Robert Cauley - Chairman, CEO and President George Haas - CFO, CIO, Secretary and Director.

Christopher Nolan - Ladenburg Thalmann David Walrod - JonesTrading.

Good morning and welcome to the Third Quarter 2017 Earnings Conference Call for the Orchid Island Capital. This call is being recorded today, October 27, 2017.

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 to the 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 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. Robert Cauley. Please go ahead, sir..

Thank you, operator, and as we done in the past, I would request that our readers if you haven't already done so to download our slide deck of our website, I'll be flipping to the slide deck as we go through the call. And obviously, it'd be much easier for everybody to follow along, if possible. If you are ready to go, I'm going to start on Page 4.

This is just a tables of contents just kind of go over the kind of your order of the conversations today. The first thing we will do is we will give our brief overview of our financial highlights for the quarter.

Then, I'll spend some time talking about the market developments basically going over the developments during the quarter that provided a backdrop for our performance. I’ll then go through our financial results basically then go through how these developments affected us.

And then finally, I'll go through the portfolio of characteristics, credit counterparties and hedge positions. This gives us a chance to describe how we manage the portfolio through this backdrop and how we are positioned for what we see going forward. Turning now to Slide 5, just quickly go over this.

We reported GAAP net income of $0.33 per share, as you're well aware, if you've been following the Company for a long lease what is known as available [indiscernible] county.

What that means is that any mark-to-market realized or unrealized gains and losses in both our assets and all of our derivative or hedge instruments go through the earnings and income statement. We reported losses of $0.18 per share for this quarter. Excluding those mark-to-market gains and losses, we reported $0.52 of earnings.

We will go through this in a little more detail later on as I said. Our book value declined $0.08 from June 30th from $9.23 to $9.15. We reported we declared a $0.42 of dividends and we had an economic return of $0.34 per share or $0.037 un-annualized, which is 14.7% annualized. Year-to-date, our book value is down $0.95.

Our dividend paid is $1.26, which results in a gain of $0.31 or 3.1% not annualized. Now, let's talk about market development if you'll turn to Slide 7. The first things we show here basically what happens into the rates market, we have the 10-year treasury note and the 10-year swap rate.

As you can see over the course of the quarter, we had a depth of cases yields declining going into early September and then reversing. By the end of the quarter, we basically finished unchanged in the course of 10-year treasury, as we were up slightly less than three basis points and the case of the 10-years swap even less one basis point.

But basically, if you look at these results, you really see kind of the tail of two stories. In the first case, the rally that we saw in the early September was basically a continuation of things that it developed or started to develop in late March or late Q1.

There was three basic drivers of what was going on, the first had to do with the current administration and congress, as you recall last year when the Republican swept the White House and Congress, there was a tremendous amount of optimism surrounding very -- what was viewed as a very pro-business administration.

There was talk of repeal and replacement of the Affordable Care Act, tax reform, infrastructure spending and the like. And overtime, this optimism quickly turned to pessimism. There were several failed attempts to change the Affordable Care Act.

The process really exposed the tremendous amount of infighting between the administration and Republicans and amongst Republican themselves. And there was even turmoil in The White House itself and all these seem to undermine confidence in the eyes of the market that anything meaningful would get done.

We also had geopolitical events particularly in the North Korea, in the Korean Peninsula. There was talk of the nuclear test and the administration was very outspoken through Twitter and otherwise, which raised tensions quite a bit. And as we all know there were tests, missiles launches over Japan and so forth.

And then finally the third leg of that was just inflation. Realized inflation is reported either personnel consumption expenditures or the consumer price index starting in March. Reported figures were 1/10 a month, which drove year-over-year figures down sharply from low to mid 2s, down towards mid 1.5 to 1.5 range and this was persistent.

But then things seem to change, in early September, they changed quite remarkably. And ironically, the biggest event was the government passing, increasing debt ceiling and basically avoiding the shutdown in the government, leased them to December. And ironically, just to show how much discord there was amongst Republicans.

This deal was a result of compromise between the Trump Administration and the leading democrats in Congress, but it did test them the tide. We also had finally a 2/10 of 1% of increase in inflation on the CPI level, which seem like maybe the decline in inflation had bottom and might turnaround.

