Orchid Island Capital Q3 2025 Earnings Report

Orchid Island Capital EPS Results

• Actual EPS: $0.16
• Consensus EPS: $0.15
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: N/A

Orchid Island Capital Revenue Results

• Actual Revenue: $77.52 million
• Expected Revenue: $25.33 million
• Beat/Miss: Beat by +$52.19 million
• YoY Revenue Growth: N/A

Orchid Island Capital Announcement Details

• Quarter: Q3 2025
• Date: 10/23/2025
• Time: After Market Closes
• Conference Call Date: Friday, October 24, 2025
• Conference Call Time: 10:00AM ET

Orchid Island Capital (NYSE:ORC) is a real estate investment trust that specializes in investing in residential mortgage‐backed securities (RMBS), with a primary focus on mortgage pass‐through securities guaranteed by the Government National Mortgage Association (Ginnie Mae). Structured to elect and maintain status as a REIT under the U.S. Internal Revenue Code, the company’s principal business strategy involves acquiring pools of U.S. residential mortgages in the secondary market and holding them to generate interest income. To enhance returns, Orchid Island Capital typically employs moderate leverage through secured repurchase agreements with a diversified group of financial institutions.

Since its formation in 2005, Orchid Island Capital has concentrated its investment activities exclusively on the U.S. residential mortgage market, targeting seasoned pools of government‐guaranteed mortgage loans. The company seeks to capitalize on the spread between the interest earned on its mortgage‐backed securities and its cost of financing. By adhering to conservative underwriting criteria for the asset classes in which it invests and maintaining a diversified counterparty base for financing, Orchid Island Capital aims to manage credit and liquidity risk while delivering consistent income to its shareholders.

Orchid Island Capital completed its initial public offering in June 2013 and is listed on the New York Stock Exchange under the ticker symbol ORC. The firm is governed by an independent board of directors and a management team with extensive experience in mortgage finance, structured securities and REIT operations. Orchid Island Capital continues to monitor shifts in mortgage prepayment speeds, interest rate dynamics and regulatory developments in the U.S. housing finance sector to inform its portfolio management and risk‐control practices.

Orchid Island Capital Q3 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Orchid reported a strong Q3: $0.53 net income per share (vs. a $0.29 loss in Q2), book value rose to $7.33, 3Q total return was 6.7%, and the company maintained the $0.36 quarterly dividend.
• Positive Sentiment: The company raised $152 million of equity in the quarter and deployed it into roughly $1.5 billion of specified pools purchased at historically wide levels, which management expects to drive increased future earnings power.
• Positive Sentiment: Portfolio is 100% Agency RMBS with a bias to higher‑coupon, call‑protected specified pools (5.5–6.5s); weighted average coupon and effective yield rose and net interest spread expanded, improving carry and prepayment resilience.
• Negative Sentiment: Funding markets showed growing friction — SOFR has traded outside the fed funds corridor, repo costs drifted from ~SOFR+16bps to ~+18bps, and potential changes around QT/reinvestment could create funding volatility or higher costs.
• Positive Sentiment: Hedges and prepayment profile support downside protection: total hedge notional was $5.6 billion (≈73% DV01 in swaps, including $3.9 billion of swaps), duration gap near zero, low modeled rate sensitivity, and specified pools materially outperformed TBAs on CPRs.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 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. Please go ahead.

[Melissa Alfonso, Company Representative at Orchid Island Capital]

Good morning, and welcome to the Third Quarter 2025 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 24th, 2025. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available and 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.

[Melissa Alfonso, Company Representative at Orchid Island Capital]

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 Cauley. Please go ahead, sir.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Thanks, Melissa. Good morning. I hope everybody's doing well, and I hope everybody's had a chance to download our deck. As usual, that's what we will be focusing on this morning. I'll throw on page three just to give you an outline of what we'll do. The first thing we'll do is have our Controller, Jerry Sintes, go over our summary financial results. I'll then walk through the market developments and try to discuss what happened in the quarter and how that affected us as a levered mortgage investor. I will turn it over to Hunter. He'll go through the portfolio characteristics and our hedge positions and trading activity, and then we'll kind of go over our outlook going forward. We'll turn it over to the operator and you for questions. With that, turn to slide five, Jerry.

