Lindsey Crabbe - Investor Relations Phil Reinsch - President, CEO & Chief Financial Officer Robert Spears - Executive Vice President & Chief Investment Officer.

Derek Hewett - KBW Steve DeLaney - JMP Securities Max Marin - Wells Fargo.

Good morning and welcome to the Capstead Mortgage Second Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded.

I'd now like to turn the conference over to Lindsey Crabbe. Please go ahead..

Good morning and thank you for attending. The second quarter earnings release was issued yesterday July 27th and is posted on our website at www.capstead.com under the Investor Relations tab. The link for this webcast is also in the Investor Relations section of our website and an archive of the webcast will be available for 60 days.

A replay of this call will be available through October 28, 2016. Details for the replay are included in the yesterday's release. With me today are Phil Reinsch, President and Chief Financial 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 could 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 available on our website. The information contained in this call is current only as of the date of this call July, 28th.

The Company assumes no obligation to update any statements, including any forward-looking statements made during this call. With that, I will turn over to Phil..

Good morning and welcome everyone. Before we get started, I wanted to express on behalf of management and our employees our gratitude to many contributions made by Andy Jacobs, our former President and CEO over his past 28 years with Capstead.

As you may know Andy resigned on July 14th and pursuant of consulting arrangement has made himself available to us through year end to help ensure us with the transition. Respecting Andy's privacy, we do not intend to discuss his departure further on this call or otherwise.

Other than the note that this leadership change in no way foreshadows any significant change in Capstead’s short duration agency ARM investment strategy, I refer you to the Company's press release also dated the 14th and our subsequent Form 8-K filing for all public information available on this subject.

Now, if I may have few quick comments on market conditions and our second quarter earnings. The markets that we deal in have been fairly volatile thus far in 2016, most critically our earnings, most critical to our earnings this year's 80 basis point decline in the 10-year U.S.

treasury rate to 1.47% at quarter end as led to yet another mortgage free financing way.

And our second quarter earnings were negatively impacted, higher investment premium amortization charges caused by higher mortgage prepayment levels while mortgage prepayment levels are heavily influenced by the available mortgage financing at attractive term, prepayments are also influenced by the overall health of the housing market and seasonal factors, not the least of which is the summer selling season.

Given currently available mortgage rate that healthy housing market and seasonality, we are anticipating that mortgage prepayments levels will increase further during the third quarter before declining in the fourth quarter.

In the meantime, we continue to enjoy incrementally higher cash yields on mortgage loans underlying our portfolio as they continue resetting higher grade based on higher prevailing 6-and 12-month interest rate indices and borrowing conditions also remain constructive particularly with the Fed appearing to be on hold for the time being.

Given current market fundamentals, we remain comfortable replacing portfolio runoff with additional agency ARM security and anticipate maintaining portfolio leverage near present levels. With that, I will open the call up to questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bose George of KWB. Please go ahead..

It's Derek on for Bose.

Can you guide to the amount of principal runoff you estimate replacing over the quarter or two? And on that sort of similar point, have you entertained the idea of buying back stock with runoff rather than reinvest?.

Sure, our runoffs running around 250 million to 300 million a month.

So a 1 billion or so a quarter right in this area of the year, we look at how the redeploying the capital in the portfolio whether that makes sense, these are other options for the capital and we do have a $100 million buyback authorization from our Board and that would certainly use that buyback authorization, if that was a better use of capital redeploying into the portfolio..

All right, has there been any discussion internally and with the Board perhaps rotate into other areas of the NBS market, I mean your net margin was 70 basis points last quarter?.

We continue to believe that the ARM market is a great way to play the residential mortgage finance business and being a levered player in this space and see the long-term advantages to running a large short duration ARM portfolio and don't anticipate expanding our per view beyond the short durations space..

And can you tell us where July's speed printed for the portfolio?.

Well, generically back to security to ARM security somewhat ours that speeds were 8% to 9% which equates to [couple of CPR] something like that..

Our next question comes from Steve DeLaney of JMP Securities. Please go ahead..

