Orchid Island Capital Aktie

Good day, and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Thank you, [ Didi ]. Good morning, and welcome to the Third Quarter 2026 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 23, 2026. At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements.

Now I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thanks, Melissa, and good morning, everyone. As usual, we've posted our deck that we will use for the call on our website. I hope you've all had a chance to download it and look it over before we begin. As again, as I've said, we will be using this for the call. We will not necessarily cover every slide in the deck, but we do try to provide as much information as we can, and we will highlight the slides that we think are the most pertinent for purposes of Q3 earnings and our outlook for the markets going forward.

Starting on Slide 3. This is just a table of comments and overview. The first thing we will do is just go over our financial results. Jerry Sintes, our Controller, will handle that. I'll then talk about market developments kind of split evenly between a quick summary of what we saw in Q3 and then an equal amount of time looking at what's happened since quarter end and kind of our outlook for the markets going forward. And then Hunter will talk about our portfolio characteristics and hedge positions, discuss some of our trade highlights that we did for the quarter and maybe since quarter end and our outlook, and then we will have our usual Q&A session.

So with that, I will turn it over to Jerry Sintes on Slide 5.

Thank you, Bob. I'll start with the financial highlights for the third quarter. Net income, we posted a net loss of $0.90 per share in Q3 compared to net income of $0.44 in Q2. Book value at September 30 decreased to $6.02 per share compared to $7.22 at the end of Q2. Total return for the quarter, inclusive of dividends declared, was negative 12.5% for Q3 compared to a positive 6.2% during Q2. And we declared a dividend of $0.30 per share during the quarter, which was consistent with Q2.

Turning to Page 6, the portfolio highlights. During Q3, we had an average portfolio size of $11.1 billion compared to $11.4 billion in Q2. Our leverage ratio at September 30 was 8.6x compared to 7.3x at June 30. 3-month CPR during the quarter was 8.4% compared to 10.9% during Q2. And our liquidity during -- at the end of Q3 was 44% compared to 54% at the end of Q2.

With that, I'll give it back to Bob.

Thanks, Jerry. I'll start on Slide 9. And as I said, just give you a quick overview. I'm sure since we're kind of the last of the peer group to report this week, you've heard quite a bit of this already. And obviously, the big story in Q3 was this material sell-off in the rates market that occurred right at the end of the quarter, driven by many, many factors: inflation, capital, with AI and sovereign debt issuance driving up borrowing costs and risk premium and several other factors. I don't need to dwell on that too much, but we did see a very substantial sell-off late in the quarter.

And since quarter end, we have actually changed. First off, I think we stabilized. We saw evidence of that last week. Probably driven by the fact that the market positioning had gotten extremely short. A lot of the selling we saw in the market was driven by mortgage investors such as ourselves, hedging convexity related extension of the assets that we own. I think that all kind of ran its course, and the market just seemed to stabilize. I think we just basically were collectively so short, really good. It was hard to have an impetus to drive further selling.

In fact, last week, we had very strong CPI and PPI data that came out, which would -- 3 weeks ago would have caused another leg lower in the market, but we did not have that at all. This week, we've kind of had a pretty meaningful change. Not only has the market stabilized, but 2 things stick out. One, we've seen this very high correlation between oil prices and rates where oil -- higher oil prices lead to higher rates. That broke this week and particularly yesterday, where oil was up quite a bit and rates rallied quite strongly.

The other thing that we've seen this week, which is a change from what we've seen really for the last 2 quarters is kind of the safe haven status of the U.S. Treasury market, where a lot of the turmoil that's taking place in the Middle East, in Europe and so forth has led to people buying treasuries. So like I said, yesterday, there was a lot of AI-related issues in the equity markets and credit markets. We had oil higher. We had political unrest in areas in Europe and then developments in the Middle East, and treasuries rallied very strongly.

No doubt, a lot of that was short covering. In fact, color today from the market would imply that CTAs are a lot less offsides, if you will, no longer have the extreme positioning they had. CTAs are commodity trading advisers that trade in futures very actively. They tend to be kind of a form of fast money, if you will. And they were very active in the market yesterday in all likelihood, covering short. So we had a very significant rally. It since petered out today. Don't know what will happen in the next few days. But we've definitely seen a change in the rates market from what we saw at the end of Q3. So that's a very significant development.

Slide 4 -- or Slide 10, rather, I don't need to spend a lot of time on this. Just looking at the mortgage market, I'll just make one observation. This is just a proxy for the attractiveness of the asset class, the current coupon mortgage spread to the 10-year treasury. And obviously, in the period after COVID, we had this several year period where the mortgage market performance was driven by the Fed, either it was QE or QT, and that's ended now. And so I think it kind of -- we have enough data points, if you will, since that ended where we can look at mortgages relative to the period prior to that.

And if you look at this chart, you can see the period up to COVID where we traded in a relatively stable range for a large number of years, and we're now north of that. So I think the asset class does look attractive. We'll talk more about that later in the call. We have had some tightening this week, but they still look attractive, and returns in the market are still quite attractive.

Moving on to Slide 11. As you can see, we've had another spike in vol associated with the sell-off late in the quarter and the meaningful mortgage underperformance. And if you look down below that, you can see we tend to have a lot of these episodes. They are obviously very detrimental for mortgage performance. The current one seems to be abating, but it seems that we're only a few months away from the next one.

The next slide, I think, is pertinent for us because when we get into a discussion of what we did with respect to the portfolio, we, like our peers, opted to not do a lot of widespread selling. Instead, we had modest selling and let the prepayments run off and instead address the sell-off by adjusting our hedges, both the notional amount of the hedges and the duration of those hedges. Obviously, we all know, as rates sell off, mortgage cash flows extend, the duration of the asset extends. So when we added to our hedge position, we did so with longer duration assets.

But also, if you look to the left, it's not as evident here how much has happened in the swap spread market. We saw swap spreads widening. But if you look back a little further, they're kind of at the wider end of the range that they've been in. And as a result, we wanted to do our hedging in the futures market more so than swaps just because swap spreads have widened so much. So if you look at the right side, you can see that the mix, the orange piece of the pie, if you will, which represents futures, has grown quite a bit. So we opted to change the mix in the hedges somewhat. We also took the hedge coverage from a pretty high 91% going into the quarter to 99%. But as I mentioned, most of the change was in the futures market, less so in swaps.

One -- next slide, 13. Just one quick point. If you look at the top right, the primary, secondary spread, we see a pretty significant tightening trend there. And I think what's driving that, if you look at the left side chart, you can see, one, the red line, that just is mortgage rates. As we all know, they're up in the mid-7% range. And not surprisingly, the refinancing activity associated with such a high mortgage rate is quite low. So it seems to be that mortgage originators may be giving up some profitability in order to maintain origination levels. As we enter into the typical seasonal slowdown with very high mortgage rates, very low affordability, it's a challenging market for that sector, for the originators.

We did see last night, for instance, President Trump signed an executive order, another step taken to try to reinvigorate the housing market, which has been struggling so much in the current rate environment and also not to downplay at all, but affordability, housing prices are quite high. So the combination, money is expensive, homes are expensive, and that makes for a very challenging market.

That's pretty much it. For the macro outlook, I'm going to turn it over to Hunter, and he can go through the portfolio developments, and then we will go to our Q&A. Thank you.

Thanks, Bob, and hello, everyone. I'd like to add a little more context to Bob's comments regarding the performance of our portfolio and the hedge book during the third quarter and October month-to-date. Following a strong second quarter when we generated 6.2% total return, performance in July as the 10-year rose about 20 basis points, and our book value declined roughly 5%. We continue to see a familiar pattern in that month in which higher rates, wider spread environment and type of environment we've experienced over the last several quarters, during those types of moves, we tend to see belly and lower coupon mortgages underperform and premium coupons outperform on a relative basis, although in July, both sectors widened relative to our hedges.

Performance improved in August as interest rates were largely unchanged. Mortgage spreads recovered a little bit, and we regained approximately half of July's book value decline. As we moved through August into early September, the 10-year treasury yield broke above its recent trading range, climbing into the 4.70s and approaching 5%. Throughout this period, we steadily extended the duration of our hedges, particularly through longer-dated treasury futures, as Bob alluded to, as the duration of our mortgage portfolio increased. This allowed us to maintain a relatively flat interest rate risk profile despite substantial extension in our underlying mortgage assets.

The sell-off remained relatively orderly through the first 10 days of September. That changed with a sharp increase in rates and volatility, combined with significant widening in the mortgage basis, triggered some convexity related selling -- or convexity related hedging, I should say, and forced selling by some of the more highly levered investors. Specified pools had held in relatively well until that point, supported by strong demand from dealers creating new CMOs in the preceding months when rates were lower. However, as rates moved higher and selling pressure increased in the CMO floater market, that source of demand slowly -- slowed considerably.

This put additional pressure on higher pay-up specified pools, particularly low loan balance and New York geographic collateral, where we saw a meaningful decline in pay-ups relative to TBA. During this period, we made some moves. We executed a 15-year, 30-year coupon swap. We unwound our 3-month into 5-year payer spread swaption trade that we put on in the prior quarter, near max value, realized approximately 200% return on the premium paid. And we added short positions in 7-year, 10-year and even 30-year treasury futures.

Market conditions remain stressed into the second week of October but have since begun to improve. This improvement has been reflected in our performance, with book value increasing approximately 4.5% month-to-date through yesterday, October 22. Since quarter end, we've made several adjustments to the portfolio and hedge book. We've replaced $1.6 billion of short-dated swaps with an equivalent amount of DV01 in the 10-year treasury futures. We've sold some low pay-up 30-year 5s specified pools against a TBA short position that we had established at the end of the second quarter when implied funding levels on the rolls were quite higher. And we bought back our 1,500 contract ultra 30-year treasury future position that we had sold in September -- or that had matured in September.

Throughout the third quarter and October month-to-date, our primary focus has been on maintaining liquidity and a relatively flat interest rate profile. At the same time, we repurchased 6.62 million shares since the end of the second quarter, taking advantage of the substantial discount to book in the stock while maintaining a competitive expense ratio and avoiding dilutive equity issuance.

Looking ahead to the fourth quarter and next year, we'll continue this disciplined approach: We expect to reduce hedges as rates rally, add mortgage assets as market conditions and leverage normalize and look for opportunities to improve portfolio carry as relative value opportunities emerge. Our taxable income estimates remain in line with the dividends paid year-to-date. More recently, a modest increase in asset yields has contributed to some improvement in our taxable net interest margin.

While the recent repricing of mortgage assets negatively affected book value during the quarter, it has also improved the prospective returns available in the market. At current leverage levels, we believe the portfolio is capable of generating returns on equity in the high teens with somewhat higher prospective returns available through new investments or selective portfolio rotation. Our economic returns on shareholders' equity for both the quarter and the year have rivaled those at the top of the pure agency peer group without the benefit of any accretive equity issuance.

With our shares trading at a discount of more than 20% to estimated current book value as of October 22, we continue to view share repurchases as an attractive use of capital alongside opportunities to invest in additional mortgage assets.

And with that, I'll turn it back over to Bob.

Thanks, Hunter. Very good summary. I think, with that, we can turn the call over to questions. Operator, Didi, you can field the first question.

[Operator Instructions] And our first question comes from Doug Harter of BTIG.

I just wanted to clarify the book value update that you gave and how that factors in kind of accrued earnings or the accrued dividend.

4.5% through yesterday, and it does include or exclude the dividend, if you will. So it reflects the dividend -- I'm sorry. It reflects the accrual of the earnings, the dividend.

So that's like an economic return number?

Yes, yes.

Okay. Appreciate it. And then can you just talk about your thought process and kind of how you weigh the decision to buy back your stock at a discount, which you guys clearly did last quarter? And how that compares to the attractiveness of kind of buying additional assets?

Well, we always -- it's just a number, right? You're looking at returns on marginal investments versus returns on buying back the shares. We're at such an extreme discount now. As Hunter mentioned, we're comfortably below 80% of book. So it's a pretty attractive return. I mean, that being said, we did 6.6 million shares. That's not a huge number, and it was something we will continue to do.

But I think, as Hunter alluded to, I would think, going forward, given what happened late in the quarter -- and by the way, the number we quote, a lot of that share repurchase activity had occurred before the last, whatever, 5 or 6 days of September. So we have done some in the fourth quarter. I think it's about 1.7 million. That's just when the stock was extremely cheap in the midst of all the turmoil. But the sector is attractive, and we'll probably -- as I think we mentioned, we had not reinvested paydowns during Q3. We will cease. We will start reinvesting paydowns.

And we may actually add some assets just to kind of take advantage of the additional -- the changes to the hedge book, I think we can accommodate that. So I would probably -- it's going to be a mix of asset acquisition and share buybacks just depending on what more -- looks more attractive at the time.

I would just chime in that...

Sorry, go ahead.

Sorry. No, I was just going to chime in that there's certainly some assets in the portfolio that look more attractive than others, and there's still a few things that are on the tighter side. And so we have a little bit of room to -- we have room to shed some of the tighter things and either reinvest the proceeds from that in stock buybacks or reallocate or rotate into asset classes that are -- or coupons, really, that are more attractive. And I just wanted to clarify on the book value question, the dividend has been removed from shareholders' equity. I got a little confused in that one.

