Bob Cauley - Chairman and CEO Hunter Haas - CFO.

David Walrod - Ladenburg.

Good morning and welcome to the Fourth Quarter 2014 Earnings Conference Call for Orchid Island Capital. This call is being recorded today February 24, 2015.

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 for 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. Bob Cauley. Sir, you may begin..

Thank you, operator. The trends we have experienced for the first three quarters of 2014 continued into the fourth. The market continued to defy expectations and rates continued to rally. While the flash rally on October 15th didn’t hold, we still ended the year with rates down over 80 basis points on the 10 year U.S.

Treasury and the curve substantially flatter. The swap curve moved similarly. In spite of the bull flattener, typically the bane of RMBS investors, 30 year agency RMBS continued to tighten to comparable duration treasuries.

The reason for the outperformance was a combination of speeds that continued to ignore lower rates available to borrowers and reduced supply in the market.

Also in spite of the rally, volatility, as measured by the SRVX index Chicago Board Options Exchange interest rate volatility index that measures the fair market value of future volatility implied by the 1 year option into 10 year pay fixed swap, remained stable and near the low end of the range for the year.

Conditions in Europe continued to deteriorate and the European Central Bank announced their intention to initiate a $1trillion program of quantitative easing on January 22, 2015.

As we neared the end of the year, tensions surrounding Greece started to rise as a new regime seemed poised to take control and was focused on defying the austerity measures imposed by the European Union when the Greek external debt was restructured just a few years ago.

This raised the prospects for a Greek exit, or Grexit from EU and coupled with the EU quantitative easing program, caused sovereign rates across Europe to reach levels never seen outside of Japan. In some cases, longer term rates were negative, as overnight funding rates pushed well through the previously unthinkable zero bound repeatedly.

These developments caused UST rates to accelerate their rally into January, with the 10 year US Treasury rate reaching a low of 1.64% on January 30th. Economic data in the US was generally mixed with the exception of the jobs data which continued to be robust.

The non-farm payroll figures for November, released in early December, were strong and perhaps more importantly, we saw the first signs of wage inflation. Specifically, average hourly earnings increased 0.4% for November 2014 period, the first reading of this magnitude since December of 2013.

The corresponding December wage data, released in early January, was negative and the November data was revised lower. However, the January data released earlier this month was strong again, up 0.5%, and the job growth figures were revised substantially higher.

The average monthly non-farm payroll gains for the past three months is approximately 336,000, and the average gain for calendar 2014 was approximately 260,000, well above the approximately 200,000 average gains we saw for the last three years.

These developments have caused the markets to struggle over what this all means for the Federal Reserve and their intentions with respect to the timing of an increase in interest rates and the removal of their accommodation that has been in place since the financial crisis. Orchid enjoyed another very successful quarter.

We continued to grow our equity base throughout the period, utilizing our At-The-Market program. During the fourth quarter the Company sold an additional 3.7 million shares through its second ATM program, which was put in place in early September. This brings the total number of shares sold under the second ATM program approximately 5.1 million.

We raised approximately 49.8 million of proceeds, net of fees paid to the agent, during the fourth quarter. The weighted average sales price of these shares was $13.87. The Company’s book value per share was $13.05 at June 30, 2014 $13.27 at September 30, 2014 and $13.06 at December 31, 2014.

At December 31, 2014 our stockholder’s equity was 218.1 million, up from $44.8 million at December 31, 2013. With the deployment of the new capital, we continued to grow our RMBS portfolio. The RMBS portfolio grew by approximately 32% during the quarter and has grown by almost 341% during 2014.

We continue to focus our exposure towards high coupon, fixed rate RMBS, and 30 year securities in particular. We have increased the weighted average coupon of the pass-through portfolio throughout the year, from 3.70% at December 31, 2013, 4.14% at June 30, 4.26% at September 30th and 4.28% at December 31, 2014.

The portfolio remains concentrated in fixed rate RMBS predominantly 20 year and 30 year maturity securities. During the fourth quarter, we sold approximately 208.6 million of fixed rate pass-throughs comprised at lower loan balance, lower [cycle] and geographically concentrated pull and we purchased 597.7 million fixed rate pass-through securities.

The purchases were split between 20 year and 30 year maturity pass-throughs. The 20 year securities added were higher coupon new origination pools. 30 years added were call protected securities all be at low premium types like low cycle, new origination or geographically concentrated pools.

