Robert Cauley - Chairman and CEO George Hunter Haas - CFO.

Steven Delaney - JMP Securities.

Good morning, and welcome to the Third Quarter 2016 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 30, 2016.

At this time, the company would like to remind the listeners that the 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 the 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 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 call over to the company’s Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead..

Thank you, operator. The upcoming trends in place over the course of the first and second quarters of 2016 reverse in the third quarter and into the fourth. The broadest measure of economic growth in United States, gross domestic product rebounded back to 2.9% in the year-to-date growth annualized appears to be returning to the 2% level.

The level widely considered to be at or slightly above trend growth in United States in this post-grade [ph] recession world. Interest rates after falling precipitously early in the year again after the passage of the Brexit referendum has since stabilized in earlier last month in fact above levels seem just before the Brexit vote on June 23, 2016.

In fact, the yield on the U.S. treasury reached an all-time low yield shortly after the Brexit vote. However, while the slow growth witnessed in the U.S. over the first half of the year has ended, economic growth is by no means robust.

Many of the drags on growth predominantly in the manufacturing and energy sectors have stabilized, but have not recovered meaningfully. The strongest sectors of the economy, the housing, consumer and labor markets continue to perform relatively well and drive economic growth.

However, the net of all is the activity appears to be modest growth of company by increasing, but not excess of inflation. Second quarter GDP growth was 1.4% and GDP growth for the third quarter was initially reported last Friday at 2.9%.

Inflation, especially the Federal Reserve preferred measure personnel consumption expenditures was reported at 1.7% on the quarter level late last week as well. Baseline effects was already from the sharp drop in oil prices in late 2014 and ‘15 should cause this measure to continue to move towards 2%, the Fed’s target level.

These conditions should allow the Fed to remove accommodation at a very gradual pace to with the market now expects the Fed to raise rates before year end, probably at its December meeting. Public comments by various state governors and committee members have been consistent in supporting this expectation.

Assuming incoming economic data remain supportive and financial conditions did not deteriorate; we expect the Fed to move rates higher by 25 basis points at its December meeting. Nonetheless, it is equally likely in the eyes of most market participants that the Fed will not raise rates aggressively in the 2017 and beyond.

Public comments by certain Fed officials are also consistent with this expectation. Accordingly, we expect the level of the U.S. federal funds rate and funding levels generally to only move modestly higher over the next few years.

With this backdrop in the economy in rates market, the mortgage market has performed well over the course of the third quarter of 2016. From a price perspective, the slight backup in rates over the course of the quarter, the U.S.

treasury curve flat modestly as 2A yields increased by approximately 17.5 basis points, while the 10-year treasury yield increased by approximately 12.5 basis points, coupled with expectations that prepayment speeds would moderate enabled 30-year fixed rate mortgages to tighten its spread through comparable duration treasuries.

In fact, with rates up, prices of 30-year fixed rates 3% to 4.5% securities increased. The same is to higher coupons 15-year fixed rate securities although to a lesser extent. From a prepayment perspective, speeds accelerated into the late summer post-Brexit and appear to have peaked in August. Based on the report issued in early September.

However, speeds moderated only modestly in September based on the report issued in early October. Going forward, the combination of higher rates, the MBS survey rate issued on October 20th was the highest since just before the Brexit vote. Coupled with the seasonal slowdown of prepayments should cause prepayment rates to decrease further.

This in turn should be supportive of mortgage valuations. In addition, the Fed appears on 10 [ph} continuing to reinvest paydowns on their MBS holdings and banks, particularly large banks continue to add to their MBS holdings both in securitized and whole loan form.

Both of these trends are supportive of mortgage valuations as well, potential pitfall would be at the Fed in an effort to seep in the curve terminated or slightly reduced, significantly reduced their reinvestment paydowns.

Governor Eric Rosengren to the Boston Fed recently hinted at this possibility although the Fed leadership Jerry Alan, Vice Chair and New York Fed Governor, Dudley have not. A second consideration for mortgage valuations is pay up premiums on call protected securities. Orchid add a significant allocation to its portfolio to these securities.

