Good morning, and welcome to the Third Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 26, 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 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 Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead sir.

Thank you, Operator. Welcome everybody this morning. I hope everybody has had a chance to either download our slide deck off of our website or I was looking at electronically. We’ll begin the slide deck on Page 3 which obviously is the table of contents I just to kind of give an outline of what I like to say today and at the end of our slide deck we’ll then open up the call for questions. As usual I’m going to start off with a quick synopsis of our financial highlights for the quarter ended September 30, 2018. I’ll then go to our market development that occurred during the quarter to kind of give us a backdrop of what was the environment that we are operating in then I’ll go into our financial results a little more. But given the developments in the fourth quarter and the extreme volatility we've seen so far in the month of October, I’d like to spend a fair amount time talking about what's happened in early Q4 and we’ve done, I think it’s very important. And then I’ll come back and talk about the portfolio characteristics positioning and so forth and how we see the world going forward. Now turning to Slide 4, these are the financial highlights for the quarter. We generated a GAAP net loss per share of $0.06. This was composed or comprised of $0.39 loss per share on net realized and unrealized gains and losses on our MBS and derivatives instruments inclusive of net interest income and interest rate swaps. Earnings per share were $0.33 excluding the same unrealized and unrealized gains and losses on MBS and derivatives and interest rate swap income. Book value per share was $7.56 in September 30 a decrease of $0.30 from our value at…

[Operator Instructions] Our first question or comment comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.

Bob when you mentioned removing extension risk from the portfolio, if I am looking at that correctly should we think about you increasing your capital allocation to IOs more?

Well, it is slightly higher but I'll let Hunter talk about this. It is more on the securities themselves that's it's all - what I was referring to was how we changed the composition of the assets in the structure the passive-side. I’ll turn over to Hunter to talk about that.

With respect to the extension risk question, what we've done and really it's a continuation of what we've been working on for a couple of months - couple of quarters I should say. At the end of last year, our allocation to 15 years in sequential practically zero and now that represents just under half of the portfolio. So the ideas really sort of rooted in improving the convexity of the portfolio both for a rising rate environment and a declining rate environment. So, the focus on removing extension risk is centered around taking away allocation from a 30 year - 30 year fixed-rate bucket market into 15s and the front sequential Bob alluded to - the primary focus there. We've also added on the hedge side - we continue to replenish IOs as they’re brought off, the capital allocation hasn't changed dramatically but those IOs that we've added do have more negative duration than some of the assets that are running off. A big component of what we did and something has been very helpful for us in damage control, I guess in this most recent selloff is earlier in the year we increased our allocation to pay our swaptions pretty substantially. So we are long know just around 850 million basically won three months by tenure at this point, a pair swaptions that has added a lot of convexity into the sell-off as well. We move the strikes around from time to time to try to minimize costs and enhance the return profile into the list scenarios and buckets that we have our IOs. But also want to add the down in rate scenario was something that we're focused on as well. So as we've been adding to 15 years for sequential's and even to a lesser extent, 20-year mortgages we've been shifting our balances into what we feel like are relatively cheap forms of call protection. So buying a lot of 85k max 15 year force for example, 20 year for shifted our generic into 85k max. So we expect the portfolio to have a little bit better convexity profile on that same note. We've added some receiver swaptions recently as well. So, we are certainly mindful in fact that basically we just don't expect rates to stay for very long. So we're trying to improve how the portfolio performs on the wings and those are the actions that we've taken.

So Hunter, if I heard you correctly based on what you said we should expect further allocation to the 15 year?

I think we're about where we want to be now with respect to the 15 years. I would say that if we have an opportunity to, something Bob hasn't really touched on yet, if we have an opportunity to buy stock back this quarter, I would expect that we would be liquidating some 30 years to buy that back. So in that respect the allocation may increase a little bit.

Final question and I'll get back in the queue. What you guys are thinking about leverage? Leverage has some room to go up, are you waiting for some sort of opportunistic moment to lever up or are you just sort of happy where you are?

I would say probably happy where we are. That kind of to me is kind of came to the question of whether you think the curve continues to bear flat or inverse. We start to see signs of the economies rolling over. I mean that's the time when you take the leverage up. The other option that might present itself and we've seen obviously mortgages had a rough at late, I tend to look at the spread of the current coupon 30 year fixed rate mortgage to this 10 year, which is an index on Bloomberg. And as of last night it was about 86 basis points. That's just wide as it's been since the summer of 2016 after the Brexit and subsequent rally, but still not as wide as it was after the taper tantrum. I suspect if we had a meaningful blow out in mortgages and you got north of 100 on say for instance on an index like that where mortgage that just looks so cheap that it might make sense to just figure it's a great buying opportunity and take the leverage up.

Just to chime in on that, mortgages certainly look a little bit better than they have but are still - I would characterize them as still being sort of on the tight end of the sum. They look good on absolute basis, sure if you - but the fact of the matter is we wouldn't be comfortable taking on hedged risk here. So that doesn't really do us a lot of good.

Our next question or comments comes from the line of David Walrod from Jones Trading. Your line is open.

Couple of questions. Your prepays were down this quarter. How much of that do you think is due to seasonality and how much do you think it's due to the increase in rates.