And our next question comes from Jason Weaver of JonesTrading.

I'm just trying to ballpark dividend coverage going forward. Can you walk me through like how comfortable you are with the $0.30 level? I know there's some expanded ROEs available in the marketplace, but we have some swaps rolling off that are giving you some positive carry at the same time.

I think we're quite content. I think the earnings level of the portfolio is pretty much in line with the dividend. As Hunter mentioned, tax-wise, it's right on top of it. We expect at the end of the year that the taxable earnings versus the dividend is going to be very close. But the earnings rate, and we just updated this for October, is very much in line with the dividend. We don't know what the future holds, but if we maintain the current level in terms of market conditions and portfolio composition, we are very comfortable with the current pay rate.

All right. And then I think during Hunter's comments, you mentioned you had a 30, 15 coupon swap that you had put on. Talk a little bit about how you're viewing that trade. And also, is part of that trade a pure spread hedge? I noticed that the 30-year leg is quite a bit larger.

It was -- I'm sorry, the trade was actually a 15, 30. We were long 15-year 5.5s versus a lower amount of 30-year 6s. And it was just really a relative value proposition. We put the trade on at sort of historic wides between 15s and 30s. And I think the trade gapped tighter about 10 ticks and then we unwound the position. I think what you may be referring to is we were also short some 30-year 5s going into -- that had been a TBA short that we put on as the basis really tightened in the second quarter, and we've kind of been riding that short as an alternative hedge.

And then in October, our leverage had increased a little bit with the losses from the third quarter. Cash was down a little. We just decided to go ahead and sell some pools and cover that TBA short. So the pools that we sold, we really didn't kind of truly experience a realized loss on if you will -- I mean, we lost a few ticks on pay-up for some specified pool features, but we were selling pools and buying back TBA. So it has helped us bolster our cash and get the leverage down a little bit, and we can wait and reposition if we want to.

[Operator Instructions] And our next question comes from Mikhail Goberman of Citizens JMP.

Most of my questions have kind of been touched on. So maybe if I could ask if you could expound a bit generally on your thoughts on the leverage ratio and where it kind of goes going forward as we move into the end of the year.

Yes, it was quite high at the end of the quarter. It has since come down. It is still north of 8x. I don't have today's number, but the last one I saw was 8.26x. Hunter, if you can update that, please do. But -- so it's down. But as we kind of alluded to earlier, with the changes in the composition of the hedge book, both in terms of the size and the duration, and the fact that the market appears to have stabilized and mortgages have started to recover somewhat, I think we're comfortable maintaining that level.

Changing market conditions obviously can change that. But for now, I think the approach that we took of just addressing the sell-off from the hedge side has worked, and it allows us to retain as much earnings power -- both as much earnings power as possible, but also as much potential book value recuperation through tightening of mortgages. So our intention now is to retain the portfolio at this size. And as I said, we'll probably reinvest paydowns, may actually add some. So we're comfortable. Long-winded answer, but the answer is we're comfortable at this level.

Yes. Leverage is at 8.12x. And all through the third quarter, our duration gap was very, very tight. So I think like in the deck, maybe it's 0.17. We maintain -- we try to maintain a very tight -- we kind of look at DV01 and we look at the DV01 of all of our partials, make sure we don't have any curve exposure. And we're very well hedged from an interest rate standpoint. We certainly have exposure to volatility and mortgage basis, but we've been able to manage -- stay on top of delta hedging as rates move around.

We'll continue -- as I mentioned in my comments, we'll continue to do that to the extent that rates pull back, which I don't necessarily think they are, but we're clearly sitting at a relatively high level of rates and come in every morning and look at our risk. So we're comfortable with the leverage from that perspective. And mortgages aren't at the far extreme of their wides, but they've certainly given up some ground and have shown signs of support.

And I think there were some things going on in the third quarter related to some hedge fund stop-outs and some liquidations, and there was a lot of kind of a flurry of BWIC activity that occurred in a very short period of time. And once that kind of passed through the pipeline, things definitely felt a lot firmer. Who's to say, I mean, it could change again tomorrow, but that little episode where things got the most extreme in the last month or so was fairly short-lived.

I appreciate that. And so as you guys -- it sounds like you guys still have a pretty good appetite for buying back your stock. As you think about continuing to do that, so I guess the question is, do you just kind of try to manage the leverage ratio at, let me guess, like an 8x, 8.5x kind of range as you go forward?

Yes, that makes sense. And I mean, I think the share buybacks, if we continue to trade meaningfully below 80% of book, that looks pretty compelling. I would hope that would change given the relative performance of the stock, but we'll see. And then on the asset side, we have seen some decent recoveries reflected in the book value. If that were to change dramatically, if we were to tighten in significantly in the near term, that will change the calculus in terms of which option looks more attractive. But for now, it's -- they're pretty close to equilibrium, in other words, about even.

Yes. There's just -- we can go through and we surveil the portfolio and things that look tight and don't have to stay. And if the better use of capital is to buy stock back, then that's what we can do and to the extent that things look wide and maybe it's less clear that that's the right move. And also, we can -- as I mentioned, there are opportunities in the portfolio at these rate levels to do some rotation and get a little bit better carry out of certain assets as well.

The big takeaway though is with the stock trading where it is, it's really an albatross around our neck. Most of our -- not most, but some of our peers trade at premiums and obviously being able to raise stock accretively and buy assets at these cheap levels is an extremely attractive option to have at your disposal. We're at the other end of that spectrum where we trade at a meaningful discount. And so that's off the table. We're not willing to sell shares at anywhere close to this level of a discount. So we manage as best we can given the price of the stock relative to book and try to generate the returns that we do and see how we stack up. And hopefully, at some point, the stock reflects the relative performance. But to date, it certainly has not.

Thank you. I show no further questions at this time. I'd like to turn it back to Robert Cauley for closing remarks.

Thanks, [ Didi ]. Again, thanks, everybody, for dialing in and listening to our call. To the extent you have further questions and want to elaborate further, we will be glad to do so. Or if you just happen to catch the replay and have a question, feel free to call us at the office. The number is (772) 231-1400. We're always welcome to take any questions. And otherwise, we will speak to you at the end of the fourth quarter and calendar year 2026. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Thank you. Good day and thank you for standing by. Welcome to the Orchid Island Capital Second Quarter 2026 Earnings Call. [Operator Instructions] Please advise that today's conference be recorded.

I'm going to hand the conference over to your first speaker today, Melissa Alfonso, Investor Relations. Please go ahead.

Good morning and welcome to the second quarter 2026 earnings conference call for Orchid Island Capital. This call is being recorded today, July 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 1995.

Listeners are cautioned that such forward-looking statements are based on currently available on the management's good faith, belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements.

Now, I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, 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 order of business will be our controller, Jerry Sintes, will go over our financial results, then I'll go over the market developments that occurred during the quarter. These are what shaped our decision-making and our results. And then we'll go through the portfolio characteristics, hedge positions, and then also our kind of 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'll 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'll go with 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'll turn it back over to Bob to discuss market developments.

Thanks Jerry. I'll start on Slide 9. A picture is worth a thousand words. If you look at the top left side of the page, you can see the movements in the curve from year end, which is the red line, the green line is June 30th, 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 at the head of the Fed. As you recall, when Fed Chairman Powell left his last meeting, there were three dissent to his meeting in favor or against retaining the easing bias so kind of a hawkish development.

And then, we had the transition in May to Kevin Warsh, and he is very, very strongly against inflation. In fact, he stated that the fact that inflation has been running above the Fed's target for 5 years is unacceptable, and he intends to do everything he can to bring it into line.

When that type of development occurs, obviously, it's going to push the front end higher because the market's going to price in Fed hikes, which is the case. But also, from the perspective of the long end of the curve to the extent ahead, 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 case that's exactly what we've 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 one 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 two curves, but the convention is to refer to that as tightening. So, swap spreads have tightened, pushing the swap curve down, and it's actually flattened even more. If you look back on a long horizon, it's 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, the current coupon spread of the 10-year treasury. As you can see, in early 2023 or mid 2023, actually May of '23, we kind of hit it at the time an all-time high spread. And over the next three years, we've been on a tightening trend. It seems like we have leveled it off. It's possible this spread is over, spread tightening is over, remains to be seen, but it's been quite a long run here that's been very favorable for mortgages.

Looking on the bottom left, you can see just the normalized price changes of various TBA coupons. As 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 were 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. Two things, you can see none of them are particularly attractive other than the sixth roll at the moment. But what we've observed over the last several months is when these rolls get hot, tends to be driven by short-term technical factors. They don't tend to persist. And even in the case of the 6, you can see that's what's 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 we've 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, it's since last Friday. But it's notable that the level, closing level of the move index yesterday was 80. And that really only kind of gets you to the high end of the range that we've been in since March. Still remains to be seen where we go from here, So there's 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, in other words, less negative. And as I mentioned, of late, that has turned around and gone the other way. Yesterday's swap spreads were in anywhere from a tense to a little over one basis point, in other words, more negative. So that affects the performance of swaps as hedges. That's why we mention that on this call. And as I said, it's more recent development. We're not really sure where we go from here. And there's 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's just the refi index. We've 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 don't have a firm read on that today, but late yesterday, that was somewhere in the neighborhood of 6.75% that might even be a little generous. It could be higher. With respect to primary and secondary spreads, they're two things, relatively low, but also very volatile as a proxy. If you look at 6.75% as the current mortgage rate, the 2-year -- or 10-year treasury is around 4.70%. So you're a little over 200 off the 10-year. That is not tight by historical standards.

Finally, Slide 14, this is really not anything other than interesting to me. I'll just show you the nominal growth in GDP over the course of, 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, in other words, not real, which is what we're accustomed to seeing, is accelerated. GDP growth in real terms is fairly stable in the 2 to -- 1.5% to say, 2.5%, but in nominal terms it is accelerating, and it 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're not active in raising new capital. We did do so. We increased our share count by about 1.5%. But all in all, it was not a very big quarter for growth. We did do some trading. We'll 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 to 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 pull 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 signed 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's actually been maintained more or less where it was prior to these changes. As I mentioned, our average coupon, again, it's 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, 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 costs, resulting in the 6 basis point decline in our net interest spread.

Moving on to Slide 17. This is kind of more appropriate than prior quarters when we were adding significantly to our capital base at a time when mortgages were attractive. Didn't do so much at all this quarter, so it's really NA, so to speak, for the quarter.

With respect to Slide 18, as I said, if you look at the profile, we did move the profile to the left slightly. 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 in spec pools. It's just not been all that great in this environment. I do have to apologize, there's slight error. On the bottom left it shows a 4.5% exposure. That is actually not -- there is no 15-year exposure at the end of June, that's all in third year. So basically, that's it. As I said, this is not a quarter, we did a lot. Just fine-tuning the positioning of the portfolio.

Moving on to Slide 19, our funding cost. This has been a very welcome development over the last several months, and the funding spread to compress quite a bit. We've 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's been driving this favorable funding market, kind of an offset between two opposite forces. On the one 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've also seen very high levels of money market AUM.

So in other words, cash available. It does appear just really 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 drift slightly higher, but there's no reason for us to think that there's anything ominous on the horizon. It's just kind of a drift slightly higher from what have 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're going to see a few hikes. Obviously, the exact timing of those is unknown. But that being said, the last easing cycle was 325 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's up slightly. It just reflects the fact it's kind of market to market as we put on new swaps in the current higher rate environment that are at slightly higher levels.

Short TBA positions increased. We use those kind of in conjunction with futures opportunistically. So for instance, if TBAs have a poor run and perform very poorly over a 2 or 3-year, even 2-month period, sometimes we'll take those off and put on futures and vice versa, but they're kind of used not as the predominant hedge vehicle, but used certainly as part of the portfolio, but kind of 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 pay to kind of minimize that. As I mentioned, if you look in the top right, our swap book grew. We added a $500 million 5-year swap and a $300 million 10-year swap. So that's how major change with respect to the hedge book.

Moving through the rest of the slides. 22 is nothing that I need to dwell on. Those are just kind of FYI for our viewers. On Slide 23, the sensitivity of the portfolio to shocks, as you can see, it's very flat, probably the flat as it's been in memory. But again, we're kind of entering into a new environment here, so there may be needs to adjust that over the course of the balance of Q3.

Kind of just going on to, I'm going to skip Slide 24. You can see our speeds, 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 don't expect we're going to realize that.

So kind of to wrap it up on Slide 25, where we stand. I prepared this deck, it was before the last few days and things have changed. With respect to the war, there's quite a bit of uncertainty with respect to the war, how that's going to impact rates, the economy and what the Fed is going to do to respond to that. We're kind of just watching with everybody else, but we are likely to have to start making some slight changes to 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's up to about 7.73. So leverage has extended as book value has moved and mortgages have extended. So we will be seeking to address that, but I don't have any definitive to say. One thing I do 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, the yield of the portfolio. And the way I calculate book value is just to take the beginning and ending values for the quarter or take the average. So if I take our average book value for Q2 and use that as the denominator, the numerator, the dividend, get a yield of about 16.8%. And then if I look at what we were earning on the portfolio using GAAP measures, we're right around the same level, right around 16.7%.