And then finally on the 20th of September, the FOMC met and at the conclusion of the meeting, Chair Yellen in her press release was quite hawkish, made it quite clear that they intended to hike in December, absent and material erosion in the economic data.

And then probably more importantly that they thought that most of the factors driving the inflation down of late were temporary and transitory and that they thought they would reverse and move back towards their 2% target.

Since the end of the quarter, we’ve seen a continuation of very strong economic data especially even today with the GD Prints for the third quarter at 3%. There is renewed optimism that maybe they can get -- Congress can get a tax reform package through. Tensions in North Korea abate somewhat, while inflation is still low and the Fed is quite hawkish.

The risk assets have done extremely well and as we all know that various stock indices were heading all time new highs, several times over the last few weeks. With respect on Slide 8, to the shape of the curve, we show that U.S. treasury curve and the dollar swap curve that was modest, flattening that took place throughout the quarter.

But it's noteworthy that if you look at the slope of the curve between the 5 and 30 year point, it's been flattening for a quite some time and in fact on the November 17th or October 17th got into the lowest point and it's been since late 2007.

This was driven by the combination of the fact that we have low realized inflation and a very hawkish leaning Fed, which meant that inflation risk premium was quite low. So the long end of the curve rallied and the front end of curve moved modestly higher to price in the hawkish Fed rhetoric.

Since then, we have backed off from those lows but they are still quite remarkable given that where we've been. As far as Fed hikes, it still -- it appears quite evident now. The December, the market is pricing at really high probability, although it's quite remarkable.

At the end of the second quarter, the market was barely pricing in one more hike through well into 2018. Turning to Slide 9, you can go through the developments in the mortgage markets and we have four tables here. The first on the top left shows the price performance of our 30-year fixed rate mortgages, 4% and 4.5% coupons.

These are kind of our core holdings in addition to 20-year 4% securities.

And as you can see these prices were relatively flat over the quarter in the case of 3 or 4, they were only up a little over a tick and 4.5 to up about 3.5, which is in stark contrast the lower coupon mortgages which tightened quite remarkably into the end of the quarter and beyond.

This was really a result of the fact that most other spread products were trading at equally tight spreads and with lower volatility in the market. Mortgage is seen very attractive and it's just seen the tightening can go on forever.

Since then, we've backed off some, but in the low volume environment mortgages appeared very, very attractive and have done really well. Bottom left shows the role market for these coupons.

Generally, people that do a lot of dollar rolling don’t do so and these coupons tend to be in lower coupons, but the takeaway from this slide is the fact that the drops were not particularly appealing during the quarter and that has relevance for how investors view the specified poor market to the extent dollar roles are weak specified pools look attractive.

If you look to the right side of the page, this is the pay up for two of the typical specified pools you can buy. And the top right, this is the low loan balance pool 85,000 K Max pool is probably the highest quality form of call protection you can buy. These tend to trade at the highest premiums.

And at the other end of, there is spectrum of what we just call new production. These tend to pay it more modest pay up simply because the call protection is quite fleeting. It really only lasts for the first several months after the loans originated and disappears quite quickly.

But if you look at the performance of those pay ups particularly the 85k pay ups throughout the course of the year, you can see they were quite strong. Obviously, the market was rallying most of the year. But even in September when the market started to back off, they did not fall much at all.

And that's kind of consistent with the fact that mortgages have done very well, but we've also seen capital raising in the REIT space by our peers and so there is a lot of buying they try to take place of late, so that's also helped these pay ups stayed quite strong. Now, I’ll start to talk about our financial results.

If you turn to Slide 11, we have two tables here. The first one on the left is our income statement. And as I mentioned, we used the fair value of accounting. So that means that as I said, all realized and unrealized gains and losses go through our income statement.

And it can introduce a large amount of volatility our reported headline earnings per share. So, what we’ve done here is basically decomposed the income statement into these realized and unrealized gains. And then the other more core components, if you will, just the headline interest income expense and our G&A expenses.

I don’t want to dwell on these two months other than to point out that it’s important for you to recognize that the one on the left is more kind of reflective of what we tend to earn overtime.

