Good morning, and welcome to the Second Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, July 27, 2018. 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 the 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 further forward-looking statements to reflect actual results, changes in the 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 welcome to our earnings call. I hope everybody has had a chance to download our slide deck off of our Web site. I will be using that exclusively for the call today, try to walk you through our results, where we've -- steps we have taken with the portfolio and how we see things going forward. I'm going to start with slide three, which is the table of contents as I always do, just to kind of give you an outline of the discussion today. As usual, the first thing we'll do is kind of go through the market developments that took place during the quarter, both the rates market and the mortgage market. This gives us a background to then move our discussion onto how these developments impacted our results for the quarter, what steps we've taken with the portfolio to position the portfolio and how we see things going forward. So with that, I will dive right in to slide four, which is just the highlights of our results. I do have to apologize that we did make a last second change to our earnings which caused two of these numbers to round. The second and the third bullet points are the items I'm referring to. One line that did not change is the earnings per share. For the quarter, we generated a GAAP net income per share of $0.03. We incurred $0.34 as opposed to the $0.33, apologize, of net unrealized and un-realigned gains and losses on MBS and derivatives including the net interest expense on the interest rate swaps. Excluding those items, we generated $0.37 of earnings per share. So $0.37 of earnings per share less the $0.34 of unrealized gains and losses resulted in a net income per share of $0.03.…

Thank you [Operator Instructions] Our first question comes from the line of Christopher Nolan with Ladenburg. Your line is open.

Hi, guys.

Hi,

Bob, thanks for the highlight. Just back to the hedges for one second; thank you for highlighting the 70% of the funding is locked in the low-twos. The variable of that 30%, is that hedged using the euro-dollars or other things, or that is sort of un-hedged?

Well, at this point putting on additional euro-dollar in swaps are going to be at much higher levels. So we've been using swaptions more, we also use treasury futures, and we have TBA shorts although not really an explicit funding hedge, but it's basically swaptions. Volatility is low and it's an effective instrument to use the hedge up, although it's just not as pure hedge as euro-dollar as a swap. So that 30% of our funding will drift higher as the Fed continues to raise rates. And we have these hedges in place, which is as I said not a perfect hedge, but they surely upset the increase in funding to the extent we see movement in the curve. And then the other side of that is what happens on the asset yield. Our yields have been moving higher, but if we don't get any more movement on the long-end of the curve, they may not move any higher, and that would leave us with the -- the net of that would probably be compression in our earnings. So that's kind of how we see things going forward.

All right. And then on the asset side, touching on the investment yields potentially going up, what do you see to be the driver of that, because looking at your portfolio it looks overwhelmingly fixed rate?

Yes. I mean it's just the spreads of where these assets trade, the yields that are available, the CMOs that we have acquired have yields of 3.5% to 3.7% or 3.8% of fixed rate mortgages. The prices of these have come down an awful lot and they prepay slower. So the yields are comfortably in the 3s. It really gets down to where the long-end of the curve stays stable. It doesn't move any higher, and mortgages spread stay stable in that case those yields would themselves of course be stable. If we see long-end rates move higher and/or spreads that these assets trade at move wider, then we have the opportunity to increase the yield on the portfolio. That's kind of the big wildcard here going forward. Everybody is aware of the fact that the curve has been flattening, it's putting compression -- downward pressure on earnings, but what happens on the long-end of the curve is going to be the key driver, whether we can still continue to see more earnings compression or we get some relief in the -- as a result of movement higher, either rates or spreads.

Final question, how does this -- where is your threshold for deciding whether not to grow the portfolio, or to buyback stock, what sort of discount are you looking for in the stock price to initiate a buyback?

Well, we had a buyback in place. So, generally about 90% of brokers are kind of an unofficial threshold. The stock yesterday traded briefly more than 5% above block, although that since gone away I believe. Same kind of threshold, I mean these are not hard fast numbers, but we like to see at least pushing 10% premium or discount before we do either. But as I said, that's not a hard fast grow, those are just kind of rule of thumb if you will.

Great. Thank you for taking my questions.

Thanks, Chris.

Thanks, Chris.

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

Good morning, everyone.

Hi, Dave.

Just wanted to get a feel you've got -- you've talked about your exposure in CMOs in the 15s, should we expect you to keep them at these levels as far as percentage of portfolio or would you continue to have increase?

I'm going to let Hunter take that one.

