Good morning. And welcome to the Fourth Quarter 2017 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, February 9, 2018. Before we begin, the company would like to direct you to their corporate www.orchidislandcapital.com. Here under the Events & Presentation section of the website you can find the supplemental materials that would be reference during today’s call. 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 the 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, Operator, and thank you everybody for joining us this morning. I am going to go through the slide deck, I hope everybody had a chance to visit our website, the Events & -- Event section of the website and pull down the slide deck. As I go through, I am going to be flipping from page to page, I won’t necessarily go in the order that the slides appear in the deck and accordingly I will move slowly so everybody had a chance to catch-up and follow with me. As I have done in the past, I am going to kind of follow the same rough outline. I will start by giving a brief overview of the highlights of our results for the quarter. I will then move on to a discussion of events that took place in the markets during the quarter, kind of with an eye towards focusing on the events that were most relevant for us. Then I will transition to a discussion of how we were positioned going into the quarter. What we did during the quarter with respect to the portfolio and how the events that unfolded during the quarter affected us giving our position. Then I will discuss the results in more detail with respect to the portfolio which again I will focus on what happened and how we were positioned. I will talk briefly about the events that have unfolded since the end of the year, which is you all know are quite substantial. Then I will have a discussion of our dividend. We did lower the dividend in January, I will kind of give some background information what went into that decision. And then finally, I will talk about our share repurchase program. Yesterday, the Board authorized an increase in…

Thank you. [Operator Instructions] And our first question comes from the line of David Walrod from Jones Trading. Your line is now open.

Hey. Good morning, guys.

Hi, Dave.

Good morning, David.

I guess, a couple questions around one theme, you raised a lot of capital in the fourth quarter, you mentioned that the capital allocation to the pass-throughs was skewed due to the cash and also that your leverage was down at quarter end. Can we expect you to, I guess, number one, bring the leverage back up closer to the high 8s, low 9s, and two, then that capital allocation to be more where it has been historically?

Well, we -- as I mentioned, we have already taken a step to do that so far this quarter. The leverage ratio is not quite up to that level, we are watching that closely, because with the sell-off and the -- there is two things that mortgagers don’t like, one, is an increase in volatility which we have had and obviously increase in rates which where the negative convexity of the mortgages can kick in and the extension of mortgages, as a result, we are mindful of what’s developing in the market and whether or not we should be increasing the leverage. As of now that decision has not been made. There was a slight uptick but not to that range. You want to say something, Hunter?

No. I -- David, in the fourth quarter we sold a rather large proportion of our inverse IO portfolio. So it was one trade consisting of a few securities that really threw that number off, so it was, I think, I believe it was so what $15 million and we ended the year with $121 million portfolio. So it’s a relatively large percentage. Since year end we have kicked up the portfolio both because the IOs are appreciating in value and because we are explicitly adding them. So we are getting back to a more normal, I think, we went from the derivative portfolio being $121 million to just under $140 million now. So that’s the combination of an increase in the market value of some of the negative duration bonds into the sell-off and some adds that we’ve done. So it’s trending back towards a more normal level.

Okay. And also with the capital raise, can you talk about any drag on your effective earnings as you guys raise capital and then deployed it?

It was particularly late in the year and that’s really when we had to lower the dividend, the curve was flattening. It was just too much. I mean, we were selling shares early in the year, even really into the very earliest fourth quarter was some of that attractive opportunity then it just really kind of went away from us and that’s why we had to basically collect dry powder wait for a better entry point, which present itself as I mentioned in the early 2018 when that money was put to work. But it was bit of a drag, presumably now that drag has been removed, assuming the curve doesn’t continue to flatten and so that’s basically that.

Okay. And then my last question is, you can just speak to, when you think -- when your portfolio -- when your capital is fully deployed, the earnings power of the portfolio, do you think it’s in line with your revised dividend or just what are your expectations there?

It is as of January and February, but as I mentioned, it really is TBD, because we don’t really know how things are going to unfold. With this steepening, that’s a very strong positive for us and to the extent that even with the Fed hiking, if the long and continues to move and we can maintain our NIM and we have also don’t forget concurrent with that steepening is probably a slowdown in speeds and we still have a high coupon concentrations, so that’s obviously a very big positive for us. Also as Hunter mentioned, the IOs that we have added are very much benefiting from that move, so to the extent that trend continues then that dividend seems or appear to be very sustainable. To the extent that things go the other way, say, for instance if the equity market really rolls over and the Fed has to pause and the curve resumes its flattening trend then that would be a negative. That would be a negative for several reason, one, because our NIM would be compressed, simply because of the gap between funding and yields on our assets, but it would also probably cause refinancing activity to pick back up and it would also be a negative for the IOs that we have added. So it’s we really have to just be careful to watch our events unfold over the balance of the year to determine what we do going forward.