The headline number interest income is just, basically, we don’t -- fair value of accounting does not require us to amortize premium through interest income, so that number is quite large. It actually represents approximately $0.86 for the quarter. The second line is interest expense. We do not use hedge accounting.

So this just reflects absolute interest expense and of course with the Fed raising rates that number has been creeping up.

And then finally with respect to our G&A expenses, most of these are non-variable, we are externally managed, so our management fee does vary as the size of the Company grows as those were allocated overhead, but the rest of those are relatively stable and in fact on a year-over-year basis are flat to lower than they were last year.

This column puts to $0.52 earnings for the quarter and we’ll talk about that a little bit more. On the right side of the page, we show the returns for the portfolio broken down by the sector. We run both a pass-through portfolio and then also a structure securities portfolio comprised of interest only and inverse interest only securities.

The pass-through portfolio generated a very strong return. The portfolio is -- has a very high concentration of the 30 year fixed rate mortgages with high coupon mortgages.

So we have a lot of premium exposure and we generated very strong return for the quarter that’s even inclusive of realized and unrealized gains and losses and derivative losses, which are basically our funding hedges, TBA shorts.

So, the returns for the quarter were quite strong which is which you would expect for quarter such as we had in our third quarter. With respect to the structure securities, the returns were slightly negative.

The biggest driver of that was mostly unrealized gains, in this case losses on the interest only securities, and that was driven primarily by speeds that we’re a little on a high side and resulted in negative fair value adjustments. Combine, we generated a 4.5% return for the quarter on the annualized for the portfolio.

Page 12, as I mentioned, this shows our current decomposition of our earnings per share. The yellow line represents our earnings absent fair value adjustments. And the blue is our headline or reported earnings per share.

And I’ll say a little bit about this more in a few moments, but as you see in the few quarters there has been some slight erosion in our kind of run-rate earnings. As I said, we don’t use hedge accounting, so any interest expense is not adjusted for any impact of our hedges. This is really just capturing the Fed increases as I mentioned earlier.

So, it’s been -- there is been some slight erosion. Turning to Slide 13, this slide shows our capital allocation between two strategies and kind of a right side is roll forward of the portfolios.

Nothing much remarkable to point out here, I will point out that the allocation of the capital between the two strategy was basically unchanged for the quarter. The pass-through went from 63.6% to 63.7% so essentially unchanged. With respect to the roll forward of the portfolios, you can see that the pass-through portfolio grew.

As I mentioned, we did not change the capital allocations. So this just reflects that a slight increase on leverage what I will talk about in more detail in a few moments. With respect to the interest only and inverse interest only, they were flat. We did have some additions through that portfolio.

When we get into a little greater discussion of the details of the portfolio, we'll go into what we bought but for now there you can just see that they were relatively flat. So, their purchases were just offset by return principle and mark-to-market losses. And that’s basically that hit for slide. Now you can into our portfolio characteristics.

Slide 15 is the snapshot of the portfolio. At the end of the quarter, we show our allocations to the various sectors. We'd point out that in the third to the column from the right is the allocation of the percentage of the portfolio.

Before we get into the details of this, I think it's probably better that go to Slide 16 to just give you some context of how we not disposition now but have been in the past. And there are four tables here. The top left just shows the size of the portfolio.

So, overtime we've grown and the portfolio is approximately $4 billion, as you can see in the last quarter it grew, but as I mentioned that was just because of slight increase in leverage. We did not increase the shares outstanding during the quarter. The bottom left shows the allocations between the two sectors.

As you can see the pass-through strategies at the high end of the range and it probably will continue to be at least in the short-term Hunter will have the few words to say about in terms of relative value and attractiveness. The short answer now is that these are structured portfolio of the securities just not necessarily a feeling right now.

The top right shows the allocation within the fixed rate portfolio. The only notable thing here is that over the last few quarters, we've taken our allocations to 20 year securities down slightly although it is up slightly this quarter.

And most of those fixed rate securities we owned as I mentioned, there were high coupon and we've been buying generally a lower pay up forms of call protection. We've shot away from the highest forms of call protection and those levels are quite rich and unattractive at the moment.

And then finally on the bottom we show our allocation to our structured securities. [Hunter], do you want to say a few words about what we like and we don't like in that space of late..

