Prepared remarks
Good day, and thank you for standing by. Welcome to the Orchid Island Capital Second Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. To ask a question during the session, you will need to press *1 on your telephone. You will then hear an automated message that your hand is raised. To withdraw your question, please press *1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Melissa Alfonso, investor relations. Please go ahead.
Good morning, and welcome to the Second Quarter 2026 Earnings Conference Call of Orchid Island Capital. This call is being recorded today, 07/24/2026. At this time, the company would like to remind 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 would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert E. Cauley.
Please go ahead, sir.
Thank you, Melissa, and good morning. I hope everybody has had a chance to download our deck as usual. We will be focused on the deck for the call. Just to begin on slide 3, we have our table of contents. The first order of business will be our controller, Jerry Sintes, to go over our financial results. Then I will go over the market developments that occurred during the quarter. These are what shaped our decision making and our results. After that we will go through the portfolio characteristics, hedge positions, and our positioning going forward and our outlook on the market. With that, I will turn it over to Jerry.
Thank you, Bob. If we turn to page 5, we will start with the financial highlights for the quarter. During Q2, we earned $0.44 per share. That compares to a loss of $0.11 during Q1. Book value at the end of the quarter was $7.22 compared to $7.08 at the start of the quarter. Total return during the quarter was 6.2%, compared to negative 1.3% in the previous quarter. Our dividend during Q2 was $0.30, which we reduced from $0.36 during Q1. On page 6, we will go over some portfolio highlights. Our average portfolio was $11.4 billion during Q2, up slightly from approximately $11 billion at the end of Q1. Economic leverage ratio at the end of Q2 was 7.3 to 1 compared to 7.9 to 1 at the end of Q1. During Q2, we experienced prepayment speeds of 10.9% compared to 14.7% in Q1, and our liquidity is down slightly to 53.7% compared to 54.5% at the end of Q1. With that, I will turn it back over to Bob to discuss market developments.
Thanks, Jerry. I will start on slide 9. A picture's worth one thousand words. If you look at the top left side of the page, you can see the movements in the curve: the red line is the start of the quarter, the green line is June 30, and the blue line is last Friday. As we all know, the market has moved quite a bit since then. If you were to put in a line for today, it would be above the blue line. Basically, what has changed: a couple of things. The first was we had a change in the head of the Fed. As you recall, when Fed Chairman Powell left his last meeting, there were three dissents at his meeting related to retaining an easing bias, so that was a hawkish development. We then transitioned in May to Kevin Warsh, and he is very strongly against inflation. In fact, he stated that the fact that inflation has been running above the Fed target for five years is unacceptable, and he has made it his intent to do everything he can to bring it into line. When that type of development occurs, it is going to push the front end higher because the market will price in Fed hikes, which is the case. From the perspective of the long end of the curve, to the extent a head of the Fed is more hawkish and fighting inflation, that tends to do well for the long bond. In fact, on the day of that press conference, the long bond actually was slightly up in price. Both of those forces tend to flatten the curve, and in fact that is exactly what we have seen. The curve has flattened, and it may continue to flatten depending on how events related to the war unfold and how those events affect the domestic economy. If you look at the swap curve, the only difference between the swap curve and the nominal curve is swap spreads. Over the last month, swap spreads have been moving more negative, which actually increases the spread between the two curves. The convention is to refer to that as tightening. Swap spreads have tightened, pushing the swap curve down, and it has flattened it even more. Looking back on a longer horizon, it is relatively unchanged, kind of in the middle of the range, but the development of late has really pushed the swap curve down further. Moving on to slide 10, some more mortgage generic slides. If you look at the top of the page, this is a long-term look back to 2010. This is the 10-year current coupon spread to the 10-year Treasury. In May 2023 we hit, at the time, an all-time high spread. Over the next three years, we were on a tightening trend. It seems like we may have leveled off; it is possible the spread tightening is over. Remains to be seen, but it has been a long run here that has been very favorable for mortgages. On the bottom left, you can see normalized price changes of various TBA coupons. At the end of the quarter, with the exception of the highest coupon, 6%, they were all negative in price returns only. The absolute returns for those TBAs are actually positive. The lowest return was about 0.2%, and the higher-belly coupons were a little over 1%. On the right-hand side, these are dollar rolls: none of them are particularly