Bob Cauley - Chairman and CEO Hunter Haas - Chief Financial Officer.

David Walrod - Ladenburg.

Good morning. And welcome to the First Quarter 2015 Earnings Conference Call for Orchid Island Capital. This call is being recorded today April 28, 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 that respect for further -- 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, please go ahead..

Thank you, Operator. As we entered 2015, the economy was humming along nicely and the market was acutely focused on any and all utterings from Janet Yellen or other Federal Reserve governors for clues as to the timing of their eventual end of the zero rate policy. Payroll growth had been robust and there were emerging signs of wage pressure.

Developments in Europe were quite the opposite, with Greece renewing talk of their possible exit from the EU. With projected demand falling and supply still expanding, oil prices had fallen nearly 50% since the summer of 2014, and the dollar was strengthening. At that point, the dichotomy in relative economic performance between the U.S.

and Europe was striking. On the one hand, the U.S. was clearly removed from the financial crisis and approaching the point where the Federal Reserve needed to remove accommodation in a more explicit fashion. On the other, Europe, and to a lesser extent Asia, were clearly slowing.

Inflation in Europe was barely positive and GDP in China was approaching the psychologically important 7% level, below which alarm bells would be triggered. The central banks in China, Japan and Europe were still running policies to provide maximum accommodation. The long end of the U.S.

treasury market rallied into January, with the yield on the 10-year U.S. Treasury reaching a low of 1.642% on January 30th. The rally at the long end of the curve was being driven by events overseas, while short rates in the U.S. were more sensitive to Fed expectations. As a result, the yield curve was flattening as we approached the end of January.

The rally at the long end of the curve ended in early February with the release of the January jobs data, and then again when the February data was released in early March. With the rally in the long end of the treasury curve reversing, the curve began to steepen.

However, later in the quarter and into April it became apparent the dichotomy was starting to erode. The strong dollar had an impact on exports and therefore, the manufacturing sector of the economy.

The manufacturing sector was also being hurt by the plunge in oil prices, which impeded more robust growth in oil production, especially with respect to high cost fracking.

Inflation in the U.S., as measured by the consumer price index, especially at the headline level, was declining into year-end 2014 before eventually leveling off just below 0% the last two months. This level is well below the Fed's target level of 2%.

Finally, on April 3rd, non-farm payroll growth for March came in at a mere 126,000, well below the 245,000 consensus estimate. Prior months were revised down as well. At this point, it became clear the growth of the U.S. economy was not as robust as expected at the beginning of the first quarter.

The market began to doubt the Fed would need to raise rates in the face of these developments and the belly of the curve, particularly the five year, rallied. This caused the curve to steepen, especially the spread between 5 and 30-year maturity U.S. Treasury securities.

The market received confirmation of this on March 18th when the Fed, at the conclusion of their two day meeting, issued a statement that clearly reflected that Fed was attuned to these developments. The Federal Reserve's Summary of Economic Projections, or SEP, was revised down from their last projections in December of 2014.

Their projections for GDP growth, the unemployment rate and inflation were all lowered. Given the lowered growth and inflation projections, their projections for the Fed Funds target rate over the next three years were also lowered. The market priced in even lower estimates for the Fed Funds going out three years.

Today we await clarity as to the true direction of the U.S. economy, hopefully to be evident in data over the next few months. The Federal Reserve stated in their March 18th statement, and in comments by Fed Governors since, that they intend to get off the zero bound this year.

We believe the market expects this to occur in September at the earliest and for the trajectory of subsequent hikes to be shallow. During the quarter, we established another at the market program, our third since first using this method of raising capital in June 2014.

The company sold an additional 1.6 million shares during the quarter through the ATM program. Inclusive of shares sold in late March and settled in early April, we raised approximately $21.1 million in proceeds, net of fees paid to the agent and other costs, during the quarter. The weighted average sale price of these shares was $13.56.

The company's book value per share was $13.06 at December 31, 2014 and $12.87 at March 30, 2015 -- 31st that is. At March 31, 2015, our total stockholders' equity was $230.7 million. With the deployment of the new capital, we continued to grow our RMBS portfolio. The RMBS portfolio grew by approximately 8% during the quarter.

Consistent with our deployment of our capital in prior quarters, both the existing and new capital raised via the ATM programs, we continue to focus our exposure towards high coupon, fixed rate RMBS and 30-year securities in particular.

The weighted average coupon of the pass-through portfolio was essentially unchanged and well within the range of approximately the past nine months, which was 4.26% at September 30, 2014, 4.28% at December 31, 2014 and 4.27% at March 31, 2015.