[Jerry Sintes, Controller at Orchid Island Capital]

Thank you, Bob. On slide five, we'll go over the financial highlights real quickly. For Q3, we report net income of $0.53 a share compared to $0.29 lost in Q2. Book value at 9/30 was $7.33 compared to $7.21 on June 30. Q3 total return was 6.7% compared to -4.7% in Q2, and we had a $0.36 dividend for both quarters. On page six, our average portfolio balance was $7.7 billion in Q3 compared to $6.9 billion in Q2. Our leverage ratio at 9/30 was 7.4 compared to 7.3 at 6/30. Prepayment speeds were 10.1% for both Q3 and Q2, and our liquidity was 57.1% at 9/30, up from 54% at June 30. With that, I'll turn it back over to Bob.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Thanks, Jerry. I'll start on slide nine with market developments. What you see here on the top left and right are basically the cash Treasury curve on the left and the SOFR swap curve on the right. There are three lines in each. The red line just represents the curve on June 30th. The green line is as of 9/30, and then the blue line is as of last Friday. On the bottom, we just have the three-month Treasury bill versus the 10-year note. What I want to point out, basically, the curve is just slightly steeper for the quarter, just reflecting the fact that with the deterioration of the labor market, the market's pricing in Fed cuts, and the front end of the curve has moved.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

If you look at basically the movements on these two lines, and it's the same for both, from the red to the green line, that just reflects the deterioration of the labor market. Ironically, the way the quarter started, the first event of the quarter was really on the 4th of July when President Trump signed into law the One Big Beautiful Bill Act. Initially, the market sold off 10-year points. It sold off by about 25 basis points. At the end of July, at the Federal Open Market Committee meeting, the Chairman was actually fairly hawkish. That was on July 30th. Quickly, on the 1st of August, the non-farm payroll number came out and was weak, but also it was very meaningful downward revisions. That kind of started a string of events which started to paint a very clear picture of a deteriorating labor market.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

The QCEM, which are the revisions to prior payroll written numbers through the first quarter of 2025, were much more negative than expected. In fact, ADP the last two months were negative, so that changed the picture. That changed the way the Fed looked at the world. The market started to price in Fed easing, and that's what you've seen here. What you've seen, between the green and the blue line, so to speak, is what's happened since the end of the quarter. Basically, the government shut down. Absent today's data, we basically have had very little data to go on. You see really what would be described as just a graph for yield. There are a few securities that offer a yield north of 4%. The long end of the Treasury curve has seen pretty good performance quarter to date. The bid continues.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

In fact, that's even present in the investment-grade corporate market where, in spite of the fact that credit spreads are very tight, you're still seeing strong demand. It's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. If I had to summarize it, from our perspective, it was actually a net, a very quiet quarter. Rates were essentially unchanged. Importantly, vol was down. I'll get to that more in a minute. Of course, the Fed's in place. A steepening curve, low interest rate volatility, always good for mortgage investors. Turning to slide 10, on the top, you see the current coupon mortgage spread to the 10-year. On the bottom, we have two charts that just kind of give you some indication of mortgage performance.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

The 10-year Treasury is the typical benchmark people look at when they think of a current coupon mortgage or to kind of appraise mortgage attractiveness. This makes it look like the, you know, the luster's off the rose to a large extent because, for instance, if you look at where we were in May of 2023, that spread was 200 basis points, and it's halved since then. It's 100. I think you have to keep in mind that the 10-year Treasury is a great benchmark over very long periods of time, but the current coupon mortgage does not have a duration anywhere close to the 10-year. In fact, it's about half. Most street shops use a hedge ratio for the current coupon. Somewhere around in here, we have a five-year or five or half of the 10-year. A more appropriate benchmark might actually be the five-year Treasury. Of course, swaps.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

We have some charts in the appendix. For instance, if you look on page 27 and you look at the spread of the current coupon mortgage to the seven-year swap in particular, I'm just going to go there now if you don't mind. On slide 27, I just want to give you a more accurate picture of what we're looking at. The blue line there just represents the spread to the seven-year swap. That's kind of the center point for our hedges. This is a three-year look at it. I just want to point out that if you look at this chart, you see that we're currently at the low end of the range, but we're still in the range. With respect to the 10-year, we've broken through that.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I think that just reflects the fact that the curve is modestly steep, and you're basically benchmarking a five-year asset against a 10-year benchmark. It looks like it's tightening when in fact it really, really isn't. The other thing I would point out too, and we've talked about this in the past as well, if you look at slide 28, I think this is important because what this shows are the dollar amount of holdings of mortgages. The red line represents the Federal Reserve, and of course, they're going through quantitative tightening. That number just continues to decline. The blue line is holdings by bank, and they are the largest holder of mortgages that there are. You can see this line, how it's increasing, is very, very modest. In fact, what we hear, most of their purchases are just in structured product, floater, and the like.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I think until they get meaningfully involved, mortgages are not going to scream tighter. There is still some attractiveness, if you will, in the mortgage market. I suspect that that's going to stay, as I said, until the banks get involved. If you look at the bottom left, you kind of see the performance. As you saw, we did tighten. If you look at this chart on the left, what did this one I show every time? It's normalized prices for four select coupons. All you do is you take the price at the beginning of the period, you set it to 100. You can see most of them move upward was in early September. The reason I point this out is if you think of it this way, but with the banks absent, the marginal buyer of mortgages are basically either money managers or REITs.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

