Good morning, and welcome to the Second Quarter 26 Earnings Conference Call Orchid Island Capital. This call is being recorded today, 07/24/2026.

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 2 thousand. 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 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.

Thank you, Melissa. Melissa, and good morning.

I hope everybody's 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 just have our table of contents. So the first thing 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.

And then we will go through the portfolio characteristics, hedge positions, and then also our positioning going forward in our outlook on the market. So 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 And 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 7.3:1 compared to 7.9:1 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 And 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 1 thousand words. If you look at the top left side of the page, you can see the movements in the curve from your end, which is the red line green line is June 30, and then the blue line is last Friday.

As we all know, the market has moved quite a bit since then. So 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 3 dissents at his meeting in favor or against retaining, easing bias, so kind of a hawkish development. And then we had to transition in May to Kevin Warsh, and he is very, very strongly against inflation.

In fact, he stated that he is--the fact that inflation has been running above the Fed target for 5 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, obviously, it is going to push the front end higher because the market's going to price in Fed hikes, which is the case.

Also from the perspective of the long end of the curve to the extent a head of the Fed is more hawkish fighting inflation tends to do well. In fact, on the day of that press conference, the long bond actually was slightly up in price.

So both of those forces tend to flatten the curve, and in fact that is exactly what we have seen, So 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, obviously, the only difference between the swap curve and the 1 on the left, which would be the nominal curve, are swap spreads. Over the last month, swap spreads have been moving more negative.

Which actually increases the spread between the 2 curves. But the convention is to refer to that as tightening.

So swap spreads have tightened. Pushing the swap curve down, and it is actually flattened it even more.

If you look back on a long horizon, it is actually relatively unchanged, kind of in the middle of the range. But the development of late has really pushed the swap curve down even more.

Moving on to slide 10. Some more mortgage generic slides.

If you look at the top of the page, this is kind of a long-term look back all the way to 2010. This is just the 10-year current coupon spread of the 10 year treasury.

As you can see, in early 23 or mid 23, actually, May 2023, we kind of hit at the time, an all time high spread. Over the next 3 years, we have been on a tightening trend.

It seems like we have leveled off it is possible the spread tightening is over. Remains to be seen, but it is been a quite a long run here that is been very favorable for mortgages.

Looking on the bottom left, you can see just the, normalized price changes of various TBA coupons. That you can see at the end of the quarter with the exception of the highest coupon, 6, they were all negative.

These are price returns only. The absolute returns for those TBAs are actually positive.

The lowest return was about 0.2%, and higher belly coupons were a little over 1%. Looking on the right hand side of the page, these are dollar rolls.

2 things. You can see none of them are particularly attractive other than the 6 roll at the moment.

But what we have observed over the last several months is when these rolls get hot, tends to be driven by short term technical factors. They do not tend to persist.

And even in the case of the 6, you can see that is what is going on. There can be any number of factors driving that.

It could be CMO, desk demand, for the front month, production to use to create CMOs. Or it just can be somebody trying to squeeze a certain coupon But otherwise, the dollar roll market is not terribly attractive and certainly nothing like it was during the days of QE.

Moving on to some of the other variables that affect us. Obviously, volatility is very important for mortgage investors.

And you can see that, you know, we have been in a long term, trend where vol was declining going back to Liberation Day in 2025. Obviously, the war caused a significant spike, and you can see that kind of around February.

This is not updated through today since last Friday. But it is notable that the closing level of the move index yesterday was 80.

And that really only kind of gets you to the high end of the range we have been in since March. Still remains to be seen where we go from here, though.

Obviously, there is a lot of uncertainty surrounding developments in The Middle East with the war. Moving on, I mentioned earlier on slide 12, this is just swap spreads They had moved in a positive direction, other words, less negative And as I mentioned, of late, that has turned around and gone the other way.

Yesterday swap spreads were anywhere from 0.8 to a little over 1 basis point, in other words, more negative So that affects the performance of swaps as hedges. that is why we mentioned that on this call.

And as I said, if it is a more recent development. We are not really sure where we go from here.

And there is just a lot of uncertainty out there. Slide 13 just gives you the backdrop for the refi or prepayment mark level.

As you can see on the top left, on the bottom line there, that is just the refi index. We have been very stable at a very low level Refinancing activity, as you would expect, is extremely subdued.

The red line is the mortgage rate. We do not have a firm read on that today, but late yesterday, that was somewhere in the neighborhood of 6.75%.