Well, they both helped. No question we're entering the seasonal slowdown and we have the uptick in rates and really the uptick in rates didn't occur at actually October, which means you're probably going to have a very slow rate environments over the course of the winter. That being said, our portfolio tends to be new, low, and as a result - they're not as subject to the seasonality there. So there's two factors at work with the new mortgages. One, is the seasonal, the other one is that it just gently moving up the curb off of zero. But we definitely have and would expect to see slow speeds for both of those reasons going into the year. The other thing for us, as you are familiar, we have this notion of premium loss due to pay down which obviously affected by speeds but it's not just affected by speeds, it's affected by the price of a given security. So I'm like say available for sale accounting were, where you amortize purchase date premium subject to quarterly revisions using the retrospective. But for us, we mark all of our securities to market each quarter and then calculate the premium loss to the pay down based on that price. So as rates have moved higher and the prices of our securities have moved lower, there's less premium to advertise. As a result, our premium lost due to pay down, I had the numbers in here somewhere, but it dropped pretty precipitously over the course of the quarter and we probably would expect it to stay low.

I would just add that the - Dave, I think where we have room to see more further slowdown is in the IO, inverse IO portion of the portfolio. Overwhelming majority of loans in that portfolio are now solidly out of the money. So I would expect going into - especially into the seasonal part of the year that you referred to, the seasonal slowdown, I would really expect to see little bit better performance on that side.

And then I guess Bob, can you expand on whatever Hunter was alluding to about the share buyback?

Well, we kind of have an unofficial threshold of 10%, and based on where the stock was trading when I walked in here this morning, we're in a position where we would be looking to buyback shares. Discount is official on where the stock is trading at the very moment. But I think it was down odd $0.40 when I came in. So that would mean that we would be looking once we pass out of our window, black out window, to look to be buyback some share.

[Operator Instructions] We have a follow-up question from Mr. Christopher Nolan from Ladenburg Thalmann. Your line is open.

Bob, how much do you think the yield curves are reacting to the stuff happening with the EU? I mean everything economically sounds okay in the U.S. generally speaking. But on the EU side it sounds like the long end of the curve might be reacting to risk from there?

I think it's possible. There was the ECB meeting yesterday. And they say they're going to end their QE program in a not too distant future. I think it's in December and then they had to pay hiking sometime late next year, the economic day. There been somewhat mixed but they seem to be not sufficiently weak to cause them to change their plan. But it's definitely impacts the term premium and there's obviously been a huge spread. When we watch spread say currently between 10 year treasury note and 10 year bond but those are very highs, they are the high end of the range lately. I'm not so sure today that's as relevant. Today, everybody seems to be more focused on inflation and whether or not we're going to have any units. Therefore it should be a term premium for that reason. Who knows, the market seems to be - the most recent date has been tamed, the GDP data came out today; core PCV was I believe 1.6%. So it's come off of the 2% level. That's going to be even no matter what happens in Europe, it's going to be hard for that term premium to get much higher with the inflation data doing what it is. But as I mentioned, if you listen to the earnings call more than equity guy, I do have CNBC on in the office and it's across many industries are talking about pricing pressures. There was the Kansas City Fed ISM number yesterday, and the Bloomberg story I read had a lot of anecdotal reports. There definitely is a lot of talk about rising import prices, not just jet fuel and airlines, it's tariff related and otherwise. There's definitely increase in pricing pressure in the pipeline. And the big question is, do they absorb that or they pass it through? Nobody knows, but certainly it's not all going to be absorbed. So it'll be starting to get pass-through's. You're going to see price pressure but is that enough to really cause a big uptick in the term premium? Hard to say. I think at this point most people think the Fed is probably going to have to consider pausing maybe sooner than they thought. So that would not mean that that's going to cause the term premium to go up.

[Operator Instructions] We have a question or comments from the line of Roy Nada from NatWest Markets. Your line is open.

I just wanted to elaborate a little bit on kind of the inflation side that's clearly a big impact to all our businesses. Productivity it was kind of touched on a few times by some of the Fed members over the last week. And obviously where we are with employment and kind of where we are in the cycle, do you guys see productivity making a step change from here to kind of counteract kind of pricing pressures? What do you think it's going to stabilize?

I wouldn't expect it to increase. Although the CapEx component of GDP wasn't so great but I think if you look back away from the super high frequency data and look at the year-over-year trend, it's still increasing at a decent rate. I believe about a month ago Kevin Hassett, the Chairman of the Economic Council, Administrations Council had a very good presentation showing clear break in the trend in all of these various measures of CapEx spending that have occurred over the last two years and those have been on a significant long-term downtrend for years for whatever reason, weak economy, excessive regulation, whatever. And that certainly has to affect productivity. So I suspect that it's rebounding after all the Tax Cut Act was aimed at doing that at least for the first two years. So in spite of whatever is showing up in the data very recently, I think it will continue to occur if for no other reason pent-up demand because it was so good for so long. So yes, I do think productivity will come back and that will take even more pressure off pricing pressure in terms of driving inflation and wages possibly. So, yes, I think the sustainable growth rate can recover and all the more reason that you don't necessarily have to worry about is inflation. Inflation is marching, and unfortunately that means term plan will be more stable as well.

The data this morning certainly supported that thesis. GDP was robust again and inflation was very tame.

[Operator Instructions] I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Management, for any closing remarks.

Thank you, Operator. Thank you all again for your time. To the extent you have any other questions you didn't get a chance to ask or you listened to the replay and want to ask a question, we're always here to answer your questions. Our number here in the office is 772-231-1400. We're always willing and able to take your questions, otherwise we'll talk to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.