Bob Cauley - Chairman & CEO Hunter Haas - CFO.

David Walrod - Ladenburg Thalmann Christopher Testa - National Securities.

Good morning and welcome to the Third Quarter 2015 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 30, 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 Litigations 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 from 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. Please go ahead, sir..

Thank you, operator. The third quarter was not boring, frustrating maybe. The market has been on a carefully managed path towards the beginning of policy normalization by the Fed since 2013. Market fully expected the initial rate hike to occur this year, early in the year it was assumed to occur around mid-year, then September.

Now no one has any degree of confidence when it will occur. The market has also lost confidence in guys from Fed officials when they speak publicly, that's the frustration. This of course was all brought up by developments for the market, especially overseas. Things got started in August when China devaluated the Yuan unexpectedly.

The move rocked all markets, especially equity markets. Market volatility persisted for several weeks in the wake of this news. This was not the only major development, the perceived weakness in China lead oil and other commodity prices to set new levels.

Various Central Banks across the emerging market landscape, as well as China, have been selling treasuries in order to minimize the impact of these events on their currencies. China's economy appears to be growing at a slower pace and Europe is recovering ever so slowly.

Last week the European Central Bank or ECB indicated they may need to enhance their own to reprogram. Some of these events call into question growth prospects for the U.S. going forward, and points to trusted levels of inflation for several months at least.

Recent non-farm payroll reports are that it feels as far as job growth appears to have decelerated. The effect of these events was confirmed again Wednesday when the Federal Reserve opted not to raise rates at the conclusion of their meeting, although they did acknowledge, albeit indirectly, that events overseas may have stabilized somewhat.

This matters to us. Our primary funding arrangements are Eurodollar futures. The market has priced out a substantial portion of Federal Reserve tightening over the next four years. This of course causes Eurodollar shorts to go against us meaningfully, and was the major contributor to our book value decline.

Making matters worse was the winding in agency MBS, both pass-through and IOs. The current coupon agency MBS spread to the constant maturity 10-year swap in a multi-year wide at the end of September and widening further in early October. This is somewhat misleading as the 10-year swap spreads went negative in late September.

But even spreads to 10-year treasuries widened, albeit modestly. This has not changed materially since while the negative swap spreads were suspected of being somewhat of a quarter-end phenomenon, this is not the case on October 30.

The combination of mortgage winding and Eurodollar future shorts moving to the extent they did are the primary reasons we suffered a 5.6% book value decline. This occurred in spite of the fact that we bought approximately 1.1 million shares back at a weighted average purchase price of approximately $8.89 per share.

The flipside of these developments is that funding levels, as in the effect of hedges should remain low for a while. Prepayment speeds not responded to lower rates, and a combination of seasonal factors and burnout seems to be in subdue for the next few months.

Accordingly, we have been able to play the dividend with a small positive margin in the third quarter and October. As always, we cannot provide guidance on the dividend since we keep the payout rates so close to 100% of taxable income. And we cannot accurately predict our earnings with any level of confidence.

The construction of the portfolio in our hedges are as always designed to protect against declines in book value. Since early 2014 we have had a bias towards higher coupon, fixed rate, call protected securities.

This biased in conjunction with due our structured portfolio of IOs and inverse IOs subjects the portfolios prepayment risk in exchange for attractive carrier income. We will maintain this bias for now. While rates are still modestly above the levels when we started the year, prepayment remains subdued.

Premiums for call protected securities are quite high for the best forms of call protection, namely low loan balance from distressed credit but lesser forms of call protection are still available in the coupons we desire and that being in levels.

For the lower forms of call protection such as securities backed by loans to low cycles, high LTV or investment properties, the call protection does not persist for long. And these securities must be replaced more frequently.

We replaced a substantial amount of these security during the quarter and sold some of the call protected 4% securities purchased earlier this year. In the latter case we were able to take advantage of increased premiums and reported some gains. We also continue to have large exposure to higher coupon 20-year securities.

Other than managing the age of these securities, we will likely maintain the position at or near current levels. We didn't start to make any changes to the structured portfolio during the and the decline in the balance of the portfolio was nearly the result of pay downs and mark-to-market declines due to the winding mentioned above.

The net effect of these changes to the foreclose has slightly increased allocation capacity securities from 56.2% in June 30, 2015 to 58% in September 30, 2015. This is -- this has since moved back to approximately at level of June 30, 2015. The change in the capital allocation during the third quarter was not material, nor strategic.