Yeah. David just wanted to add a couple of points there. We are really sort of a pivot moment here, where we are going to see what the earnings power of the portfolio looks like in a market where mortgage rates to borrowers is in 450, I don’t know, call it a range of 440 to 465 over the course of the last several weeks. So as you know, our theme has been to maintain a relatively short duration asset mix through by high premium mortgage-backed securities. So the one thing that pinched us in the fourth quarter was that we saw the rate movement in the belly of the curve, which lines up with the durations of those bonds work against ourselves 4s and 4.5s is there kind of in the three-year to five-year duration type bucket, that’s where the curve moved the most. So we saw the negative price action associated with that rate move, while at the same time, we didn’t get the benefit of mortgage rates to the borrowers underlying those bonds moving to a point, our mortgage rates more broadly moving to a point where those borrowers did not have an economic incentive to refinance any longer. That has since changed in the first quarter. So a large portion of our portfolio is now out of the money so to speak. So those borrowers do not have an economic incentive to refinance, that’s especially true for our derivative portfolio, including our IOs. So we are going to see over the next couple of months how much the yield on that -- on the asset side of the portfolio has extended, thus far we are really only seeing the negative impact of the increase yields on the funding side of things. So it will be an interesting couple of months. I mean, we have an idea obviously of what we think that’s going to settle in. That’s generally consistent with the distribution rate that we are making. But I think the earnings as it relates to your question, the earnings power of the portfolio is in the state of change and a lot of that state change will ultimately depend upon where mortgage rates to borrowers settle in here.

Okay. That’s it for me. Thanks guys.

Thanks, Dave.

Thank you. [Operator Instructions] And we have a question from the line of Christopher Nolan from Ladenburg Thalmann. Your line is now open.

Hey, guys.

Hey, Chris.

What was the weighted average price of shares that were issued in the fourth quarter, please?

I don’t have that in front of me, I want to say it was in the high 9s, but I don’t have that in front of me, I can get you that information.

Okay. But it looks like it was accretive to book value?

Oh! Yes.

Great.

Yes.

All right. And then, if I am reading this right, Bob, if the longer duration on the portfolio, that’s actually working to your advantage as the curve steepens, because I thought it would be the opposite. I’m just -- I was little confused by your comments to David a minute ago?

No. Well, what we were talking about and especially the Hunter was stressing was the borrowers rates, so we will be backing up of rates is good from the perspective of prepayments, it’s good from the perspective of the performance of our IO securities. But as two mortgage durations extend, that’s a negative for the pass-throughs all else equal because they are going to extend be down in price and pay out premium did extend on specified pools will be hurt. So that can be a negative. There is the convexity component of our pass-through portfolio. And so we have adjusted our hedges accordingly. We’ve increased the percentage of the liabilities stock that is hedged in response to that. So we are trying to mitigate the effect of that. So it really depends on what perspective, if you’re talking about book value that increase in rates is a negative or potentially a negative, if you are talking about earnings it can be a positive, because it’s going to mean slower speeds and the gap between your asset yields and your funding cost is maintained. So it’s really depends on your perspective. If you are talking about earnings, it’s a positive. If you are talking about book value, it is probably going to be a negative, especially because we don’t have -- we typically don’t hedge 100%. We are something less than 100% and mortgage cash flows are -- you hedge them with IOs and you can use different types of instruments, but it’s -- they are a challenged to hedge perfectly in any environment.

Great. Thank you for the clarification. Final question is, I know you’re just talking about the spreads between 10 years and 30 years, but is -- should we really be looking as to where the one-year to three-year or five-year, where the curve is going from one-year to three-year to five-year or so, because that’s sort of the belly of the curve, that really sort of matches where your duration is at the moment. I mean, is that the area of the curve that’s really going to affect your earnings power in terms of spreads?

Well, yes and no, as we have mentioned the duration of our assets is in the belly and we fund obviously on the front-end. However, prepayment speeds are driven by kind of the 10-year area, right. And so if the 10-year is moving down, the prepayment speeds are staying higher increases -- increasing and we own a lot of high coupon mortgages duration in the belly of the curve, but the prepayment on those is sensitive to the long rate. That’s what we are seeing in the fourth quarter, where those assets as the belly of the curve sold-off, because of that’s where they laid on the duration spectrum their prices were hurt. But because the long end wasn’t moving prepayment speeds aren’t slowing. So here is an asset that’s going down in price, let say, high coupon mortgage going down in price and prepayment activity is staying the same. So that’s kind of a double negative. On the other hand, when you have a steeping of the curve, that means prepayment activity on that instrument is slowing, if the five-year is continuing to sell-off, it’s duration is going to cause us to go down in price, so book value negative, earnings positive, because speeds are slowing. So, I mean, yeah, that part of the curve, that’s really not relevant for us even though on a duration basis it appears that’s where those assets shares. The earnings perspective is 10s and 2s or 10s funds.