What we saw around that period, where in addition to the prolific ATM issuance by REITs, we also saw two preferred offerings by some of our peers and a secondary by another of ours. Those were kind of chunky issuances. I think that's what drove that kind of spike tighter. If you were to look at the spread of our current coupon mortgage to the five-year Treasury, you see a spike down right around that day. It was over about a two-week period. Since then, we've kind of plateaued. Mortgages have still retained some attractive carry. Hunter's going to get into that in more detail. I don't want to rain on his parade, but I just wanted to point out that, you know, mortgages, while we had a good quarter, they're still reasonably attractive. On the right, you see the dollar roll market.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Generally, dollar rolls are impacted by anticipated speeds. With the rally in the market, that's become a big issue. I will just point out one of these. If you look at that little orange line, again, this is like a one-year look back. That orange line represents the Fannie 6 roll. You can see towards the end, as we enter September, with the rally, that roll's come way off, and the market's pricing in extremely high speeds. As a result, spec pools, which are the beneficiary of their call protection and perform well in a rally, have done extremely well. The cash window list that would come out every month in October this month, they did very, very well, and I suspect they will probably continue to do so going forward.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

The next chart on page 11, again, this is very relevant for us as a levered mortgage investor since we're short prepayment options. You can see on the top, this is just normalized vol. This is a proxy for volatility in the interest rate market. The spike there, which was in early April, that was Liberation Day. You can see since then, it's done nothing but come down and continue to come down. In fact, if you look at the bottom chart, this is the same thing, but with a much longer look-back period. You can see the spike there around March of 2020. That was the onset of COVID. Obviously, a very volatile event. The immediate after that, you had extremely strong QE on the part of the Fed buying treasuries and mortgages.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

It's kind of like a rate suppression environment where they're buying up everything and driving rates down, which is the byproduct of that is that they drive volatility down. As you can see on the right, we're getting near those levels now. I don't think that means that rates are going to zero, but what we are seeing is interest rate vol being pushed down. I think part of what's behind this is the fact that we all know that next year, the Fed chairman is going to be replaced when his term ends in May. In all likelihood, that's going to be by someone who's pretty dovish. The market expects kind of a very dovish outlook for Fed funds and rates in general.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Of course, to the extent that that happens, and who's to say that it will, it would also continue to be supportive for us as a celebrity agency MBS market because mortgages, you would think, would continue to do well in that environment. Turning to slide 12, this is a relatively important slide because this really is focused on the funding markets. This is what's really become a hot topic, if you will. What we see on the left are just swap spreads by tenor. If you'll notice, in the case of the purple one, which is the 10-year, and the green one, which is the seven-year, they've all kind of turned up. In other words, they're less negative. We would say they're widening, even though it seems counterintuitive because the spread to the cash Treasury is actually getting narrower, but it is what it is.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

What happened here was that the Chairman recently, in a public, his comments mentioned that the end of Q2 was in the next few months. Most of the market participants were expecting that in the first, if not the second quarter of 2026. That was news. More importantly, what we've seen since, especially this month, is that SOFR has traded outside of the 25 bps range for Fed funds, which is between 4% and 4.25%. In fact, it's been consistently well outside that range, which points to potential funding issues. The Fed will, in all likelihood, address that and quite possibly at their meeting next week. What that means if they end quantitative tightening is that the runoff in their portfolio, which we saw in that chart in the appendix, is going to stop. It'll just plateau.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

What they'll likely do, and I don't know this, of course, with certainty, but I suspect it's the case that Treasury paydowns will be reinvested back into Treasuries and mortgage paydowns, since they don't want to hold mortgages long term, will also be reinvested in the Treasuries, probably more so in bills. What that means then is going forward, given that the government is running large deficits, is that the Treasury, that the Fed will become a buyer of Treasuries. As a result, the cash Treasuries will not continue to cheapen as they have in swap spreads, which have gotten really negative, have gone the other way. That just reflects the anticipation by the market that the Fed, as a buyer of Treasuries, is going to keep issuance in check and keep issuance from flooding the market and driving spreads wider and term premium higher.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

That is significant for us because if you look at the right-hand chart, this is our hedge positions, pie chart, obviously, by DV01. In other words, the sensitivity of our hedges to movements in rates. As you can see, 73.1% of our hedges are in swaps by DV01. Obviously, this movement has been beneficial to us to the extent it continues. Of course, it will continue to be beneficial. In fact, I just looked at swap spreads before I came in on the call today. If you look at pretty much every tenor outside of three years, every one of them on a one, three, and six-month look-back is at their wides. Absolutely, I mean, pegged 100% of the wides. That's a significant movement.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

That being said, as we did mention, there have been some issues with the funding market with SOFR being outside of the range, and funding spreads to SOFR have been a little bit elevated. We typically used to be in the mid-teens. It's there to the high teens now. The fact that the Fed is very much on top of this is good for us because it means they're going to be attentive to it and keep us from repeating what we saw, for instance, in 2019. The next slide is 13 refinancing activity. This kind of paints a very benign picture, frankly. I just want to talk about it. If you look at the top left, you can see the mortgage rates and the red line and the refi index, and while rates have come down some, the refi index has bumped up. It's not much.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