Leverage of September 30, 2015 was 7.6:1 versus 7.1:1 at June 30, 2015. The mark-to-market losses coupled with share repurchases decreased the capital base but with speed low and the market rallying, we're comfortable letting the leverage creep up slightly. Since quarter-end it has in turn returned to approximately 7.0:1.

This level is still on the higher end of our range but for the reasons just mentioned, we are comfortable with this level. Our speed for the last two months were actually lower than were late last year and earlier this year. This is a result of the combination of speed slowing generally and the portfolio count.

Our funding interest remain concentrated in Eurodollar futures and notional balances have not changed since the end of the second quarter. Our 10-year treasury future chart position was increased from $120 million at the end of the second quarter to $185 million at the end of the third quarter.

The 10-year treasury future contract is a duration of approximately double the weighted average of Eurodollar shorts.

Accordingly, the notional balance of our hedges, consisting of $935.7 million Eurodollar shorts and the equivalent of $370 million additional Eurodollar shorts of the 10-year treasury future shorts represents approximately 67% of our repurchase agreements balance at September 30, 2015. A comparable figure for June 30, 2015 was approximately 80%.

However, as I mentioned, yes, it's taken our leverage down since quarter-end by $125 million as repurchase agreement balance or 0.5X our quarter-end book value. The hedge position has now changed so our coverage is now approximately 72%.

We are comfortable with this level of coverage for now but are also in the process of reevaluating our funding options and strategy. A component of this reevaluation is potentially joining one of the home owned banks and possibly adding some term financing. As we are still just considering this stuff, I cannot provide any specifics at this time.

Looking ahead we continue to anticipate the Federal Reserve within the process of policy normalization which will entail among other measures increases to the Fed funds targets range. When this occurs is another story.

The language of the September Federal Market Committee statement stated, recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.

Since then domestic economic data has been somewhat weaker on balance but news try to point to some stabilization. The People's Bank of China announced a rate decrease last Friday, plus various economic stimulus measures announced previously suggest it's even more likely.

At their meeting last Thursday, the European Central Bank hinted at either an expansion in the size of and/or extensions in the length of their own QE program. These stuffs are likely the reason the Fed removed the language mentioned above in their statement this week although they did mention they will continue to monitor events overseas.

The risk to our position would be lower rates and increased prepayment fees. This most likely cause of such a development will be an aggressive expansion of the ECB QE program. As we saw after the initial plan was sent out earlier this year, the relative price spread between U.S.

Treasury rates and the various European sovereign rates, particularly Germany, matters. If additional QEs and ECB causes rate across Europe to decline, we could see more downward pressure on rates in the US. This could be enough to keep product to get primary rates while 3.5% for 30-year fixed rate mortgages and streamline another refined rate.

Of course, this development would also tend to suppress funding levels as well, assuming the Fed lift up were delayed as well, we will see. Operator, that concludes my prepared remarks. We can now open it up for questions..

Thank you, sir. [Operator Instructions] And we do have a question from line of David Walrod of Ladenburg Thalmann. Your line is open, please go ahead..

Good morning, everyone..

Good morning, David..

I just wanted to talk a little bit, the morning on the portfolio was down a little bit quarter-over-quarter.

Can you talk a little bit about the return opportunity you're seeing now and how we should think about the margin going forward?.

I'll speak briefly and then I'll turn over to Hunter. They are more attractive than we've seen for some time. Not so much -- I will let Hunter speak more about the structured space, I'll just talk about passers.

But they are attractive, we have had quite a bit of a rally as you know, recently getting close to 2% which was something we like to see just as then we've backed off fair amount.

We're also at a point in time with the seasonal where we expect speeds to slow, and we really -- even with the rally I just mentioned, when we got close to 2%, the refined index really hasn't responded at all to that. So there is clearly signs of a burnout in the market.

To turnover speed, we've talked about that a lot at the end of the second quarter because we've seen them spike. Turnovers when we're talking about someone refinancing or repaying their mortgage not because they are in the money, just because they are moving. That's of course has slowed a little bit and that's again seasonal.

So all those things point to slowing of speeds and recently attractive entrant level prices on bonds means that the carry looks pretty good for a while.

Hunter, you want to elaborate?.

Sure. On the funding side I would just mention that we saw -- during the third quarter we saw a spike, small spike in rebuilt funding levels. I think the street was really trying to bake in the idea that the Fed was going to go in September, that was you through July and August.

And then towards the end of September we just started hitting some -- quarter-end funding pressures, balance sheets were tight. And so we saw higher repo rates than we've really seen for a very long time. They are still relatively low but we definitely saw repo bids creeping into the 50s in some cases, not all but some.