And that might even be a little generous. It could be higher.

With respect to primary, secondary spreads, they are 2 things, relatively low but also very volatile. As a proxy, if you look at 6.75 as the current mortgage rate, and the 2-year/10-year Treasury is around 74.

So you are a little over 200 bps off the 10 year. That is not tight by historical standards.

Finally, slide 14. This is really not anything other than interesting to me.

It just shows you the nominal growth in GDP over the course of you know, this goes back 17 years and the money supply this is starting to get a little more attention It just shows you that when you have inflation running high, that inflation that GDP in nominal terms other words, not real, which is what we are accustomed to seeing, is accelerated. GDP growth in real terms is, you know, fairly stable in the 2 to 1.5 to say 2.5 percent.

But in nominal terms, it is accelerating and that coincides with growth in the money supply. Now let's talk more about the portfolio.

I think the most important point to make for us is that not a lot changed. We were not active in raising new capital.

We did do so We increased our share count, by about 1.5% But all in all, was not a very big quarter for growth. We did do some trading We will talk about that more in a few minutes.

We did shift the kind of profile of the portfolio slightly down in coupon. The largest concentration of our holdings, which, by the way, are now all 30 years are in 5.5% coupon.

Basically, the portfolio is concentrated in the 3 coupons nearest the par. So 5s, 5.5s, and 6s.

And the reason we did that, we moved slightly down in coupon basically, to take advantage of the fact that specified pool performance has not been that great of late. Especially with the refinancing activity so low.

So we went down in coupon, lower absolute dollar price lower absolute pay ups. With some upside in the event of a rally.

Coinciding with the move slightly down in coupon, The hedge book had to adjust slightly as well. We added to our swap positions and try to move the swap book to coincide and line up better with the portfolio.

With respect to the impact on dividend going forward, absent fluctuations in the leverage ratio, it is actually been maintained more or less where it was part of these changes. As I mentioned, our average coupon again, it is mostly it is all exclusively a 30 year portfolio.

Average coupon was down about 6 basis points. We had a slight decline in our economic net interest income a 1 basis point decline in the yield of the portfolio, from 5.75% to 5.74% and a 5 basis point increase in our economic funding cost resulting in the 6 basis point decline in our net interest spread.

Moving on to Slide 17, this is kind of more appropriate in prior quarters when we were adding significantly to our capital base at a time when mortgages were attractive. Did not do so much at all this quarter, so it is really NA, so to speak, for the court.

With respect to slide 18, as I said, we did if you look at the profile, we did move the profile to the left slightly. And it was really just driven by the performance of spec pools, which have been fairly weak.

Dollar rolls, as I mentioned, there have been sporadic coupons that have gotten special traded well. But the relative attractiveness of spec pools is just not been all that great in this environment.

I do have to apologize. there is slight error on the bottom left it shows a 4.5 exposure.

That is actually now original 15-year exposure at the end of June. that is now in 30-year.

So basically, that is it. As I said, this is not a quarter where we did a lot.

Just fine tuning the positioning of the portfolio. Moving on to slide 19, our funding cost.

This has been in a very welcome development over the last several months, and that funding spreads have compressed quite a bit. We have observed periods where SOFR trades through Fed funds and our funding in the repo market has basically run high single digits to low double digit spreads.

what is been driving this favorable funding market, kind of an offset between 2 opposite forces. On the 1 hand, you have the Fed's reserve management purchase program.

Whereby they purchase bills in the market, so they take away investments to cash providers and drive them into the repo market. We have also seen very high levels of money market AUM.

In other words, cash available. It does appear just this week, but we are starting to see some movement away from this very, very attractive levels.

Bill issuance by the treasury is actually increasing. Money market AUM declined slightly.

So we have seen funding levels just slightly higher but there is no reason for us to think that there is anything ominous on the horizon. it is just kind of a drift slightly higher from what had been very attractive funding levels.

And as you can see on this chart or this graph, our funding our economic funding levels continue to converge with the absolute level of SOFR and what we pay in repo. Obviously, with the Fed on the horizon, probably likely we are going to see a few hikes.

Obviously, the exact timing of those is unknown. But that being said, the last easing cycle is 25 basis points moves.

Those were kind of characterized as a taking out insurance, if you will, and the potential for a slowing economy. And maybe they take those back.

Remains to be seen. We have a new Fed chair, and we have a lot to learn in terms of how he tends to operate in his management of the Fed.