Sure, so as I think Bob alluded to earlier, we saw rates go down in the mid third quarter and start to sort of rebound, which in a continuation of that and inverse IOs and IOs in particular performed very well.

We spent quite a bit enough time and capital in the first quarter buying at IO positions off of mortgage bank securities that had jumbo balances, balances in the $500,000 to $600,000 to $700,000 pro-loan area.

Those performed as you would expect relatively poorly as rates came down in the first seven or eight months of the year and then have since start to rebound quite nicely. So, it doesn’t leave us with the lot of options with respect to the IO and inverse IO book.

Inverse IO is a sort of run out of what we will recall negative duration, so the ones that with the exception of maybe some of the more generic inverse IOs we have off of of Fannie and Freddie, 4.5 have really sort of their IOs component has extended to sort of maximum or at least there is not much room left for it to extend at this point.

So that puts us in a position where those particular assets have more LIBOR risk than we kind of like on the books with the mix of hedges that we have in place. So we really did increase hedges or decrease that run-off the number of those assets.

We’re still sort of muddling on which of those past wouldn’t take most likely we’ll continue to have more or less the same position. We might less of it run off or so to pieces which you just don’t put our risk profile at this point in time. If we can find IOs, we’ll certainly add them but they are hard to find and relatively tighten prices.

So, we probably won’t do too much there. So, I wouldn’t be surprised if our allocation towards specified pools grew in the coming months particularly, if we raise any capital..

Thanks. If you go back Slide 15 for a moment, this as I said, this is snapshot of the portfolio. There is not a whole lot to talk about here. The third column from the right is the allocation, as you can see the fix rate were 95.17%, push back to assets, we don’t apply leverage to the structure securities.

So in terms of the percentage of our assets allocated to our portfolio very small capitals of course much higher. I also mentioned that we have been deemphasizing the 20 year securities. This particular quarter they grew slightly and as a result, our weighted average coupon of the fix rates was 4.37% and had been 4.42% last quarter.

But as Hunter said, we’ll probably continue to run the fix rate portfolio at or above these levels. And I think it makes a lot of sense given where we are for several reasons. One, we’re kind of at the end of the calendar years. We typically tend to see a slowdown.

And prepayment speeds for the most recent month, our fix rate portfolio prepaid at 8.1 CPR, that’s actually probably slightly high end of the range what we realize for the year. But we would expect that to moderate. And then also with the back up in rates that should put even more pressure, downward pressure on speeds.

And as a result it allows us to feel more comfortable owing those securities. And as Hunter mentioned, the ability to IOs to extend meaningfully and provide operating protection is somewhat limited in the space, so they really not an attractive asset to add to the mix. Turning now to slide 17, I did -- we have two things on this table.

First, just our repo counterparties and our weighted average borrowing rates, we have extended our weighted average maturity sum, we’ve started to put on some longer term repo.

As you can see, the weighted average maturity in some cases is over a 100 days that’s somewhat of a departure from the past where we tended to fund pretty much exclusively in 30 year to 60 year or 30 day to 90 day range. On the right hand, we show our leverage, as you can see we took it up. So question might be why would reduce all.

And the reason is the following. As we mentioned, the market was rallying for the first -- almost nine months of the year. And our portfolio because of its high concentration of -- high coupon fix rate mortgages in IO, demonstrated a very negative empirical duration, in other words book value was going down in the phase of the rallying market.

When we got to the point in early September when the 10 year was on the verge and is going through 2% and the market it priced out, but all future Fed hikes seem to us that absent are real rolling over of the economy to the point where the market was going to start to pricing in easing, that rates on that long end of the curve could not go sustainably below 10% or 2%.

In that the market is pretty much price that all of the feds, so given the fact that we kind of thought it was hard to believe that the market could sustain below 2% for any like the time and our euro dollars shorts and so forth have been hit so hard with the market pricing at so much good hike in that.

The risk profile going forward was asymmetric and we were comfortable taking up the leverage back to around 9%. And we will say a few words about how we view that things today, but at that point that's seems like a very easy decision to make.