So I think you probably noticed in the press release that the funding rates went up a little bit. In addition to what Bob spoke of, I think the same is true for the structured space. We had experienced very high housing turnover levels in the summer, I expect that to come off a little bit.

We have some very low coupon IOs and inverse IOs that I think can improve in terms of their income generating capacity as the seasonal turnover comes off. And in addition to what Bob discussed in the pass-through side of the book, we also traded a lot of the portfolio in the third quarter. I think we had some $1.7 billion in buys and sales.

So what we were able to do for the first time in a long time -- as you know, we like high coupon mortgages, they really weren't making that many of them in the first half of the year. And then this -- since the end of the second quarter we've seen a lot more production in spaces where we like to hang out.

So we were able to get rid of some of the bombs that were coming up, the seasoning ramps, and starting to pay a little bit faster and replace those with fresh new production in the types of call protection stories that we like.

So for that reason I think those will continue to prepay relatively slow rates for the next several months, absent another refinancing opportunity..

Okay, great. Bob, you mentioned buying 20-years, what percent -- I guess your breakdown mean the pass-through portfolio between the – they are the 20s and 30s and whatever else is in there..

Yes, we kind of have done that so we've always done the pretty significant portion of mostly 20-year force on the economy but it's in the press release as we have the Q economy.

But we've always had a pretty significant portion of them and as I mentioned in my remarks, we have sometimes bought call protective forms of those that generally we just tend to buy them generic if you will. And the 20-year securities somewhat like a 15-year it's more of a revised product.

In other words, I think you own a 30-year mortgage and you want to amortize it a little faster so you might decide to go in with 15-years. So 15-years will always be as a revised product.

20-year is a little bit longer term and the region somebody goes into 20-year probably is because the payment on the 15-year is little too high so they go into 20-year. They generally are borrower who is interested in amortizing their loan a little faster.

And then once they take out that loan, they are going to tend to stay in it because they have put out same reason, they want to amortize. So you don't get very high prepays, so you get good carry out of those. So that's one of that all-in-all..

We've been targeting 20% to 25% of the portfolio likely, we're just sort of on the high end of the historic range. I wouldn't expect it to go through that but we still really liked the story a lot, and those assets have performed very well for us..

Okay. Just a couple of more things.

You mentioned the possibility of joining the FHOB system, what about direct repo, is that something you look back?.

Absolutely, in fact we work with AVM as you know, and after several years, and they are a big proponent of that and trying to get that going through some time. And really the reason it hasn't is more because a lack of effort on their part, it's generally been the other side, the providers that have been a little bit reluctant but that's changing.

So we know that some of our peers are actually -- have done that and we also would be very much interested in doing so..

And we're just now really within the last six to nine months at the point where we have sufficient capital base that these cash providers would consider us as not being too small. So we look forward to doing everything we can to continue to do business on the direct repo front.

And we're encouraged to hear that maybe even some of the Federal Home Loan banks are involved in that side which would be great because we know they have a familiarity with our space and have sort of -- to a certain extent already done a little bit of the credit work.

So that's a new -- something we just recently found out, maybe others have known for a while but we were encouraged by that and look forward to trying to get into that space..

My last question is more philosophical in regards to the buyback, and speaking with some of the companies that have reported so far, some talk about being opportunistic with the buyback and listening other dips in the stock, so we're going to step in and support in here.

And others are saying, when we look out over the investable landscape we think buying our own stock is superior to investing in pools of mortgages. Can you just talk a little bit about how you're thinking about the buyback in regards to choosing between that and buying pools of securities? Thanks..

Sure. I mean generally it's just expected return. When our stocks trading at -- say $10 or $20 and therefore somewhat less discount to book by loss at one time. The return on that capital versus what you might get in the portfolio was not as attractive.

So when we first announced that plan, it was just after the second quarter, our book value most recently -- reported book value was $12.38, it was stock traded at one point in the high sevens, that's like a 50% return, there is no investment need levered MBS space it's going to approach that. So that was pretty much a no-brainer.

But generally I probably look at it, with one camion, I would say the one overlay that we have to consider is that unlike some of our peers, we're not that big. So for instance, we did 1.1 million shares in the third quarter, we had less than $23 million shares outstanding at the start of that program.

So that represented pretty sizeable portion of our capital base, and Hunter just mentioned for instance, accessing direct repo, and the fact that it's a function of the size because people are making a credit decision when they provide that funding to you.