If you look at the left axis, you can see, you know, we were at a 5,000 level in December of 2020, and we're far below that. The second chart on the right just shows primary and secondary spreads, and they've just been very choppy. There's really not a story to be told from that. What I want to focus on is the bottom chart. What this shows is the percentage of the mortgage universe that's in the money. That's the gray shaded area. Then you have the refi index. As you can see on the right-hand side of this chart, there's some gray area there, but it's very modest. Again, it paints a very benign picture, but it's misleading. The reason it is so is because this is the entire mortgage universe.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Most of the mortgages in existence today, or a large percentage of them, were originated in the immediate years after COVID. They have very low coupons, 1.5, 2, 2.5, 3, and they're out of the money. If you were to do the same chart for just 2024 and 2025 originated mortgages, it would be an entirely different picture. It would be a much higher percentage of the mortgage universe in the money. It'd probably be north of 50%. Since we as investors in this space, like our peers, we own a fair number of 2024 and 2025 originated mortgages. In fact, we own, to some extent, somewhat of a barbell in the sense that most of our discounts are very old, and most of our newer mortgages, the higher coupons, are lower wall. That really means security selection is important.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

In a moment here, I will turn the call over to Hunter. He will talk about what we've done in that regard in great depth. I just want to point out this picture, that this chart is somewhat misleading. Before I turn it over to Hunter, as always, I'd like to just say a bit about slide 14. A very simple picture. There are two lines on this chart. The blue line just represents GDP in dollars, and the red line is the money supply. What it points out is the continuing fact that the government, or fiscal policy if you will, is still very stimulative. The government is running deficits between $1.5 trillion and $2 trillion. That's in excess of 5% of GDP.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

The takeaway is that in spite of what might be happening with respect to tariffs or the weakness in the labor market or geopolitical events, the government is supplying a lot of stimulus to the economy, and you can't forget that looking forward. That's probably why, in spite of the tariffs, among other reasons obviously, the economy really has not weakened materially. With that, I will turn it over to Hunter.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Thanks, Bob. I'd like to talk to you a little bit about how our portfolio of assets evolved over the course of the quarter, our experience in the funding markets, our current risk profile, how our portfolio is impacted by uptick in prepayments, and give a little bit of my outlook, I suppose, going forward. Coming out of a volatile second quarter, we took advantage of an attractive entry point by raising $152 million in equity capital and deploying it fully during the quarter. The investing environment allowed us to buy agency MBS at historically wide spread levels. During the second half of the quarter, equity raises slowed, but the assets we purchased in the third quarter tightened sharply during that second half of the third quarter.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

As discussed on our last earnings call, our focus has been on 30-year 5.5, 6s, and to a lesser extent, 6.5 coupons. Those didn't tighten quite as much as the belly coupons, but we feel like they offer superior carry potential going forward. The portfolio remains 100% agency RMBS with a heavy tilt towards call-protected specified pools. These pools help insulate the portfolio from adverse payment behavior and reinforce the stability of our income stream. Newly acquired pools this quarter all had some form of prepayment protection. 70% were backed by credit-impaired borrowers like low FICO scores or loans with high GSE mission density scores. 22% were from states experiencing home price depreciation or where refi activity is structurally hindered. Those pools were predominantly Florida and New York geographies. 8% were loan balance pools of some flavor.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

As a result of these investments, our weighted average coupon increased from 5.45 to 5.53. The effective yield rose from 5.38 to 5.51, and our net interest spread expanded from 2.43 to 2.59. Across the broader portfolio, pool characteristics remain very diverse and defensive towards prepays. Exposure, 20% of the portfolio now is backed by credit-impaired borrowers, 23 Florida pools, 16 New York pools, 13% investor property pools, and 31% have some form of loan balance story, if you will. We had virtually no exposure to generic or worse-to-deliver mortgage securities, and we were net short TBAs at 9:30. Overall, we improved the carry and prepayment stability of our portfolio while maintaining a conservative leverage posture and staying entirely within the agency MBS universe. Turning to slide 17, you can see a sort of visual representation of what I just discussed.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

You can clearly see the shift in the graphs, the concentration building in the 5.5 and 6 coupon buckets across the three graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. Now I'd like to discuss a little bit about the funding markets. The repo lending market continues to function very well, and Orchid maintains capacity well in excess of our needs. That said, we've observed friction building in the funding markets, particularly during the weeks of heavy Treasury bill issuance and settlement. These dynamics have led to spikes in overnight SOFR and the triparty GC rates relative to the interest paid by the Federal Reserve on reserve balances, particularly around settlement dates. This is largely attributable to declining reserve balances and continued heavy bill issuance.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Orchid typically funds through the term markets, which has helped insulate us from some of the overnight volatility, but still, term pricing has been impacted. We borrowed roughly SOFR +16 basis points for most of the year, but in recent weeks, that spread has drifted up a couple of basis points, say SOFR +18 more recently. Looking ahead, we expect the Fed to end QT potentially as early as next week's meeting and begin buying Treasury bills through renewed temporary market operations. If and when this occurs, it should provide a positive tailwind for our repo funding costs, especially if it's paired with further rate cuts by the FOMC. This would help with the continued expansion of our net interest margin. Just wanted to make a brief note about this chart on this page. It might seem a little bit counterintuitive.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