While the capital allocation has shifted during the quarter away from the pass-through strategy, it is also within the range of the past nine months.

The allocations of capital were 64.2% pass-throughs and 35.8% structured securities at March 31, 2015, 61.0% pass-throughs and 39.0% in structured securities at September 30, 2014, and 70.8% pass-throughs and 29.2% structured securities at December 31, 2014.

The variation within this 10% allocation range of the respective portfolios over the past three quarters reflects the variation in the relative attractiveness of IO securities versus higher coupon passthroughs during the period.

We were able to acquire some attractive IO securities during the quarter and the realized weighted average yield of the structured securities portfolio was a negative 9 basis points versus a negative 3.88% for the fourth quarter of 2014 and a negative 1.39% for the third quarter of 2014.

Importantly, this shift also reflects the fact our pass-through portfolio, in conjunction with our funding hedges, has traded to a negative duration during the market rally, especially so in the last two quarters.

This enables us to rely less on the IO portfolio to provide up rate protection for the combined portfolios, which in turn allows us to select more current coupon oriented IO's versus those that offer little current income in return for up rate protection.

The IO securities added for the quarter were collateralized by lower coupon, 20-year mortgages, so it makes us servicing IOs offer a 30-year 4% mortgages and some Ginnie Mae 3.5% loans. In the case of the Ginnie Mae IOs, the sector cheapen considerably after the FHA announced decreases to the mortgage insurance premium or MIP rates in January.

We also added some IOs collateralized by relocation or relo-loans. As I mentioned, the securities are offering modest positive yields generally in the low-to-mid single digits to model speed assumptions. The securities also had up rate protection even of a sell-off, although not as much as many of the securities we had acquired previously.

With respect to our funding hedges, the notional balances of our hedges in place at March 31, 2015 represents approximately 77% of our repurchase agreement balances versus 79% at December 31, 2014, based on the balances of outstanding repurchase agreements in place at the time and assuming all unsettled security sales and purchases were settled, if applicable.

Our leverage ratio at March 31, 2015 was approximately 6.7 to 1 as reported. When adjusted to reflect $79.2 million of unsettled security purchases subsequently financed by $74.5 million new purchase agreement obligations, the leverage ratio at March 31, 2015 remained an approximately 6.7 to 1.

This is up slightly from our levered ratio at December 31, 2014 of 6.6 to 1. As was the case at December 31, 2014, the portfolio was exposed to substantial increases in prepayments fees.

While we saw an increase in refinancing activity as a result of rally in January, and we may see speeds remain elevated when the April figures are released in early May, the market appears to have stabilized above the January lows as the 10-year U.S. Treasury Note has traded between 1.85% and 2% since early February.

Further, while the MBA refinance index has remained near the 2000 level, the percentage of applications that are for refinancing has remained below 60% since January, which is not consistent with a refinancing wave.

We do not anticipate an acceleration in refinancing activity from current levels absent another shock, such as a Greek exit from the EU or a material downturn in economic data in the U.S. Accordingly, we intend to maintain our exposure to higher prepayment speeds.

We have been able to avoid excessive prepayment speeds by holding lower payup call protected securities. We anticipate ARM prepayment speeds to accelerate when the Fed begins to raise rates. As a result, we continue to avoid them.

On the other hand, if we are wrong, if speeds remain at the elevated levels or accelerate, the resulting increased amortization will put pressure on the dividend rate.

Finally, we started to opportunistically enter into dollar roll transactions this quarter and expect to continue to do so, although we do not anticipate generating a meaningful amount of our income from dollar rolls in the near future.

As we mentioned when we reported our fourth quarter 2014 results, we no longer see the greatest risks to the market as symmetrical and balanced. 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. However, as always, the consequences of such an outcome are potentially very severe, and so we attempt to protect us against that outcome.

We feel the high premium passthrough IO bias of the portfolio, which has traded to a negative duration for the past six months, will do well in such a scenario.

However, if we rally further we may see our earnings come under pressure due to higher premium amortization, offset at least partially by appreciation in price for our call protected passthroughs, as they did during the first half of the first quarter.

Looking ahead, we continue to anticipate the Federal Reserve will begin the process of policy normalization, which will entail, among other measures, increases to the Fed Funds target range.

However, the economic data seems to reinforce the notion of strong dollar and the decline in the price of oil are having an impact on economic growth, and more importantly, the Federal Reserve has noticed.

