Good day and welcome to the Capstead fourth quarter 2016 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lindsey Crabbe. Please go ahead.

Good morning. Thank you for joining Capstead’s fourth quarter earnings conference call. The fourth quarter results, our earnings release was issued yesterday January 25 and is posted on our website at www.capstead.com under the Investor Relations tab. A link to this webcast is also in the Investor Relations section of our website and an archive of this webcast will be available for 90 days. A replay of this call will be available through April 26, 2017. Details of the replay are included in yesterday’s release. With me today are Phillip Reinsch, President and Chief Executive Officer, and Robert Spears, Executive Vice President and Chief Investment Officer. Before we get started, I want to remind you that some of today’s comments can be considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our filings with the SEC, which are also available on our website. The information contained in this call is current only as of the date of this call, January 26, 2017. The company assumes no obligation to update any statement including any forward-looking statements made during this call. With that, I will turn it over to Phil.

Thank you, Lindsey. I want to mention several items that stand out relative to our fourth quarter performance and touch on our view of our future prospects. Then will open the call up for questions. Our earnings this quarter did not improve over third quarter results, largely because mortgage prepayments did not decline as quickly as we – or the market, for that matter – expected. That’s the not so good news. The good news is our strategy of investing in short duration agency ARM securities in order to produce attractive risk-adjusted returns over the long term is operating as advertised. With the Federal Reserve raising short-term interest rates for the first time in a year and the 10-year Treasury up 85 basis points during the quarter to end the year at 2.45%, our book value declined by only 2.2%. And of that 2.2%, only 1.4% is associated with our ARM portfolio on interest rate swaps held for hedging purposes. The remaining 0.8% decline in book value for the quarter was actually a return of capital to our stockholders, resulting from the fourth quarter common dividend exceeding our reported earnings. Given our inherent book value stability during a period when market rates moved sharply higher, we expect to significantly outpace the fourth quarter of our peers in the mortgage REIT industry that hold longer duration portfolios that you'll be hearing from in the coming days and weeks. Looking forward, much of the increase in rates seen in the fourth quarter occurred post-election, sharply diminishing refinancing opportunities. This is expected to translate into lower mortgage prepayment levels in February and March, benefiting future portfolio yields and earnings. In addition, we see cash yields on our current reset ARM securities continuing to increase in 2017 as coupon interest rates on underlying mortgages reset the higher rates based on higher prevailing 6 and 12-month indices. This coupon reset feature of ARM securities allows us to potentially recover over time increases in our borrowing costs resulting from Federal Reserve actions to increase short-term interest rates. Finally, with short-term LIBOR rates having risen faster than repo borrowing rates, we’re currently benefiting from higher variable rate swap receipts relative to our unhedged borrowing rates compared to past periods. I’ll conclude my remarks by emphasizing that given our strategy and portfolio, we believe we are well-positioned for the year ahead. Provided the Federal Reserve does not move to increase short-term interest rates significantly faster than market expectations and the level of longer-term interest rates remain benign, we expect to report higher earnings in the coming quarters. With that, I’ll open the call up to questions.

[Operator Instructions] The first question comes from Bose George with KBW. Please go ahead.

Thanks. Good morning, guys. It’s Eric [ph] on for Bose. And Happy New Year. I think you guys have mentioned in the past that a one CPR change equals about $1.5 million in premium amortization expenses. Is that still the case?

That’s fair, Eric. We have a static portfolio. It’s in that range.

What are some of the variables that would potentially change that? I think it's probably a higher percentage of longer reset ARMs. Is that right?

Well, our basis in our longer reset portion of the portfolio is higher than the current reset portion – part of our portfolio, at least right now. So, that could play into it as well, the mix of prepays.

Got you. And I think you guys pointed out in the press release that historically a curve steepening scenario has reduced the refi incentive for ARM borrowers, but is there anything different about this current environment that would the change that dynamic? Specifically, I'm focusing on the fact that it's been almost a decade since the Fed went on a serious tightening spree, plus the qualifications for ARM borrowers has changed since the financial crisis. Do you have a sense for whether folks who are refinancing are going from ARM to fixed or if some portion of those are going from ARM to ARM?

I think it would be a combination of both depending on how steep the curve is at a given point in time. I think we pointed out in the press release, though, ARM prepayments in general have a tendency to lag fixed-rate prepayments and we’re seeing that again. I think in the fourth quarter, ARMs were fairly flat and fixed rate pass-through actually piked up a little bit in prepay, but the last couple of months, you’ve seen a decline in the fixed-rate market in prepay, but not necessarily in ARMS and a lot of that has to do with the way originators go after product. And they go after the low hanging fruit first, which are lower coupon loans that have originated in the last couple of years. And that same things holds for hybrids. So, in that type of environment, when you have a flatter curve, we will see prepays kickoff in our newer issued 5.1s, the longer reset paper. As rates move up and the curve steeps, you’ll start to see a convergence in prepays where the longer resets will start to slow down and the shorter reset securities, particularly ones that are resetting for the first time, will have a little spike as they try to get their loan refinanced before rates go up. And so, there's a lag and there’s a lot of moving parts in our portfolio, but comparing – if you look at the January prepay report for fixed-rate pass-throughs, let me give you an example there. They declined in average by 10%. But cohorts with 4.5 and higher coupons in the 30-year space actually picked up. And the same thing happened with 15-year 3.5s and higher. And it’s because, once again, these are people that have had opportunities to refinance and have not and they are jumping off the fence. So you see a purge in originator pipelines and you’re kind of seeing that now. But with the 30-year no-cost refi at around 4.5 right now and most ARMs resetting in the high 3s, there’s not the incentive to refinance. And so, we expect to see steam come down. The same thing happened in the taper tantrum in 2013. So, there's just a little bit of a lag. But, once again, you’re seeing longer resets kind of converge with shorter resets right now.

Got you. That’s a very helpful answer, Robert. Thanks. Last question for me, can you just talk about spreads on your investments and what they're looking like right now and what your projected levered ROE is pre-expense?

Yeah. What kind of happens, to start out the year, which is a really good thing from a book value standpoint, ARMs have tightened to your fixed rate pass-throughs. There’s a really strong bank [indiscernible] right now. And so, if you look at all fixed rate asset prices are down on the quarter dependent upon the bucket and the duration, but most hybrid ARMs are actually up 4 to 5, 32nd [ph]. They’ve tightened that much. And what’s going on, you’ve kind of got the old origination like 5.1s, for instance, you have these 2.375% coupons that are coming out, but now the overproduction is 50 basis points higher. The bonds are coming out in March and April. So because of this and a lack of supply in the front month, it’s driven spreads then. So, right now, we are probably looking at – probably 9 to 10, 11 returns, 80, 90 basis point spreads. It’s come in. It’s tightened probably 10 basis points just since the end of the year. So, once again, that’s good for book value, not as good for purchases at the margin. And so, we’re being very patient and diligent and not necessarily loading up on bonds at what we think are pretty tight spread levels on a historical basis. So, we want the production to pick up and ARM supplies to pick up in the next 3 to 4 months and we’ll probably be bigger buyers then than we are right now.

Right. So, it sounds like leverage should stay around the 9 times range and not…

That’s kind of what we are targeting right now. It doesn’t make sense if we can buy bonds that we think provide attractive returns and [indiscernible]. That’s kind of the game plan.

Thanks, guys. Really appreciate it.

[Operator Instructions] And if there are no further questions, I would like to turn the conference back over to Lindsey Crabbe for any closing remarks.

Thanks again for joining us today. If you have further questions, please give us a call. We look forward to speaking with you next quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.