Good morning, and welcome to the First Quarter 2017 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 28, 2017. At this time, the Company would like to remind their listeners that statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available and the management's good faith, belief with respect to future events and are subject to risk 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, Operator. Good morning and welcome to the First Quarter Earnings Call for Orchid Island Capital. With me today is Hunter Hass, our Chief Investment Officer and Chief Financial Officer. Today we will depart from our normal practice and incorporate a slide deck presentation into our call. Hope you had a chance to download the slide deck from the Investor Relations section of our website. If not, please do so. Now if you can, as we have been provided some help over Allison Table that will facilitate this day's discussion. Before going over the slide, I would like to go over the course of the quarter and their impact on Orchid. As the year 2017 unfolded, risk markets and particularly the equity markets were bullied by optimism stemming from developments in Washington, generated by the incoming Trump administration. The President Elect made every effort to let the world and the markets know that the Trump administration is going to be very pro-business and pursue an aggressive legislative agenda that encompassed healthcare reform, tax reform, infrastructure projects and regulatory relief. As various cabinet nominations were announced, most of which were from the business world and the new President continuously met with leaders of most major industries, the equity in risk markets continue to rally, setting all time new highs in the case of the Dow Industrials and S&P500 in early March. Optimism was so high that when the Federal Reserve raised the feds fund rate by 25 basis points at their March meeting, the markets reacted calmly. Various members of the federal open market committee and fed governors have increasingly discussed the reduction of the feds balance sheet as the next phase of the removal of monetary accommodation, in addition to increasing the Fed's fund rate, of course. Member of…

The primary theme in the first quarter and really even extending into April has been to continue to shorten the duration of the portfolio, we've done so as Bob just mentioned adding hedge positions, adding to the swap position, adding longer TBA shorts, vis-à-vis the Fannie 3 shorts that we have in place and continuing and up in coupon shift out of lower coupon, 15 years, 20 years and even 30 year 4%, 4.5%s which were the really the performance of the 4.5%s was a primary culprit of our unrealized and realized mark-to-market losses in the period. Coupon widened considerably versus treasuries using Wall Street hedge ratios on 10-year. We spotted that the coupon under performed by roughly 0.5 point maybe a little bit more than that depending on whose hedge ratios you use. So, we've continued to sort of leg in as that coupon has gotten cheaper. As Bob mentioned, the first quarter was big for reducing our exposure to inverse IOs. We had a unique opportunity similar really to what we saw in the third and fourth quarter of 2016 when pay ups were very high in the early part of the first quarter, we saw at least on a spread basis very tight levels for certain call protected inverse IOs. I think there was some concern that we've gone too far and might rally back a little bit in the wake of the Trump Euphoria that we saw in the fourth quarter. Whatever the reasons was, we were able to at least on a spread basis sell those inverse IOs at what have basically been year-to-date types for loan balance and other call protected types of inverse IO securities off of the coupons we like, which is primarily 4% and 4.5%s. As Bob alluded to, throughout the…

No, I would say, the portfolio has been for quite some time now kind of biased to an uprate scenario. We continued on a lot of securities that have risk, their exposure to prepays, whether it's hard coupon premiums or the IOs and inverse IOs. We have periods like we did, mid to late 2016, probably the election, you have a big rally that amortization puts downward pressure on our earnings. But we do view the underlying economy is quite strong and the market very much is focused on trump and his ability to execute on his legislative agenda right now. It looks like it's maybe a struggle and of course the first quarter data was, we can sell, the market just kind of sees that as reinforcing this kind of negative bias. But I think if you look at the underlying economy, it's still quite strong whether it's the housing market in the case of say for instance home price appreciation running in the mid-single digits, very strongly, new home sales, existing home sales are still increasing. The labor market is still strong. The Fed has mentioned in many cases that they view say 50,000 to 100,000 is the number of jobs that need to be added and recorded absorb new entrants to the workforce. We've been running above that for some time. Various measures of unemployment continue to either be flat a low level or trend down and the consumer spending as a result is – there is some volatility, certainly what we saw today when it was only up 0.3 for the quarter, but it's been running in the high 2%s, low 3% for a number of quarter. So, all the underpinnings of the economy appear to be strong. I suspect there is some issues with the GDP there that tends to have some seasonal adjustment factors wherever the case maybe. It doesn't seem to be consistent with the rest of the data. So, we are positioned for up rates and we see the economy being supportive of that position. As Hunter mentioned, inflation is – the price component today was 2.3%. We think it will continue to trend above the Fed too and through the Fed 2% target. I think the Fed will continue to raise rates, probably more aggressively in the Fed that the market is pricing. So that's kind of it. Operator, I think we're ready to take some questions

[Operator Instructions] Our first question is from the Mickey Schleien of Ladenburg

Good morning Bob and Hunter. First off…

Good morning.

