Good morning, and welcome to the Fourth Quarter 2020 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, February 26, 2021.

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 future events and are subject to risks and uncertainties that could cause the actual performance or results to differ materially from those expressed in such forward-looking statements.

The important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission including the company's most recent Annual Report on Form 10-K.

The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir..

Thank you, operator and good morning. I hope everybody had a chance to download our flipbook, which we posted on our website last night. And as usual, I'll be going through the flipbook over the course of the call.

I just want to start off by saying that Orchid had another very strong quarter of continued book value recovery from Q1 and strong earnings. We continue to pay a very attractive dividend that is covered by earnings, which in turn allows our stock to trade at or above book value, which it has for several months now.

And again, this in turn allows us to opportunistically raise capital by either our ATM or our secondary whenever opportunities in the market present themselves. This of course gives us a chance to enhance the earnings power of the company.

With respect to the slide deck, we do maintain the majority of the slides from quarter-to-quarter depending on the quarter, some are more relevant than others given that we're kind of late into February, I will be skimming over some especially the ones on the market focus slides.

And then also given the significant changes in the market especially over the last two weeks, I will spend some time going over steps that we've taken with the portfolio since year-end. With that, just go over the slide deck now. As usual, start off by giving you the highlights for the quarter of our results.

As I said we'll go through the market developments relatively quickly, discuss our financial results and then spend the most of the time talking about the portfolio, our hedged positions and changes made to bulk over the course of both the fourth quarter and year-to-date. With that on Slide 4, Orchid reported income per share of $0.23.

This is net earnings per share of $0.30 excluding realized and unrealized gains and losses on our RMBS, asset and derivative instruments including net interest expense and interest rate swaps.

We had a loss of $0.07 per share from these realized and unrealized gains on our RMBS and derivative instruments including a gain in net interest expense on the swaps. Book value per share was $5.46 at the end of the year, an increase of $0.02 or 0.37% from the end values into the third quarter of $5.44.

In the fourth quarter of 2020, the company declared and subsequently paid $19.5 per share in dividends. And since our initial public offering the company's declared $11.785 in dividends, including dividends declared in the first two months of this year. So economic return of $21.5 per share or 4% for the quarter, which is 15.8% annualized.

Turning to Slide 5 and 6. This is where we present our results versus our peer group. Our peer group is of course listed at the bottom of each page. On the first slide we show the performance calculated on a total return basis using change in the stock price and dividends.

And on the second page using book value because we are doing this before all the results are in for the fourth quarter, book value numbers are not available for all the peer group. So the second slide is only through the third quarter. But as you can see again, Orchid has had very strong performance versus the peer group.

As each case we're looking back either one through seven year period and then the actual calendar years and Orchid continues to generate very attractive returns for our shareholders. Turning out to the market developments which again - I'm not going to spend a lot of time on given how late we are in the first quarter on what's happened so far.

On the left side, you can just see the changes in the Treasury curve. The blue line represents the curve at the end of the third quarter, the red line at the end of the year, and the green line is as of last Friday, even since last Friday, the market has moved quite a bit.

But just to focus on the fourth quarter for a moment, over the course of the quarter rates did move higher, for instance, the 10 year Treasury moved from just below 70 basis points to over 90.

And this is pretty much driven by the recovery with respect to the vaccine, not so much COVID cases, because as we all know, COVID cases in the fourth quarter were starting to rise very dramatically. But we did get the announcement of a vaccine during the quarter, and the market started to price in a modest recovery. Obviously, that's changed in Q1.

But also it's important to note with respect to a mortgage investor that the spread between the primary rates available to borrowers in the applied current coupon on a mortgage, what we call the primary secondary spread, did continue to contract in Q4.

So prepayments were still very, very fast in the quarter, and really showed no meaningful sign of slowing on a seasonal basis, which we would typically see. The second side just shows the same thing with respect to swap - the swap curve.

And just a brief comment on what we've seen this quarter, obviously, with the economic data, developments with respective vaccines, and the drop in COVID cases, all of these have improved very dramatically in a very short period of time. And not surprisingly, rates have followed suit, especially in again in the last two weeks.

And so what we're really seeing is the normalization process of both the economy and the rates market are moving very rapidly.