The blue line on the chart represents our economic cost of funds. This metric, as you can see, has ticked slightly higher in spite of the fact that rates are coming down. This is really due to the fact that, as we've grown, there's a diminishing impact of our legacy hedges on the broader portfolio. So, recall that this metric, economic cost of funds, includes the cumulative mark-to-market effect of legacy hedges. It is sort of akin to the rate paid on taxable interest expense with the deferred hedge deductions factored in. On the other hand, the red line, which has been moving lower, represents our actual repo borrowing costs with no hedging effects. As the Fed cuts rates, any unhedged repo balances will benefit directly from this decline.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

As of June 30th, 27% of our repo borrowings were unhedged, and that increased to 30% more recently, modestly enhancing the benefit to lower our potential benefit to lower funding rates. Turning to slides 19 and 20, speaking of hedges, on September 30th, Orchid's total hedge notional stood, as I said, at $5.6 billion, covering about 70% of our repo funding liabilities. Interest rate swaps totaled $3.9 billion, covering roughly half the repo balance, with a weighted average pay fixed rate of 3.31% and an average maturity of 5.4 years. Swap exposure is split between intermediate and longer-dated maturities, allowing us to maintain protection further out the curve while taking advantage of lower short-term funding costs. Short futures positions totaled $1.4 billion, comprised primarily of SOFR five-year, seven-year, and 10-year Treasury futures, as well as a very small position in EUR swap futures.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

On a mark-to-market basis, our blended swap and futures hedge rate was 3.63% at 6/30 and 3.56% at 9/30. You can think of this metric as the rate we would pay if all of our hedges had a market value of zero at each respective quarter-end, a par rate, if you will. Our short TBA positions totaled $282 million, all of which were, I think, Fannie 5.5s. A portion of this short is really part of a bigger trade where we are long 15-year 5 and short 30-year 5.5s, so a 15/30 swap structured to provide protection against rising rates in a spread-widening environment. The remainder of the short position was just executed in conjunction with some pool purchases late in the quarter, following a period where spreads had tightened materially. We did not want to take the basis exposure quite yet.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Orchid held no swaptions during the quarter, which was fortuitous because there was a sharp decline in volatility. At June 30th, as I mentioned, approximately 27% of our repo borrowings were unhedged. That figure increased to 30% by September 30th. This increase reflects the impact of the market rally and the corresponding shorter asset durations, which allowed Orchid to carry a higher unhedged balance while maintaining minimal interest rate exposure. In other words, this shift does not indicate that the portfolio is less hedged. In fact, at June 30th, our duration gap was -0.26 years, and by September 30th, it had grown to -0.07 years. This still highlights a very flat interest rate profile. Speaking of which, slides 21 and 22, you get a real pitch sense of our interest rate sensitivity.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Orchid's agency RMBS portfolio remains well balanced from a duration standpoint, with the overall rate exposure very tightly managed. Our modeled rate shock showed that a +50 basis point increase in rates would estimate would result in a 1.7% decline in equity, while a 50 basis point decrease would reduce equity by 1.2%. It's a very low interest rate sensitivity, at least on a model basis. The combination of higher coupon assets and intermediate to long-term, longer-dated hedges reflect our continued positioning that guards against rising rates and a steepening curve. This positioning is grounded in our view that a weakening economy and lower rates across the curve, while potentially introducing short-term volatility, should be positive for agency MBS and the broader sector in general, as such environments are often accompanied by stress in equity and credit markets, and investors often seek safety in fixed income and REIT stocks.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and a basis widening in the belly of the coupon stack, with outperformance shifting to shorter duration, high coupon assets, which are currently lagging due to prepayment exposure. That's a perfect segue to slide 23, where we talk about our prepayment experience. This has been something that we've largely glossed over for the past couple of years, other than a brief period of time following a 10-year brief run at 360 last September. In the third quarter, including the September speeds released in early October, Orchid experienced a very favorable prepayment outcome across the portfolio. Lower coupons continue to perform exceptionally well. 3s, 3.5s, and 4s paid at 7.2, 8.3, and 8.1 CPR compared to TBA deliverables, significantly slower at 4.5, 2.9, and 0.7.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