And so to the extent you're too small they may ignore you and not wanting to entertain lending to you. So we have to be cognizant of that. So that's kind of the balancing element.

So I would say that the net effect of that is that when you look at the expected return, we have to see a slightly higher gap than we would otherwise because of that concern..

I think doing that actually sets us up to be the best buyer in the market for our own stock too. We just -- we step in, and we step in aggressively when it is clear to us that there is a disconnect, at least between the way we view our future and the way the market is.

So we're happy about the purchases we've made so far and are working tend to not really push too hard as the stock price grinded into the low tens here more recently..

Just quick clarification and then I'll get out of your way.

How many -- sure you left in the buyback at the end of the quarter and have you been active into the fourth quarter?.

2 million shares was the amount of the total -- the total amount of program, of course that could be changed with Board action. We did a little under 1.1 million, and because of the way our program is set up we're not allowed to buy back shares when we're in a quiet period, which is what we are in now.

So for the month of October we've been prohibited from buying shares. It's like an insider trading policy kind of thing when you're you know possession -- public information you cannot be buying back shares, so until couple days after we release our earnings we’re not supposed to be buying..

I’ve a question, for the benefit of our readers you publish earnings estimates as do some other analysts.

Would you mind just kind of walking everybody through kind of the process you go through in arriving at that number?.

Sure. I think what you're getting at is the core number and what you need to do is there is on the front page of your press release in the first table.

There is a premium loss due to pay downs which was which was 3.75 million this quarter, you need to deduct that from core earnings to get to a true operating number, I think that’s what you're getting at..

Now would you say across the space I mean that practice is something similar to that is what is conducted by most analysts in the space if not all..

I would say that most folks may look to get to a core number will deduct that premium yes. The premium loss..

So when you put out estimates you’re not looking at GAAP earnings per share you're looking at this notion of a core earnings number..

That is correct..

A report mentioned yesterday that it's honing in on GAAP earnings per share number and comparing that to the consensus of analysts and noting the gap and I decide the beneficial for everybody listening to the call to recognize the reason that your numbers so far off the GAAP number because you’re forecasting something different than the GAAP number which wouldn’t include fair value changes in the fair value of the portfolio..

Yes I published a report this morning that put the core earnings numbers in $0.47..

Our next question comes from the line of Christopher Testa of National Securities, Your line is open. Please go ahead..

I just wanted to confirm out of the 22.5 million or so the total losses on the derivative instruments Bob, what was the amount of that that was unrealized, was that about 14.2 million?.

I think it was more than that..

But the core earnings number that Dave just mentioned $0.47 is correct right, just like back into what that would be.

That numbers in the queue and [indiscernible] and the Q should be out today. And it was a big like I said it was predominantly dollars and that's of course unrealized..

Chris as you know because of our fair value option we don't report a "core income number". But if we go through the math and sort of doing it the way that we know you and Dave and the other analysts, $0.47 is the number we come up with also..

And just on the inverse IO composition going forward I know you've had that pegged at over 15% of the capital allocation. You know what are you seeing kind of quarter to date that market and what are you expecting for that through 2016? Standing color there is much appreciated..

So I guess there are two schools of thought. We bought some more inverse [indiscernible] in late in the second quarter. We felt like they offered pretty good value there and as the expectations for Fed move in September and then even at one point December we’re backing off fairly rapidly. We know we felt like they just became even more attractive.

So what we saw was a widening and really about any measure you look at LAS or expected yield, we're reluctant to add too much at these really low rate levels but in backup and to the extent that the belly of the curve depends back up a little bit I think we would look to have the balance at least where it is now if not increase a little bit just because opportunities in the market right now make them look pretty attractive.

We don't like going in too aggressively when rates are at such especially on end of the curve at such low levels just because of the LIBOR exposure on those, but I wouldn't say we're a seller of them and they widen enough that they really are compelling trades right now..

I dug up the data for the losses and gains on the derivative issuance for the quarter was 22.506 million and all of the 10,000 were Eurodollars. We didn’t change the hedge position in the Eurodollars at all in the quarter, the balance of that was just [indiscernible] $10,000..

Okay, and subsequent to the quarter end what have you seen in the repo markets? Have the rates remain kind of elevated as people are expecting the Fed to act or have they kind of you know put it back down since?.

It's 6, 7 bips..

Yes they are back down.

We still have some legacy stuff that was put on in the third quarter that’s working its way off the books, but as I mentioned to Dave in the prior call, you know we saw rates -- we saw repo bids, not great repo bids but some repo bids in the 50 basis point sort of handle and we're back down to seeing them in the mid to high 30s again which was really kind of the run rate for the first couple quarters of the year and has been for some time.

