Orchid Island Capital (NYSE:ORC) reported second-quarter 2026 earnings of $0.44 per share, compared with a loss of $0.11 per share in the first quarter, as book value and total return improved during the period.
Controller Jerry Sintes said book value rose to $7.22 per share at June 30 from $7.08 at the end of the prior quarter. Total return was 6.2% in the second quarter, reversing a negative 1.3% total return in the first quarter. The company paid a quarterly dividend of $0.30 per share, down from $0.36 in the first quarter.
Portfolio shifted toward lower coupons
Chairman and Chief Executive Officer Robert Cauley said Orchid made limited changes to its portfolio during the quarter and was not actively raising significant new capital. The company increased its share count by about 1.5%, he said.
Orchid’s portfolio is now composed entirely of 30-year securities and is concentrated in mortgage coupons closest to par, including 5%, 5.5% and 6% coupons. Cauley said the largest concentration was in 5.5% securities.
The company moved its portfolio modestly toward lower coupons, citing weaker recent performance from specified pools and low refinancing activity. Cauley said the shift offered lower absolute dollar prices and payups, as well as potential upside should rates decline.
The repositioning reduced the portfolio’s average coupon by about 6 basis points. Orchid’s economic net interest spread narrowed by the same amount, reflecting a 1-basis-point decline in portfolio yield to 5.74% and a 5-basis-point increase in economic funding cost.
“Not a lot changed,” Cauley said of the quarter’s portfolio activity, characterizing the moves as fine-tuning rather than a major repositioning.
Hedge coverage increased as rate uncertainty rose
Orchid expanded its hedge positions during the quarter, adding five-year and 10-year interest-rate swaps. The company’s hedge coverage rose to 91% of repo funding at the end of the second quarter, from 72% at the end of the first quarter.
Swap notional increased to about $10.1 billion from approximately $7.9 billion. Swaps covered 70% of repo funding, compared with 65% in the prior quarter. The weighted average fixed-pay rate on swaps was 3.61%, up modestly as Orchid added hedges in a higher-rate environment.
Cauley said the company also increased short TBA positions and added a swaption position, using long and short positions to reduce the net premium cost. He said the portfolio’s rate-shock sensitivity was “very flat,” though the company may need to make further adjustments during the remainder of the third quarter as market conditions evolve.
In response to an analyst question, Cauley said the elevated hedge coverage should provide substantial protection if short-term funding rates rise. However, because the company is not fully hedged, some increase in funding costs could still affect economic returns and, potentially, the dividend depending on asset yields.
Management cited higher volatility, mortgage cheapening
Cauley said market developments following the quarter had increased uncertainty around interest rates, the economy and Federal Reserve policy. He pointed to a flatter yield curve, more negative swap spreads and heightened uncertainty related to the war in the Middle East.
He said mortgage volatility had risen following a spike around February, although the MOVE Index remained within the high end of its range since March as of the prior day’s close. Cauley also said refinancing activity remained “extremely subdued,” with mortgage rates estimated in the neighborhood of 6.75% late in the prior day’s trading.
Funding conditions had been favorable in recent months, with repo spreads in the high-single-digit to low-double-digit range over SOFR, according to Cauley. He said increased Treasury bill issuance and a slight decline in money-market assets under management had recently caused funding levels to drift somewhat higher, though he did not see an ominous development.
Management expects rates and mortgage-market volatility to remain important factors. Cauley said mortgages had cheapened during the week of the call and that prospective returns were rising. He estimated that returns on equity available in the market had been in the 16% to 17% range and could move higher if mortgage securities continued to cheapen.
Book value declined after quarter-end
Cauley said Orchid’s leverage had increased to about 7.73-to-1 as of the prior night, from 7.3-to-1 at quarter-end, as book value moved and mortgage durations extended. He said the company would look to address the increase but did not provide specific plans.
He also provided an update on post-quarter book value. As of the prior Friday, book value was down 2.1% including dividend accrual and down 0.7% excluding dividend accrual. As of the prior night, book value was down 4.3% including dividend accrual and down 2.9% excluding it.
Despite the market volatility, Cauley said the portfolio’s yield remained closely aligned with the dividend. Using average second-quarter book value, he calculated a book-value dividend yield of about 16.8%, compared with portfolio earnings under GAAP measures of about 16.7%.
On expenses, Cauley said the company’s roughly 2% expense ratio had increased partly because management and staff received stock-based awards for reducing the expense ratio over prior years. He described the awards as a one-time event and said he expected the expense ratio to trend back toward approximately 1.7% as the company grows.
About Orchid Island Capital (NYSE:ORC)
Orchid Island Capital 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.