So the portfolio continues to yield something very much in line with a dividend and to the extent we are able to raise capital. I suspect that mortgages may continue to cheapen here. I do see there's a lot of measures you can use to gauge the movement, performance versus hedges or OAS, whichever your preferred measure is. There's no question that mortgage is a bit of cheapening over the course of this week. And so the market is becoming more attractive. So that is -- if we do have the opportunity to raise capital, it's probably not a bad time to deploy.

I do want to give you an update on book values because I know you're going to ask and so I want to follow kind of the convention of our peers. I'm going to give you 2 book value numbers. One is as of last Friday, just to coincide with those who reported earlier in the week, and then I'll give you a book value number as of last night. And then I'm going to 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's basically it. That's it for the prepared remarks.

Operator, we can open up the call to questions.

[Operator Instructions] And our first question comes from the line of Doug Harter of BTIG.

Hoping you could talk a little bit about Slide 19, and how you think that economic cost of funds should trend in kind of the coming quarters if the forward curve plays out and we get rate hikes. Just how to think about that. And then, just any differences on kind of how that shows up on 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 lines to pivot and start heading higher. Our hedge coverage is at a very high percent. It's 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 the in '23, so we would have a pretty sizable protection from the increased funding levels.

To the extent that we, of course, try to grow the portfolio, we'd be putting in place more hedges and market to market those. So it would be kind of moving higher with respect to the average paid fixed rate. But if we don't, and we stay at this level, there will be pressure because we're at 91% coverage, that's not 100%, so there would be some leakage into our funding costs. The impact on the dividend is going to 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's some room there for leakage in terms of compressing the dividend. But again, 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, kind of the return covering, feeling comfortable relative to the dividend. How do you think about incremental returns? Where do you see them today relative to that, that required return you talked about for the dividend?

Yes. They're starting to move higher. I would suspect that the move we're in the midst of is not over simply because I think the forces that are driving this move are far from having played out. An important development yesterday was where the 10-year treasury closed. We had been at a support level or support range. Somewhere in the 4.60s, we broke through that level. So now we're in the midst of establishing a new range in rates.

Vol was higher yesterday, taking somewhat of a reprieve today. But I think the primary driver is of the war. I don't see any end in sight of the war. In fact, I suspect that it's probably going to get worse. I think that's going to keep market uncertainty at a high level. There's another development yesterday. Nick Timiraos put out an article. He's kind of been viewed as the mouthpiece of the Fed. In his article, he basically said two things. One, he doesn't have any idea what the Fed's going to do, and he also implied that there are members of the FOMC don't know what the Fed's going to do.

As we all know, markets don't like uncertainty, so you couple that with the developments with respect to the war, vol probably going higher. I suspect we're in the midst of a move to a higher level of rates and cheapening of mortgages. I suspect given all this, our stock is trading well below book. So I don't expect that we're going to be able to raise capital. When and if we are, it's probably going to be down the road. And at that point, I wouldn't be surprised if mortgages were quite a bit more attractive than they are now. So it's really hard to answer your question precisely just because I think we're breaking into a period of higher fall and certainly higher levels of uncertainty. So I really can't handicap exactly where it is we'll be able to put money to work and what ROEs will be at the time higher. Other than that, I can't say much more.

Our next question comes from the line of Jason Weaver of JonesTrading.

Just one from me. And as you look at the market today, obviously we're somewhat defensive, but 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're moving higher. So I would have said somewhere in the 16% to 17% range. I think they could be moving higher in terms of what's the most attractive coupons. There's -- 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 lower coupons have done well in this environment, but that's not something we would typically own just because of carry that's associated with them.

The coupons we're in, yesterday the 5% coupon suffered the worst and that may be kind of a telltale sign of what to expect. It's the cuspiest coupon with a conjunction of 5.5s 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 the -- call it 5% to 6.5% would be my guess, 2 weeks whatever it is from now, whenever the dust hopefully settles. And I think as I said, the ROEs are probably moving higher. I wouldn't be surprised another percent or so. But it's really hard to say, given that we're in the midst of this move.

Our next question comes from the line of Jason Stewart of Compass Point.

Just a quick follow up on Doug's question about hedging and passive rates and the dividend. If we do see the curve flatten, 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 flows through to your projected impact on the dividend?

Yes, I mean the curve is going to flatten. I think it's going to continue to flatten and the fact that only 70% of the book is in swaps, I think is what you're saying, and that's kind of locked in. The rest of the book is less explicit. But what's really going to drive the dividend is not just going to be what happens to our funding and our funding levels versus our hedge protection. Obviously, there's some leakage there, but it's also going to be what happens on the asset side.

And I think we're going to see the spreads compress a lot less than -- spread levels going to compress less than the curve. I think we're going to see mortgages cheapen some more. And I don't think the spread between current yields that are going to be available in the market in the near term versus funding are going to compress that much. And one drives the other, because there's a lot of the investor base in mortgage spaces levered money and clearing levels as the Fed is entering a hiking phase are going to have to reflect that. So I think that it remains to be seen, but I don't expect a massive compression in spread levels such that you would have dramatic decreases in the dividend. You may have some, but I don't think you're going to have exorbitant ones.

Okay. And then as I sort of think through that, being down in coupon, you give a little less carry for some duration protection. When you get to the end of it, you're going to be able to reposition into higher ROEs. But during that interim period, if 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 don't know if they'd be willing to do that. That's a pretty dramatic move. One thing we found that, as you know, in the past, we've had larger exposures to those coupons. And generally, that's 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 doesn't always track what's going on in the rest of the stack, and it can be kind of challenging to manage through. So I don't know that we would make wholesale changes to the portfolio just to kind of wait out whatever it happens to be, month or 2 or 3 or whatever period. I think we would try to hold tight. I do think we'll make some changes in the portfolio on the margin, but I don't think it would be in that direction, certainly not in size.

Our next question comes from the line of Mikhail Goberman of Citizens JMP.

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, kind of parallel to that, wanted to see what drove the sort of year-over-year increase in expenses from about $5 million to $6 million in 3 quarters.

Glad you asked that. Let's go to Slide 33, if you would. I'll give you a chance to get there. That is our expense ratio. And as you can see, it did bump up. So two things happened there. One, if you look at where it kind of was back in 2022, quite high, and we had a long downtrend. We got well under 2%. Management and staff were rewarded with bonuses this year as a kind of a reward for driving the expense ratio down. So two things to say about that. One, the awards are all 100% in shares, stock, no cash.

And two, it's not the kind of award I would expect to see repeated in the near future or the future at all. I don't 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. If you're familiar with our management fee structure, it's 1.5% up to $250 million, 1.25% up to $500 million, and then everything after that is 100 basis points. So we're 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 the capital by a meaningful amount. As I said, we had this kind of one-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's more of a one-off thing. I wish it weren't, 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, say, 1.7% or so, which is where it was a couple of quarters ago.

I'm showing no further questions at this time. I'll now turn it back to Robert Cauley for closing remarks.

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 can 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) 231-1400. Otherwise, we look forward to talking to you at the end of the third quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Orchid Island Capital First Quarter 2020 Earnings Call. also. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Melissa Fato, Office Manager. Please go ahead.

Good morning, and welcome to the First Quarter 2026 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 24, 2020. 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.

The 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 and the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K.

The company assumes no obligation to update such forward-looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward-looking statements.

Now I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, Melissa. Good morning, everyone. I hope everybody has had a chance to download our deck as usual. That will be kind of the basis of our call today. First off, I'd just like to walk you through the agenda as usual. .

Jerry Sintez, our Controller, will walk you through the financial results. I'll then go through the market developments, basically discuss briefly the market variables that impact our decision-making in our performance and some -- a few comments on those.

Hunter then will talk about the portfolio and our hedging positions, and then we will open the call up for questions. With that, I'll turn it over to Jerry.

Thank you, Bob. If we start on Page 5, we'll look at the financial highlights of the first quarter. For the first quarter, we had a net loss of $0.11 per share compared to net income of $0.62 in Q4.

Our book value at 3/31 was $7.08 per share compared to $7.54 at December 31. Total return for the quarter was a negative 1.3% compared to 7.8% in Q4 and we declared dividends of $0.36 during both quarters.

On Page 6, portfolio highlights. Our portfolio continued to grow. During Q1, we had an average balance of approximately $11 billion compared to $9.5 billion in Q4. Our leverage ratio increased at 7.9% compared to the $7.4 million $121 million 3-month CPR, during the quarter was 14.7% compared to 15.7% and our liquidity at 3/31 was 54.5% compared to 57.7%.

On Page 7 is our financial statements which are also presented in our earnings release last night, and it will also be available on our 10-Q later. And with that, I'll turn it back over to Bob for a discussion of the market development.

Thanks, Jerry. All right. I will start on Slide #9, as I get mentioned. We're just going to go through the market variables that impact our decision-making and our performance. So on Page -- Slide 9, we have the interest rate curve on the top of the page.

On the top left is the nominal or cash market. curve. On the right is a swap curve on the bottom is just the spread between 3-month treasury bills and 10-year treasuries. Just a few general comments.

Obviously, in this environment, the war headlines with respect to the war are driving performance of not just interest rates, but basically all risk assets. We kind of have competing forces at play.

On the one hand, you have forces that are inflationary in nature. Others are kind of impact growth or slow growth. The ultimate outcome is yet to be seen. We could end up with both. We could end up with a inflation with respect to the economic data we've been seeing. It's actually been fairly resilient, although I would characterize it as mix.

We've had some strong, some weak. But that being said, most of the data that we've seen so far is really for the pre-war period. So we have seen a lot to gauge the impact of the war. And I'd also like to point out that while the war kind of represents a headwind to economic activity and maybe supportive of inflation, there are also tailwinds impacting the economy.

The one big beautiful bill was passed last year. The government is running a very significant fiscal deficit. Both of those factors should be kind of supportive of the economy. And I think they go along way and explain why the data has been so resilient.

And kind of finally, as we're fairly far into Q1 earnings, the earnings have been very strong. So at least so far, the impact of the war seems to be modest. With respect to rates, as I mentioned, rates have been very stable.

If you look on the left, you can see that the curve has flattened. The market is pricing out most Fed cuts that were in the market 3 months ago or pre-war -- now there's actually nothing priced in, in terms of cuts for the balance of 26, a few basis points.

But the curve has been very stable. The impact of inflation is driving Fed cuts out of the market. and the impact on growth is keeping longer-term rates stable. On the right-hand side, you can see the swap curve, even more stable, same kind of flattening. I would say that the difference between these 2 is simply just swap spreads and if you look at where swap spreads are for some context, most spreads across the curve are at or slightly above their 12-month averages.

They have been moving in Q1. I'll say a little bit about that in a moment. Moving on to the next kind of variable for us. Obviously, mortgage spreads and the performance of TBAs, we do not own typically a lot of TBAs. We do own spec poles, but they trade at a spread to TBA.

So obviously, the performance of this matters. If you look on the top, you can see the spread of the current coupon mortgage to the 10-year treasury. This data goes back 60 years, so it gives you a lot of perspective.

As you can see on the right-hand side, for quite a while, mortgages have been tightening. I think it's noteworthy to note that's a pretty solid performance and also without the participation of 1 of the largest -- typically, 1 of the largest holders of mortgages, which are the large banks, they have not been active in the market and yet this market has performed well.

If you look at the extreme right, you can see the tightening as we all know, early January, President Trump put out a post on Truth Social, indicating that the GSE Fannie and Freddie would be buying up to $200 billion in mortgages this year, moving this gap tighter, that was in late January as we moved into February, the performance of the sector was still very solid.

At the end of the month, the war hit, we gapped wider. But as you can see, we've been tightening since. And so the way I look at that is that the tightening that we've seen in place for 2 years appears to be resuming in terms of the extent of the tightening our book was down about 6.1%.

We've got back a little under half of that. But this week, we've given back a little bit, but we basically recouped about half. With respect to the prices of TBAs on the bottom left, as we always show, these prices are normalized. So for each coupon, we started at 100, I just basically want to show the change over the quarter.

Obviously, the announcement by President Trump early in the month caused most mortgages to do very, very well. The exception being the orange line there, those are higher coupon mortgages a representative of higher coupons and they would be impacted by speeds the rationale for the buying of the GSEs is to try to drive spreads tighter, which would presumably impact refinancing driving it higher.

So higher coupons at poorly, then you see the impact of the war as we move into margin. Performance was all given up. Since quarter end, we've gotten some of that back, and we're pretty much back to neutral. With respect to the rural market, it's really with the exception of 1 coupon and maybe 2, it's been pretty benign.

Most of the activity there was just driven by a presumed technical thing that those mortgages that flow was small and bid by the GSEs might have caused a squeeze, but that's actually gone away.

The next big variable for us obviously is implied volatility in interest rates. Obviously, mortgages have a lot of all component, so when all is high, mortgages do porting when ball is low, they do well. And as you can see on the top, this chart really basically goes back a year or liberation Day, April 2 of last year.