Slide 18, this is the last slide we will talk about and this just show our hedge positions and this is a good point. Once I go through this slide, we can talk about how we see the world today and going forward and what that means for our not just positioning, but earnings probably going forward.

So, we basically show all of our various hedge instruments that we use here. On the top left where our euro dollar position and you can see we have a $1 billion on each contract up through the December of 20 contract and we show our average rates below that. We have our treasury future short which is the TY contract. We took that down quite a bit.

It used to be around 465 million and just like we have the same discussion about the change in the leverage, when we got into late August, the curve get flattened quite a bit and the market was pricing out so much Fed hiking that we just thought it was not the appropriate point to hedge and we moved our hedges out of the 10-year part of the curve.

We've put on more of the 30-year TBA short, which is shown on the top right corner because mortgages are tightened and it seemed like the market was just headed on whatever flattening trend. So, we were not getting any satisfaction in fact the mark-to-markets on those were quite negative on the long end of the curve.

Below that we show our swap agreements, we have slight over $1 billion in place mostly between the 1 and 5 years parts of the curve. Our weighted average pay fixes were all pay fix swaps and our weighted average rate on those is 1.43. And then finally below that swaption, we added to our swaption position in August.

As I mentioned, we've changed our TY hedges. We had seen the belly of the curve lead the rally as the market priced up to Fed involves at extremely lower levels, to seem like a perfect opportunity to put on some swaption whereby we have the options in both cases for a year to enter into some form of a pay fixed swap.

We entered into two of these one on the 5-year plan of the curve, the other on the 7-year part of the curve. And then those off course have done well and even beyond at the end of the quarter have done well. But this is an interesting point, so that basically our positions.

And so one of the things it's been a challenge for us and all of our peers frankly has been the fact that we've been in the long period of time where we've faced an upward slope in yield curve and the need to hedge.

So what does that mean, we're either paying fixed on swap or entering in the year or dollar shorts of the like, and in all cases, these are done at levels above current funding levels.

And the forward curve has not been realized at all up until recently, which meant that these hedges tend to do and we closed our out of the money and they added to our interest expense.

And so in our Q, we show extensive tables that show what we call our economic interest expenses, which is just our absolute interest expense adjusted for the fact that our hedges were expiring out of the money and that number has been increasing. But as we look in the 2018, that’s not so much the case anymore. The Fed has started to raise rates.

And we’re not sure how much continues to do so, but now these hedges aren’t necessarily out of the money. Our swaps have a fix rate of 1.43%, and our receive rate of 1.31% and that’s three month LIBOR. Today, three month LIBOR is 137, 138. And there's the prospect that the Fed may hike in December in which case it would likely go higher.

Our euro dollar contracts had a strike rate of 1.62 for this year at least for the December contract which is out of the money. But for 2018, that rate is 1.845%. So, based on the Euro dollars and the swaps, our blended rate for 2018 is 1.64%. So, what is that mean.

Well, today as I said, three month LIBOR is at about 137, 138, that is the market price and a very high probability maybe December hike it’s been moving up for everyday.

If in fact the Fed were to hike in December and given what we have observed prior -- in prior periods in other words, if you go back to before the period where the Fed was being priced in, three month LIBOR was trading about 16 basis points above effective Fed funds.

So effective Fed funds right now is about 116 basis points, if the Fed were to hike another 25, it takes to about 141.

If the relationship between three month and LIBOR and Fed funds hold in other words, it’s about 16 basis point cushions that would get three month LIBOR at the end of the year in the mid to high 150s, which would put our swap position in place. And our euro dollar positions is closer to price. Now, we don’t hedge a 100% of our liabilities.

We are using all of the various euro dollars, swaps and swaption and so forth would about 63% of our funding and inclusive of our TBA hedges about 71%. So, it’s not a 100%, but at least for the first time in the while these hedges have gone at a point where they’re actually going -- actually help us on the interest expense side.

As we all know, the Fed has been raising rates and in this prospects we're doing so in the future. And it puts some pressure on earnings. We published in our Q as I mentioned, I apologized it’s not available for you yet today, but I can just kind of give you some information that’s in there.

But our economic interest expense and our economic yield on our assets. For the first nine months of the year has moved from a 114 basis points for the first nine months of 2016 to 262 basis points for the this year. So, it’s gone up by 48 basis points.