So we will just stand by and wait for that. Moving on to Slide 20.

As I mentioned, our hedge position, we did increase We basically added some 5-year and 10-year swap positions. As a result, our repo funding the percent of our repo funding that is covered by our 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 that our swaps covered 70% of our repo versus 65 Weighted average pay fixed rate is $3.61. that is up slightly It just reflects the fact it is kind of marking to market.

As we put out new swaps in the current higher rate environment, they are at slightly higher levels. Short TBA positions increased.

We use those in conjunction with futures opportunistically. So for instance, if TBAs have a poor run-in perform very poorly over a 2- or 3-year, even 2-month period, sometimes we will take those off and put on futures and vice versa.

But they are kind of used, not as the predominant hedge vehicle, but used some of these part of the portfolio, but interchangeably. We also added a swaption position this year or this quarter.

Which is detailed on the slide below. On slide 21 on the bottom right.

This is something we often do where we do a long and a short position. The idea is to kind of offset the cost of premium paid to try to minimize that.

As I mentioned, if you look in the top right, our swap book grew. We added a $500 million 5-year swap.

A $300 million 10-year swap. So that is how major change with respect to the hedge book.

Moving to the rest of the slides, 2022 is nothing that I need to dwell on. Those are just kind of FYI for our viewers.

On slide 2023, the sensitivity of the portfolio to shocks, as you can see, is very flat, probably flat as it is been in memory. But, again, we are kind of entering into a new environment here, so we may need to adjust that over the course of the balance Of Q3.

Kind of just going on to I want to skip slide 24. You can see our speed, as we mentioned.

Jerry mentioned at the onset of the call. With rates higher, speeds did slow.

Over the course of the quarter, and I suspect they will continue to slow as mortgage rates drift even higher, offsetting what would otherwise be a seasonal factor that would tend to drive speeds higher. So I do not expect we are gonna realize that.

So kind of to wrap it up on slide 25, where we stand You know, I prepared this deck. It was before the last few days, and things have changed.

With respect to the war, there is quite a bit of uncertainty with respect to the war, how that is gonna impact rates, the economy, and what the Fed's going to do to respond to that. We are kind of just watching with everybody else, but we are likely to have to start making some slight changes in the portfolio just to account for the fact that our Portfolio is extending.

Our leverage ratio, as we mentioned, was 7.3 at the end of Q2. As of last night, it is up to about 7.73.

So leverage has extended as book value has moved. And mortgages have extend.

So we will be seeking to address that, but I do not have anything definitive to say. 1 thing I do I want to say, though, is that if you look at our existing portfolio versus the dividend, I tend to look at the dividend in terms of the dividend divided by book value.

So in other words, what is the book value yield of the portfolio? And the way I calculate book value is to take the beginning and ending values for the quarter, take the average.

So if I take our average book value for Q2 and use that as the denominator, the numerator is the dividend, you get a yield of about 16.8%. And then if I look at what we were earning on the portfolio, using GAAP measures, we are right around the same level, right around 16.7.

So the portfolio continues to yield something very much in line with the dividend. And to the extent we are able to raise capital, I that mortgages may continue to cheapen here.

I do see there is a lot of measures you can use to gauge the movement, performance versus hedges or OAS, whichever you are preferred measure is. there is no question that mortgages is cheapening.

Over the course of this week. And so the market's becoming more attractive.

So that is if we do have the opportunity to raise capital, it is probably not a bad time to deploy. I do wanna give you an update on book value because I know you are going to ask.

And so I want to follow the convention of our peers I am gonna give you 2 book value numbers. 1 is as of last Friday, just to coincide with those who reported earlier in the week.

And then I will give you a book value number as of last night. Then I am gonna give you those numbers both with and without the dividend.

So as of last Friday, our book value was down 2.1%. As of last night, it was down 4.3%.

Those do include the dividend accrual, If you back out the dividend accrual, the numbers are as of last Friday, down 0.7%. And down last night, down 2.9%.

So that is basically it. I have to state for the prepared remarks, operator, we can open up the call to questions.

Thank you.

Thanks.

Hey, Doug, and good morning.

Hey. Hoping you could talk a little bit about, you know, Slide 19 and how you think that economic cost of funds, you know, should trend in kind of the, you know, the coming quarters, you know, if the forward curve plays out and we get rate hikes, just to kind of think about that.

And then just any differences on kind of how that shows up in GAAP versus kind of how you think about the dividend?