And you can see after the initial spike ball has continued to tighten, the onset of the wars drillbit higher, but we've come pretty much all the way back, so to the extent that Val stays at this type of level, this is very conducive for our business model. In fact, all of these variables, stable interest rates, low swap yields, and mortgage performance that's steady.

All of these are very conducive for our business model. Moving on to swap spreads, in particular, you can see on the left of Slide 12 that spreads have been moving more negative or tightening. That's bad for our hedges because it's offsetting the impact of them but then it's creating more spread for marginal cash investments.

As you see since quarter end, they started to wind back out. Of note, put on a trade during the quarter, whereby after TBAs had widened quite a bit after the war. We took a lot of our hedges out of TBAs and put them into a because they had tightened.

And since then, that trades work quite well. If you look on the right-hand side, you see the DV01 composition of the hedge book the green areas, it represents swaps. So that's higher than it was prior to that. So that trade has worked out quite well.

The next state variable, if you will, is refinancing activity. The current mortgage rate available to borrowers is around 6.4 depending on the day. As a result, refinancing activity has been fairly benign. We did have elevated levels -- as I mentioned, President Trump's announcement, ultimately, the yield on the 10-year treasury dip below 4% in late February, and we did see a couple of months of fast speeds.

But with the backup in rates since then, and mortgage rates sitting around 6.4%. For instance, on the bottom of the page, the gray area, the percentage of the universe that's refinanceable while it's higher, it's not high. and refinancing activity has been and we expect it to stay relatively benign.

Hunter will have a lot more to say about that. We talk about the current construction of the portfolio. How we see that evolving over time and how we're positioned with respect to prepayment levels. The final variable that I would talk about would be the funding markets I'm not going to say a lot about that now.

We'll talk about that later. But the short answer is that the funding markets are far more stable than they've been. We had actions taken by the Federal Reserve, for instance, to put in place a reserve management policy, whereby mortgages as they roll off the Fed's balance sheet are invested in bills, spreads available to us are at very attractive levels, and we don't have the spikes that we've had in the past at quarter end or year-end. So pretty much all of the variables that impact our market, whether it's the level of rates, implied fall in rates, swap spreads, funding levels, everything is in a very good state, if you will, right now.

So it's very conducive and leaves us very bullish on the business model and levered MBS investing. With that, I will turn it over to Hunter.

Thanks, Bob. The investment portfolio section of the presentation starts on Slide 16 if you're following along, mortgage spreads have continued their tightening trend that began following the volatility we saw last April, and that move accelerated meaningfully after the President's GSE purchase announcement on January 8. .

This drove spreads tighter by roughly 20 to 25 basis points versus swaps, almost instantaneously, within a couple of days. As we moved into February, those spreads began to drift a little bit wider and that wide accelerated sharply around the geopolitical events in the Middle East jumping as much as 40 basis points wider at its peak versus the pipes of the quarter.

We closed the quarter near those wides and have begun seeing some stabilization since then spreads have retraced about 20 basis points. So we had a pretty volatile quarter in terms of spreads.

First tightening sharply by 25 basis points before blowing of 40 and then quarter-to-date so far in April, we've tightened back in around 20 basis points. So against that backdrop, we remain focused on maintaining a highly liquid 100% agency portfolio and deploying capital opportunistically through this volatility.

We raised approximately $108 million in the quarter and an additional $28 million in early April. Importantly, we were able to deploy that capital at attractive levels. Roughly roughly half the capitalized spreads drifted off their type levels and at levels similar to those we saw in December.

And then the remainder of the capital we deployed after the big geopolitical shock. In total, we purchased approximately $1.6 billion of agency specified pools and TBAs with a focus on call-protected collateral including loan balance stories, borrower credit attributes and structures that we expect to perform well across the recent rate range.

The net impact was a modest reduction in the weighted average coupon of the portfolio, reflecting a shift slightly towards slightly lower coupons. That included $182 million of loan balance, $4.5 million, $624 million of 5s, $425 million of FICO and LTV 5.5 million and $138 million of 6 million is mostly in for GEO pools and FICO.

We also purchased $250 million of 15-year $4.5 million -- and as Bob alluded to, we've swapped out some of our TBA shorts that we had on in Fannie 30 or 5.5% for swaps at the kind of local wides.

The net effect, as I've mentioned, was a slight reduction in the weighted average coupon of the portfolio from 5.4% to 5.5. More broadly, over the past several quarters, we've continued to refine the portfolio towards production coupons, say, at dollar prices around $99 million to $101 million. So this encompasses the kind of 5% to 6% range of coupon buckets, and that's where we see the best balance between carrier duration and convexity.

As we've discussed, we've reduced our exposure to lower coupons that tend to exhibit greater spread duration and become -- can become a source of volatility during risk of periods, particularly when money managers are actively selling.

At the same time, we remain disciplined around prepayment risk. The portfolio continues to be heavily concentrated in specified pools with strong call protection. At quarter end, approximately 92% of the portfolio was backed by specified pools with at least 10 ticks of pay up.

Turning to the funding side of the equation. slide 19, you're following along. Our funding conditions continue to improve over the quarter, allowing us to more fully realize the benefit of the December 10 rate cut, both SOFA relative to fed funds and our observed repo funding spreads to SOFR continue to grind tighter.

A reserve management operations help stabilize the funding market. At present, we're currently funding in the 11 to 13 basis point range over silver which is quite a drastic improvement from what we saw in the fourth quarter.

Turning to the hedge positions. From a hedging perspective, we maintained a pretty consistent framework. The hedge coverage is approximately 65% of our repo balance and we continue to put an emphasis on in interest rate swaps. At March 31, our duration gap was approximately 0.07 years which equates to a net long DVO1 of roughly $375,000, I think $372 from the deck in the earlier slides.

In terms of partial durations -- our hedge profile remains barbelled between the 2- and 3-year part of the curve and the 7 10- to 10-year part of the curve. We do have a lot of swaps on in the mill, but that's just kind of -- if there were if I were to suggest there was a skew it to the front and longer end of the curve.

By the long end, I mean 7 to 10 years. Prepayment speeds did pick up during the period during the quarter in response to rates reaching local lows speeds increased from 10.9 CPR in January to 16.3 CPR in March.

Looking forward, we expect speeds to ease in the coming months. I think Water Street projections are for the prepaid universe have come down by approximately 15% expected to see as much, if not even a greater impact on us owing to the fact that we own more recent production in most of the portfolio -- rates of on hire.

So that's really going to be the emphasis -- the impetus for that slowdown in speeds. From a positioning standpoint, the portfolio remains somewhat defensive against the risk the risk of inflation reaccelerating, the 6% higher coupon portion of the portfolio, which represents over 40% of total mortgage assets performed very well during this most recent sell-off. We did less so in the earlier parts of the quarter when rates were rallying.

That said, the marginal capital, we continue -- we expect to continue allocating towards production coupons, as I alluded to, first discount or first premium part of the stack. This is going to start to gradually reduce our exposure to higher premium assets over time.

Looking forward, while spreads have retraced from their recent wides, we continue to see an attractive environment for agency mortgages at quarter end, the model returns for combined portfolio, inclusive of hedges and at current funding levels were between 15% and 17% range return on equity.

We believe those returns can move higher if prepay speeds do a fact trend lower or if the outlook for additional Fed easing reemerges.

With that, I will turn it back over to Bob for his concluding remarks.

Thanks, Hunter. Just to kind of give you a kind of a quick rehash. Over the course of the last 4 or 5 quarters, Orchid has more than doubled in size. There have been benefits to us. As a result of doing that, we've been able to lower our cost structure.

I would like to just turn your attention before I move on to any further points to Slide 31. Buddy would quickly turn to that page. -- out. What we have on Page 31 is basically 10 years of data I'm sorry, 32 -- this is 10 years of data on the top, we show our stockholders' equity going back to 2015.

As you can see, it's been a very -- and by the way, this is annualized data. So this is annual world data, not annualized annual data. So the change year-over-year for both equity and our expenses. And as you can see, our shareholders' equity has grown by 442% over the last 10 years, which is an annualized growth rate of 18.4% and our expenses have grown 159% or at a 10% annualized rate.

The benefit of that or the option to that is on the next slide, Slide 33. And you can see where our expense ratio is, again, that's for calendar year 2025 as we move through the year, we will probably start to show this on a 4-month rolling average until we get to the end of the year when we can fully update the graph.

But as you can see, our expense ratio has moved from just under 3% or our G&A load to 1.7%, which is, as you know, very low in regard to most of our peers and actually only lower than all but the 2 largest peers. So that's one thing I wanted to point out.

With respect to the portfolio, just to kind of quickly summarize what Hunter said, we expect prepayments to be benign, but we still have a very well call-protected portfolio with a very modest premium dollar price.

Hunter mentioned that returns in the sector are approximately mid-teens, call it, 5, 15 to 17. The current yield on the portfolio with a $0.10 per month dividend and the current book value is very much in that exact same range.

So unlike last year, the yield of the portfolio in terms of the dividend divided by the book and returns in the market are very much in line. So to the extent that we were deploying new capital, it would not have any meaningful impact on the yield of the portfolio.

And as we just alluded to, as we've grown the portfolio and the company, our expense ratio tends to come down. So -- and that -- the bottom line of that basically is that growth is accretive to earnings.

With respect to our outlook, the market is very appealing to us. Returns are still attractive, they're not as attractive as they were a year ago, but they are still quite attractive in all of the variables that matter to us, interest rates, the level, the level of swap spreads versus yields on assets.

The level of implied vol, the funding markets, everything is in a very great state of state. And therefore, we are quite bullish on the market going forward. The big variable, of course, is the war. Nobody knows how that's going to play out.

But it seems my personal observation, which is the big tail risk going into the war was a massive escalation, meaningful and lasting damage to production capacity in the Middle East. It seems that, that risk is now much lower. I think that kind of explains why the markets have become pretty benign over the last week or 2, while we still react to headlines from the war generally, the risk assets have done well.

And I presume that, that's just because we think that the big outsized tail risk is quite low. So that's our outlook. With that, we'll turn the call over to questions.

[Operator Instructions] Our first question comes from the line of Jason Weaver with Jones Trading.

Bob, First, I noticed it looks like the effective duration of the portfolio extended a bit to about as of 3/31. Was that intentional tactical decision around the purchase of the GSE purchase announcement? Or maybe just a consequence of adding those belly coupons?

Yes, a little bit of both. And rates have drifted higher, the portfolio extended a little bit, and we're trying to sort of not add too much hedge at the local highs. So we don't mind that the portfolio duration drifts a little bit higher as we approach higher rates. .

In the beginning of the first quarter, we -- when rates were pushing much lower particularly in January and early on, we noticed underperformance and kind of higher coupons and wanted to make kind of a strategic shift to getting into some more 4.5 and 5 to have a little bit more balance. It's particularly true whenever we are at local highs in rates.

I would just add to that. getting you said, if you look on Slide 21, we did move more of the hedge book for swaps. And if you look at the average maturity, it did go out a little bit kind of coinciding with what Hunter just said. .

So we moved the average life of the hedge book out about 0.3 of a year. So move further out the curve. That was a conscious decision in response to the movements in the portfolio.

Got it. That makes sense. And then on the dividend, I know you're methodical about this, and it's obviously never easy to make the decision to make a cut. But talk about the sort of level of core spread income coverage out of floor that you need to establish the run rate going forward?

Well, yes, I'm glad you asked that. I know everybody is concerned with that. A couple of things in mind. We have a distribution obligation. So in '24 and '25, we were paying a $0.12 dividend, which at the end of the year, was 95% covered by taxable income.

A lot of that was driven by hedges, the performance of our hedges during the tightening cycle, where we had a lot of equity in those hedges which actually -- when you close them and they have significant positive equity, which was the case, that basically creates a liability, if you will, of future taxable income that has to be distributed over the remaining life of those hedges.

So for that reason, we had a dividend yield on a tax basis that was slightly above the GAAP earnings of the portfolio. But as we mentioned in the last call, as we move into the new calendar year, we reevaluate, we've seen the effect of those closed hedges.

One, we're often to be diluted just because of the growth of the company and the portfolio, shares outstanding. And so now when we appraise the current run rate, that's what drove us to move the dividend where it is.

In terms of where that is in relation to what the portfolio is generating, they're very much in line. So right now, the dividend yield is very much in line with what the portfolio is generating and what you can earn in the market today on marginal capital, all in that 15% to 17% yield range.

So they're all pretty much in line. And just -- next year, I will tell you, sometime in the first quarter, we will be again reevaluating where we see taxable earnings running for 2027 and to the extent necessary, we'll adjust, we don't, of course, have any insight into that at the moment.

But now based on where we see things running, it seems the prudent thing to do. And as I said, they're all in line now. We should be -- have our earnings of the portfolio, our dividend yield and the marginal return on capital all be pretty much in line.

[Operator Instructions] Our next question comes from the line of Mikhail Goberman with Citizens JMP.

Hope everyone is doing well. Just a quick 1 first. Could you update us on current book value? .

Books up about 2.5% as of yesterday. We've given back some this week. If you had asked me the same question on last Friday, it was a little higher than that. But this week, we've given back some of that. So we're up about 2.5% from where we were. .