Our yield on average MBS assets has moved from 380 basis points to 404 basis points, so a 24 basis point increase which reflects the change in the mix of the assets it’s probably highly coupons. So, on net, our net interest margin has declined by 24 basis points basically reflecting the fact that they had -- the Fed has been high teen.

But what is that mean going forward, well based on positioning we’ve talked about how the asset makes us unlike to change, we’re taking a lot of prepayment risk, we think that’s prudent given the back up in rates and the seasonal slowdown that we typically see.

But also we now have hedges that are going to start to help us some at least to the extent that we’re hedged. And what that means for our NIM going forward is really just the question of what actually the shape that it occur. As we mentioned that it had been flattening for some time, but that has changed somewhat of late.

Last Thursday night, the senate passed a budget resolution which cleared the way for potential tax reform. Yesterday, the House did so as well. So, now there is the potential knows what we’ll actually get, but there is a potential for meaningful tax reform, which could be similar to the economy.

As we mentioned, we’ve seen some acceleration in the growth of the economy, two straight quarters of growth over 3%. All of the economic data of late has been very, very strong.

So is it possible that the market starts to re-steep in the curve and that allows our asset yields to creep up slightly higher and that would be both positive from an earnings perspective as well. So, we could see that offset the effect of the Fed.

We don’t know what would be the case, time will tell, but we think that our positioning is appropriate for this environment and it's glad to see that are hedges are finally going to have some benefit for us. That's pretty much it. Operator, we're done with the presentation. We can open up the call for questions..

[Operator Instructions] And our first question comes from the line of Christopher Nolan from Ladenburg Thalmann. You may begin sir..

Quick question on your comments.

Is it correct to say that if the Fed tightens in December the euro/dollar futures start to go and the money? Is that really correct?.

Not quite, weighted average strike for next year is 1.845% and that off course is the underlying is index is pretty much LIBOR. It would be still out of the money with that one hike, but it's getting closer. We don’t know what the Fed will do next year whether it's one, two or three actually none.

But the breakeven given where we assuming Fed hikes of December would be about 1.5 hikes more than 1.5 hikes would get those in the money..

So, it starts not to December hike, but if we get a normal pace of hikes say quarterly or something of effect, it doesn’t take very in many before it turned and goes the other way.

Also worth noting that well we are not hedged to 100% on the front end of the curve, we have taken some steps to pretty dramatically increase our longer term funding positions. So we put a I don’t know, it was the few $100 million worth of one year repo on at sort of the rate lows that struck in I think in a blended basis in the lower 150s.

So those should be in the money and we've also been rolling over. The December hike is still not a 100% priced in and so we've been taking advantage of that by locking in rates and the kind of the 139 to 140 area which take us well into January..

And then it looks like you guys really slowed down your equity issuance this quarter.

Is that correct?.

Yes..

Yes, that was in fact a product of two things.

This one was just the fact the stock price through most of the quarter was not trading at very high premium to book value and then secondly we had a lot of tightening in the mortgage base, as you know some of our peers were active in raising capital and that put some pressure on pay up premiums for the very specified pools.

So, it's just -- in the combination of a modest premium to book on the stock price and not necessarily really attractive investment opportunities kind of due to the crowding out of our peers. We just think it was good time to do so..

We've seen a widening in mortgage assets since quarter end and also we’ve -- our stock prices trading relatively well especially today. If that holds in then I think that creates a different dynamic than we saw in the third quarter..

You have a fair amount of cash liquidity on the balance sheet.

Should we expect that to be deployed?.

Not necessarily, that can just affect timing, unsettled security purchases in the like -- it might be just modestly above where we would typically keep it. So, not, we have to do capital raising, I would not reach too much into that unless there is capital raising.

The cash balance today is not reflective of eminent new investments as of September 30..

Final question, in your comments you dictated that you were decreasing your exposure to 10-year futures and going 30-year TBA short.

So, is it fair to say that you sort of expecting a steeper yield curve in the 30 year part for the curve?.

