Lindsey Crabbe - Investor Relations Officer Phillip Reinsch - President and Chief Executive Officer Robert Spears Jr. - Executive Vice President and Chief Investment Officer.

Trevor Cranston - JMP Securities.

Good day and welcome to the Capstead's second quarter 2017 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Lindsey Crabbe, Investor Relations Officer. Please go ahead..

Good morning. Thank you for attending Capstead's second quarter earnings conference call. The second quarter results release was issued yesterday, July 26, and was posted on our website at www.capstead.com under the Investor Relations tab.

The link to this webcast is also in the Investor Relations section of our website and an archive of the webcast will be available for 90 days. A replay of this call will be available through October 25, 2017. Details of the replay are included in yesterday's release.

With me today are Phil Reinsch, President and Chief Executive 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 27, 2017.

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

Thank you, Lindsey. Good morning and welcome everyone. I'll make a few brief comments then we will open the call to questions. Our results for this quarter were negatively affected by higher mortgage prepayments and higher borrowing costs while benefiting from higher cash yields and higher portfolio balances.

Overall, yields were down 1 basis point while related borrowing rates were up 15 basis points. After declining by 2.7 CPR in the first quarter, mortgage prepayment rates reversed course during the second quarter increasing about 1.8 CPR to average 24.7 CPR for the quarter, largely attributable to seasonality and the flattening of the yield curve.

This resulted in about $2.4 million in additional investment premium amortization negatively affecting portfolio yields.

Meanwhile our repo borrowing rates were higher this quarter with the markets adjusting for three 25 basis point Fed hikes in the last seven months, higher interest rates also weighed on our hedging costs due to cumulative effect of older lower rate swaps expiring in recent quarters and newer higher rate swaps being added.

On the plus side and key to our short duration ARM strategy, we picked up 6 basis points in portfolio yields, largely due to periodic coupon interest rate resets.

And as illustrated on the last page of our press release, the currently resetting portion of our portfolio can be expected to continue increasing in coupon in the coming quarters with fully indexed coupons 32 basis points higher at June 30 than related coupons in effect on that date.

Against this backdrop, we are in $0.14 per common share in the second quarter, down from $0.20 in the first quarter. We paid a $0.21 common dividend for the quarter. Book value was down $0.26 for the quarter to $10.72 per share including $0.07 returned to stockholders with a common dividend.

Weaker ARM pricing levels contributed $0.12 to the decline in book value compared to March 31, while swap pricing contributed $0.07. Year-to-date book value is down only $0.13, including a total of $0.08 in dividends over earnings and we paid $0.42 in common dividends, this produced an annualized economic return of 5.3%.

Given the stability inherent in our short duration ARM strategy, we believe we are well positioned to preserve our stockholders' capital, while generating attractive risk adjusted returns over long-term investment horizon, more immediately mortgage prepayment levels in the coming months and quarters as well as the face of feature increases in short term interest rates remain key to our near-term results.

With that I'll open the call up to questions..

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

Hey, good morning. It's Eric on for Bose. Guys I'm hoping you can talk a little bit about the relative attractiveness between pre-reset and post reset arms.

Specifically, how does the option adjusted spread between those two segments compare right now? And I realize that there is a lot of different cohorts of loans but just generally speaking if you can give us an idea of the OAS between those two buckets? Thanks..

Sure, I mean, obviously OAS on arms on failed model you run can give you a lot of different answers. If you would by the OAS and speed assumptions post resets look fairly attractive right now versus new issues but then you get into the cohorts and speed performance and issuers.

I would say that irrespective of OAS post resets look a lot more attractive now than they did six or 12 months ago.

I think particularly in some of the paper were IOed has expired two or three years ago, it's been beat up pretty severely and I think when your life wars [ph] has been fairly stable for the last seven or eight months and so you're not going to have the payment shock in those securities like you had 12 months ago, so some of that paper looks very attractive in our models.

Newer issue five ARMs or the speed ramp is faster now there has been some fun and I think a lot of that has to do with property values going up, flippers in their so barring that normally you would see prepay in the 10 to 12 CPR area six months then are prepaying at 20.

And so I would think that because of that we are not as prone to buy as many new issued 5/1s right now, so, long answer. More seasoned post resets are throw in a higher OAS and just season paper in general I think is more attractive than new issues for the most part..

That's a really helpful answer, Robert, thank you..

Sure..

Also what's your outlook right now on the refi activity for IO loans? Are refis sensitive to the level of mortgage rates as they are for a traditional ARM?.

And what you're seeing on the IO paper in general the paper that went from IO to fully amortizing in 2016 and 2017 that is fairly fast right now. Before the amortizing in 2015 or earlier it's not, it's fairly well behaved and paper that still has IO on it is fairly well behaved.

So the fact is IO paper is back, they're expiring in that year or one to two years earlier, on either side of that it's fairly well behaved..

Got it. Thanks for the comments..

Sure..

[Operator Instructions] The next question comes from Cranston Trevor of JMP Securities. Please go ahead..

Hi. Thanks, good morning. I got on the call a few minutes late, so apologies if you've already addressed this, but can you talk about where prepayment fees were in July versus what the second quarter average was and what your outlook is for the balance of the quarter and the year? Thanks..

So we sell ARM speeds generally pick up for the July factors and a lot of it is day count related and then we should see that come back the other direction for our August factors. That's just a matter of how many business days were in the month versus holidays. And longer term, we expect to see some moderating of the prepay activity.

But I don't know if you want to combine any additional insight, Robert?.

No, I think, the data is out there. Generically I think ARMs July versus June were up between 5% and 10% from the June print which was kind of been one that's frustrating, they should come back now in August due to day count and June is the highest perhaps from a seasonal standpoint.

So quarter-over-quarter, third quarter speed should be slightly higher than second quarter based on the data we've seen so far..

Okay, got it. That's helpful. Thank you..

This concludes our question-and-answer session. I would 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 call has now concluded. Thank you for attending today's presentation. You may now disconnect..