Got you. And if I can just squeeze in 1 more. You talked about investment opportunities being pretty attractive at the moment. Assuming rates on MBS continue to kind of creep up higher? How does that sort of look to your portfolio construction of your premium portfolio going forward?

You say, right, do you mean mortgage rates available to borrowers?

Yes. .

That would be beneficial. That improves carry. We have a slight premium in the portfolio, as I mentioned, Hunter mentioned, about $1 $1.5 price -- we have call protection with Chanel in fact, to just take over. I mean, that's your question.

No, yes. Like I said in my prepared remarks, that the portfolio is over 40% in that bucket. I mean we have a couple of 7s. Those are -- have been paying -- the speeds were elevated, particularly in March. And as mortgage rates have risen and spreads have blown out a little bit with respect to rates available to borrowers.

We expect to see a corresponding slowdown in prepaid speeds. So yes, we're proud of -- we have intentionally skewed the -- both the portfolio and the hedge book to guard against kind of a rising rate environment.

Our house view has been quite as, I guess, sanguine as the rest of the market with respect to Fed eases. We've kind of long since held that. We didn't think we were going to get as many as what was pressed into the current market. That's played out.

And so now that we're at the kind of higher end of the range, we're looking to restack the deck a little bit -- with a little bit more of a skew towards lower coupons as we add additional capital and to the extent that we have paydowns.

So that's -- we'll probably buy more fives and kind of first discount type coupons just because of where we are with respect to kind of the recent range in rates.

And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Robert Cauley for closing remarks. .

Thank you, operator, and thank you, everyone. We very much appreciate you listening in on the call. To the extent you have another question that comes up or you don't listen to the call live and have a question that comes up after listening to replay.

As always, feel free to call a number here in the office is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the second quarter. Everybody, have a good day. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Orchid Island Capital Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Melissa Alfonso. Please go ahead.

Thank you, [ Didi ]. Good morning, and welcome to the Fourth Quarter 2025 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, January 30, 2026.

At this time, the company would like to remind the listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements.

Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, Melissa, and good morning. I hope everybody has had a chance to download our deck off of our website. As usual, that's what we'll be using for a basis of the call today. And again, as usual, I'll just walk you through the deck. I'm joined here today by Jerry Sintes, our Controller; and Hunter Haas, our Chief Financial Officer and Chief Investment Officer.

Starting on the third page, I'll just kind of give you an outline. Jerry will quickly go through our results and discuss our liquidity position. I'll then go through the market developments, which basically shape the market that we operated in and the impact that, that had on both our results for the fourth quarter and then also our outlook going forward into 2026. Then Hunter will spend some time discussing the portfolio hedge positions and so forth, developments during the quarter, positioning in the portfolio as of today. And then we'll have a few concluding remarks. We have some information in the appendices that we want to share with you and then we will take your questions.

So with that, I'll turn it over to Jerry.

Thank you, Bob. If we go on to Page 5, I'll begin with the financial highlights for the fourth quarter. During the fourth quarter, we earned $103.4 million in net income, which equates to $0.62 per share compared to $0.53 in Q3. Our book value at the end of the quarter was $7.54 compared to $7.33 at the end of Q3. Stockholders' equity at the end of Q4 was approximately $1.4 billion. We paid dividends in the quarter of $0.36, which has been the same rate for a couple of years now. Total return for the quarter, which takes into account the change in book value and the dividend, was 7.8% for Q4 compared to 6.7% for Q3.

Turning now to Page 6, we'll look at some of the portfolio highlights. During Q4, we had average MBS of $9.5 billion compared to $7.7 billion in Q3. At the end of the year, that the actual balance was $10.6 billion, so we grew a lot approximately 27% during the quarter. Our leverage for Q4 was 7.4%, which is the same as Q3. Liquidity during the quarter -- at the end of the quarter was 57.7% and 57.1% at the end of Q3. That's a little higher than our historic norms, which are usually around 50%. The reason for that is primarily because of lower haircuts, which are around 4% at the end of the year. Prepayment speeds for the quarter were 15.7% compared to 10.1% in Q3. On Page 7 and 8, are our financial statements which you can read in the deck or in our earnings release last night.

And now I'll turn it back over to Bob.

Thanks, Jerry. I will start with the market developments on Page 10. The top left is the treasury curve here. This curve is actually a very good place to start because it basically encapsulates what went on during the quarter, recognizing that these 3 lines just represent snapshots, if you will, of the cash curve as of 9/30, 12/31 and 1/23 or one week ago. In fact, rates were more or less steady throughout the quarter as rates traded in a very tight range, realized interest rate volatility, obviously [indiscernible] for low and implied vol in the [indiscernible] market was declining throughout the quarter and really has declined for quite some time.

What's behind this? Well, typically economic data for one as it comes out, tends to drive interest rate movements prior to the quarter. The data was basically considered to be suspect because of well discussed issues at the various MMEs that collect the data, and then we have the government shutdown on 10/1. So basically, you went from having suspect data to no data at all. And then when the government reopens, you had very much delayed data that was still considered suspect. So basically, there is not much to drive interest rates other than geopolitical events and the political events, which did, but not meaningfully so. If you look to the right, you can see the swap curve is fairly similar but it did move more, and that's all swap spreads, and I'll discuss in a few moments why that is, but we basically had swap spreads moving up as in less negative, and that's why you see movement in the curve from the red line up to the blue and the green line. If you look at the spread between the 3-month treasury and the 10-year bill, really hasn't changed much for over a year, but there's been movements elsewhere in the curve.

Moving on to Slide 11. This is a very germane to what's going on. The spread of the current coupon mortgage to the 10-year treasury. As you can see, this is a very long look back period. This goes all the way back to 2010. And the thing that sticks out very obviously is how much we've tightened of late and especially since year-end. The most recent data point there is last Friday, you can see it's at about 80 basis points. If you look back to the period, say, between the taper tantrum in '13 up until the outbreak of the COVID pandemic, mortgages trade in a very tight range, centered at approximately 75 basis points, say, and we're basically there. And obviously, the most recent development which just becomes evident, on the bottom left.

When you just look at these prices, this is again same chart we always use, there is a selection of 30-year fixed rate mortgages, 3%, 4% or 5% and 6%, and these are normalized prices. So this basically shows you the price movement relative to the starting point at the beginning of the quarter. And as you can see, especially with respect to lower coupons, they had a very good quarter. And then if you kind of try to focus in on what happened around January 8, when the administration announced that the GSEs would be buying up to $200 billion of mortgages, performance was affected. In the case of lower coupons, they went materially higher. And in case of higher coupon 6s, that gave out performance and the reason -- remember, these are TBAs, not [indiscernible].

And the reason that the higher coupon suffered is simply because the anticipation is that the administration's goal is to lower mortgage rates, increase affordability of housing, which would drive prepayments faster. So current market pricing is reflected in the rural market for any of the higher coupons 5, 5.5 and 6 and above are for very, very fast speeds and lower coupons did very, very well.

Looking to the right, you can see in the rural market, especially the role in the 3.5 [indiscernible] really much on fire, very strong. And this reflects the relative value trading because these coupons are below par and not going to be started to prepayments. And if the market rallies, these will be obviously the targets for purchases. So they've done extremely well. So they're technical they're strong.

But that being said, going forward into 2026 to the extent that plays out and those coupons are produced because rates are lower than the supply will overwhelm the demand and that relative performance [indiscernible] but that very much remains to be seen.

Moving on to Slide 12. I talked [indiscernible] about swaption volatility. And you can see that this trend is very, very clear and strong past year-end, even today, vol continues to decline. The peak that you see there on the top left, that's Liberation Day, early April of 2025. We all know what happened that day. But vol has done nothing but come off and continues to do so. And if you kind of look at it in a historical context going on the bottom of the page, we go back to 10-plus years now, we're pretty much back to the levels that we were at back during the days of the Fed rate suppression regime. When the Fed was using QE to keep rates artificially low in doing so, obviously, they suppress volatility and it was indeed suppressed very low for many years, and we're basically back to those levels.

What happens at this point on remains to be seen, but we are in a very low environment. And we know that mortgage is very much susceptible to [indiscernible] volatility because it affects option values, especially in prepayment models and the like, and the option value is very low, then mortgages can do well. And in fact, they have.

Turning to the next slide on Slide 13, we see a sample of swap spreads. The blue line is a 2-year swap and the purple line is a 10-year. And as you can see, going back through the quarter and really since the second half of the year, these have been moving higher or less negative.

Why is that? Well, the Fed announced at the October meaning that they were going to end QT, the market anticipated that swap spreads started to move. And then they announced in December, the [indiscernible] reserve management program in which they are going to be buying up to $40 billion of bills. And so the logic behind that is a recognition on the part of the Fed, that as the economy grows, that their balance sheet should grow in proportionate fashion, as a result, they will be growing. So they're taking out bills, which also helps bring the Fed treasury holdings in line with the outstanding universe of treasuries because historically, they have not owned bills.

And also has implications for the funding market because bills are an investment option for money market lenders and to the extent that the Fed is buying them that allows more funding available for repo, such as ourselves, repo borrowers.

Our hedge position, and Hunter will discuss this in greater detail later. But as you can see, we look at our hedge positions from the perspective of DV01 that's just our sensitivity of our hedge instruments to movements in rates. And you can see it's very heavily concentrated in swaps, and this is the reason why what we just discussed, we expect that this may continue for some time.

Moving on to Slide 14. These are the same [indiscernible] we've had for a while. As you can see, something has changed, but not much. On the top left, the red line is in the mortgage rate, but it's still at 6.38% and the refi index, while it's higher, it's not high. It's still quite low. And I think if you look on the right-hand chart, you get an idea why while mortgages have tightened substantially and we mentioned that the current coupon mortgage spread to the 10-year treasury was 80 or 90 basis points. The change is about 4.25. And these spreads and available mortgage rates to borrowers are still north of 6. So the spread for the borrower, not for mortgage-backed security, but for the borrower is still relatively wide. It is not tight as much as mortgage-backed securities have. As a result, mortgage rates available to borrowers are still close to 200 off the 10-year and therefore, refinancing activity, while it's picked up some, it's still not particularly high.

Chart 15, just basically the same picture I like to show. The red line just shows you the supply of money into, and the blue line is just the economy, GDP in nominal terms. And as the chart implies the economy is still awash liquidity the takeaway from this, I believe, is that it's hard to say that financial conditions are overly tight. And if you look at the economy, the GDP data, retail sales, there's not really weakened precipitously, and this might be -- help explain why that might be.

With that, that's the end of my discussion of the macro backdrop, I will turn it over to Hunter to discuss the portfolio.

Thanks, Bob. Turning to Slide 17. Just a few highlights for the quarter. During the quarter, we purchased $3.2 billion of agency specified pools. The breakdown of the purchases is $892 million in Fannie 5; $1.5 billion, Fannie 5.5; $600 million, Fannie 6s; and $283 million, Fannie 6.5. All these pools had some form of call protection primarily lower loan balances, loans that were originated in refined challenged states like New York or Florida and loans backed by borrowers with low credit scores, high LTVs or high [indiscernible] and the like, some sort of credit impairment that would keep them from being able to refinance as readily as borrowers that didn't have those constraints.

On the model yield, our acquisitions, we're in basically the low 5% range and we did sell some assets that were yielding mid-4s at the time we sold them. The model yield on -- I'm sorry, the repositioning enhanced our carry profile while mitigating our exposure to higher rates and spread widening as the higher coupon mortgages have much less spread duration sensitivity than the lower coupons that we sold.

Slide 8 -- Slide 18, it's a new chart we just put in to kind of recapture what happened throughout the course of the year. Over the course of 2025, we experienced substantial growth doubling both our equity base and MBS portfolio. Important to note that this growth occurred at a time when the MBS spreads were at historic lives, allowing us to build a portfolio with strong long-term return potential. The line on the slide shows a time series of Morgan Stanley Index that attracts 0 volatility spread over the treasury curve for a hypothetical 30-year MBS priced at par. And the green shaded area highlights the timing of our asset purchases during 2025 and into early 2026.

Over 75% of the $7.4 billion in acquisitions that we made during the last year and a month or so, occurred at a time when this index was well over 100 basis points. On average, the spread level of all of our purchases was 108 basis points. And that's the weighted average of the Morgan family index at the time we made the acquisitions, I should say.

Turning to Slide 19. As you can see, we talked about this in the past, our portfolio evolution as mortgage spreads tightened throughout the year, we increased our allocation to production in premium coupons, primarily 5 through 6.5. This strategic shift reflects the fact that lower coupon MBS, which carry greater spread sensitivity, duration, significantly outperformed higher coupon assets during -- over the course of the last year.

Initially, we executed this sort of strategic portfolio shift through acquisitions, deploying new capital into higher coupons. And then in mid-December, we took a more active portfolio management approach by actually selling lower-yielding 3s, 3.5s and 4s, reallocating that into higher carrying lower duration and spread duration pools in the 5% to 6.5% range, as I previously discussed.

Turning to Slide 20, just to make a few quick notes about our funding costs. Our funding costs saw a meaningful improvement over the quarter, driven primarily by Federal Reserve policy actions. We benefited from 2 rate cuts and the Fed's announcement that it would begin purchasing $40 billion in treasuries per month, plus an additional roughly $15 billion tied to MBS paydowns through its reserve management purchase program.