And based on comments from the Fed chair this week, it seems that the Fed chair is comfortable with these moves, they view them as a - the market reassessing the economy, and pricing and recovery, which is something they very much like to see addition to rising inflation expectations. Although yesterday was a little bit different.

Yesterday, we saw the front end of the curve move. And I think it remains to be seen the level of comfort the Fed has with that but that's probably more of a conversation for the first quarter and it's called in today. The subsequent slides just show the change in the 10 year rate over both the quarter and for swaps and going back to a year.

So if you can see the change in the fourth quarter was very modest. We ended the quarter just over 90, but we were over 150 yesterday. So obviously the market is continuing to sell off in price and recovery in very dramatic fashion.

Slide 10, I think is very telling what we show on the bottom of this slide, this green line is the slope of the 530 curve. And this is basically a proxy for the slope of the curve.

And as you can see, going back to 2013, we entered into a very long flattening period, which has changed dramatically over the last couple of years and especially 2020 and early 2021. Interestingly, yesterday, this actually reversed and it's continued to reverse slightly today.

So this 530 spread actually got north of the level here at 155 actually got into the 160s. But it's since come back about 15 basis points or so just in the last not even two days. Another telling slide is Slide 11, just to go to show you how much things have changed in this quarter.

As you can see, in the fourth quarter mortgage prices were fairly stable. Higher coupon mortgages did well as the market really anticipated potential burnout in the case of the higher coupons. We've seen some of that today, maybe not as much as the market expected.

And of course, lower coupons were supported by fed purchases, which continued are ongoing. Just to give you some points of reference that you can see on the top left, we show TBA prices over the course of the fourth quarter.

If you look at the bottom line, that's the price of a Fannie 2, and as you can see, at the end of the year, it was pushing up against 104. Yesterday those bonds traded below par. So obviously a very significant move. The red line are Fannie 2.5, they were amid $105 dollar price. Yesterday, they were at a 102 handle.

And ironically, the top line Fannie 4s, which were a high $106 price at the end of the year actually have traded up in price since year-end, again reflecting the desire for higher coupon securities. With respect to the role market it's the story really hasn't changed, the levels have changed somewhat.

Higher coupons tend to trade with flat or negative drops and the lower coupons have attractive drops although that it's been changing slightly lately. On the right side of the page, we see spec prices. Obviously they've been very, very strong, we'll have more to say about that a little later.

It remains to be seen where these levels are given the moves in the last two weeks. Next week, we have the auction cycles and we should be able to get a good picture on where things are. The last week, especially the last two days, we've had very limited color with respect to spec pricing.

I think just given the magnitude of the markets move in such a short period of time, there just hasn't been enough trading to flush that out. The next slide is implied wall, which is obviously very important for mortgage investors. As you can see, last year in March, we had a huge spike. And then it was very, very subdued to the balance of the year.

Yesterday, we were at the mid to high 80s. So we've spiked again, not quite as dramatically as last March, but again, a very big move in a short period of time. These next few slides, I can go over fairly quickly. One thing that's interesting to note here on Page 13, is LIBOR OAS TBAs.

As you can see, they had tightened someone in the fourth quarter and that continued to be the case early in the first quarter of 2021. So even though mortgages cheapened quite a bit in the last few days, keep in mind that this is after tightening to multiyear tights, earlier in the quarter. So they were really just coming from a very tight level.

And so, we're really just getting back to what I might call fair values. So this is nothing like say, for instance, the taper tantrum where mortgages got exceptionally cheap. We're really just getting back into more fair-based ranges, I would say price range. Slide 14, this is again, kind of more last year's news.

As you can see, in the fourth quarter risk assets had an extremely strong quarter because we all know that the stock markets continue to make new highs or we’re doing so.

And that reflects in the bottom side what you see the year-to-date returns and again risky assets, whether it's high yield or emerging market high yield, or the S&P we’re very strong and lower risk assets after having a very strong first quarter have actually kind of trailed, not surprisingly.

Slide 15, this is very relevant for us in today's discussion. On the top left hand side, you see the red line there, which is the mortgage rate available to borrowers in the level of the refi index. And as you can see, the level of rates to borrowers continued to drop all year and got down as low as 280.