Well, we did talk about two -- I don't a week or so ago [indiscernible] happen, we had such a pronounced flattening of the curve. Those shorts are getting very people owned and mortgages were tightening at the same time. So, it just really didn’t make sense to continue to have that hedge to that magnitude that point in the curve.

And it seems -- by the impact way, we're shorting TBAs, we’re shorting the 3% coupon, which is a pretty long duration of assets. So, to the extent the market turned around and went meaningfully the other way, you would expect that 30 year mortgage to 3% to extent coupled with the factor that it had been tightening.

So, we just thought it was more effective hedges instrument and we also entered into some swaptions. The belly of the curve had led the rally into early September.

The middle of the curve is the most sensitive to long-term Fed expectations and as the market was pricing out the Fed, the belly of the curve was rallying quite strong and volatility was very, very low right. And so that was just an easy trade to get into. So they just seem to be more effective hedges at the time..

Yes, if I could just chime in on that. I think that what we saw was, as rates were coming down towards the low 2%, the convexity in our portfolio was getting -- gets pretty bad. So, I mentioned we have some of those jumble IOs, we have a lot of prepaid sensitive assets.

So, if rates were to breakthrough sort of the psychological barrier of 2%, hedging with treasury notes future is not necessary where it want to be in. So, mortgage is tightening like crazy into the -- into the third quarter, volatility was very low. So that was really more a function -- that was really where more of our hedges were than anything.

One, we wanted to shift reduced our basis exposure by getting out of treasury back MBS product or treasury back product and then into MBS hedges. [indiscernible] was very low, so we thought it was a good opportunity to maybe buy a little bit back. So, we bought the 5 year and 7 year swaptions.

And then that also allow us to improve the convexity of the portfolio because now as more MBS portfolio would, we would expect underperform into more of a rally, but into a selloff we would -- we have a little bit of positive convexity through purchase a option hedges or conditional hedges as opposed to just straight rationing based hedges..

And they were out of the money too so they were sort of in the position where their durations could go from being relatively low to sort of increasing -- at an increasing rate as sold off..

Thank you. [Operator Instructions] Our next question comes from the line of David Walrod from JonesTrading. You may begin..

You mentioned that it wasn’t a lot of capital raising done in the third quarter, but there was quite a bit in the second quarter.

Was there any leftover or hangover or earnings drag that was realized in the third quarter from the deployment of capital that was raised in the second quarter?.

Yes, that was typically the case especially it was so back loaded. Most of that capital raising was in May and June. There is slight downward pressure, but that only lasts for month. But it effects July basically..

And then your speed ticked up a little bit.

I know you said you think that move backed down, but have you attempted to quantify the impact on this quarter results of the uptick in speeds?.

Well, we have the one number with, as you know, we call it premium law suite of pay down because under the fair value option, we don’t amortize premium directly into the interest income. And that was probably about a $1 million slightly above last quarter and they'll be a 1.5 million at the most and in terms it's about 45 million shares outstanding.

So 2% or 3% increase, so it definitely had some slightly modest impact. And as I've said, we do expect that to reverse in this quarter. But as I -- don't forget, we hit the year-to-date low in rates in early September 2.04% on the close. So in the speeds and the past structure well, so I would expect that to be the high watermark for the year.

And so premium amortization even using our methodology was probably peaked for the year..

We're pretty bullish on speeds are going into the next 3 or 4 or 5 months so especially at base rate levels 248 or above 10-year treasury levels hold. One, we are going to have the seasonal slowdown which has been more -- the season of the nature of pay downs has been more pronounced as it seems like in recent years than was previously the case.

And also just -- we've had -- we've moved over a very costing part of our portfolio in terms of where mortgage rates are now and we would just expect to see the declines in the speeds particularly in the IO book..

And we have a follow-up question from the line of Mr. Christopher Nolan from Ladenburg Thalmann. You may begin, sir..

Actually, Dave just answered my question. So, thank you very much..

Hi, Chris, thank you.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Robert Cauley for any closing remarks..

Thank you, Operator. To the extent anybody has any questions they pop up later or they don’t listen to the call live and listen to the reply and have questions, feel free to call us in the office. The number is 772-231-1400. I always willing to take any questions otherwise we look forward to just speaking to you at the end of the year. Thank you..

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