attractive other than the 6% roll at the moment. Over the last several months when these rolls get hot, they tend to be driven by short-term technical factors and do not tend to persist. In the case of the 6%, there can be any number of factors driving that: CMO desk demand for the front month, production to use to create CMOs, or someone trying to squeeze a certain coupon. Otherwise, the dollar roll market is not terribly attractive and certainly nothing like during the days of quantitative easing. Moving on to other variables that affect us, volatility is very important for mortgage investors. We had been in a long-term trend where vol was declining going back to the LIBOR transition in 2025. Obviously, the war caused a significant spike around February. This presentation is not updated through today; it is through last Friday. Notably, the closing level of the MOVE index yesterday was 80, which gets you to the high end of the range we have been in since March. It remains to be seen where we go from here, given uncertainty surrounding developments in the Middle East. On slide 12, swap spreads had moved in a positive direction, meaning less negative, and of late that has turned around and gone the other way. Yesterday, swap spreads were anywhere from negative 0.8 to a little over 1 basis point, in other words, more negative. That affects the performance of swaps as hedges and is why we mentioned it on this call. This has been a more recent development and there is a lot of uncertainty. Slide 13 gives the backdrop for the refi or prepayment mark level. On the bottom line is the refi index. We have been very stable at a very low level. Refinancing activity is extremely subdued. The red line is the mortgage rate. We do not have a firm read today, but late yesterday it was somewhere near 6.75% and that could be a little generous; it could be higher. Primary-secondary spreads are relatively low but also very volatile. As a proxy, if you look at 6.75% as the current mortgage rate and the two-year/ten-year Treasury is around 74 basis points, you're a bit over 200 basis points off the 10-year. That is not tight by historical standards. Finally, slide 14 shows nominal GDP growth over the last 17 years and money supply. It shows that when inflation runs high, nominal GDP accelerates, coinciding with growth in the money supply. Real GDP growth has been fairly stable in the 1.5% to 2.5% range, but nominal terms have accelerated. Now let's talk more about the portfolio. The most important point is that not a lot changed. We were not active in raising new capital; we did increase our share count by about 1.5%, but overall it was not a big quarter for growth. We did some trading and shifted the profile of the portfolio slightly down in coupon. The largest concentration of our holdings, which are now all 30-year, is in the 5.5% coupon. The portfolio is concentrated in the three coupons nearest par: 5s, 5.5s, and 6s. We moved slightly down in coupon to take advantage of the fact that specified pool performance has not been that strong of late, particularly with refinancing activity so low. We moved to lower absolute dollar prices and lower absolute pay-ups, with some upside in the event of a rally. Coinciding with moving slightly down in coupon, the hedge book adjusted slightly. We added to our swap positions and tried to align the swap book better with the portfolio. With respect to the impact on the dividend going forward, absent fluctuations in the leverage ratio, it has been maintained more or less where it was. Our average coupon is down about 6 basis points; economic net interest income declined slightly, with a one-basis-point decline in portfolio yield from 5.75% to 5.74% and a five-basis-point increase in economic funding cost, resulting in a six-basis-point decline in our net interest spread. Slide 17 is more relevant to prior quarters when we were adding significantly to our capital base. We did not do much this quarter, so it's not highly relevant. On slide 18, as I said, we moved the profile to the left slightly, driven by the weak performance of specified pools. Dollar rolls have had sporadic coupons that traded special but the relative attractiveness of specified pools has not been strong. I apologize: there is a slight error in the deck. The bottom left shows a 4.5 exposure that actually represents original 15-year exposure at the end of June that is now in 30-year; that item is now 30-year. So that is corrected. This was not a quarter where we did a lot—just fine tuning the positioning. Moving on to slide 19: our funding cost has been a very welcome development over the last several months as funding spreads have compressed. We've observed periods where SOFR trades through Fed funds and repo funding spreads have been attractive. What has driven this favorable funding market is an offset between two forces. On the one hand, the Fed's reserve management purchase program purchases bills in the market, taking investments out of cash providers and driving them into the repo market. On the other hand, money market AUM has been very high, meaning cash available. Just this week we are starting to see some movement away from those very attractive levels: bill issuance by the Treasury is increasing and money market AUM declined slightly, so funding levels have drifted a bit higher but there's no reason to think anything ominous is on the horizon. As shown