That 10s move the duration of our portfolio is going to get -- of our pass-through portfolio is going to get longer as well. So it will be a transitioning target. So, yes, that might be -- going back to the fourth quarter when mortgage rates were relatively low because the 10-year was stubbornly low as well, our assets were lining up on the belly of the curve as we transition into higher yield environment on the longer end of the curve are mortgages we would expect to extent some. And in fact we have seen that happen. The flipside of that the IOs have negative durations and lineup very much on the long end of the curve. So they have a lot of room to expand both in terms of income generating potential, as well as book value increase.

I just want to summarize, if you are talking about earning, it’s that 2s, 10s, funds 10s it really matter, because that movement on the 10-year effect prepayments and movement on the front-end effects our funding cost. If you are just talking about book value and the movement, the price of our assets, for it’s -- we are -- our assets are predominantly in the belly of the curve, so that that really matters in terms of price movement to book value. Of course, what Hunter just said is as rates go higher and higher they extend, so they maybe move from a four-year to six-year or potentially big enough sell-off even longer. So in terms of movement on the curve it really depends on whether you are talking about earnings or book value, because the relevant part of the curve is different for earnings and book value.

Understood. And just by the long end of the curve movements, which is pretty modest, I would say, since the fourth quarter, it’s -- I mean from -- on a 10-year to 30-year basis, it would seem that your CPRs are likely to go down in the first quarter just the way things are heading?

Yes. And then also there is a seasonal slowdown. This is typically when prepayment activity is muted and turnover is muted, so if you look at any prepayment model that’s out there, they are going to tend to show all those equal, prepayment activity is going to trough in the first quarter and we have seen that this year. So it’s been a double win if you will. We have had rate sell-off now in the long end and it’s the seasonal part of the year where speeds are the slowest. So our portfolio the last two months, we mentioned this on the call yet, but our pass-through portfolio over the last two months are been in the mid-single digits.

How many Fed hikes are you assuming for 2018 and I’ll end it with that?

Sure. I would assume three, maybe four, a lot of it has to do with whether not the equity markets change that. But based on fundamentals alone and assuming the equity market hangs in there, I would say, three or four, in fact, I would say, based on the fact, they pass that bill this morning, probably four.

Yeah.

We have position so that, just as added color we have position so that if we get more than three this year but maybe more broadly, if we get more than three or four over the next couple of years, the curve gets really flat really quick and so we have struck a lot of new funding hedges out in the area of say late 2019 through late 2020.

‘18.

I am sorry, late 2018 through late 2020. So to the extent that have one or two or three more hikes over that period of time then what’s currently baked into the market in particular swaps and Eurodollar hedges will benefit from that pretty greatly.

Got you. But if the forward end of the curve remains pretty flat, it could be a negative earnings issue?

Yeah. We -- definitely we go against as if we get only say three, but we feel like there is an asymmetry to that risk profile in that. We just -- unless we just don’t get any that -- that’s really the downside to us. But if we get one or two or three over the course of the next few years that’s -- has a very minimal negative impact to us at this point the way the markets pricing in future Fed hikes.

And again, Chris, I want to stress this. Three hikes, four hikes, who knows and obviously our funding costs goes higher, but our dividend is a function of the NIM, right. And so if we get four hikes in the 10-year stays here and goes lower, that’s going to be a big negative for our earnings. If we get four hikes but the 10-year ends the year at 320 we may not be at all, because we will be able to maintain that NIM.

Yeah.

So…

Prepayments speed.

Yeah. Yeah. We are going into, this was a very perplexing thing, I would say, I will spend a moment talk about this and not a lot of people in our space understood this is -- was the incredible outperformance of the long end of the curve, the third year, the third year treasury had an remarkable run until very, very recently. Why was it? Well, there is several theories put forward. One was, because equities have such a phenomenal run that anybody that runs a balanced portfolio between equities and bonds was simply just reallocating to rebalance equities that had a big run they have become a proportionally higher part of the portfolio, sell some equities and buy some bonds and bring it back into the target allocation. The other and predominantly in the case of asset liability managers and pension funds, so there was this -- someone was a bigger buyer of the third year and that’s why the 5s 30s curves just kept flattening and flattening, that seems to have finally reversed. But and then also we have to consider what’s going on abroad, what’s going on with ECB and their asset purchases, because our longer rates have been very attractive to long rates there. To the extent the market starts to think they are going to taper their asset purchases and maybe reverse them then yields on the long end in Europe would move higher. That relative attractiveness would go away. That could cause the long end to sell-off. So that’s really what matters from an earnings perspective. It’s not just how many hikes. It’s just how many hikes in relation to what moves -- what happens on the long end of the curve.

Understood. Yeah. Okay. Thank you very much for taking the time and answering my questions.

You’re quite welcome.

Thank you. And I am showing no further questions over the phone lines at this time. I would like to turn the call back over to Robert Cauley for closing remark.

Thank you, Glenda. Everybody I thank you for your time. Appreciate the chance to get on the phone and talk about what we have been doing and field your calls. To extent somebody has a call that -- question that didn’t come up during the call or comes up afterwards, listen to the replay, feel free to call our office, our phone number 772-231-1400. Very glad to take your call. Otherwise look forward to talking to you next time. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.