And depending on your source could even been below that in many cases were. The refi index was very high, around 4,000 and actually got as high as 4,500 earlier this year, never quite as high as we've seen in the past, but still very strong, steady level of refinancing. We all of course know how strong the housing market is.

Over the course of just the last few weeks, though this red line is a reversed course and it's probably over 3% today. Last week or this week, actually, the refi index dropped a little over 10% it's below 4000. And I would assume that these rates hold that will continue to drop.

One important note, one of the large production coupons is the 2.5% 30 year mortgage. And we're kind of just past the point where they went no longer 50 basis points in the money depending of course on the gross WAC, but so now that coupon is probably not so refinancable, and that's a meaningful development for the coupon stack.

On the right hand side, you see the primary secondary spread.

As you can see, by year end, it was around 150 that continued to compress into the first quarter, depending on the items you look at to calculate that we use the Freddie Mac survey rate versus the implied yield on a term coupon mortgage that got much closer to 1% earlier this quarter and now started to move up with rates pretty much basis point-for-basis point.

Bottom side, so it's just the refinance ability of the mortgage universe. Obviously that continued to change especially given that we've had a lot of 1.5% to 2.5% mortgages originated in 2020 and early 2021. So if 10-year rates move meaningfully above 150, a lot of that portion of the mortgage universe will no longer be refinancable.

Now with respect to our financial results on Slide 17, the left hand side we just basically decompose the numbers which we talked about at the top of the slide deck, where we breakout our earnings absent mark-to-market gains and losses. And this just provides a detail.

On the right hand side we show the returns by sector in terms of how we allocate capital. And given what happened in the fourth quarter mortgages in spite of the rates moving slightly higher continue to tighten throughout the quarter in the past the portfolio did quite well.

Given how high speeds were in the compression of the primary secondary spread, interest only securities, so I actually had a negative return for the quarter that is not the case in the first quarter. This year, as you would expect, those numbers have reversed and IO doing quite well.

Just a few more historical slides before we get into the meat of the presentation on Slide 18, we just show our dividend history and this NIM, as we report it, just kind of focusing on the last four quarters. As you can see, the blue line there at the top of the page just represents the yield on our average assets. And of course, it's been declining.

The red line is our funding costs, which has also been declining. A net of that is the green line, which shows that our name has actually expanded modestly over this fourth quarter period, and seems to have dropped.

If you look at the dividend, you see more or less mirrors that the dividends got as low as $0.055 briefly earlier in 2020, and since we are covered. Remains to be see - what we'll see for the balance of 2021, but to the extent you have rates remaining higher and curves steeper.

As long as funding stays low, which I would think is a reasonable bet for the balance of the year, it should be a very attractive earnings environment for agency rates for the balance of 2021. Slide 19 is just our earnings per share, 2020 to show to the allocation of capital.

I will just mention briefly on the left hand side you can see the allocation of pastures has been very high and trending higher for several years now. We're just starting to reverse that ever so slightly and add some more IO exposure. And that I think just reflects the changing nature of the investment environment we're in.

With respect to the right side, you can see that the portfolio grew somewhat. As I mentioned, we've been able to opportunistically add capital either to the ATM in the case of the fourth quarter or to a secondary earlier this quarter, and the company continues to grow slightly. And now really just turning to the - what we've done in the portfolio.

First of all, with respect to the fourth quarter as I mentioned, we had two primary developments that drove decision making. On the one hand, you had rates moving slightly higher, and you could see what the introduction of a vaccine that was likely to continue.

But you also saw compression of the primary secondary spread, which was keeping refinancing activity quite high. And what we did if you look on Slide 22 and the portfolio looks somewhat slightly different than what we saw at the end of the third quarter.

And basically what we were doing was we're going down and coupon out of higher coupon, very high quality specs into lower coupon, lower quality specs.

Basically, the reason being that, over the course of the quarter, really into the first quarter of this year, what we saw is that - the pay of premiums for all specs were rising rapidly, but also the highest quality were very, very high.