in the chart, our economic funding levels continue to converge with the absolute level of SOFR and what we pay in repo. With the Fed on the horizon, it's likely we will see a few hikes; the exact timing is unknown. We have a new Fed chair and have a lot to learn about how he operates. On slide 20, regarding our hedge position, we did increase our swap positions. As a result, the percent of our repo funding covered by hedges increased from 72% at the end of Q1 to 91% at the end of Q2. Our swap notional balance increased from about $7.9 billion to $10.1 billion, which meant our swaps covered 70% of repo versus 65% previously. The weighted average pay fixed rate is 3.61%, up slightly, reflecting marking to market and new swaps entered at higher levels. Short TBA positions increased; we use those in conjunction with futures opportunistically. We also added a swaption position this quarter. On slide 21, you can see how we structured long and short positions to offset premium costs and minimize net premium paid. In the top right, we added a $500 million five-year swap and a $300 million ten-year swap. Slides for 2022 are informational. On slide 23, the sensitivity of the portfolio to shocks is very flat, probably as flat as it has been in memory. We are entering a new environment so we may adjust over the course of Q3. On slide 24 you can see speeds; as Jerry mentioned, speeds slowed with higher rates during the quarter and I suspect they will continue to slow as mortgage rates drift higher, offsetting seasonal factors that would otherwise push speeds higher. To wrap up on slide 25, I prepared this deck before the last few days and things have changed. The war creates uncertainty on how it will impact rates, the economy, and how the Fed will respond. We are watching along with everyone else and will likely make slight portfolio changes to account for the fact that our portfolio is extending. Our leverage ratio was 7.3 at the end of Q2; as of last night it was up to about 7.73. So leverage has extended as book value has moved and mortgages have extended. We will seek to address that but have nothing definitive now. One detail I want to give you: if you look at our existing portfolio versus the dividend, I tend to look at the dividend divided by book value—i.e., the book value yield. I calculate book value by averaging beginning and ending values for the quarter. If I take our average book value for Q2 and use that as the denominator with the dividend as numerator, you get a yield of about 16.8%. Using GAAP measures for what we were earning on the portfolio, we're right around 16.7%. So the portfolio continues to yield something very much in line with the dividend. To the extent we can raise capital and mortgages continue to cheapen, I see measures that indicate mortgages have cheapened over the course of this week and the market is becoming more attractive. If we do raise capital, it is probably not a bad time to deploy. I want to give you a book value update because I know you'll ask. Following peer convention, I will give two book value numbers: one as of last Friday, and one as of last night, both with and without the dividend accrual. As of last Friday, our book value was down 2.1%. As of last night, it was down 4.3%. Those include the dividend accrual. If you back out the dividend accrual, the numbers are: as of last Friday down 0.7%, and as of last night down 2.9%. That is basically it for the prepared remarks. Operator, we can open the call to questions. Thank you.
Questions and answers
At this time, we will conduct a Q&A session. As a reminder, to ask a question, you will need to press *1 on your telephone and wait for your name to be announced. To withdraw your question, please press *1 again. Please standby while we compile the Q&A roster. Our first question comes from the line of Doug Harter of BTIG. Your line is now open.
Thanks. Hoping you could talk a little bit about slide 19 and how you think that economic cost of funds should trend in the coming quarters if the forward curve plays out and we get rate hikes, just to think about that. And then any differences on how that shows up in GAAP versus how you think about the dividend?
Sure. Looking at the chart, you would expect the red line and the average one-month SOFR line to pivot and start heading higher. Our hedge coverage is at a high percent—about 91%. Absent changes in the size of the portfolio, I would expect our economic cost of funds to remain fairly stable, similar to what we saw in 2023. That gives us sizable protection from increased funding levels. If we try to grow the portfolio, we'd be putting in place more hedges in mark-to-market mode, so the average pay-fixed rate would move higher. If we do not grow and stay at this level, there will be pressure because 91% coverage is not 100%, so there would be some leakage into our funding cost. The impact on the dividend will depend on what happens to yields on the assets. All else equal, the fact that we only cover 91% of funding with hedges implies some room for leakage compressing the dividend, but to put numbers to it really depends on what happens on the asset side.
Great. I appreciate that answer. You talked about the current portfolio covering and feeling comfortable relative to the dividend. How do you think about incremental returns—where do you see them today relative to that required return you talked about for the dividend?