In spite of the fact, the rates during the third quarter and continuing into the fourth, such pay up premiums remain elevated consistent with prepayments fees. Going forward, the prepayments to be continuing to moderate further, call protected security pay up premiums could diminish.

Among the option cycles that to commence this week should shed some light on the markets view of anticipated prepayment levels.

The company has been reducing exposure to such securities gradually over the course of the third quarter and to-date in the fourth, while weighing potential risks of continued pay up erosion versus the need for prepayment protection as speeds have moderated only modestly so far.

Portfolio positioning remains concentrated in higher coupon fixed rate securities with various forms of call protection.

Exposure to increasing rates is mitigated by interest-only and inverse interest-only securities coupled with various forms of funding hedges, short positions in euro-dollar futures, treasury futures, pay fixed interest rates swaps and short positions in TBA Securities.

However, as discussed above pay up premiums for call protected securities remain elevated.

As mentioned, to address the exposure to a more dramatic increase in rates and likely erosion of these premiums, we have sold securities with some of the highest forms of call protection to the dealer community for purposes of structuring them into agency CMO structures whereby we took back an inverse IO position.

Thereby allowing us to maintain the favorable prepayment protection, while removing the exposure to high premiums. This activity was the primary reason, the capital allocation shifted slightly from pass-throughs to structured securities. The allocated to pass-throughs decline from 62.1% at June 30, 2016 to 58.9% at September 30, 2016.

Returns for the quarter reflects the strong quarter for MBS securities as the mark-to-market on our pass-through portfolio was positive as was the mark-to-market on our funding hedge positions and not a common occurrence.

As a result, the pass-through portfolio generated return on average invested capital of 14.7% for the quarter on an annualized basis.

The structured securities portfolio generated return of negative 0.6% for the quarter, as movements on the frontend of the rates curve driven by increased expectations of Fed rate increases caused our inverse IO securities to separate negative mark-to-market adjustments in spite of higher rates.

The combined portfolio portfolios generated return of 8.6% for the quarter not annualized. The company's book value increased from $10.86 at June 30, 2016 to $11.21 at September 30, 2016.

Book value is up slightly again so far in the fourth quarter given the continued increase across the rates curve coupled with continued strong performance by mortgages generally. Finally, we reduced the leverage ratio on the balance sheet to 7.8:1 excluding unsettled security purchases at September 30, 2016 from 8.5:1 at June 30, 2016.

With the reduction in specified cash flow positions mentioned above leverage is down slightly more as if today. Going forward, the exposure to the high forms of call protection is likely to continue to decrease absent of reversal of the upward trending rates.

To the extent, it is possible we've also reduced such exposure by the structuring option whereby we retain the IO portion likely in the form of an inverse IO owned to the demand for floating rate CMOs. Otherwise, the portfolio would rely on lower forms of call protection when redeploying paydowns or investing new capital when and if available.

Operator that concludes my prepared remarks. We can now open the call up to questions..

Certainly. [Operator Instructions]. Our first question comes from the line of Steve Delaney from JMP Securities. Your line is now open..

Great. Good morning, Bob and congratulations on a really strong quarter..

Thanks, Steve..

With the Fed, obviously, I think premature by this looking at the December. I'm just curious about how you're thinking about 2017, the uncertainly of what they might do next if anything. But are you guys thinking about maybe shifting more to fixed pay swaps and you've got about what's $600 million in swaps currently.

Any thoughts towards shifting some of the futures into actual received LIBOR swaps..

We actually considering probably doing some of both. The euro-dollar curve is extremely flat all through December of 19, I think somewhere about a 150, 160 basis points and of course the swap curve, swaps spreads have been volatility given all Investor Day corporate issuance. There is still a very attractive logo as well.

As far as our expectations of the Fed, I would say, we probably expect and we don’t sit down and try to actually some stone [ph], but I would say probably two hikes next year, as I mentioned in my prepared remarks, the baseline measures are going to probably dry, reported inflation numbers up slightly, we'll probably go to 2% and maybe beyond.

It’s also interesting to note Steve, the Fed and their remarks, they always try to give themselves lots of room, you know they always talk about being very dependent, but they are concerned about initially with events overseas or financial conditions.