And, given that rates were backing up, and there's a lot of duration in those premiums, we were trying to reduce the portfolio's exposure to those. But we're also able to do so by going into lower coupons, keep prepayment levels very, very low. And we spoke at the top of the call about our - the earnings power of the portfolio.

And it's been very strong for quite some time now. And we were able to keep it so by doing these trades. So we were kind of reducing our exposure to very high pay up premium TV spec pools. We also added some TBA dollar rolls to capture some income that way.

And then we also started to change our hedges slightly, we added some shorts, TBA shorts and 3% coupon. So that was both did very well for us in the quarter. I'll come back to what we did in the first quarter in a moment. In the meantime, just want to talk briefly about some of the slides.

Slide 23 shows, this one slide that was very tropical last year, it shows our allocation in the case of the red line to very high quality specs. And as you can see, it started to come down over the course of the year and it's continued to do so into 2021.

As we do, what I just mentioned with respect to the change in coupons, but also with the increase in rates, we would also expect that the refi index would start to come off. That being said on Slide 24. As you can see, these are our prepays over the fourth quarter and the last four quarters versus the cohorts.

And since you know the portfolio has had a focus more on high quality specs versus TBAs. Security selection was obviously very important and critical for us to maintain the earnings part of the portfolio.

And we're very happy to say that we've done so quite well over the course of the year and has allowed us to continue to earn the dividend very attractive dividend. So you can see here, the prepays for each of the months in the fourth quarter, we're well below cohort speeds.

And looking on the bottom right, you can see - have been so for some time, but that - the way that we achieve that now it's just changing. Slide 25, just shows you a level of a 10-year versus our pre-pays. This little green line that we show on the chart, this is basically a very simple calculation.

We just divide the dollar amount of prepays by the unpaid principal balance of the portfolio. And as you can see, over the course of 2020, when we had rates at the lowest levels ever, we were able to keep our refis quite low through our security selections in fact, even lower than in 2019, late 2019.

The leverage ratio for the quarter was relatively flat, round in the high eights. And then finally, with respect to our hedges, we continued to add to hedges over the course of the fourth quarter and into the first quarter less so with respect to swaps. More with - instruments would have a higher option component.

So you see on the top right hand side of the page, you see the payer spreads, which we've added. And we continue to focus our hedging strategies in that area.

And also, we did and I'll get to this in a moment, We did make some changes to the swap book, the balance of the hedging other than the small positions in euro dollars in five year futures is in TBAs.

So now I'd like to spend a few moments to talk about this quarter, given the moving rates, I'm sure that's very topical in everyone's mind, given the magnitude of the move. So obviously, a lot has changed, especially in the last two weeks.

So what we've done with respect to the asset side of the portfolio is, basically shed all of our very low coupon securities. We no longer have any 30-year exposure to any coupon less than 2.5.

We've changed the maturity profile, we've reduced our exposure to 30 years by about €250 million, increased our exposure to 20 years by 300 million in 15 years by 250 million. We no longer have any TBA long's, in fact we've increased the shorts. Now our shorts and 3% coupon are over $500 million.

And we've actually added some shorts in third year, 2.5 %. Over the course of the month, the leverage ratio is down slightly to about 8.5%. We view this as kind of a transitory step just to kind of wait out the correction in the rates market.

And actually as a consequence of the TBA shorts, which we've added, inclusive of those, our economic leverage ratio was down to 6.6. Although I have to point out that the bulk of the TBA shorts we have a 3% coupon, and the drop there is actually negative. So the cost of shorting those is actually the opposite. It's actually a mouth positive.

There is of course, a cost on the shorts of 2.5% coupon. But given the fact that, while that might be an increased cost, and a drag on the portfolio, with speeds, you know, slowing and probably expected to slowing further, I think net of those two will be negligible. And then finally, we have done some trading with respect to adding to the IO book.

We sold some of our fixed rate CMOs were front credentials, and we’re able to additional and take back that inverse IO offer that to very short cash flow. So we think we have minimal exposure to the Fed hiking.

But we get - to retain in the most attractive component of that security, which is the IO component, which would probably expect to do quite well as rates move higher. With respect to hedges, we've also made some changes our swaps we did two things with the swap book. We struck those now, we have a weighted average strike of 0.53% versus 1.14%.