Sure. So just looking at the chart there, so you would expect the red line and the average 1 month SOFR line to pivot and start heading higher Our hedge coverage is at a very high percent.

it is about, as I mentioned, 91%. So absent changes in the size of the portfolio, I would expect our economic cost of funds to remain fairly stable.

So it should be akin to what we saw in 2023 So we would have a, you know, pretty sizable protection from the increased funding levels To the extent that we, of course, try to grow the portfolio, we would be putting in place more hedges in market to market mode. So it would be kind of moving higher with respect to the average pay fixed rate.

If we do not and we stay at this level, there will be pressure because we are at 91% coverage. that is not 100.

So there would be some leakage into our funding cost The impact on the dividend, is gonna depend on what happens to the yield on the assets. To the extent that they drift higher or not But all else equal, the fact that we only cover 91% of the funding with hedges implies there is some room there for leakage in terms of compressing the dividend But, again, to put to put numbers to it, it really depends on what happens on the asset side.

Great. I appreciate that answer.

And you talked about kind of the current portfolio you know, kind of the return covering know, feeling comfortable relative to the dividend. How do you think about incremental returns, where do you see them today relative to that, you know, required return you talked about for the dividend?

Yeah. They are starting to move higher.

I would suspect that the move we are in the midst of is not over. Simply because I think the forces that are driving this move are far from having played out Important development yesterday was where the 10 year treasury closed You know, we had a support level or support range somewhere in the 4 sixties.

We broke through that level. So now we have established it.

We are in the midst of establishing a new range and rates. Vol was higher yesterday.

Taking somewhat of a reprieve today, but I think the primary driver is the war. I do not see any end in sight of the war.

In fact, I suspect that it is probably gonna get worse. I think that is gonna keep market uncertainty at a high level.

there is another development yesterday. Nick Timiraos put out an article.

he is kind of been viewed as the mouthpiece of the Fed. And in his article, he basically said 2 things.

1, he does not have any idea what the Fed's gonna do. And he also implied that there are members of the FOMC who do not know what the Fed's gonna do.

That you know, as we all know, markets do not like uncertainty. So you couple that with the developments with respect to the war, vol probably going higher, I suspect we are in the midst of a move to a higher level of rates.

And cheapening of mortgages. So you know, I suspect given all this, you know, our stock's trading well below book, so I do not expect that we are going to be able to raise capital.

When and if we are, it is probably gonna be down the road. And at that point, I would not be surprised if mortgages were quite a bit more attractive than they are now.

So it is really hard to answer your question precisely just because I think we are breaking into a period of higher vol and certainly higher levels of uncertainty. So I really cannot, you know, handicap exactly where it is we will be able to put money to work and what you know, ROEs will be at the time.

Higher. Other than that, I cannot say much more.

Alright. I appreciate it.

Thank you. Yep.

Alright.

Are you there? I was just saying thanks for the commentary as always.

Just 1 from me. And, you know, as you look at the market today, obviously, we are somewhat defensive.

But you know, what--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?

Well, presently, they are they are moving higher. So, you know, I would have said somewhere in the 16% to 17% range.

I think they could be moving higher. In terms of what is the most attractive coupons, to the extent we continue to move higher in rates, the extension potential of the highest coupons is going to drive them quite a bit cheaper.

So they could become the most attractive with, you know, lower coupons have done well in this environment, but, you know, they are not something we would typically own. Just because of carry that is associated with them.

The coupons were in, Yesterday, the 5% coupon suffered the worst, and that may be a kind of telltale sign of what to expect it is the cuspiest coupon with conjunction with 5 and a halves. By depending on the measure you looked at, 7 to 8 ticks wider yesterday.

They could continue to cheapen and so they could become the most attractive coupon Those with higher coupons also. I think those, you know, the call it, 5% to 6.5% would be my guess.

2 weeks, whatever is from now, whenever the dust hopefully settles. And I think as I said, the ROEs are probably moving higher.

I would not be surprised, you know, another 1% or so. But it is really hard to say.

But given that we are in the midst of this move.

Thank you. I appreciate that color.

Mhmm.

Hey, good morning. Thank you.

Just a follow-up on the question, about hedging and the passage of rates and the dividend. You know, if we do see the curve flatten, you know, can you talk us through how you think about the 70% hedge on the on the funding cost versus the total portfolio at 90 and how you think that flow through to your projected impact on the dividend?

Yeah. it is I mean, the curve's gonna flatten.