Your prepared remarks were very good and I appreciate you taking the time to explain the backdrop for you investment thesis. Just wanted to ask you about the balance of the year, there is certainly lot of uncertainty about how and when the fed will start shrinking its balance sheet and the potential impact on spreads. So, I'm curious to understand how that uncertainty is affecting the cadence of your capital deployment?

Thank you. Good question. As I said, I think the key is the market has formed an expectation of how they think this will play out. And that is that it will start probably late this year early next and it will be a wind down on the reinvestment at a gradual pace. What critical I think is, whether or not they stick to that, to the extent they accelerate that or they change that, then I think you'll see more widening. For now, it's been modest. We did see some widening. We may see some more, but it's not been shocking, it's nothing like the taper tantrum in 2013 and I think that's probably key. The fed is very cognizant of what happened then and they want – it appears they want to avoid having that happen again. Ben Bernanke wrote [indiscernible] and he talked about the need for a gradual pace and I think that made sense. I think the various state governors that have spoken and Board members have echoed that. So, really, we do anticipate there may be some slight widening over the balance of the year into next. But as long as the rhetoric stays consistent, I think it will be very easy to live with for lack of a better word and also represent some slightly improved investment opportunities.

So, Bob, given what you just said, it doesn't sound like you're going to take a wait and see attitude and you know retain dry powder. You're – it sounds more like a steady as she goes investment pace unless you see something to change your fundamental view. Is that – would you agree with that?

Yeah, I would. That's a fair assumption.

Okay. That's it from me. I appreciate your time this morning. Thanks.

Thanks Mickey.

[Operator Instructions] Our next question is from the line of David Walrod of Jones Trading. Your line is open.

Good morning guys.

Good morning Dave.

Hey David.

Just a little more on the Fed. Can you kind of walk us through your outlook for the pace of rate increases and how you position the portfolio?

Well, it's – the position of the portfolio as I said is very much biased towards you know stable to higher rates. I think the Fed is going to go in June. The current Fed funds futures is pricing 70% depending on the second you happen to look at the screen. And I think you'll probably get at least one more hike after that. Everything in the economy seems to be sounded strong and inflation appears to be increasing, so I think they are going to continue to go through the process of normalization. I think the market's a little overly focused on what Trump's able to achieve, the timing of the year doesn't help. You know first quarter this year was weak and has been for several years. We'll see what happens going forward, but the fundamentals in our minds tell us that this first quarter is not going to be repeated. This is not indicative of what the underlying strength of the economy is. So, I think you continue this see if the fed goes in June and what's more that's three hikes this year and you'll probably get more next year. I think what will determine what happens in 2018 is going to be the extent to which inflation gets above 2% if it does in a meaningful way then you will definitely probably see three hikes in 2018.

Hey David, this is Hunter. If you happen to have the slide deck in front of you and can go to Page 23. You can see that with respect to how we're prepared for coming Fed hikes. We have a very large hedge position skewed towards the first three or four years of given for the next three or four years and the vast majority of that is comprised of or I guess about over two-thirds of that is comprised of short euro-dollar positions and pay fix swaps. So, to the extent that the Fed goes more than anticipated or even just follows really the path of forward rates as you can see on – there is a dotted line that shows what tariff structure looks like at the moment. Those hedges will continue to go in the money and help offset our interest expenses in coming quarter. We do have a little more of a skew towards the long-end of the curve than we have traditionally in the hedge book. This is accomplished through shorting TY no futures and also being short at the moment some longer duration mortgage PBAs. So, we – those two positions in conjunction with our skew back towards being more along IO than inverse IO in our structure book, definitely puts us in a position where, if there is a surprise to the upside and inflation, we're prepared for it. But, for the next one, two, three four years, we do have considerable amount of protection on the front end of the curve as well.

Great that's very helpful. Then my other question is, just in regard to pre pays, can you give us your thought on how they are going to trend in the coming quarter?

That's always a tough one because we feel fairly comfortable with our view on the Fed, the long end can be driven by a number of other factors. I suspect it's going to be much more tamed than last year. You know we have the French election coming up and that seems to be the last hurdle for the ECB to get over in terms of the risk to the economy and the markets in Europe. Yesterday, Draghi was fairly bearish and the underlying data in Europe continues to be fairly sounder evidence of recovery. And that's been, it's with the extent that Europe continues to recover and we start looking towards a tapering of ECB purchases. I think that important, because what drove rates in the long-end down in the U.S. for a long-time was relative yield difference between European sovereigns and treasuries. And so, between the Fed buying treasuries and investors buying them because they were such a high yield relative to what was available in Europe. They really were suppressed and couldn't really respond in a meaningful way the economic data to the extent that source of demand is removed both in the case of the fed and investors overseas, because the yield gap between European and U.S. spreads are lower. That would imply that the long rates could go higher and of course to the extent they do, that's going to keep fees lower. So, we view those development would be positive obviously. You know even risk, geopolitical risk and escalation of what's going on with respect to North Korea would cause a flight to quality and lower rates. Let's hope we don't see that for a number of reasons, but you know the backdrop I think is favorable for rates to stay here, creep higher.