And we extended the maturities from four on average to five. We also mentioned we have a lot of exposure to option based instruments. And we struck those to higher strikes, so that they offer us better protection and event of rates continuing to increase and less downside exposure, we rallied back.

And then finally, we've added a few other trades which I won't spend too much time detail wise, but these are what we call conditional flattener trades. These are trades that are kind of more forward-looking in anticipation of a normalization of rates market and eventually the market pricing in Fed hikes.

This is a trade that will protect the portfolio from a meaningful flattening of the curve and which of course would put you know, downward pressure on our NIMs and upward pressure on our funding costs.

So we put those trades on at attractive levels and of course we monitored all of our hedges just to make sure that their struck or the levels that we have them honor it are most effective levels to protect the portfolio.

So basically, that’s about it - kind of gone through everything with respect to the portfolio book in - or 2020, Q4, and also quarter-to-date. And I think with that operator, we can open up the call to questions..

[Operator Instructions] Our first question comes from Jason Stewart with JonesTrading. Your line is open..

Thank you for the update for the 1Q activity. I was wondering, it sounds all great in terms of the way that rates have been incredibly viable and sort of resettling out here.

Can you put a pin in it and sort of estimate what book value per share is, after doing all that?.

It's quite challenging, we're certainly going to be down slightly. I would say yesterday accounted for at least half of the move quarter-to-date. The problem is, I mean we have a rough estimate, Jason. But what we don't have is a lot of exposure to spec pool levels.

There was very little activity yesterday, and the day before, and nothing that you can really benchmark off of, for instance, we saw some 50 wallet door five 4.5% trade and very seasoned higher coupons. Next week, we will probably see in all the origination lists, we'll get some levels on specs. And we're also seeing some recovery today in the market.

Very choppy as I said for the last two weeks and meaningfully so yesterday. I would guess that - all of the move in our book value of quarter-to-date, over half of it occurred yesterday. So, it's definitely going to be down a few percent.

But I would be hesitant to put too fine a pencil to that level, and also probably going to be changing in a few days anyway..

Right, and the quarter is not over, correct?.

Yes..

When we think about the IO positions, how big? You know, it's been trending down for quite some time for good reason.

How big do you think it could be? And do you really think it's a true hedge against spaces widening? Maybe put some thoughts around that, that will be helpful?.

Yes, the basis aspect of it is a little bit challenging, because the - mortgage derivatives tend to widen with just - regular pass-throughs or TBAs or what have you. I think what we find, though, as just as it relates to the refinance ability of the underlying instrument.

That does present an opportunity when you have a large widening and say, like TBAs. And you have primary rates increase. There will ultimately be kind of dollar-for-dollar if you will impact in the derivatives because they are so sensitive to prepayment.

So, but on a mark-to-market basis, as you're going through a period of widening basis, we’ll definitely experience the same sort of problems and on a levered fashion that mortgage as well. But the fundamentals are vastly improved when something like that happens.

My answer to the question in terms of how much more would we add, I think its very opportunity dependent. Bob alluded to the fact that we added an inverse IO off of a front sequential that we've been holding in the portfolio for a couple of years. That collateral was off of New York force, and has been behaving rather well.

We thought like the floater market would have caught enough of a bid with this sell-off and the demand taking up for those that we could sell one with a really low cap. And maintain a short cash flow and - that really dovetail well with our kind of our macro view that we will see bearer steepner and the long end could get quite volatile.

But we believe that the Fed is going to remain anchored at or near zero for the next couple of years. And so, if that plays out, while that cash flow does have exposure to higher rates on the front end, we like that trade, something that - I think we would do more of if we found the right opportunity..

Thanks a lot..

Space is hedged just to chime in a bit. I mean - let me on the basis close out. Like, I think it's really important understand that at the end of 2020 and into the early parts of the first quarter margin gain really, really tight TBA, OAS depending on your model, most people use benchmark off of yield book, minus 20, minus 25, very, very tight levels.

And so, while we've come off a lot, you're coming off a very tight level. So mortgages are not at multiyear cheeps by any stretch or the imagination. Their fair or more fair wearing proper programmer is..