4.5 and 5s paid 11 and 7.5 CPR for the quarter versus 2.3 and 1.9 on comparable deliverables. Among our low premium assets, which are 5.5 largely throughout most of the quarter, these were largely in line with the deliverables. 6.2 was our experience, and 6.2 CPR versus 5.9. However, in the most recent month, generic 5.5 jumped up to 9 CPR while our portfolio held steady at 6.3, really underscoring the benefit of pool selection and the relatively low wall of the portfolio. In the premium space, 6s and 6.5s paid 9.5 and 12.2 CPR for the quarter compared to 13.8 and 29.5 on TBA deliverables. As refi activity spiked in September, the various forms of call protection embedded in our portfolio produced a very sharp divide, though.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

In the most recent month, our sixes paid 9.7 versus 27.8% for the generics, and our 6.5s paid 13.9 versus a 42.8 CPR on the generics. You can really see the benefit and potential carry above and beyond TBA for those coupons. Overall, the quarter's results highlight our disciplined pool selection, where call protection, one more call-protected specified collateral, continues to deliver materially better prepaid behavior than the TBA deliverable, as I mentioned. Just a few concluding remarks for me. In summary, we experienced a sharp rebound in the third quarter, more than offsetting the mark-to-market damage done during the volatile Liberation Day widening in the second quarter. Orchid successfully raised $152 million during the quarter and deployed the proceeds into approximately $1.5 billion of high-quality specified pools.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

The pools were acquired at historically widespread levels and will serve as a meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high coupon specified pools and bear steepening bias resulted in slight underperformance relative to our peers with more exposure to belly coupons, we remain highly constructive on our current asset and hedge blend. We believe our positioning will continue to deliver great carry and be more resilient in a sell-off, particularly given our call protection and limited convexity exposure. Looking ahead, we're very positive on the investment strategy.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

I mentioned several factors that could provide significant tailwinds to the agency RMBS market, and our portfolio for the quarters ahead are the continued Fed rate cuts, the anticipated end of quantitative tightening, a renewed Treasury market operations to help stabilize the repo and bill markets, potential expansion of GSE retained portfolios, a White House and Treasury Department that are openly supportive of tighter mortgage spreads. We also continue to see strong participation from money managers and the REITs, as Bob alluded to. There's potential for banks to reenter the markets more meaningfully, as funding and regulatory capital conditions improve. Taken together, we believe the current opportunity in agency RMBS is still among the most attractive in recent memory, and we're well-positioned to capitalize on that. With that, I'll turn it over to Bob.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Thanks, Henry. Great job. Just a couple of concluding remarks, and then we'll turn it over to questions. Basically, just to reiterate kind of our outlook. I think that it's kind of hard to say where we go from here in terms of the market and the economy. I think that we're possibly at a crossroads. On the one hand, we've seen a lot of labor market weakness, and it's gotten the Fed's attention, and they appear ready to cut rates, which could lead to a prolonged low-rate environment. We also see a lot of resiliency in the economy, very strong growth. Consumer seems to be in decent shape. As I mentioned, the government's running large deficits. Plus, you have the benefits of AI and the CapEx buildout, all that tied into the one big beautiful bill and the very favorable tax components of that.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I think the market could, and the economy could go either way. The important thing is, as Hunter alluded to, that the way the portfolio is constructed with the high coupon bias, with hedges that are a little further out the curve, and the call-protected nature of the securities we own, I think that we can do well in either. For instance, if we do stay in a low-rate environment and speeds stay high, we have very adequate call protection. To the extent that the opposite occurs and the economy restrengthens and we start going into a higher-rate environment, we have most of our hedges further out the curve, and we have higher coupon securities that would do well in the sense they would have enhanced carry in that environment.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I guess one final comment is that we do expect now, especially after the data today, that the Fed will likely cut a few times. Over the course of the next few months, we're probably going to potentially adjust our hedges to try to lock in some of that lower funding and maybe add a little up-rate protection because we think if the fact the Fed does ease a few times, that in all likelihood, the move after that is a hike. With all that said, we will now turn the call over to questions.

[Operator]

Thank you. As a reminder, to ask a question, 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. One moment while we compile our Q&A roster. Our first question is going to come from the line of Jason Weaver with JonesTrading. Your line is open. Please go ahead.

[Jason Weaver, Managing Director and Head Specialty Finance and Real Estate Research at JonesTrading]

Hi, guys. Good morning. Congrats on the results in this quarter and the growth. I guess first, given the relatively consistent leverage and even greater liquidity now, as well as, you know, sort of the positive developments that you mentioned, the prepared remarks, especially lower vol, is there anything particular on the horizon, macro-wise, that you'd be looking for to change overall risk positioning, maybe like notably, like maybe leaning more into leverage?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

As I kind of said at the end, we could with leverage. Like I said, if there's two paths I see the market following, one is where we kind of stay where we are. The Fed continues to cut. Rates stay low. In that environment, we're going to benefit, obviously, from the first few rate cuts because the percentage of our funding that is hedged is on the low side. I think in the event that we do see that, as I mentioned, I think we'll probably look to lock that in. If we do so, we probably would be comfortable taking the leverage up some, to the extent the market and the economy rebounds and we see a strengthening, which I think is very possible. Frankly, I would say I would take the under on the number of rate cuts between now and the end of next year.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I would say we would not be taking leverage up. We would be looking to kind of protect ourselves, one, lock in funding and then look to protect ourselves on the asset side from extension and rate sell-off impact on mortgage prices.

