Orchid Island Capital, Inc. 2026 Q3 Earnings Call

Good morning and welcome to the third quarter 2026 earnings conference call for Orchid Island Capital. This call is being recorded today, October 23rd, 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 call over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley.

Please go ahead, sir. Thanks, Melissa, and good morning, everyone.

As usual, we've posted our deck that we will use for the call on our website. I hope you've all had a chance to download it and look it over before we begin. As again, as I've said, we will be using this for the call. We will not necessarily cover every slide in the deck, but we do try to provide as much information as we can, and we will highlight the slides that we think are the most pertinent for purposes of Q3 earnings and our outlook for the markets going forward. Starting on slide 3, this is just a table of contents and overview. The first thing we will do is just go over our financial results. Jerry Sintes, our Controller, will handle that.

I'll then talk about market developments, kind of split evenly between a quick summary of what we saw in Q3 and then an equal amount of time looking at what's happened since quarter end and kind of our outlook for the markets going forward. Hunter will talk about our portfolio characteristics and hedge positions, discuss some of our trade highlights that we did for the quarter and maybe since quarter end in our outlook, and then we will have our usual Q&A session. With that, I will turn it over to Jerry Sintes on slide 5.

Thank you, Bob. I'll start with the financial highlights for the third quarter. Net income, we posted a net loss of $0.90 per share in Q3 compared to net income of $0.44 in Q2. Book value at September 30th decreased to $6.02 per share compared to $7.22 at the end of Q2. Total return for quarter inclusive of dividends declared was negative 12.5% for Q3 compared to a positive 6.2% during Q2. We declared a dividend of $0.30 per share during the quarter, which was consistent with Q2. Turning to page 6, the portfolio highlights. During Q3, we had an average portfolio size of $11.1 billion compared to $11.4 billion in Q2. Our leverage ratio at September 30th was 8.6 times compared to 7.3 at June 30th. Three-month CPR during the quarter was 8.4% compared to 10.9% during Q2.

Our liquidity at the end of Q3 was 44% compared to 54% at the end of Q2. With that, I'll give it back to Bob.

Thanks, Jerry. I'll start on slide 9, and as I said, just to give you a quick overview. I'm sure since we're kind of the last of the peer group to report this week, you've heard quite a bit of this already. Obviously the big story in Q3 was the material sell-off in the rates market that occurred right at the end of the quarter, driven by many, many factors of inflation, capital with AI and sovereign debt issuance driving up borrowing costs and risk premium, and several other factors. Don't need to dwell on that too much, but we did see a very substantial sell-off late in the quarter. Since quarter end, we have actually changed. First off, I think we stabilized. We saw evidence of that last week, probably driven by the fact that the market positioning had gotten extremely short.

A lot of the selling we saw in the market was driven by mortgage investors such as ourselves, hedging convexity-related extension of the assets that we own. I think that all kind of ran its course, and the market just seemed to stabilize. I think we just basically were collectively so short really good it was hard to have an impetus to drive further selling. In fact, last week we had very strong CPI and PPI data that came out. Which 3 weeks ago would have caused another leg lower in the market, but we did not have that at all. This week we've had a pretty meaningful change. Not only has the market stabilized, but two things stick out. One, we've seen this very high correlation between oil prices and rates, where higher oil prices lead to higher rates.

That broke this week, and particularly yesterday, where oil was up quite a bit and rates rallied quite strongly. The other thing that we've seen this week, which is a change from what we'd seen really for the last two quarters, is kind of the safe haven status of the U.S. Treasury market, where a lot of the turmoil that's taken place in the Middle East, in Europe, and so forth, has led to people buying Treasury. So, like I said yesterday, there was a lot of AI-related issues in the equity markets and credit markets. We had oil higher, we had political unrest in areas in Europe, and then developments in the Middle East, and Treasuries rallied very strongly. No doubt a lot of that was short covering.

In fact, color today from the market would imply that CTAs are a lot less offsides, if you will, or no longer have the extreme positioning they had. CTAs are commodity trading advisors that trade in futures very actively. They tend to be kind of a form of fast money, if you will. They were very active in the market yesterday, in all likelihood, covering short. So we had a very significant rally. It's since petered out today. Don't know what'll happen in the next few days. But we've definitely seen a change in the rates market from what we saw at the end of Q3. So that's a very significant development. Slide 4, or slide 10 rather. I don't need to spend a lot of time on this. Just looking at the mortgage market. I'll just make one observation.

This is just a proxy for the attractiveness of the asset class, the current coupon mortgage spread to the ten-year Treasury. Obviously in the period after COVID, we had this several-year period where the mortgage market performance was driven by the Fed. It either was QE or QT, and that's ending now. I think we have enough data points, if you will, since that ended, where we can look at mortgages relative to the period prior to that. If you look at this chart, you can see the period up to COVID where we traded in a relatively stable range for a large number of years, and we're now north of that. So I think the asset class does look attractive. We'll talk more about that later in the call.

We have had some tightening this week, but they still look attractive, and ROEs in the market are still quite attractive. Moving on to slide 11. As you can see, we have had another spike in vol associated with the sell-off late in the quarter and the meaningful mortgage underperformance. If you look down below that, you can see we tend to have a lot of these episodes. They are obviously very detrimental for mortgage performance. The current one seems to be abating, but it seems that we are only a few months away from the next one. The next slide I think is pertinent for us because when we get into a discussion of what we did with respect to the portfolio, we, like our peers, opted to not do a lot of widespread selling.