Now that inflation starting to head towards 2%, they are saying that they’re not going to allow the economy to run Hawk, which implies it though probably be patient and allow inflation to run above 2% without hiking.

So, the way we read the Fed coupled with the fact that the compositions going to change next week, three of the more Hawkish members are going to leave, I think there is only one that’s going to be replaced by a similarly Hawkish member.

I think the Fed will maintain their duvets [ph} and so I think two is probably about it and beyond that it’s hard to say I mean you just really can’t have much clarity beyond that. I'll let Hunter talk a little bit more about the hedging strategy..

Sure. Hey, Steve. We have been looking at adding to the both euro-dollar position, really for the - for positions on the shorter end of the curve, say inside of March 2020 and swaps for durations slightly longer than that maybe another year or two.

There is really not a lot of I guess in our minds downside risks in the euro-dollar, the euro-dollar positions going out through say the end of 19, just because if you - if we’re going to do - if we get a hike in December and then only say one or two more throughout the next couple of years, the downside of those trades is really pretty limited going all the way out to even these 19 euro-dollar futures.

So, even if the Fed doesn’t go more than one or two times after December, we’re only looking at loosing like 25 basis points. So long as we don’t rotate into an environment where they're actually taken an easing posture in that same period of time..

Exactly, yeah. And I am, your pass-through portfolio, I noticed you know - I know you guys like specified pools and your CPR really held in single-digits, which is remarkable compared to some. But you are carrying I guess a $1.9 per average purchase price.

Should we assume that virtually all that pass-through portfolio has some degree of prepay protection in it, reflected in that high dollar price?.

Yes. Predominant, yes it does. There are some with I guess lower forms of call protection, but we have kind of started to strategically shift into forms of call protection that don’t cost quite as much, as say the loan balance pools, which were something we started acquiring back in spring of this year.

We felt like, rates have moved enough that we should start and the - and the pants [ph] were cheap in that we should start layering on that type of call protection and we did and have sense started to kind of going back to the other way.

Although, reluctantly so, we do spend quite a bit of time trying to acquire these pools and we’re really happy with the results and the way they performed in this post-Brexit rally.

So, the way that we've gone about shedding that pay up duration, if you will, is by putting them into CMO structures and rotating a derivative off of them, which lowers our pay up risks and our explicit direction per unit of capital but it enables us to maintain the positive attributes of the underlying collateral in mortgage derivative form..

Okay, just one final thing. In terms of a lot of things were working obviously on your book value this quarter, in terms of the way things were positioned and Bob you mentioned that the inverse IOs were little negative, but in terms of just a straight IO, did sort of the natural hedge there, you know in terms of rising rates.

Did you see the kind of positive marks you would have expected on the IO securities?.

The one thing, Steve, it's yes and no, it's more delayed. The problem with an IO addition is that like this is the perfect example what we witnessed this year where speeds remain fairly elevated even in the most recent report and so you don’t really start to sketch your satisfaction if you will out of the IO marks until speeds in fact do slowdown.

You get initial pop when rates start to move higher, but you really need to see speeds realized before you get that. So, it kind of plays out over several months - more instantaneous but not in the actual securities..

Got it. That’s a good point and I had that considered that, because we were worried about what in July, we were down below 140 and people - all people wanted to think about with speeds going higher. So, well listen, good quarter, thanks for the….

Sorry, obviously, our IO tends to be more generic in nature, because we are looking for - or at least a large portion of it, because we are looking for large negative durations in those. So, when we have many refi waves, the paydowns are always a headwind to the mark-to-markets..

Got it, got it. Thanks for the comments guys..

All right, thanks, Steve..

Thank you. [Operator Instructions]. We'll see if we have any more questions. [Operator Instructions]. All right, and at this time, I am not showing any further questions. I would like to turn the call back over to Mr. Cauley for any closing remarks..

Thank you, operator. Thank you, everyone for your time to the extent anybody does come up with a question later or to the extent you listen to the replay and didn’t have an opportunity to ask question live. Please feel free to call us at the office, the number here is 772-231-1400, we are available all day.

Answer any and every question you might have until, otherwise we will speak to you at the end of the year. 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..