[Jason Weaver, Managing Director and Head Specialty Finance and Real Estate Research at JonesTrading]

Yeah, I think that's helpful. Then, referencing the remarks on the high coupon spec pools you've purchased just as of late, do you have any view on payouts upside potential here, especially if we see more refi momentum growing?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

We've really seen payouts ratchet higher in the beginning part of this quarter, this most recent cycle of the GSEs. We saw payouts increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of a strategy when the roll markets were more healthy. That carry from those rolls has just completely evaporated. You've seen people who might have had heavier concentrations in TBAs really be forced to dive in and start buying everything they could find to supplement that income. We fortunately didn't have that problem, and most of the spec pools we bought were really in the first half of the quarter. That's just to reiterate that point. I mentioned we had the spike tighter in mortgages in early September. I forgive you if you mentioned this, I missed it.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Of the capital we raised in the quarter, 70% of that was deployed before then. We benefited from that. Also, we talked about this at the end of the second quarter. At that time, the weighted average price of the portfolio was basically par. It was like $99.98. Most of what we added, all of what we added, were to higher coupons. That being said, the average price of this portfolio now is a little over $101, $101.7. Our average payoff is 33 ticks. While we've been adding call protection, we're not paying up for the highest quality. Frankly, we don't think that it's been warranted. Not to get too into the weeds of what we own, but we've gotten, as you saw in our realized prepayment speeds, very good performance out of those securities without having to pay extremely exorbitant payouts.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

I don't know that we're ever going to get back to where we were in 2020 or 2021 just by comparison. Back then, our higher coupon, New York, whatever coupon they were, the payouts were multiple four and five points. I don't know that we're going to see that anytime soon, but we've done quite well without having to go anywhere near those kind of levels.

[Jason Weaver, Managing Director and Head Specialty Finance and Real Estate Research at JonesTrading]

Thanks for that. I appreciate the time, guys.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Yep.

[Operator]

Thank you. One moment for our next question. Our next question will come from the line of Eric Hagen with BTIG. Your line is open. Please go ahead.

[Eric Hagen, Managing Director at BTIG]

Hey, thanks. Good morning, guys.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Eric, how are you?

[Eric Hagen, Managing Director at BTIG]

Hey, good morning. I think you guys have kind of talked a little bit around it, but you know, are there scenarios where dollar roll specialness would return to the market in a more meaningful way? How do you feel like specialness would affect trading volume and kind of market dynamics overall, going forward?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Excuse me. Sorry about that. I don't know that, I mean, we saw that really in spades back in the early days of QE when the Fed was buying everything. I don't think we're going to see QE. In fact, it's been made pretty clear by the Fed that when they reinvest paydowns with respect to mortgages, they're only going to be buying treasuries and probably bills. I don't know. I don't really see the specialness of the roll market coming back in a big way. We've historically not been big players in that regard, as you probably know. I don't see it as a core, one, I don't think it's likely to happen. Two, it's never been a core element of our strategy.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

No, I think as long as they're, you know, especially in the upper coupons, that's really being driven by fear of prepayments and their speeds that are being delivered into these, the worst to deliver pools that are being delivered in the TBAs are pretty bad here. I would expect them to continue to be so for the next couple of months. I think it's going to stay depressed, at least in that space, until we pop out of this. It'll either pop out of this rate environment that we're in now, trend back towards the top or middle of the recent rate range, or, you know, until rates move meaningfully lower. I think we're kind of at a spot here where it's not going to see too much in the roll space.

[Eric Hagen, Managing Director at BTIG]

Okay. Yeah, that's interesting. Can you talk through some of the, you know, what the supply and availability for longer-dated repo looks like right now? I mean, do you see that as like an effective hedge for the Fed not cutting as much as what's currently anticipated?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

We'd like to be doing so. We've looked into it a lot. Unfortunately, the spreads are just too wide. We've done some, and we will continue to do so. As Hunter mentioned, you know, we were historically in the mid-teens. We're approaching the higher teens, but you're getting above that when you start going out in term. We have done some just to try to lock in as much as we can, and we do it opportunistically. For instance, you know, if we were to see, let's say the government reopens and you get some heinous, you know, non-farm payroll number in the market, you know, prices in seven or eight cuts, that's when we try to do those things. I would opportunistically.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

Yeah, it's been, it's been, Eric, it's been more effective to do in future space for us. We do so from time to time. I think I alluded to the fact that we have a pretty good chunk of the portfolio that is unhedged right now. We can certainly have room to move in and do some shorter dated, short futures, you know, in the first year or two of the first couple of years of the curve, or, you know, some kind of a swap or something like that with a relatively low duration. We joke around that the repo lenders are always, you know, very quick to price in hikes and very reluctant to price in cuts.