With the continued rally in the rates market premiums were higher quality call protected securities have approached levels last seen before the [retention].

As you may recall in the Spring of 2013 the Federal Reserve hinting that they will begin to pay for their asset purchases cause rates to sell off and RMBS assets prices to decline in especially premiums for call protected passes. We have not added to our 15 year fixed rate position or any type of arm for some time.

We have not found the security is attractive. We fear the potential impact of flattening curve an increases to the Fed Funds target range might have on both on-prepayments and valuations.

The returns available in the 15 years space continues to look quite well for most of our fourth quarter of 2014, however this month 15 securities have outperformed 30 year counterparts reversing much of the better performance experienced over the course of the second half of 2014.

The company is yet to get involved in the dollar role market is the means of generating income or the source of funding. We believe that our overall markets will continue to offer attractive opportunities over the course of 2015 and we may participate going forward.

The capital allocation was shifted during the quarter towards the pass-through strategy. The allocation of capital to pass-throughs increased from 61% to pass-throughs and 39% structured securities at September 30, 2014 to 70.8% pass-throughs and 29.2% structured securities at December 31, 2014.

To compensate for the added duration of the 30 year securities, we continue to add to our funding hedge positions by increasing our short Eurodollar futures positions and adding to our swaption positions.

The notional balance of our hedges in place at December 31, 2014 represents approximately 79% of our repurchase agreement balance up from 68% at September 30, 2014, 70% when adjusted to reflect the unsettled purchases and sales and that existing at September 30, 2014.

While the allocation restructuring securities portfolios decreased during the quarter it did add to our IO position. We added 6.2 million of IOs analyzed by 20 year security. At current stream the securities offer modest yields while still offering some potential upside in the event of our rate increase.

That’s contributing modestly to our offer rate protection. Since year-end we have continued to add to our IO positions, we continue to add securities that offer a modest combination of current yield and upgrade protection. This should allow us to begin to reduce our use of leverage and buy the higher allocation to the pass-through portfolio.

Our leverage ratio at December 31, 2014 was 6.6 to 1, up slightly from 6.3 to 1 at September 30, 2014. Note that the leverage ratio up to September 30, 2014 as reported was 7.3 to 1.

However, on adjusted were flat 249.4 million of unsettled security sales based on values of the kind of sale, the repayment of 238 million of related repurchase agreement obligation and 66.8 million of unsettled security purchases subsequently financed by 53.1 million of new repurchase rental obligation the leverage ratio at September 30, 2014 was approximately 6.3 to 1.

As I mentioned above, the portfolio is positioned for a continuation of modest prepayment speeds.

While refinancing activity may accelerate as a result of the rally in January, and we expect to see an increase in speeds when the February figures are released in early March, the sell-off month-to-date has reversed most of the January rally and mortgage rates are close to the year-end levels.

We do not expect a significant wage of mortgage refinancing. Only mortgages originated since the summer of 2013 are exposed to low rates for the first time and, because of lenders unwillingness to aggressively pursue refinancing activity, the primary secondary spread has increased.

A primary reason for mortgage lenders unwillingness to aggressively refinance mortgages is due to their reduced capacity and new regulations imposed by the Dodd-Frank Act that have impaired their ability to quickly ramp up their staff/capacity levels. We no longer see the risks to the market as two-fold and balance.

Previously we feared there was a small, but non-zero probability we might see an outbreak of inflation resulting in a more aggressive Fed and elevated volatility in the rates markets.

With the drop in oil prices, strong dollar and very low inflation in Europe, this outcome seems even more unlikely although the downside risks associated with this outcome are so severe that we will continue to protect ourselves against this scenario.

We believe developments around the globe and the strength in the dollar will limit the pace and extent of Fed tightening once it begins, with an increase in interest rates likely to occur by the end of the third quarter of this year if not at the June meeting.

Another possible, perhaps probable, risk we may see would be a continuation of the rally we experienced earlier this quarter. We feel we are well positioned for the first scenario. We continue to guard against the further rally by maintaining a material allocation to call protected securities.

During the latter part of the third quarter and while at the fourth quarter of 2014, we began to brace for a short-term acceleration in refinancing activity by selling lower payup specified pools and replacing them with new issue pools and credit impaired pools.