At the end of the day, if you're trying to hedge that basis, you know, rates are not going to be 100% effective. The only thing you can really do is short TBAs or maybe put options on TBAs. We added this you know - when you are a REIT, you have limited ability to do that. I mean you can’t hedge a 100% of your mortgage exposure.

You kind of have no reason to be in a business on a lease for any length of time. So, you're going to be net long, and you benefit when it tightens and you suffer a little when they widen..

Our next question comes from [indiscernible] GMP Securities. Your line is open..

Good morning. Thanks for taking the question. Definitely we appreciate the comments on book value and portfolio positioning in the first quarter as well. Just the question on how you guys are thinking about leverage going forward? Obviously, it looks like it's going to be a pretty volatile while the year in mortgages and rates.

And also how you guys are thinking about the dividend going forward? Thanks a lot..

Sure, well yesterday I presented it to the Board, and the way I really deeply believes that, we were very well levels of rates all-time lows, and we started to sell off.

And as we got more for 1%, approached 120, on the mortgage market started to get skittish, and my view was that 125 or 130 was that point where the 2.5% coupon, no longer refinancable, and mortgage investors were going to really become concerned with extension of the mortgage universe.

But I also thought, if we went for instance, from 125 to 150, 110 that would be a very painful episode for mortgages. But once you got above that level, or meaningfully above that level, I didn't really think you could go much higher in rates, for instance, rates across the bond, either bond are still relatively low compared to ours.

And so, there is that kind of our, there is also the potential impact on the equity markets and financial conditions and the likelihood that the Fed wouldn't tolerate that would step in. And maybe extend the land with their purchases, that kind of thing. So I really thought there was at least a soft cap on rates.

And so if we could get to that level north of 150, where refinancing activity was meaningfully subdued, but the Fed hadn’t hiked, you had a very attractive investment opportunity. And so, we kind of got there much quicker than we thought.

But now that we're here, if we stay here, it's not that bad of a place to be, yes, mortgages are wider, give up a little bit of both to get here. But the earnings are look a very, very attractive. And so maybe we stay volatile like this for the balance of the year, in which case, we'll just have to face that deal with it.

But if rates stabilize in a higher range, call it 140 to 160, whatever it happens to be, it's really not a bad place to be. And I don't think that puts downward pressure on the dividend. Yes granted, we've had to change the hedges somewhat.

We even took the leverage down a little bit, but we view that as temporary because we're just trying to protect ourselves through this move. But unless we stay in an extremely volatile market for the balance of here, I would expect we'd be able to remove those.

And so, it gets us back to an environment where it's again, it's you know, the curve is steeper funding still cheap, prepays are lower. And the big challenge of 2020 was avoiding excessively high refinancing activity.

So everything we talked about it every earnings calls of all the steps we're taking to keep refinancing down and we show you all these slides in the earnings call deck about how our portfolio prepaid versus the cohorts and so forth. But now that's less of a concern. We have a steeper curve and slower speeds, so I don't see anything negative..

[Operator Instructions] Our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open..

Any idea in terms of where prepays stand here to-date?.

Yes, we had two very good months. We'll get another one next week, but we did.

We can get to those numbers, but they were in our most recent press release in February, we put out our February dividend, we had the January prepays, which were - the prepays released in January were 16.7 for the past three years and 44 for the structure, combined total was - I think it was 20. I think, in Q4, they were - not what that was.

Chris, I don't have it in front of me, our February press release had the January level and February, which was not released yet, I expect to be in line. So it's been a good, slower than Q4..

Great.

And then, I guess, how much of your capital you're allocating to IOs?.

Well, it's - now it's probably just about marginally over 10%. No, it has gotten well under 10. With his inversely took back and it just kind of said, you know, that may be an attractive asset for us to pursue or other IOs. We typically looked at IOs as much as hedges versus income.

And so we wanted IOs that had a lot of extension potential, in other words, something that was paying fast now, but in the event of a sell-off, would extend and slow down. And so there were plenty of others available before, terrible carry instruments. And they've done well quarter-to-date, very much so.

We'll look maybe to opportunity add those, I think the allocation to past year is well, north of 90 is probably no longer warranted. But as Hunter said, it's really opportunity driven, when the opportunities present themselves we'll take a step.