They are starting to move higher. I would have said somewhere in the 16% to 17% range and I think they could move higher. I suspect the move we're in is not over because the forces driving it are far from played out. An important development yesterday was where the 10-year Treasury closed: we had a support range somewhere in the 460s; we broke through that level and are in the process of establishing a new range. Volatility was higher yesterday and took some reprieve today, but the primary driver is the war. I do not see an end in sight for the war; I suspect it may get worse, keeping uncertainty high. Another development yesterday: Nick Timiraos published commentary suggesting uncertainty about what the Fed will do; markets do not like uncertainty. Couple that with the war and higher vol, and I suspect we are in the midst of a move to higher rates and a cheapening of mortgages. Our stock is trading well below book, so I do not expect we'll be able to raise capital immediately. If we can raise capital down the road, mortgages might be more attractive then. It is hard to give a precise answer because we are breaking into a period of higher volatility and uncertainty, so I cannot handicap exactly where we'll be able to put money to work or what ROEs will be then. They could be higher, but I can't be more precise.
For our next question, our next question comes from the line of Jason Weaver of Jones Trading. Your line is now open.
Are you there? Thanks for the commentary, as always. As you look at the market today, we are somewhat defensive. Where would you see the most attractive areas within the coupon stack or various specified cohorts for incremental deployment? And what do you think the ROEs look like presently?
Presently, ROEs are moving higher; I would have said somewhere in the 16% to 17% range and they could move higher. In terms of attractive coupons, if rates continue to move higher, the extension potential of the highest coupons is going to drive them quite a bit cheaper, so they could become the most attractive. Lower coupons have done well in this environment, but they are not something we typically own because of lower carry. Yesterday the 5% coupon suffered the worst, and it may be a telltale sign of what to expect; it is cuspier with 5 and 5.5. Depending on the measure, it was 7 to 8 ticks wider yesterday and could continue to cheapen and become attractive. My rough guess is the 5% to 6.5% range could be attractive in the coming weeks after the dust settles. ROEs are probably moving higher; I would not be surprised by another 1 percentage point or so, but it's hard to be precise in the midst of this move.
One moment for our next question. Our next question comes from the line of Jason Stewart of Compass Point. Your line is now open.
Hey, good morning. Thank you. Just a follow-up on hedging and the passage of rates and the dividend. If we do see the curve flatten, can you talk through how you think about the 70% hedge on the funding cost versus the total portfolio at 90% and how you think that flows through to projected impact on the dividend?
If the curve flattens further, I think that will continue. The fact that only 70% of the book is in swaps and that 91% of repo funding is covered by hedges gives us some protection but not full protection. The dividend impact will not be driven solely by funding coverage; it will also depend on what happens on the asset side. I expect spreads to compress less than the curve—mortgages may cheapen further. I do not expect a massive compression in spread levels that would cause dramatic decreases in the dividend. You may see some pressure, but I do not expect exorbitant decreases. Regarding your point about moving down in coupon: being down in coupon gives less carry but some duration protection. It could reduce interim ROE, and we would consider whether to hold the dividend level while waiting for economics to flow through. I do not know that we would make dramatic portfolio changes just to wait out a month or two. We tend to hold tight and make marginal adjustments rather than wholesale reallocations in size.
One moment for our next question. Our next question comes from the line of Mikhail Goberman of Citizens JMP. Your line is now open.
Hey. Good morning, Bob. Most of my questions were touched on. If I could ask about expenses a little bit. The 2% expense ratio I see in your slide deck: is there any more opportunity for positive operating leverage? Or is that a level you're comfortable with at the moment? Also, what drove the year-over-year increase in expenses from about $5 million to $6.75 million?
Glad you asked. Let's go to slide 33. That is our expense ratio and it did bump up. Two things happened. First, back in 2022 it was quite high and we had a long downtrend. We got well under 2% and management and staff were rewarded with bonuses this year as a reward for driving expense ratio down. The awards are 100% in shares, no cash, and I would not expect that type of award to be repeated; it was a one-off. That explains the bump in the expense ratio. I would expect this line to trend back down. The more we grow, the lower the expense ratio becomes because our management fee is asymptotic to 1%: 1.5% up to $250 million, 1.25% up to $500 million, and then 100 basis points after that. We are well past those thresholds. Historically, growth in expenses has trailed capital growth. This was an exception with a one-off award. I would expect the expense ratio to track back down toward where it was a couple of quarters ago, around 1.7% or so.
I am showing no further questions at this time. I will now turn it back to Robert E. Cauley for closing remarks.
Thanks, operator. Thanks, everyone. I appreciate you taking the time to join us today. If you have any additional questions or did not get a chance to listen live and have a question, feel free to reach out to us at the office at 772-231-1400. Otherwise, we look forward to talking to you at the end of the third quarter. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.