As prepayment concerns amongst investors became more elevated specified pool payups for the highest quality call protection securities mainly loan balance increased dramatically.

In response, the Company shifted much of their remaining holdings in loan balance specified pools to more fairly priced securities that still offer call protection but with better carry per unit of duration like the new issue and credit impaired pools as mentioned previously.

In the event of a meaningful increase in speeds, we believe these securities will provide adequate protection and the premiums we paid likely have room to increase to offset the increased premium amortization, as we witnessed in January.

Going forward, we anticipate the Federal Reserve will begin the process of policy normalization which will entail, among other measures, increases to the Fed Funds target range. Such increases in the Fed Funds target range are likely to result to increases in LIBOR rates, which are tied to the Company's funding costs.

The Company utilizes Eurodollar futures and swaptions to hedge its funding costs, although it does not employ hedge accounting for GAAP purposes. For GAAP, our funding costs will rise as short-term rates rise as there will be no hedge offset.

However, to the extent the corresponding hedges increase in value as LIBOR increases then we will experience increased income via a positive fair value adjustment associated with the funding hedges. Operator, that concludes my prepared remarks, we will open the call up for questions..

[Operator Instructions] And our first question comes from David Walrod of Ladenburg. Your line is now open..

I want to talk a little bit about the capital allocation obviously the 70% allocation to the pass-through is historically high, can you talk about how high you’re willing to let that go I guess some of the factors that were into that discussion?.

You’re right that’s the highest it’s ever been range we don’t have a hard and fast limit, but it’s generally 70/30 or 30/70.

It is at the high end of the range and since I try to allude to it on the call on my prepared remarks, it has started to back off somewhat since then about 100, speaking a moment about exactly rationale, but that led to high end of the range and we’re going to bring it back from there and a lot of that has to do with what’s we’ve been able to find in the IOs today..

That’s exactly right, David, also I guess one point to add to what Bob mentioned is that, it’s pretty typical of us when we are raising capital as we were in the third and fourth quarter to have the skew of pass-throughs to structured securities increase, the pass-throughs just typically are easier to find and get in place in a manner in which we can start producing some income off of them.

So the structured take a little more digging to find the times of profiles we like for those and so that’s sort of another reason why it’s starting to normalize little bit here in the first quarter just because we’ve able to find some things.

It’s actually quite opportunistic I guess that we were had the increased skew because IOs were very tight at the end of the fourth quarter and with the rally in January loosened enough that we’ve been able to find things we like a lot more -- there are a lot of more revenues available..

Well that kind of feels into my next questions which you just feel on a little bit about the return opportunity you’re seeing today relative to quarter ago or six months ago?.

The pass-throughs space, there is still a feeling if you can pick up call protection at a reasonable price.

As I mentioned in prepared remarks, we’re rallying in January pay ups got extremely high, the most costly form of call protection would be 30 year 4.5 and the pay ups went, I think it will strike from 70 to 120 picks in a few weeks, 120 is about the level they were in the spring of 2013.

Now we’ve sold off in February and those numbers have dropped although we haven’t seen bonds up for the bidders much lately, so next week we’ll know where they’re but I believe they dropped pretty close back to 70.

So those are not appealing that’s being said there are other call protected securities you can buy that offer higher pay up premiums and they were in the past but still at a point or maybe slightly over and so not too ghastly high and the carry you can carry on those spots still very appealing.

And Hunter mentioned the IOs thought a little more if you will about that and what we see in that base..

Sure, there is a combination of a couple of different things. One is the low level of rates that we saw in January which was end of January very loosening IO market up in general and in addition to that we had some anxiety associated with the new FHA nip decrease.

And we were able to take advantage we think I guess in February at least in with respect to both of those things. So we have been able to find attractive structured securities that offer reasonable yields and also have the kind of interest rate profiles as we like in being able to find both of those [space].

So negative duration and income is been something that we really haven’t seen for quite some time. It does add to the prepaid risk as a portfolio but we continue to think that at least from the perspective of the assets we have been buying that, that risk is relatively well contained. .

And at this time I am showing no further questions in queue. I would like to turn the call back over to management for any closing remarks. .

Thank you operator. To the extent anybody does come up any additional questions we will be here throughout the day to answer any and all questions you may have. And as always we appreciate your time at Orchid Island and we look forward to speaking to you again at the end of the first quarter. Thank you. .

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