Orchid's average repo rate declined from 4.33% at the beginning of the quarter to 3.98% by quarter end. After the December 10 FOMC meeting, SOFR initially settled into the upper 3.60s before spiking to 3.87 into year-end. During that time, repo spreads to SOFR also widened kind of pushing from the mid-teens into the low to mid-20 basis point range. So we had a little bit of funding pressure going into year-end. Since year-end, the funding environment has improved markedly. SOFR settled in the 3.63 to 3.65 range and Orchid orchard repo spreads have trended to the 14 basis point area, call it. So we're kind of on track to turn over the repo booking sort of the 3.8% range going into the next few months. So we don't really expect any Fed cuts before the next governors sworn in.

Turning to Slide 21. Just want to overview of the hedges. Our hedge notional remained relatively stable over the quarter. At the end of the quarter, we were 69% of outstanding repo, just slightly lower than the 70% it was at the end of the third quarter. The unhedged notional portion of the portfolio stands to benefit from a material decline in short-term rates and tighter repo funding spreads as monetary policy continues to ease. As [indiscernible] weakened and mortgage spreads tighten, we also adjust our hedge positions by increasing our TBA shorts, primarily in 5 through 6.5s as mortgages tightened, we put on a little bit of basis hedge it's not material, but just sort of lagging in as we saw mortgages had tightened for several months in a row. We added pay-fixed swaps on the very front end of the curve, further improving our downside rate protection.

Slide 22 [indiscernible] in a little more detail. This slide helps visualize the hedge adjustments I just discussed. At the end of the third quarter, we have virtually no outright TBA hedges. The short positions you see here reflected 0 coupon swap we had in place, which we've maintained for several months. Now as shown here, we're outright short 5.5s and 6.5s and we put on a small short of 5s in early January.

On the treasury hedge side, we continue to reduce our exposure there. It's reflected in the top left table. And then as we acquired new specified pools, we hedge them almost entirely with interest rate swaps. And we were focused more on the very front end of the curve as rates come down, the duration of the portfolio shortened and we put these hedges on at a time when there were still several rate cuts baked into 2026, which is [indiscernible] a little bit since.

Net of the unwinds that we did during the quarter, we added $950 million 2-year pay-fixed swaps, $800 million in 3 years, $90 million 5 years and $75 million in 7 years. This strategy is aimed at locking in, as I said, market predicted rate cuts will fine-tune the hedge book to account for the shorter net duration of the portfolio.

Slide 23, just going to kind of quickly go over some of the risk metrics in the portfolio. We like to follow these measures [indiscernible] portfolio duration remains low at 2.08%. That's a direct result of our higher coupon SKU, which carries less duration exposure than the lower coupon alternatives. The shorter duration profile is a key part of our risk management strategy performed better in a sell-off or spread widening event, which we think could occur. It offers us more defensive positioning than the 3, 3.5 and 4, which we sold in December.

On the other hand, this profile is -- will benefit less from further tightening, which we've actually seen in January, which is consistent with our modestly lagging performance versus what some of the other -- some of the peer group has reported since [indiscernible] announcement in January, one of the GSEs to purchase $200 billion more MBS in their retained portfolios.

Also, I just want to note the OES shown here. [indiscernible] the 6.5% remains quite attractive in the 50 to 60 basis point range, reflecting our strong call protection in our portfolio. For comparison when we published Q2 earnings call deck, the same OAS levels were at least 20 basis points wider. This tightening reflects improved technical and more constructive talent and agency MBS markets but also speak to how well timed our 2025 purchases were.

Slide 24. I'll discuss the interest rate risk profile. And you see we continue to maintain a very flat interest rate profile. This portfolio has some negative convexity. This is reflected in the fact that both the plus 50 and minus 50 interest rate shocks show small mark-to-market losses. It's a natural result of hedging of [indiscernible] agency MBS asset with more linear instruments like swaps and futures.

December 31, our [indiscernible] stood at 122,000 long. As of now, more recently, it's increased slightly to 178,000. The duration gap also moved modestly throughout the fourth quarter. It was negative 0.7 years at 9.30, 0.12 [indiscernible] and currently stood at approximately 0.17 years.

Turning to Slide 25. Prepayment speeds were major focused during the fourth quarter, especially given the relative underperformance of up in coupon TPAs. However, as we've emphasized in the past, Orchid is exclusively invested in specified [indiscernible] with call protection. And this positioning insulated us from the more dramatic impacts seen in the TBA markets. That said, [indiscernible] did trend a little bit higher in the quarter, particularly for 6s and higher coupons, which reduced carry slightly and trimmed yields in those positions.

Looking forward, we expect prepay speeds to moderate modestly, which would improve carry, and we continue to closely monitor in light of the potential Fed actions and influence of related policy headlines that could put a little bit of upward pressure on speeds. But I think that most of that is probably baked in at this point.

To wrap it up, 2025 was a great year for us. We took advantage of the dislocated market and stay -- while staying very disciplined with respect to risk and liquidity. We raised capital when spreads were wide, put it to work in production coupons and call protected pools that should deliver great carry with lower interest rate sensitivity. We continue to manage our leverage tightly with a year -- we ended the year with a very flat duration profile and our hedging where we see the most risk, which has continued to be sort of into reignition of inflation type of bare steepening rate shock scenario that's where we think that companies like ours get pinched the hardest.

So with that, I'll turn it back over to Bob for his concluding remarks.

Thanks, Hunter. Thank you very much. Just a couple of things I want to go over. Just kind of spend a few moments just talking about our outlook. Hunter did a very good job of disclosing -- discussing how we're positioned and our hedge outlook and so forth. But it seems -- even though mortgages have tight quite a bit, based on what you see in the market and the sentiment in the market, it seems that it could continue, especially if you look at alternative assets available to multi-sector fixed income investors, investment-grade corporate spreads are at or near the highest levels we've seen since the late '90s, high-yield spreads tight as well. And there's at least a prospect of the GSEs becoming more active. I think it's debatable how much $200 billion per year represents in terms of an increase because what we see their current run rate is not far from that. But in any event, to the extent they become -- stay there, become more active, you could see mortgages tighten further from here.

And then with respect to just the rate outlook, generally speaking, and what would be on the horizon that would make you think we're going to see a meaningful change, there isn't anything really there now, although those are [indiscernible]. So to the extent we kind of stick around here and mortgages continue to grind tighter, the portfolio should do well. Everybody in our space has benefited from the benign rate environment in the fourth quarter and really 225 generally. We could see a continuation of that. And until we get the next black swan event or shock, it should remain a decent environment. And certainly, compared to a year ago, mortgages aren't as attractive. But that being said, I don't think it's unrealistic to think we could see some further tightening.

One thing I do want to point out though, which is, I think, very important. I want to turn your attention to Slide 7, and we discussed this. Jerry went over this briefly. But what I want to point out, if you look on Slide 7 in our balance sheet, you can see that the company basically doubled over the course of the year size-wise. So whether it's shareholders' equity or our total assets, they basically increased by a little over 100%.

If you look at the income statement for the year on Slide 8, you see that our expenses were up much less than 100%. Now you could argue that, that's somewhat misleading because the growth occurred over the year. And what's more relevant is kind of your run rate at the end of the year, which would be consistent with the current size, that's a valid point.

So if you look at the income statement on the prior page, Page 7, for the fourth quarter, you compare the fourth quarter of '25 to the fourth quarter of '24, that should capture the lion's share of that growth. And indeed, our expenses did go up, but certainly far, far less than double.

And so now I want to turn your attention to a slide in the appendix which is in there, Slide 33. On Slide 33, this is what we kind of our expense ratio. So basically, this is all of our G&A expenses inclusive of our management fee in relation to our shareholders' equity. And as you can see back pre-COVID we were running in the high 2s, close to 3% then we have the COVID breakout and then, of course, this prolonged Fed tightening cycle, which forced some deleveraging and our expense ratio got up over 5.

But now we're running -- our current run rate as of the end of 2025 is 1.7%. I'm not going to name names, but we all know that there are 2 other agency REITs out there that are substantially larger than us and their expense ratios are not meaningfully below that. So when you get our 10-K next month, you will see, for instance, that our management fee did go up, in fact, over the course of the year, but the rest of our G&A expenses only increased very marginally.

So we have been controlling expenses and allowing the company to grow obviously. And this is the byproduct. This is the benefit of that is bringing the expense ratio down. So that just makes the company more profitable on a go-forward basis, all else equal.

And then the final thing I want to bring your attention is, given that it's year-end, on Slide 42, this information has been lifted right off of our website. And on the bottom of the page or on the top of the page, you see the dividends for 2024 and 2025. And as you can see, for every month, the dividend was $0.12. The next column, tax total ordinary dividends, that's basically taxable income derived dividends and then the nondividend distribution and the second to last column, that is just the return of capital. So that basically tells you that in the case of 2024, that 95.2% of our dividends were derived from taxable income. And in the case of 2025, 95.0% were derived from taxable income. So the dividend was $0.12 per month for the year. And basically, we were distributing all of our taxable income. Had the dividend been say, for instance, $0.11 instead of $0.12, we would have slightly underdistributed our taxable income and either had to make a special dividend at the end of the year or opted to potentially pay tax on the undistributed earnings.

So I just want to bring us to your attention, show you that the dividend policy does reflect current taxable income, both for the 2025 and 2024, and that our dividend in relation to the tax income is very slightly over distributed less than 5% last year and 5% this year.

So with that, I will turn the call over to questions. Operator?

[Operator Instructions] And our first question comes from Mikhail Goberman of Citizens.

A couple of questions. I guess we could start and forgive me if I missed this, I dialed in maybe 3 or 4 minutes after 10. Any update on current book value?

We do not give that. We have accrued and reflected a dividend in our current book. So our book is up just or so slightly reflective of the dividend. Absent the dividend accrual, we'd be up, I think, 1.6%. We're basically off just slightly, inclusive of the accrual of the dividend.

Inclusive of the dividend. Okay. I was wondering if I could get your thoughts on prepays. Going forward, obviously, the CPR went up quarter-over-quarter given the portfolio construction, but also prepays with respect to your prepaid protected portfolio and what kind of premiums you guys are paying on those on those prepaid protected pools [indiscernible].

I'll say a few words, and then I'll turn it over to Hunter. I would say that the securities in the portfolio, we targeted par to slight premiums as you can see in the charts 5% and 5.5%, 6% and lesser extent, 6.5%, but it's mostly 5.5% and 6s. And those are modest prepays, we're not paying up for the highest forms of protection. So the premiums have been -- mindful to keep the premiums kind of from being too high.

I'll turn it over to Hunter [indiscernible] to say a few words about the prepay outlook beyond the next few months.

Yes. So over the last couple of years, we've really tried to focus on I'd say the bulk of our acquisitions have been just sort of like the first premium coupon or the first discount coupon. And we were, at times, able to even at 7s using that strategy. So from a historic cost perspective, we've always been very tight, not getting too far out in the premium land. And we focused really more on kind of the mid-tier call protection, we think that the old low loan balance, 85, 110ks, those are really expensive stories. New York have gotten pretty expensive. We've been really focused a lot more on sort of leaning into this so-called K-shape recovery by focusing on more credit-sensitive borrowers.

I think that they have a hard time refinancing, doing buying things like high LTV, first-time homebuyer type of tools, we've focused on geos like the State of Florida is great. There's a tax that's curative for refinancing, but also home price depreciation is really sort of helping out with the portfolio there. So we've seen very good performance, especially after the Trump announcement about the GSEs that sort of the knee-jerk reaction was that the higher coupon MBS TBAs didn't perform very well at all. But once things kind of stabilize, we've really seen good appreciation in all of those specified pool stories underlying those coupons.

And as I alluded to in my prepared remarks, we've taken advantage of the fact that roles have weakened in order to shed a little bit of basis exposure because those roles are so cheap now. It actually makes a little bit of sense to be short the TBA and long the specified pool. So that's kind of how we're thinking about things.

Yes. Just to add some number to that. If you go to Slide 34, and you can do this [indiscernible] right now. But the weighted average current price at year-end was basically 1 or 2.5%. So that would be all in price. By comparison, the price at the end of September was a little over [indiscernible]. So we shifted the portfolio up in [indiscernible] the weighted average coupon at the end of the third quarter was 550. It's now 564, so slightly higher, but of course, the market has moved. So the price is at basically [indiscernible] is the price. So yes, it's a premium, but we've tried to avoid real high premiums. It's just not that kind of market.

I mean going back to post-COVID, we find New York 3s with like dollar prices of [indiscernible] and change, right? So we just don't have the kind of premium in the marketplace now that owing to the kind of the relatively high nature of interest rates. So it will compress earnings to the extent that we see an acceleration in speeds. And -- but I think the combination of the call protection we have in the portfolio and the fact that we just don't have huge premiums on, is not going to really move the needle too much.

I would just add that -- if you look at the roll market, 5.5, 6s and 6.5, the speeds implied in those roles for the next few months are extremely high, 5560 CPR. So that's fine for the next few months. But if you kind of step back and look at the balance of the year, I think a number of market participants ourselves included, don't really think we're going to see a lot more Fed cuts. I think the economy is quite strong. The inflation is good [indiscernible].