I would just add that just more locally I guess our earnings were really impacted by the speeds we saw in the fourth quarter and we are going to witness a – and have a market – mortgage market that has considerably slower speeds than what we saw. Those even creep early in the January, so absent that negative influence and sort of fully being into the plus 2% 10-year treasury to even 2.30%, 2.40% as we've witnessed over the course of this year so far. That's a dramatically different rate environment and then dramatically different speeds environment. And I think you can see that starting to show up in our numbers like our premium lost due to amortization, which is sort of an important theme I guess with respect to the earnings power of our portfolio, because it didn't look all that great in the fourth quarter when we were seeing a lot of pressure on our amortization, our income via amortization and that headwind is really come off pretty strongly in the first few months of the year, and in particular in February and March. And so, we may see a slight uptick as rates bounce around or as we go into the sort of the seasonally high turn portion of the year which is summer time when people move, but we think that our earnings power is much more in line with our given in pay rates now than it was at the end of the fourth quarter.

Okay great. Thanks a lot guys.

Thanks Dave.

Thank you. Our next question is from the line of Andre [indiscernible] or State Capital. Your line is open.

Hi guys. Quick question, just going back to some boring accounting and then mark-to-market share value thing, I guess the other way that sort of flows through is through the balance sheet and that seems like it's picked up leverage quite a bit where we're close to 9 times now.

Right.

What leverage are you comfortable taking on to maintain the dividend?

Thanks for your questions and thanks for asking the question. We're definitely at the higher end of the range in the low 9s, our leverage is probably ranged from the mid to low 6s at the extreme low and so this new low to mid 9s. As I mentioned, the reason we do feel little comfortable is we made a few changes to the composition of a portfolio. One, as Hunter mentioned, we've changed the composition of our TBA shorts from you know a mix of low and high coupons to exclusively lower coupon. So, in this case it's fairly 3s, long duration hedge. We've also added to our euro dollar and swap hedges. And then we've also added these IOs that we talked about which have what we call extension potential in other words. These are IOs backed by collateral that is typically paid very, very fast. It's jumbo collateral. So, when these borrower are in the money, they tend to prepay very, very fast and when they're out of the money they prepay very slow very binary if you will. And so, with the backup or any backup in rates, those prepayment speeds can drop precipitously and those IOs perform extremely well. So, we basically enhanced if you will the hedges to allow us to get more comfortable with that leverage level to the extent that we do get for instance a meaningful sell-off and those hedges work. At some point we say, look, we view going forward, maybe the balance is more, risk is lilted more balanced and we all need as much of rate protection which case we could take some of that off. But we definitely, we're cognizant of the point you just raised and we did take these steps in advance of allowing the leverage to creep higher.

Just some ballpark numbers, the way we think about is, Bob, I think mentioned earlier in the call that we were short roughly 250 million Fannie 3s and TBA form. We still like this takes off a little bit more than one turn of leverage without adding a lot of risk. So, the trades that we're putting on that go against these shorts and there is a little bit of curve exposure in that we're buying some higher coupon stuff and we are shorting the Fannie 3s. But we're buying very low pay up bonds that we expect to carry well for a few months versus those trades. So, it's really just a little bit of earnings boost that we put on in this trade and to the extent that we get a sell-off, it helps us with our hedges and it also helps with current carry. But – I think we put in our last dividend press release what we called our effective leverage ratio, where we sort of backed out the effect of TBA shorts from the balance of the portfolio or the balance of our liabilities I should say. And, so that's just something to be cognizant of. It's not – I'm not saying that it's not added risk, but it's a much different form of risk.

Got it. So the headline number is a little bit higher than you'd like, but there are some things in there that you think count against leverage, but don't flow through the financials?

Yes.

Yes.

TBA shorts don't reduce the liability balance.

Right.

Right. Great, thank you.

Thank you.

Thank you. And that concludes our Q&A session for today. I'd like to turn the call back over to Robert Cauley for any further remarks.

Thank you, operator. To the extent anybody comes up with a question after the call, they didn't think of now, please give us a call to the extent you capture the call on a recorded version versus live. Feel free to call us. Our number here at the office is 772-231-1400. We will be available and very willing to take any and all questions. Other than that, we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude today's program and you may all disconnect. Everyone have a great day.