher coupon portion of the portfolio, which represents over 40% of total mortgage assets, performed very well during this most recent sell-off but did less so in the earlier parts of the quarter when rates were rallying. That said, the marginal capital we expect to continue allocating towards production coupons, as I alluded to, kind of first discount or first premium part of the stack.

This is going to 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 our combined portfolio, inclusive of hedges and at current funding levels, were between 15%-17% range return on equity. We believe those returns could move higher if prepay speeds do in fact trend lower or if the outlook for additional Fed easing re-emerges. With that, I will turn it back over to Bob for his concluding remarks.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Thanks, Hunter. Just to kind of give you a quick rehash. Over the course of the last 4 or 5 quarters, Orchid has more than doubled in size. There have been benefits to us. As a result of doing that, we’ve been able to lower our cost structure. I would like to just turn your attention before I move on to any further points to slide 31. If everybody would quickly turn to that page. I want to point this out. What we have on page 31 is basically 10 years of data.

Hunter, Portfolio Manager, Orchid Island Capital: 32.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: I’m sorry, 32?

Hunter, Portfolio Manager, Orchid Island Capital: Yes.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: This is 10 years of data. On the top, we show our stockholders’ equity going back to 2015. As you can see, and by the way, this is annual data, not annualized. The change year-over-year for both equity and our expenses. Our shareholders’ equity has grown by 442% over the last 10 years, which is an annualized growth rate of 18.4%, and our expenses have grown 159% or at a 10% annualized rate. The benefit of that, or the offshoot of that, is on the next slide 33, and you can see what our expense ratio is. Again, that’s 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. As you can see, our expense ratio has moved from just under 3%, or our G&A load, to 1.7, which is, as you know, very low in regard to most of our peers and actually only lower than all but the two largest peers. That’s one thing I wanted to point out. With respect to the portfolio, just to kind of quickly summarize what Hunter said. We expect prepayments to be benign, but we still have a very well protected portfolio with a very modest premium dollar price. Hunter mentioned that returns in the sector are approximately mid-teens, call it 15%-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 were deploying new capital, it would not have any meaningful impact on the yield of the portfolio. As we just alluded to, as we’ve grown the portfolio and the company, our expense ratio tends to come down. The bottom line of that basically is that growth is accretive to earnings. With respect to our outlook, the market is very appealing to us. Returns are still attractive. They’re not as attractive as they were a year ago, but they are still quite attractive.

All of the variables that matter to us, interest rates, the level of swap spreads versus yields on assets, the level of implied vol, the funding markets, everything is in a very great state. Therefore, we are quite bullish on the market going forward. The big variable, of course, is the war. Nobody knows how that’s going to play out. It seems my personal observation, which is that the big tail risk going into the war was a massive escalation, meaningful and lasting damage to production capacity in the Middle East. It seems that risk is now much lower. I think that kind of explains why the markets have become pretty benign over the last week or two, while we still react to headlines from the war.

Generally, the risk assets have done well, and I presume that’s just because we think that the big outsized tail risk is quite low. That’s our outlook. With that, we’ll turn the call over to questions.

Operator: Thank you. As a reminder, to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from the line of Jason Weaver with Jones Trading. Your line is now open.

Jason Weaver, Analyst, Jones Trading: Hey, Bob. Hey, Hunter. Thanks for taking my question.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Hey, Jason.

Jason Weaver, Analyst, Jones Trading: First, I noticed it looks like the effective duration of the portfolio extended a bit to about 3 as of 3/31. Was that intentional tactical decision around the GSE purchase announcement or maybe just a consequence of adding those belly coupons?

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Yeah, a little bit of both. Rates have drifted higher. Portfolio extended a little bit, and we’re trying to sort of not add too much hedge at the local highs. We don’t 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, particularly in January and early February, we noticed underperformance in kind of the higher coupons and wanted to make kind of a strategic shift to getting into some more 4.5s and 5s to have a little bit more balance. Particularly true whenever we are at local highs in rates.

I would just add to that. I agree with everything he 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, kind of coinciding with what Hunter just said. So we moved the average life of the hedge book out about three-tenths of a year. So moved it further out the curve. That was a conscious decision in response to the movements in the portfolio.

Jason Weaver, Analyst, Jones Trading: Got it. That makes sense. On the dividend, I know you’re methodical about this, and it’s obviously never easy to make the decision to make a cut, but can you talk about the sort of level of core spread income coverage at a floor that you need to establish the run rate going forward?

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Well, yeah, I’m glad you asked that. I know everybody’s 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, which actually, when you close them and they have significant positive equity, which was the case, that basically creates a liability, if you will, 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 the last call, as we move into the new calendar year, we reevaluate. We’ve seen the effect of those closed hedges, one, wear off, and two, be diluted just because of the growth of the company and the portfolio shares outstanding. Now when we appraise the current run rate, that’s 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’re 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%-17% yield range. They’re all pretty much in line.

Just next year, I will tell you sometime in the first quarter, we will be again reevaluating where we see taxable earnings running for 2027. To the extent necessary, we’ll adjust. We don’t, of course, have any insight into that at the moment. Now, based on where we see things running, it would seem the prudent thing to do. As I said, they’re all in line now. We should have our earnings of the portfolio, our dividend yield, and the marginal return on capital all be pretty much in line.

Jason Weaver, Analyst, Jones Trading: Got it. That’s a great color. I appreciate you guys.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Yep.

Operator: Thank you. As a reminder, to ask a question at this time, please press star one one 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, Analyst, Citizens JMP: Hey, good morning, guys. Hope everyone’s doing well.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Good morning.

Mikhail Goberman, Analyst, Citizens JMP: Good morning. Just a quick one first. Could you update us on current book value?

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: Book’s up about 2.5% as of yesterday. We’ve 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’ve given back some of that. We’re up about 2.5% from where we were.

Mikhail Goberman, Analyst, Citizens JMP: Got you. Thank you for that. If I can just squeeze in one more.

You talked about investment opportunities being pretty attractive at the moment. Assuming rates on MBS continue to kind of creep up higher, how does that sort of look to your portfolio construction of your premium portfolio going forward?

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: You say rates, you mean mortgage rates available to borrowers?

Mikhail Goberman, Analyst, Citizens JMP: Yeah.

Robert Cauley, Chairman and Chief Executive Officer, Orchid Island Capital: That would be beneficial. That improves carry. We have a slight premium in the portfolio, as I mentioned, Hunter mentioned about $1-$1.5 price. We have call protection, which Hunter alluded to. In fact, why don’t you just take over? I mean, that’s your question, so.

Hunter, Portfolio Manager, Orchid Island Capital: No, yeah. It’s like I said in my prepared remarks, the portfolio’s over 40% in that 6.5 bucket. We even have a couple 7s. Those have been paying. The speeds were elevated, particularly in March. 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. Yeah, we have intentionally skewed both the portfolio and the hedge book to guard against kind of rising rate environment. Our house view has been not quite as, I guess, sanguine as the rest of the market with respect to Fed eases. We’ve kind of long since held that we didn’t think we were going to get as many as what was priced into the current market. That’s played out.

Now that we’re at the kind of higher end of the range, we’re looking to restack the deck a little bit with a little bit more of a skew towards lower coupons as we add additional capital and to the extent that we have to pay down. We’ll probably buy more fives and kind of first discount type coupons just because of where we are with respect to kind of the recent range and rates.

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

Thanks.

Thanks.

Thanks, Scott.

Operator: Thank you. I’m 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, Orchid Island Capital: 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 don’t listen to the call live and have a question that comes up 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.