While we still believe the Fed is anxious to get off the zero bound in interest rates, the path of Fed Funds -- of the path of the Fed Funds target rate over the next few years or range as it is likely to be will be shallow and reach a lower terminal rate than appeared likely in late last year.

This is clearly reflected in the market pricing, such as the Euro dollar market and the Fed Funds futures. When and if Europe recovers materially and the ECB can consider removing their QE program, the Euro will begin to appreciate against the dollar and the effects of the strong dollar discussed above should begin to reverse.

At that point, the Fed rate moves, absent other developments may occur on a steeper trajectory. In any event, any increases in the Fed Funds target range are likely to result in 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 positive fair value adjustment associated with the funding hedges That concludes my prepared remarks, Operator. And we can now open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from David Walrod with Ladenburg. Your line is open. Please go ahead..

Good morning..

Hey, Dave..

First question I have is in regards to the capital allocation, obviously, it moved down a little bit the -- in the past few portfolio.

Can you talk about what you’ve done in the second quarter so far? Are we going to see that continue to move closer to 50-50 or what are you seeing?.

Hey Dave, this is Hunter. As the rate -- as the rate get lows, I guess a couple of times in the first quarter. We sort of opportunistically bought IOs as they widened out a little bit. And that’s something I think we discussed in our last call that we wanted to do. We had deployed the proceeds from the ATM program throughout the fourth quarter.

And we are a little heavier than we wanted to be on the past three side. So the added IOs from the first quarter, we were really sort of trying to get us back into our target range. I suspect to the extent that we are active in the ATM program again. It will be more of a repeat of that situation.

IOs are still -- relative to passthroughs more difficult to find. And we have to kind of pick our spots where we feel like they offer value or as in with the case of the mid reduction we have some policy concern that creates a little bit of anxiety in the IO market which afford us the opportunity to buy at somewhat distressed levels in that sector.

So we’ll just continue to, I think, pick our spot. I think they were in the range. I’d like to see the portfolio skewed a little more towards IOs on balance.

But it may in fact there'll be other way a little bit if we are active in the ATM, just because that’s in the nature of the way, we put those funds to work to buy passthroughs, first and get the income earning assets on the books and hinge those up to the extent we need to and that add IOs as they present themselves..

Sure. That's helpful.

And then from the standpoint if you are active in the ATM, how would you compare the return opportunities if you’re able to invest in today relative to, I guess, the existing portfolio?.

I would say that they are generally in line. That all obviously depends on speeds and amortization. We did see that acceleration resolve around in January. That was reflected in the March speeds and again in April. Though they weren’t quite as high in April they were in March. We expect them to come down and to the extent, we are right.

I would say that the opportunities are more or less in line. I mean obviously there are -- they are less than they were a year ago. But then the IO front, they are a little better even last year the IO securities were generally negative yielding assets. Today they are slightly positive. And the way we do it is, we’ve set our loans.

We’ve taken on a lot higher coupon 30 year securities and by opportunistically buying call protected securities not the extremely high pay up types and owning those securities for what we deem to be an appropriate length of time. We were able to own them, capture fairly high amount of income.

And then we’ll just roll out them into newer securities and that strategy has been working for sometime now and we expect it to continue. Again, predicted on our assumptions that speeds begin to moderate which, so far everything, all the indicators indicate that’s what’s going to happen..

Right. I would just add to that. I could say in a slightly different way. The reward to risk trade-off in this type of assets is very high right now.

So in another words, we get relatively high returns, even at the sort of elevated speeds that are expected in the market for the next month or two versus the interest rate risk that these assets are exhibiting.

So, Bob mentioned in his prepared remarks that we’ve experienced some negative empirical durations and that’s largely due to the fact that we had premium assets, have shortened fairly considerably over the last six months. So the portfolio has very low duration.

And again, if we are right in our thinking that speeds are going to climb over the course of next few months, back to more sort of baseline levels then this asset -- then it’s particularly interesting environment to acquire more of these assets. So, I think we’ll move forward with that way of thinking..

Okay. Very helpful. Thanks much, guys..

Thanks, Dave..

Thank you. [Operator Instructions] And I’m showing no further questions at this time. And I’d like to turn the conference back to management for any closing remarks..

Thanks, Operator. Thank you for your time as always. Also to the extent that anybody has any follow-on questions, we’re in the office. Please feel free to call. The number is 772-231-1400. We are always anxious to take calls and discuss basically everything you want, so we welcome that.

Otherwise, we look forward to talking to you at the end of the second quarter. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..