We've noticed kind of surprising because everything is coming down in terms of rates and that's what has created this dilemma for you on [preface], but just in the last few weeks I guess post Brexit we've seen short LIBOR rates moving and actually one-year LIBOR too, but it looks like on three months were up to 75 basis points maybe 10 higher than it was at the end of June, I am just curious if you guys have any thoughts about why we're getting that movement there given the Fed is being so patient and more importantly I guess has there been any spillover into repo pricing, we getting any pressure on repo because LIBOR is moving higher? Thanks..

Yes, Steve, we'll update that. We're not seeing any pressure on repo rate. I think a lot of the movement up in LIBOR has to do with European funding cost post Brexit whether [indiscernible] or what European banks are having pay for their money.

At the same time, you got this money market reform that should make once it's implemented [agency] repo very attractive alternative for those let's say money market mutual funds, and so what we're seeing which is that we kind of helping offset some of the negatives on the prepayments side, we're seeing LIBOR go up which helps our indexes and it also helps us receiving on the SLOB stock, but we're not [indiscernible] if the rates go up, and so we're still repaying around 65 basis points which is where we were before with the life along one month where we're receiving, if that's 49 basis points and for that spread only about 16 where it has been running closer to 20.

So that helps us and also to your point about reset just June 30th, if you look at one year and six months LIBOR, they're up 17 basis points and then when you're seeing [fees up 10]. So net just looking at our Fannie and Freddie short recess that's about15 basis point.

So if you look on page 82, we show all fully index [lag] that's now going to be about 15 basis points higher, if rates stay where they are right now. So that helps to offset some of the prepayment pressure.

Now, on the other hand [indiscernible] going to be resetting higher and so they might have a little more incentive to refinance so that's going to be somewhat offset by prepayments, but net of net LIBOR going up is good for us..

Got it, that's great color Robert.

I appreciate it and I'd not focused on that positive technical with the flows from money market funds and we by on this call it's been around while, but back in the day maybe pre-crisis when we always saw repo living somewhere between Fed funds and LIBOR, so it's really only been in the last several years if we've had repo consistently above LIBOR so maybe --.

It's dislocated a little bit from LIBOR recently..

Okay good thanks for that and just one follow-up on that, it was nice to see the expense ratio come back down because you guys had historically been the lowest in terms of operating expenses.

I guess the sub-100 basis points I think the total dollar terms was like 3.2 million, do you guys see that is a sustainable level roughly something 1% or lower on total G&A expenses?.

Yes, sure we really do, the first quarter had an adjustment of prior year accruals..

Yes on incentive comp, yes..

And we would -- one of the top two or three operating decisions….

And Phil, are you guys planning any new hires given the change in the C suite, I guess at this point you're CEO and CFO as we think about G&A should we factor in that there is going to be some hiring someone to replace you in CFO role?.

Yes, we're going to put a new CFO in place within the next few months I imagine and so we won't have a gigantic change. Andy is an elemental drop off it will be adding that..

[Operator Instructions] Our next question comes from Joel Houck of Wells Fargo. Please go ahead..

This is actually Max Marin for Joel.

Could you guys pleas give us some color on how seasoned ARM pricing and more broadly book values this quarter to-date?.

ARM pricing and book values quarter to-date; is that what you're asking?.

Yes, about seasoned ARM pricing..

I am sorry, are you asking in terms of what sense quarter end?.

Yes..

Generically, seasoned post resets are more or less unchanged in price and longer resets kind of in the 51ish type area are down for 30 second and now a lot of movement..

And then just ahead of potential pick up in prepays here, do you think that we could see you guys in a quarter like next quarter where prepays likely higher take like a short-term position in U.S.

treasury, is that something outside of the mortgage market?.

No, I don't see that.

Replacing ARM securities with treasury securities?.

Yes..

That’s probably not going to happen..

Okay, I was just figuring on a short-term basis if your prepay elsewhere --.

I mean if you look at prepays there a little higher than they were on the ARM's segment than they were in 2016 where we were similar fixed rate levels, the curve is little flatter so probably going to see the peak and speed a little higher this year than it was last year, but we're not expecting that to be materially higher..

That concludes our question-and-answer session. I'd 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 is now concluded. Thank you for attending today's presentation. You may now disconnect..