So as the old ones roll off and new ones come on we'll see a decrease in our funding rate and then we sort of are expecting to see a kick up and going in the year-end because there were significant balance sheet pressure's going in the quarter end which is for us a telltale sign that we're probably going to be even worse in December but October November look to be lower..

Also just one final another add to that, the wording of the Fed statement on Wednesday definitely spooked the marked a little bit.

Going into that meeting there was a view in the markets that if the Fed were indeed going to go into December that they probably had convinced the market that that was really in play and then if they would in order to do that they had to put something in the statement, well they in fact did so the market was really fading, December's potential height.

Now the odds are about 50:50. There is obviously some data between now and then and then I understand that [indiscernible] is supposed to speak twice, I think it's December second and third.

She will presumably know the December [indiscernible] payroll number when she speaks so you would expect if they have the intention of hiking in December that she would probably say something that would forewarn the market then.

You know at the same time based on what we saw in September when it looked like it was pretty much a done deal that they were going to go they still backed off.

So there is still some issue in the market size about the credibility of what they say and all much stock we should place in it but the wording of the statement when they did imply that December is very much implied.

So [indiscernible] the data between now and then would be strong and the market price in a higher probability of a December hike you could see that reflected in funding costs because it was the case in September's as Hunter mentioned..

Right.

And do you think just hypothetically speaking here, if the Fed were to stand firm in December and not raise rates, do you think that there is still a floor kind of under the repo rate where it just remain elevated as people expect they will do with the following meeting or do you think that kind of backs off a bit as people say wow maybe we're not getting a raise for quite some time here..

Well the way I will answer is -- if the data is strong, let's say non-payrolls are 150 or more and they don't hike in December then the market is going to lose a lot of faith in the Fed and I think the market's going to basically price outfit hikes for long time in LIBOR and funding rates are going to stay in the low to mid-30s for a while.

If the data is weak between now and then they don't hike the market say in a sense in which case you know maybe get some year-end pressure and it effects the funding but after that it should come back down and we remain data dependent.

But the market is losing faith and you know the problem is that the Fed says one thing and doesn't another, and that’s really the lack of credibility comes from..

I suppose one caveat on that which is that the repo providers don't always follow the LIBOR markets says we would expect them to so, that was true in the third quarter when we saw some of the highest repo rates coming from broker dealers whose own economist were putting off Fed hikes well into 2016.

So the repo test isn't always necessarily in sync with what's going on the on LIBOR side of things..

And also the European banks tend to have other issues they're dealing with more on the regulatory side and--.

Yes I know a lot of them are very capital constrained right now..

That shows up in their funding levels too..

And just on the negative swap rate persisting, I mean I know in the crisis we kind of hit that briefly and then immediately that changed.

With this kind of remaining, I mean is this here to stay? Is this a factor of I guess you know a lack of liquidity in the treasury markets from all the regulations coming into play? What do you make of this?.

Let me just address our funding hedges and I let Bob speak more to the economics, I know he has some views on that, but you know as you alluded to earlier all of our funding hedges are -- have been mark to market and those are all unrealized losses that we saw in the third quarter.

So to the extent that a portion of those losses is related to swap spreads going negative and in the belly of the curve. So long as we don't unwind those hedges they really -- we would expect to get that back and the reason I say that is because when we look on the short end of the curve all the way.

You know as you transition from a five year point to the two year, one year or even down to bills that negative swap spread doesn't persist. In fact it flips positive and on the front end of the curve it's still the laws of the risk free rate still sort of applied right.

So as our hedges roll up the curve if you will we will -- that negative impact of swap spreads going negative this quarter will ultimately unwind overtime..

As far as the negative swap spreads they are worse today, we were just talking about this before we get on the call, almost everything from five years [indiscernible] which means it's tighter.

The 10 year swap spread is like negative 8.5, seven years negative 10 and there is a lot -- we’re wondering why this is and what's possible and reasonable explanation I've heard is the following.

Generally that should be our play, even with an exchange clear swap there's still an element of credit risk and so a 10 year swap should have a higher yield than a 10 year treasury because of some element of credit.

However the way that that is our delay typically by the hedge funds and alike is that they enter into the trade that goes away the other way but the problem is because of Reg and Dodd Frank and other reasons there are substantial capital costs of putting on that trade and entering into a swap in the 4% to 5% haircut especially in a specialist in 10 year part of the curve which is where all this occurs.