We have continued to increase a little bit on the 15-year side. I think we would like to see an increase in CMO space. We really have to be opportunistic about when we add those. There has been a lot of demand for them of late, so they are tightened up quite nicely, kind of taken them out of the range where we would be net adding. We haven't sold many into that either though. So we kind of hold right now on that sector. The curve flattening really limits what we can do. The back-end cash flows are -- the demand for those is very weak, when we have seen the curve is flat because the incremental yield pickup in a flat curve environment for a very long duration bond is just not compelling to those who invest in those back-end cash flow. So we will opportunistically continue to add. I think I would like to see that balance gets to be around 20% to 23% of the portfolio. And then we will see what the curve gives us. I mean that's really then the strategy is in our view, why take the additional duration and extension risk, when the front-end the belly of the curve offers as much as yield as the longer end does. So that's been kind of the strategy, it's de-risking the portfolio while still being able to take advantage of the fact that the front-end of the curve and potential to the three to five year point is really compelling from a unit perspective.

That's very helpful. Next would you say that this quarter, with all the trading activity you did that maybe had a minor drag on your earnings?

Yes, exactly. We had some -- we had a lot of our CMOs that we added were June 30 settled and some of the bonds that we sold were June settle, so we had about 15 days of interest that we didn't receive on a few $100 million and they were small gaps like that throughout the quarter. I wouldn't say if this is material but it definitely had able to drag on earnings. The other thing that of note was the Libor where I'm funding spikes that occurred in late first quarter had a little bit of a lingering effect into April and May. So while the rate started trending back down, if we had on a one or two month repo that we executed in March and we didn't do a lot of longer term stuff because of the small spike in funding. That stay on the books through April and into May. So those are kind of the two components and I would say we're out of the ordinary that affect might have affected earnings a little bit.

I know you talked a little bit about yields but can you talk about the spreads opportunities and how the 15s and the CMOs, what opportunity is there relative to 30s and to your existing portfolio?

Go ahead, Bob.

No, go ahead, Hunter. You take that.

These are really I mean back to where is it moment ago, there is definitely a yield gap between 30s and 15s but when we look at what it takes to hedge the 30 years versus this 15s and CMOs. On a risk adjusted basis, we feel like it's a pretty easy trade. So while there might be 20 or 30 basis point give on nominal yields, we would quickly absorb most if not all of that in adding hedge costs buying options to guard against our extension risk and I think if you followed us for the last few quarters, we are just taking a view that it's okay to have in this period in time this point of the Fed hiking cycle, we'd rather give up a little bit on the earnings front and guard against sort of at inflation type of surprise that gets long end rates moving quickly. That's the kind of move it can be devastating to portfolios like ours and we'd rather guard against that and maybe soft little bit on the earnings side for a few quarters then be exposed to a windfall decline and the value of our assets.

Great. And then my last question, Bob you mentioned in your prepared remarks that leverage had been kind of drifting down, any thoughts about how you want to take leverage, do you given the current environment maybe want to take leverage up a little bit or you're comfortable where it is?

Well at the end of last year, when it was higher we also had a much higher allocation to 30 year mortgages, much higher and therefore we kind of view that differently than we do now, now as Hunter alluded, we have a lot less extension risks. We have the CMO's, we have 15 years, we have far fewer 30 year coupons and therefore that in conjunction with the added use of the swaptions makes us a little more comfortable with the leverage there. So it's come down but it's, I would say it's not likely to move meaningfully lower than where it is now that we did not feel that way you know last year we felt we that, we have to meet people we position of portfolio in terms of the asset mix or take the leverage ratio down. We've changed the asset mix we're continuing to let the leverage get down a little lower but that target is not nearly as low as it was that is frankly net up TBA hedges we're in the mid sevens, I don't know it's going to go materially below that based on the way the world looks today.

All right, it's all very helpful. Thanks guys.

Thanks, Dave.

Thanks for the questions there.

Thank you. And I'm not showing any further questions at this time.

Thank you Operator, and thank you everybody for taking the time to listen to our call. To the extent that you didn't have a chance to listen to the call when you want to listen the replay and then have questions we always are welcoming of those. Please call the office the number is 772-231-1400 otherwise we look forward to talking to you next quarter. Thank you everybody.

Ladies and gentlemen this does conclude the program. You may now disconnect. Everyone have a great weekend.