[Hunter Haas, Chief Investment Officer, CFO and Director at Orchid Island Capital]

That's been kind of the experience that's kept us from, and you just think about it, you know, the dynamics of what usually happens when the Fed gets involved and, you know, has to cut five or six times. It usually coincides with a credit market rolling over or a weakening economy. You know, those are not particularly comfortable environments for repo lenders.

[Eric Hagen, Managing Director at BTIG]

Got you, guys. Thank you so much.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Thanks, Eric.

[Operator]

Thank you. One moment for our next question. Our next question will come from the line of Mikhail Goberman with Citizens JMP. Your line is open. Please go ahead.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

Hey, good morning, guys. Hope everybody's doing well.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Hey, Mikhail.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

Hey, you guys talked about call protection. About what percentage would you say of your portfolio is covered with call protection if rates were to go down, say, 50 basis points in a sharp manner?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Almost 100% of the portfolio has some form of call protection. We have little pockets of low, what we call a kind of lower payout, stories. This is like LTV, that sort of thing. We're still constructive on those in spite of the fact that they're relatively low in terms of payout. We have a housing market that's under pressure, and borrowers going out, it's difficult for borrowers with high LTVs to turn around a refi at every opportunity. They will ultimately be able to do so, but it's not very cost-effective for them. It's not the lowest hanging fruit, I guess. The more generic stuff is. Almost all of it is.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

We have some stuff that we keep around just in case we have a dramatic spread wideness and really low payout pools that we use if we ever have to get in a situation where we need to quickly reduce leverage by just delivering something in the TBA. The rest of the portfolio has got some form, and most of it's been working out really well for us. As far as the rally, as I mentioned, our weighted average price at the end of the quarter was a little over $101. I think the average coupon is still high fives, so it's premium. It's in the money, but it's not so extreme. Another 50 basis points rally gets you obviously like a north of the six, which is like a $102 or $103 price.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

They're going to be faster, but with the call protection we have, I don't think the premium amortization is going to be so detrimental. In fact, I think our premium amortization for this quarter was very, very modest. It was an uptick, obviously, from there, but it's nothing like, for instance, what we saw in the immediate aftermath of COVID when those numbers were very, very large.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Yeah. As we bounced around kind of this rate range, where we have, you know, bought the more expensive, I guess, or the higher quality stories, has been kind of in that first discount space. The rationale there is just they're relatively cheap at that point in time. Like when rates were a little bit higher, 5s were, you know, $98, $99 handle. We bought a lot of New York 5s in the very beginning part of the quarter where rates were a little bit higher. Those will do very well if we continue to rally.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

That's helpful. Thank you very much. If I can ask one about the, flesh out your comments a bit about the hedge portfolio. If swap spreads were to widen back out, how much benefit do you guys see to the portfolio?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

You said why not? They've been widening, right? I know it's unusual to know the inflation.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

They continue to widen here.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Yes, continue to benefit from that. I mean, it's, I don't know if we have a dollar amount on it, but it was, you know, if you look at, it's around $2 million DV01. You can think of it in those terms.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

For instance, the long end is at -50. Let's say you went to 40, obviously, you know, something like that. I don't know how much further you can go, though, because you could argue that the market's really priced in the end of quantitative tightening and the Fed stepping in to reinvest paydowns in the treasuries. I think in order for that to happen, you'd almost have to see quantitative easing, meaningful quantitative easing, not just reinvesting paydowns. I wouldn't say 100%. $2 million DV01, so if you get another 10 bps, what is that in dollars? Something like $0.15 or something like that or $0.12 a book.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

Fair enough. If I could just squeeze in, any update on current book value, month to date?

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

It is up a hair, basically. We don't audit that number every day because we get a dollar amount every day. It's up very, very modestly for quarter-end.

[Mikhail Goberman, VP and Equity Research at Citizens JMP]

Gotcha. Thanks so much, guys, as always. Take care.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Yep. Yep. Thank you.

[Operator]

Thank you. I would now like to hand the conference back over to Robert Cauley for any further remarks.

[Robert Cauley, Chairman and CEO at Orchid Island Capital]

Thank you, operator. Thank you, everybody, for taking the time. As always, to the extent anybody has any questions that come up after the call or you don't get a chance to listen to the call live and you wish to reach out to us, we are always available. The number here is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the fourth quarter. Have a great weekend. Thank you. Bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Participants

Executives

• Jerry Sintes, Controller
• Melissa Alfonso, Company Representative
• Robert Cauley, Chairman and CEO
• Hunter Haas, Chief Investment Officer, CFO and Director

Analysts

• Jason Weaver, Managing Director and Head Specialty Finance and Real Estate Research at JonesTrading
• Eric Hagen, Managing Director at BTIG
• Mikhail Goberman, VP and Equity Research at Citizens JMP