Now let's think about that. So the current Fed funds rate is $3.64 in the 2-year yields like $3.54. So if you don't think the Fed is going to cut rates much over the next 2 years, do you really think the 2-year should be yielding lower than Fed funds.

Second question you might ask is, given that, do you think that, for instance, [indiscernible] is going to invert? I don't think so. So the current 10 years at 4.25%, if the 2-year moves higher, unless that curve flattens, the 10-year should also move higher. So now you come to 2-year tenure going from 4.25% to whatever, 4.50%, the current mortgage rate available to borrowers is 6 or low 6s., right? And so if rates are going to go higher over the next year, that rate is not going down unless mortgage rates, borrowers tightened substantially and I don't know how likely that is.

So if you have the available borrowing rate at 6%, 6.5%, pushing up to 7%, a 6% mortgage backed security implies basically a 7% gross WACC. That's not that in the money, especially if mortgage rates push to 650 and higher. So are they going to sustain 50 and 60 CPR? I don't know. But I think there's kind of an inconsistency in market pricing between the mortgage dollar roll market and the, say, for instance, market pricing of Fed cuts. There's -- they don't seem to [indiscernible]. Anyway, that's my two cents.

That's very helpful. If I could squeeze in one more. I appreciate the good work done on getting expenses down. How much more the available capacity you guys have for driving that down further going forward, do you think?

Well, it's the -- I probably get you the numbers, maybe we'll try to work on it for the next quarter, but almost all of the increase in our expenses was management fee. Unfortunately, we don't have detailed line item expenses here. But from memory, reading through draft, nonmanagement fee expenses were only up in the few hundred thousand dollars. So it's gotten to a point that pretty much it's the management fee and our marginal management fee is 100 basis points, right? And our management fee is $250 million. The first layer is up to $250 million and there's -- that's 150 basis points then from $250 million to $500 million is [indiscernible] and everything over $500 million is 100. So now every dollar of capital we raise, the marginal management fee is 100 basis points and the nonmanagement fee expenses are going up very modestly and low percentage points.

So just if we double from here, I don't have -- I have to run the numbers, but it's -- that trend would continue. I don't know how much lower it goes, but it should be asymptotic towards 1%, right? If the capital were up $500 billion [indiscernible] I mean management fee would be basically 100 basis points plus whatever your audit fee and your legal fee and whatever. So that's kind of where it could go.

I'm showing no further questions at this time. I'd like to turn it back to Robert Cauley for closing remarks.

Thank you, operator. I hope we didn't scare everybody off the call at length of that answer. But to the extent anybody has call or questions to come up either because you didn't have time to answer them, ask now or you didn't listen to the call and you want to catch us later, please feel free to do so. The number in the office is (772) 231-1400. Otherwise, we look forward to talking to you at the end of next quarter. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Orchid Island Capital Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

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 Alfonzo. Please go ahead.

Good morning, and welcome to the Third Quarter 2025 Earnings Conference Call for Orchid Island Capital. This call is being recorded today on October 24, 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 on the management's good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward-looking statements.

Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thanks, Melissa. Good morning. Hope everybody is doing well, and I hope everybody has had a chance to download our deck as usual. That's what we will be focusing on this morning. And also, as usual, turn on Page 3, 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. Then Hunter, I will turn it over to Hunter who'll go through the portfolio characteristics and our hedge position and trading activity, and then we'll kind of go over our outlook going forward. And then we will turn it over to the operator and you for questions.

So with that, turn to Slide 5, Jerry.

Thank you, Bob. Slide 5, we'll go over the financial highlights real quickly. For Q3, we reported net income of $0.53 a share compared to 29% loss in Q2. Book value at 9/30 was $7.33 compared to $7.21 at June 30. Q3 total return was 6.7% compared to negative 4.7% in Q2, and we had a $0.36 dividend for both quarters.

On Page 6, 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 at 10.1% for both Q3 and Q2. And our liquidity was 57.1% [indiscernible] parity, up from 54% at June 30. With that, I'll turn it back over to Bob.

Thanks, Jerry. I'll start on Slide 9 with market developments. What we 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 3 lines in each, red largest represents the curve at June 30. The green line is as of 9/30 and then the blue line is as of last Friday. And the bottom, we just have the 3-month treasury bill versus the tender note.

So what I want to point out though, basically the curve is just slightly steeper for the quarter, just reflecting the fact with the deterioration labor market, the market's pricing in Fed cuts, so the front end of the curve has moved. If you look at basically the movements on these 2 lines, I think 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 fourth of July when President Trump signed a new law, the One Big Beautiful Bill Act. And initially, the market sold off 10 years point slipped off by about 25 basis points. And at the end of July at the Federal Open Market Committee meeting, the Chairman was actually fairly [indiscernible] that was on July 30. And then quickly on the first of August, the [indiscernible] payroll number came out it was weak, but also it was very meaningful downward provisions and that kind of started the extremes, which started to pin a very clear picture of a deteriorating labor market, the QCEM, which are the revisions to prior payroll numbers through the first quarter of 2025.

We're much more negative than expected. And then, in fact, ADP in the last 2 months were negative. So that changes the picture that changed the way the Fed looked at the world. And then the market started to price in Fed easy, and that's what you exceed here, which 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 -- and basically, you see really what would be described as just a ground for yield. There are a few securities that offer a yield north of 4% and the long end of the treasury curve has seen pretty good performance quarter-to-date. The bid continues.

In fact, that's even present in the investment-grade corporate market where in spite of the fact, if credit spreads are very tight, you're still seeing strong demand. And it's probably just because there's a lack of alternative investments that you can buy with that kind of a yield. But I guess if I had to summarize it, from our perspective, it was actually a net -- a very quiet quarter rates were essentially unchanged. And importantly, law was down, and I'll get to that more in a minute. And then of course, the Feds in place. So 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 in a 10-year and then on the bottom, we have 2 charts that just kind of give you some indication of mortgage performance. The 10-year treasury is a typical benchmark people look at when they think of occurrences on mortgage or to kind of appraise mortgage attractiveness and this makes it look like the [indiscernible] is off the lowest 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 tap since then, it's 100, but 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 fact, it's about half. Most street shops at the hedge ratio for the current coupon, somewhere around in here of 5 years -- or 5 or half of the 10 years. So a more appropriate benchmark might actually be a 5-year treasury and of course, swaps.

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 7-year swap in particular, and 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 7-year swap. That's kind of the center point for our hedges and this is a 3-year look back. And 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. Whereas with respect to the tenure, we've broken through that. I think that just reflects the fact that the curve is modestly steep, and you're basically benchmarking a 5-year asset against a 10-year benchmark. And so it looks like it's tightening when, in fact, it really isn't. And the other thing I would point out to, and we've talked about this in the past as well.

If you look at Slide 28, I think this is important is what this shows are the dollar amount of holdings and mortgages. The red line represents the Federal Reserve and of course, they're going through Q2. So that number just continues to decline, but the blue line is holdings by bank, and they are the largest holder of mortgages that there are. You could see this line while 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. And I think until they get meaningfully involved, mortgages are not going to screen tighter. So there is some attractiveness, if you will, in the mortgage market. And 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.

And as you saw, we did tighten -- and if you look at this chart on the left, one I show every time, it's normalized prices for 4 select coupons. So all you do is you take the price at the beginning of the period, you said it to 100. And you can see most of the move upward was in early September. And the reason I point this out is if you think of it this way, but with the bank's absent, the marginal buyer of mortgages are basically either money managers or REITs. And what we saw around that period were in addition to the prolific ATM issuance by REITs, we also saw 2 preferred offerings by some of our peers and a secondary by another at large.

So those were kind of chunky issuances. And 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 5-year treasury, you see a spike down right around that day. It was over about a 2-week period. At same time, we've kind of plateaued. And so mortgages have still retained some attractive carry. Hunter is going to get into that in more detail. I don't want to bring on his grade, but I just want to point out that mortgages, while we had a good quarter, are still reasonably attractive.

On the right, you see the dollar roll market. Generally, dollar rolls are impacted by anticipated speeds with the rally in the market. That's become a big issue. And I would just point out one of these. If you look at the little orange line, again, this is like a 1-year look back. That orange line represents the Fannie 6 role. And you can see towards the end as we entered September, with the rally that rolls cut way off and the market's pricing in extremely high speeds. And as a result, spec poles, which are the beneficiary of their call protection and performed well in a [indiscernible] have done extremely well. The cash window list that we've 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.

The next chart on Page 11, again, this is very relevant for us as a levered mortgage investors since we're short prepayment options. And you can see on the top, this is just normalized mall. This is a proxy for volatility and interest rate market. The spike there, which was in early April, that was liberation Day. And you can see since then, it's done nothing to come down -- 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. And you can see the spike there around March of 2020, that was the onset of COVID it's always a very volatile event. [indiscernible] need it after that, we had extremely strong [indiscernible] part of the Fed bonds, treasuries and mortgages. So it's kind of like a rate suppression environment where they're buying up even and driving rates down, which is a byproduct of that is that they drive volatility down. And as you can see on the right, we're getting near those levels. And I don't think that means that rates are going to 0. But what we are seeing is interest rate volume pushed down I think part of what's behind us 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 [ dullish ]. So the market expects kind of a very dullish outlook for Fed funds in range in general. And of course, to the extent that, that happens and needs to say that it will, but it would also continue to be supportive for us as a levered agency MBS markets 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 funding markets. And this is what's really become a hot topic, if you will, so what we see on the left are just swap spreads by tenure. And if you'll notice in the case of the purple one, which is the 10-year and the green one, which is the 7 year, they've all kind of turned up. In other words, they're less negative. So we would say they're widening even though it's counter to if there's a spread to the cash treasury is actually getting narrower, but is what it is. What happened here was that the Chairman recently in a public his comments mentioned that the end of Q3 was in the next few months. Most of the market participants were expecting that in the first, if not the second quarter of 2026. So that was news. And more importantly, what we've seen since, especially this month, is that SOFR has traded outside the 25 basis point 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 and will in all likelihood address that and quite possibly at the meeting next week.

What that means, if they [indiscernible] QT is that the runoff in their portfolio, which we saw in that chart in the appendix is going to start just plateau, but they'll likely do, and I don't know this, of course, with certainty, but I suspect it's the case, the treasury paydowns will be reinvested back in the treasuries and mortgage paydowns since they don't want to hold mortgages long term. We'll also be invested -- reinvested in the treasuries probably more so in bills. And what that means then is going forward, given that the government is remaining large deficits is that the treasurer 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. And 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 spread wider and term premium higher. And 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. And as you can see, 73.1% of our hedges are in swaps by DV01. So 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 look at swap spreads before I came in on the call today. And if you look at pretty much every tenor outside of 3 years, every 1 of them on a 1-, 3- and 6-month look back at their [indiscernible] after we picked 100% of the wides. So that's a significant movement. That being said, as we did mention, there has been some issues with the funding market with super being outside of the range and spreads -- 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. But the fact that the Fed is very much on top of this is good for us because it means they're going to be a tenant to it and keep us for repeating what we saw, for instance, in 2019. The next slide is 13, refinancing activity. And 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 in the red line and the refi index. And while rates have come out, some the refi index has bumped up. It's not much. In fact, if you look at the left axis, you can see we were at 5,000 level in December of 2020, and we're far below that. The second chart on the right just shows primary secondary spreads and they've just been very choppy. There's really not a story to be told from that. But what I want to focus on is the bottom chart. And what this shows is the percentage of the mortgage universe that's in the money. That's the gray shaded area, and then you have the refi index.

And as you can see on the right-hand side of this chart that this is -- there's some gray area there, but it's very modest. So again, it paints a very benign picture, but it's misleading. And the reason it is so is because this is the entire mortgage universe. Most of the mortgages in [indiscernible] today or a large percentage of them were originated in the immediate years after COVID. So they have very low coupons, 1.5, 2, 2.5, 3, and they're out of the money. But if you were to do the same chart for just '24 and '25 originated mortgages, it would be an entirely different picture. It would be a much higher percentage of the mortgage university in the money, probably be north of [ 50% ].

And since we, as investors in the space and like our peers, we own a fair number of '24 and '25 provisioning mortgages. In fact, 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. And so that really means security selection is important. And in a moment here, I will turn the call over to Hunter, who will talk about what we've done in that regard in great depth, but I just want to point out this picture that this chart is someone dating.

Before I turn it over to Hunter. As always, I'd like to say a bit about Slide 14. Very simple picture. There are 2 lines on this chart. The blue line just represents GDP in dollars, and the red line is the money supply. And what it points out is the continuing fact that the government or fiscal policy, if you will, is still very stimulus. The government is running deficits between $1.5 trillion to $2 trillion. That's in excess of 5% of GDP. And 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, but government is supplying a lot of stimulus to the economy, and you can't re-get that looking forward.

And that's probably why in spite of the tariffs, among other reasons, obviously, but while the economy really has not weakened materially. And with that, I will turn it over to Hunter.