And then you have other issues in the repo markets with treasuries and so the cost of putting on that trade has gone so far that breakeven in other words, the degree of the negative spread has to be higher before that trade can be put off and therefore negative 4%, negative 5%, negative swap spread was not enough for the economics of that trade to work.

So now it has to be even more negative before the [indiscernible] can put it in, so in effect you could argue, I'm a lot of politicians, but this is an instance where Dodd Frank is affecting the normal operations of the market because now we have commission where swap spreads can be materially negative and it can persist because the cost of operating that layer is too high.

Now what's driving is it's corporate issuance and if you can follow that market, corporate issuance has been substantial and a lot of that is swapped and so that’s what tends to drive swap rates that way in the first place. It's what would normally drive them back that’s missing..

And just a last one for me, what do you guys looking at for your leverage range for 2016? I know you mentioned in the press release you took it down a little slightly since the end of the third quarter.

Just kind of a range how you’re thinking of that?.

It's usually driven believe it or not by the construction of portfolio. So to the extent--.

Right I know you won't lever the structure..

Yes so if we don't like the structure markets we're going to get a lot more [indiscernible] the leverage is going to be higher, if we really -- structured market is really attractive then we can get nice returns there, we're going to have more structured securities and that is in of itself, and the secondary factor is kind of what I mentioned in my remarks and that is when you look at where the leverage was the combination of what's going on the market, where speeds are and that kind of thing drive with levels of leverage--.

We think once the Fed ultimately goes for the first time that this becomes a much more manageable market and we'll cross that bridge when we come to it but in that type of -- in a less volatile environment we would be more comfortable with slightly more leverage all else equal..

[Operator Instructions]. We do have a question from the line of Jim Porter [ph], Private Investor. Your line is open. Please go ahead..

Could you please maybe a comment on the stability of future dividends at the current rate?.

I'm afraid we really can't speak to that, we as a practice have never given forward guidance on our dividend.

As I mentioned on my prepared remarks we tend to pay out at or close to 100% of what we earn in terms taxable earnings and we really have no ability to predict that into the future with any degree of certainty and so therefore I really can't but what I can tell you is one if you look back you'll see that it confirms what I just said and that is that based on the 1099 and reporting that we tend to pay out at or very, very close to our taxable earnings are.

But also looking forward in terms of what affects the dividend, you know we saw for instance in the second quarter when prepayment speeds got very high that was cause for the dividend to be lower, so the level of prepayment speeds matters a lot, So to the extent that they are subdued that they have been and that ended up then that factor alone would not cost much of a change in the dividend.

A second factor would be our funding cost to the extent they go up a lot even with hedges that could maybe put pressure on earnings. So that's another thing for you to watch and then maybe a third and much more or less important would be you for instance leverage as Chris just mentioned on his call.

If we were to really take the leverage down and you'll may know that some of our peers have done that, they have lowered their leverage fairly materially in some cases and they just don't have enough portfolio to generate as much earnings says they did before.

So high leverage will tend to yield more earnings all else equal and so to the extent we took our leverage down that might indicate that maybe we're going to have some negative earnings pressure but the two big ones are speeds and funding costs..

In the third quarter our estimated taxable income was sufficient to pay out the $0.14 in each of the three months in the third quarter. So we made a little small cushion. But again these are estimates, actual numbers are going to be finalized well into next year but at present that -- or at least in the third quarter that was a good growth..

Are you restricted to giving dividend to 100% of operating income as long as you’ve the cash on and you feel comfortable with it, would you still could distribute the same dividends?.

You can in fact. You can probably in excess of earnings, it's considered return of capital. We wouldn’t want to do that certainly not much, but just because you’ve sometimes can't predict exactly what your earnings is going but we have seen some of our peers pay out dividends in excess of earnings, that’s just return of capital.

You’re basically getting your money back so to speak..

I think we would rather repurchase shares than return capital to dividends. Just as philosophical practice that we would employ..

So retain capital especially the $0.100 on the dollar whereas if you buyback your shares when they are trading at a discount, you’re buying it back at $0.80 on a dollar..

Thank you. And that does conclude our question and answer period. I would like to hand the conference back over to management for any closing remarks..

Thank you, operator. Thanks everybody for their time. We will be in the office all day so if anybody has any subsequent or questions or well afraid to ask on the call, please feel free to call the office the number is 772-231-1400. We will be glad to take your calls otherwise we look forward to speaking with you next quarter. Thank you..

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day..