Really what's been driving, I will say this is that I kind of mentioned, part of the reason that we got away from high coupon, high pay up premiums in Q4.

And this continued into Q1 is the demand basically, it's from the street, a lot of these CMO desks pay up for this collateral, because they can carve it up and create far reach price bonds for banks, the bank demand in the mortgage space has been very, very strong, Q4 and Q1. Deposits are very high, and loan growth has been modest.

So they've been big buyers of mortgages, and they tend to buy around par, so the street can buy attractive collateral that looks great on a OAS model, and create a par-ish price script on bond, and then whatever is left gets set off to the rest of us.

But it makes it very challenging to compete against that when you're participating in these origination cycles or auctions, because they're very aggressive bid. And that's really what drove us away from those securities.

And that's in our minds, it's like, you know, this is a chance to sell these payoffs at very high levels, rates are going higher, and these payoffs are going to be imperiled, if rates shoot higher in a short period of time, which is in fact what happened.

All of a sudden, the low loan balance Fannie 3 or 3.5 is that pay up premiums going to drop, so we were selling those, and adding lower quality specs and lower coupons, and we realized very low speeds off of those so.

So that CMO bid, we'll see if it stays there now that we've moved higher in rates, but that was a big driver of spec levels up until the most recent few weeks..

And then two more questions, I appreciate the detail Bob. In your comments, you indicate that you're shutting the lower coupon, position is particularly for those with really long terms, 30 years and so forth. What are you focusing more on now if you can just - because I missed that..

[Indiscernible] to added maturity, 20 years and 15 years. And we actually just - we didn't actually sell 2.5, but we did add 2.5 TBA shorts. We view that as kind of a temporary trade just to kind of get us through this turbulent period. The 2.5 will probably continue to own those going forward.

We may not have those shorts in place, but otherwise it's just been shorter maturity mortgages. And we may add some higher coupons are probably going to start seeing more than produced. Probably going to start seeing some 3s get produced in the next few months. So we'll revisit those - with the levels - drive our decision making a lot..

Final question. In terms of - as you're going forward and the environments changed a lot.

And from my position, it looks like it's pressuring book value, but your earnings outlook looks good, where is the balance for you in terms of sacrificing book values to protect earnings and so forth, or vice versa?.

Well, it's fortunately, when you get a move like this, it's so sudden, you can get very cautious and add to your hedges, which are going to put downward pressure on earnings to protect the book. And if it does episodes over quickly, then you know, it's a minimal impact on earnings.

I mean, our thought process is, we're willing to sacrifice a little bit of earnings in the short run to protect the book. If it's a long, long grind higher in rates, then we have to fine tune our analysis to find the appropriate balance.

This played out quite quickly and we expected this to play out over the first two or three quarters, and in fact, it played out in three weeks.

So like I said earlier, on the last call, if we get to a level of rates, especially if it's north of 150, and appear to be rich standing into a range, then we can get - take off some of the hedges and not irresponsibly. So - but be able to attract generate pretty nice returns in that environment.

But like I said, I think there is a soft cap on rates, I don't see that tenure blowing through 2% anytime soon, I don't think the Fed is going to be willing to - the equity markets going to tolerate that and which in cases force the Feds hand..

Okay..

Chris, just may just do a follow-up on the on the speed question, the current mix of the portfolio. The one month speed as of the most recent prints, which was earlier this month was 13.7. And three months speed was 11.2 for the specified tools, which are of course the most sensitive.

So one other point to add there is a correlation between the drop down lowering coupon from the end of the year into the New Year here, because the premiums on those assets are substantially lower. So we have been sort of two factors going on.

One is speeds are a little bit slower, but two is the negative impact of those speeds is a little bit smaller as well, because the premium on the assets isn't quite as high..

[Operator Instructions] And there are no callers in queue at this time. I'll turn the call back over for closing comments..

Thank you, operator and thank you everyone. As always, if you have additional questions, please feel free to call us. The number in the office is 772-231-1400. If we're not at the office, which is often the case these days, we can be reached by cell, but I will leave that to our office manager to end that up.

And otherwise, we look forward to speaking with you next quarter. Thank you for your time today..

This concludes today's conference call. You may now disconnect..