Thanks, Paul. I'd like to talk to you a little bit about our portfolio of assets evolved over the course of the quarter. Our experience in the funding markets, our current risk profile our portfolio is impacted by uptick in prepayments and give a little bit of my outlook, I suppose, going forward. So coming out of [indiscernible] second quarter, we took advantage of 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 the second half of the quarter, equity rate has been slowed, but our -- but the assets we purchased in the third quarter were tightened sharply during that second half over the third quarter.

As discussed on our last earnings call, our focus has been 35.5, [ 6s ] and to a lesser extent, 6.5 coupons. And those didn't tighten quite as much as the [indiscernible] coupons, but we feel like they offer a superior carrier potential going forward. The portfolio remains 100% Agency RMBS with a heavy tilt towards call-protected specified pools. These tools 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. As a result of these investments, our weighted average coupon increased from 5.45 to 5.53, 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 Florida, Florida pools, 16% New York pools, 13% investor property pools and 31% have some form of low [indiscernible] story, if you will. We have 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 of our prepayment stability of our portfolio while maintaining conservative leverage posture and staying entirely within the agency MBS universe.

Turning to Slide 17. You can see sort of visual representation of what I just discussed, you can clearly see the shift in the graphs, the concentration building in the 5.5 and 6 coupon buckets across the 3 graphs. These production coupons remain the core of our portfolio and continue to offer the best carry profile in the current environment. And I'd like to discuss a little bit about the funding markets repo lending market continues to function very well and Orchid maintains capacity well in excess of our needs. That said, we observed friction building in the funding markets, particularly in the -- during the weeks of heavy treasury bill issuance and settlement. These dynamics have led to spikes in overnight so and the tri-party 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. 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 plus 16 basis foods for most of the year, but in recent lease that spread has drifted up a couple of basis points, say, SOFR plus 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. The blue line on the chart represents our economic cost of funds. This metric, as you can see, is slightly higher in spite of the fact that rates are coming down, then 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. So it's sort of [indiscernible] 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 raise any unhedged repo balances will benefit directly from this decline. As of June 30, 27% of our repo borrowings were unhedged, and that increased to 30% more recently modestly enhancing the benefit to lower -- or potential benefit to lower funding rates.

Turning to Slide 19 and 20, speaking of hedges. On September 30, Orchid's total hedge notional stood, as I said, $5.6 billion, covering about 70% of our funding liabilities. Interest rate swaps totaled $3.9 billion, covering roughly half the rebook balance with a weighted average pay fixed rate of 3.31% at 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 for funding costs. Short futures positions totaled $1.4 billion comprised primarily of SOFR 5-year, 7-year and 10-year treasury futures as well -- I'm sorry, SOFR 5-year [indiscernible] 7-year treasury futures as well as a very small position in year swap futures.

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. If you think of this metric as the rate we would pay if all of our hedges had a market value of 0 at each respective quarter end part rate, if you will. Our short TBA positions totaled $282 million, all of which were, I think, Fannie 5.5%. A portion of this short is really part of a bigger trade where we're long 15-year 5, a short 30 year 5.5%, so a [ 15, 30 ] swap structured to provide production 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 have tightened materially. So we didn't want to take the basis exposure quite yet.

Orchid held no swap [indiscernible] during the quarter, which was [indiscernible] as a sharp decline in volatility at June 30, approximately, as I mentioned, price a 27% of our repo borrowings were unhedged. That figure then increased to 30% by September 30. 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 30, our duration gap was negative 0.26 years. And by September 30, it grown to negative 0.7 years. So still highlights a very flat interest rate profile. Speaking of which, Slides 21 and 22, get a real pitch sense of our interest rate sensitivity. Agency RMBS portfolio remains well balanced from a duration standpoint with the overall rate exposure very tightly managed. Model rate shock showed that a plus 50 basis point increase in rates would estimate -- we estimate would result in a 1.7% decline in equity, while a 50 basis point decrease would reduce equity by 1.2%. So again, it's a very low interest rate sensitivity, at least on a model basis. The combination of higher coupon assets and intermediate 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 offered often accompanied by stress in equity and credit markets and investors often seek safety and fixed income and REIT stocks. Conversely, if the economy remains strong or inflation proves sticky, we would expect a corresponding rise in rates and basis widening in the belly of the coupon stack with outperformance shifting to shorter duration high-coupon assets, which are currently making due to prepayment exposure.

And 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-years brief run at [ 360 ] last September. In the third quarter, speeds released 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. 3, 3.5 and 4s was paid it at 7.2, 8.3 and 8.1 CPR compared to TBA deliverables, significantly slower at 4.5, 2.9 and 0.7. 4.5s and 5 paid 11 and 7.5 CPR for the quarter versus 2.3 and 1.9 on comparable deliveries. Among our low premium assets, which are 5.5 largely through up most of the quarter. These were largely in line with the deliverables, 6.2 was our experience, 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 premium space, 6s and 6.5s have paid 9.5 and 12.2 CPR for the quarter compared to 13.8 and 29.5 on TBA deliverable as refi activity spiked in September, the various forms of call protection embedded in our portfolio predicts very sharp divide though in the most recent month, our 6s paid 9.7% versus 27.8% for the generics and our 6.5 paid 13.9 versus a 42.8 CPR on the generics. So 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 -- what 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 vote liberation day widening in the second quarter. Orchid successfully raise $152 million during the quarter and deploy the proceeds into approximately $1.5 billion of high-quality specified pools. The pool required a historically wide spread levels and a certain meaningful driver of increased earning power for the portfolio in the coming quarters. While our skew towards high coupon, specified pools and bare steepening bias resulted in slight underperformance relative to our peers with more sellers to belly coupons, we remain highly constructive on our current asset and hedge plant. We believe our positioning will continue to deliver great carry and be more resilient in a selloff, particularly given our call protection and 1 of the convexity exposure.

Looking ahead, we're very positive on the investment strategy. So I have mentioned, several factors that could provide significant tailwinds to the Agency RMBS market and our portfolio for the quarters ahead are continued Fed rate cuts, the anticipated end of QT, a renewed treasury open market operations to help stabilize the repo and build 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 RBS is still among the most attractive and recent memory, and we're well positioned to capitalize on that. With that, I'll turn it over to Bob

Thanks, Hunter. 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 from 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, but we also see a lot of resiliency in the economy, very strong growth. Consumer seems to be in sync shape. And as I mentioned, the government is running large deficits, plus you have the benefits of AI and the CapEx build out, all that tied into the One Big Beautiful Bill and a very favorable tax components of that. So I think the market in the economy go either way. But the important thing is, as Hunter alluded to, is 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. So for instance, if we do stay in a low rate environment and speed stay high, we have very adequate call protection. And 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 have enhanced carry in that environment.

So 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. And 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 had a little uprate protection because we think if the fact the Fed does ease a few times that in all likelihood to move after that's a hike. So with all that said, we will now turn the call over to questions.

[Operator Instructions]

Our first question is going to come from the line of Jason Weaver with JonesTrading.

Congrats on the results in the quarter and the growth I guess, first, given the relatively consistent leverage and even greater liquidity now as well as sort of the positive net as we mentioned in the prepared remarks, especially lower vault. 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?

Well, as I kind of said at the end, be -- we could with leverage. I mean, like I said, there's 2 paths. I see the market following. One is where we kind of stay where we are. The Fed continues to cut rates stayed 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. And if we do so, we probably would be comfortable taking the leverage up some. To the extent the market -- the economies rebound 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. Then I would say we would not be taking leverage up. We would be looking to kind of protect ourselves one lock in funding as they look to protect ourselves on the asset side from extension and rate sell-off impact on mortgage prices.

Got it. That's helpful. And then second, referencing the remarks on the high coupon spec pool you purchased just as of late. Do you have any view on pay-ups upside potential here, especially if we see more refi momentum growing?

We've really seen pay-ups a ratchet and higher in the beginning part of this quarter. This most recent cycle of the GSEs, we saw pay increase sharply. A lot of that is attributable to the fact that there were people who were long TBAs as kind of strategy when the roll markets were more healthy. And that those that carry from those roles has just completely evaporated. And so you've seen people who might have had heavier concentrations in TBAs really be forced to dive in and just start buying everything they could find to to supplement that income. We fortunately didn't have that problem. And most of the best pools we bought was really kind of the first half of the quarter.

So yes, that's just to reiterate that point. I mentioned we had the spike tighter in mortgages like in early September. I -- forgive me, you mentioned this, I missed it, but of the capital we raised in the quarter, 70% of that was deployed before then. So we benefit from that. And then also, I just -- 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%. And most of what we added all of that we added were higher coupons. But that being said, the average price of the portfolio now is a little over 101-- [ 101 and 7 ] and our average payoff is 33 ticks. So 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 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 pay-ups. I don't know that we're ever going to get back to where we were in '20 or '21, just by comparison, back then, our higher coupon, New York, whatever coupon they were the pay-ups were multiple 4 and 5 points. I don't know that we're going to see that anytime soon, but it's -- we've done quite well without having to go anywhere near those kind of levels.

Our next question will come from the line of Eric Hagen with BTIG.

I think you guys have kind of talked a little bit around it. But are there scenarios where dollar roll specialness would return to the market in a more meaningful way? How do you feel like special sort of effect like trading volume and kind of market dynamics overall going forward?

Sorry about that. I don't know that -- I mean we saw that really in space 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 pay-downs with respect to mortgages, they're only going to be buying treasuries would probably build. So I don't know I don't really see the specialists of the rural market coming back in a big way. We've historically not been big players in that regard, as you probably know. So I don't see it as a core -- one, I don't think it's like going to happen; and two, I don't -- it's never been a core element of our strategy.

No. It's looking as long as -- especially in the upper coupon, that's really being driven by fear of prepayments and the speeds that are being delivered into these worse to deliver rules that are being delivered in the TBAs are pretty bad here. So I mean I would expect them to continue to be so for the next couple of months. So I think it's going to stay depressed, at least in that space. until we pop out of this. It will either pop out of this rate environment that we're in there.

So turns back to the top or middle of the recent rate range or [indiscernible] rate is meaningfully lower. But I think we're kind of in a spot here where we're not going to see too much in the role space.

Okay. Yes. That was interesting. Can you talk through some of the -- 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?

We 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. But as Hunter mentioned, 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 terms. So we have done some just to try to lock in as much as we can. And we do it opportunistically. So for instance, if we were to see, let's say, the government reopens and you get some [indiscernible] non-payroll number in, the market prices in 7 or 8 cuts that's when we try to do those things. So it opportunistically.

Yes, it's been -- Eric, it's been more effective to do in future space for us, and 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 hedged right now. So we can certainly have room to move in and do some shorter-dated short futures in the first year or 2 of the first couple of years of the curve or some kind of a swap or something like that with a relatively low duration. But we joke around that repo lenders are always very quick to price in hikes and very reluctant to price cuts.

So that's been kind of the experience that's kept us from -- and you just think about the dynamics of what usually happens when the Fed gets involved and it has to cut 5 or 6x. It's usually coincides with a credit market rolling over or a weakening economy and doesn't not particularly comfortable environments for repo lenders.

Our next question will come from the line of Mikhail Goberman with Citizens JMP.

Hope everybody is doing well. You guys talk about call protection. About what percentage would you say of your portfolio is covered with call protection and if rates were to go down, say, 50 basis points in a sharp manner?

Almost 100% of the portfolio has some form of call protection. We have little pockets of what we call our kind of lower pay-up stories like LTV, that sort of thing. We're still constructive on those in spite of the fact that they are relatively low at low in terms of PAP. But we have housing market that's under pressure and borrowers doing -- it's difficult for borrowers for 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. So a little -- it's not the lowest hanging fruit, I guess, the more generic stuff is. So almost all of it is. We have some stuff that we keep around just in case we have a dramatic spread wiping, some really low pay-up pools that that if we ever have to get in a situation where we need to quickly reduce leverage by just delivering something in the TBA. But the rest of the portfolio has got some form. And most of it's been working out really well for us.

And 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 5s. So we're -- it's premium, it's in the money, but it's not so extreme, so another 50 basis point rally gets you obviously, like a north of the 6, which is like a 12 or 3 price. So they're going to be faster. But what 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. So it was uptick of you from there, but it's nothing like [indiscernible] what we saw in the immediate aftermath of COVID when those numbers were very, very large.

As we bounced around kind of this rate range, where we have bought the more expensive, I guess, or the higher quality stories has been kind of in that first discount space. And the rationale there is just they're relatively cheap at that point in time. So like when rates were a little bit higher 5s were 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. And so those will do very well as if we continue to rally.

That's helpful. And 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?

We said, why not they've been widening, right? I know it's unusual.

Continue to widen, yes.

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 -- if you look at.

its around 2 million DV01, so you can think of it in those terms yes.

Like it's like the long end is like a negative 50. So let's say you went to 40%, obviously, something like that or I don't know how much further you can go, though, because you could argue that the market is really priced in the end of Q2 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 meaningful culture investing pay down. But what Hunter said. So $2 million [indiscernible] wants it to get like another 10 bps, what is that, and it's something like $0.15 or something like that or $0.12 book.

Fair enough. And if I could just squeeze in. Any update on current book value month to date?

It is up a hair basically, we don't audit that number every day because we get $1 -- an amount every day, it's up very, very modestly from quarter end.

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

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, and have a great weekend. Thank you.

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