I think it is going to continue to flatten. And the fact that only 70% of the book is in swaps, I think is what you are saying, and that is kind of locked in.

The rest of the book is less explicit. But what is really gonna drive the dividend is not just gonna be the what happens to our funding and our funding levels versus our hedge protection.

Obviously, there is some leakage there. But it is also gonna be what happens on the asset side.

And I think we are going to see the spreads compress a lot less than spread level is gonna compress less than the curve. I think we are gonna see mortgages cheapen some more.

And I do not think the spread between current yields that are gonna be available in the market in the near term versus funding are gonna compress that much. And 1 drives the other.

Because there is a lot of the investor base in mortgage space that is levered money. And clearing levels as the Fed is entering a hiking phase are gonna have to reflect that.

So I think that it remains to be seen, but I do not expect a massive compression in spread levels such that you would have dramatic decreases in the dividend. You may have some, but I do not think you are gonna have exorbitant ones.

Okay. And then as I because I sort of think through that, you know, being down in coupon, you give a little less carry for some duration protection.

You know, when you when you get to the end of it, you are gonna be able to reposition into you know, higher ROEs. But during that interim period, you give up a little bit of ROE, are you willing to hold the dividend level for a quarter or however long it takes before the economics flow back through to the bottom line?

I do not know if they would be willing to do that. that is a pretty dramatic move.

1 thing we found that, you know, as you know, in the past, we had larger exposures to those coupons And generally, that is the area of the stack that money managers traffic in. They run money against the index.

Those are large components of the index. And you tend to see that your performance is impacted a lot by flows into their funds and out of.

And so it does not always track what is going on in the rest of the stack, and it can be kind of challenging to manage through. So I do not know that we would make wholesale changes to the portfolio just to kind of wait out whatever it happens to be, you know, month or 2 or 3 or whatever period.

I think we would try to hold tight. I do think we will, make some changes in the portfolio on the margin, but I do not think it would be in that direction, certainly not in size.

Okay. Thanks for the color, Bob.

Appreciate it.

Yep.

Hey. Good morning, Bob.

Most of my questions have already been touched on. But if I could maybe ask about expenses a little bit.

The 2% expense ratio that I see in your slide deck, is that is there any more opportunity you guys think for more positive operating leverage? Or is that a level that you guys are kind of comfortable with at the moment?

And, also, kinda parallel to that, wanted to see what drove this sort of year over year increase in expenses from about $5 million to $6.75 million? Thanks.

Glad you asked that. Let's go to slide 33, if you would.

Yep. Give me a chance to get there.

That is our expense ratio. And as you can see, it bumped up.

So 2 things happen there. 1, if you look at where it kinda was back in 2022, quite high, and we had a long downtrend.

We got well under 2%. Management and the staff were rewarded with bonuses this year.

as a kind of a reward for driving the expense ratio down So 2 things to say about that. 1, the awards are all 100% in shares.

Stock, no cash. and 2, it is not the kind of award I would expect to see repeated in the near future or the future at all.

I do not expect to see that kind of dramatic improvement. So you did see a bump up there in our expense ratio.

But it really reflects compensation costs related to the share awards that were made earlier this year. And I would expect to see this line continue to trend down Obviously, the more that we can grow, the lower it gets because our management fee is asymptotic to 1%.

So all capital raised from this point forward, the management fee is 100 basis points. You are familiar with our management fee structure, it is 1.5% up to $250 million 1.25% up to $500 million, and then everything after that is 100 basis points.

So we are well above that level. And if you look at the as you show on the slide above that, the growth in our expenses has trailed that of capital by a meaningful amount.

As I said, we had this kind of 1-off award this year. Otherwise, our incentive comp structure is tied entirely to our relative performance and most of the awards are tend to be modest.

This was an exception But, again, I think it is more of a 1-off thing. I wish it were not, but it probably is.

And so, as I said, I would expect to see this line start to track back down and our expense ratio to start trending back towards, you see, 1.7 or so, which is where it was a couple of quarters ago.

that is it. Great.

Thank you for the color. Appreciate it.

Yep.

Thanks, operator. Thanks, everyone.

Appreciate you taking the time to join us today. To the extent that you have any additional call or questions, or you did not get a chance to listen to the call live and you have a question, feel free to reach out to us at the office.

The number is 772-231-1.4 thousand. Otherwise, we look forward to talking to you at the end of the third quarter.

Thank you.