Good morning and welcome to the Second Quarter 2022 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, August 5, 2022.

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 Security 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 actual performance or results to differ materially from those expressed in such forward-looking statements.

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

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

Thank you, operator, and good morning. Welcome everybody to our call, wherever you can join us on, if you can't join us live, I hope you're able to do so via recording.

We're going to assume that everybody has been able to download the deck that we used every month and once more, we'll be going through the deck as kind of the driver of the agenda for the call. As always, I'll just give you a quick walkthrough to highlight the agenda.

We'll discuss our highlights for the quarter, financial highlights briefly, and then as usual, we'll go through the market developments just to kind of show you what shaped our performance, and then we'll go into our financial results in more detail, and then the portfolio characteristics, hedging and so forth.

So with that, our financial highlights for the quarter, we had a net loss per share of $0.34. This included net earnings per share of $0.12, excluding realized and unrealized gains and losses on our RMBS assets and derivative instruments, including net interest expense on interest rates swaps.

We had a loss of $0.46 per share from these realized and unrealized losses on our RMBS driven instruments, again, inclusive of net interest expense on our interest rate swaps. Book value per share is $2.87, or was at June 30, 2022 versus $3.34 at March 31, 2022. In Q2 2022, the company declared and subsequently paid $13.05 per share in dividends.

And since then our initial public offering, the company has declared $12.77 in dividends per share inclusive of the dividends declared in July of 2022. The total economic loss for the quarter was $33.05 or 10%. Now looking to market developments on Slide 6.

The one thing that really sticks out here is, and again, what we show here, the Treasury nominal curve and the swaps curve both at March 31 and June 30, but then also has of last Friday, which is June 29. And one thing that sticks out very clearly here is that the front end of the curve has been moving the most.

So if you look at the -- either curve on the left or right side, and you move from the blue line to the red line, to the green line, which goes through time from March through last Friday, you can see that the front end of the curve continues to move higher.

And the long end actually, especially through July is lower than what it was at June and the curve is quite inverted and has inverted even more so today.

And this basically just reflects the fact that the Fed is going to continue to raise rates very aggressively because inflation is at very high levels, that notion probably was reinforced meaningfully this morning with the payroll number.

And that the market -- and more importantly, or as importantly, it affects that these hikes to be effective at containing inflation ultimately, and therefore you see the long end of the curve not selling off. And certainly that would not be the case if the market feared that inflation could become fully unanchored.

And also the effect that especially now as the Fed’s seeing even stronger data than they had as of yesterday, the fact that they're going to have to hike as much as they probably will to contain inflation, just increases the chances that those hikes ultimately lead to a recession. And that's another reason that the long hedge has rallied.

In fact, last week when we did have the Fed meeting the market's perception was that maybe that the Fed had pivoted, that they saw some early signs of weakening in the economy and that maybe they wouldn't hike as much as feared.

But once they came out of their blacked-out period pretty much you -- every single Fed speaker since has pushed back hard on that notion. In essence, the market had to do its own pivot and now reflects the fact that they acknowledge that the Fed is going to have to be very aggressive, and also data dependent.

And as a result of that data dependence days like today are going to tend to have outsized responses if the data is outside of expectations. So today is nonfarm payroll, CPI numbers that will be coming between now and the next meeting are going to be very important for the market, and you're likely to see reactions as you did today.

So that's really what's going on. You just see this meaningful inverting of the curve 2s, 10s is getting to extreme levels. This morning, the meteoric reaction to the number, I think we got close to 40, we backed off of that, but very inverted. Just moving through the rest of the slides.

Slide 7, we just showed you the 10 year trait and and swaps and SOFR swaps. And then longer look back and just as you can see, it's meaningful sell off into mid-June and then a subsequent rally when the Fed had to pivot. Turning now to Slide 8. This is a new slide that in our opinion is very important.

And one thing we did here was we changed the period basically to cover what I would call the pandemic period. So if you look at this slide on page eight, at the beginning of the slide is the end of 2019. And as you can see with respect to the 10-year, you had the huge rally when the pandemic started.

And of course over time, it crept higher as we entered 2021, rates started to move a little higher, but then in the second quarter, maybe even when the war started in Ukraine in late February, the data started to become even stronger, still especially inflation data.

And then also the effect of the war and the effect of lockdowns in China started to really grab the market's attention and focused the Fed on the fact that inflation wasn't transitory, it was becoming ingrained, and that they were going to have to react and in fact, they did.

And so what you see in the rates market is the sell off into the second quarter. And that peak there was right around the middle of June 10. You may recall that CPI number was very, very strong, University of Michigan data implied that inflation expectations had become very high. And then the market sold off very meaningfully.

July was -- has been a recovery month, but we'd come off those peaks. But that was driven by the Fed’s very strongly response to those numbers and the fact that they hiked as much as they did, remember 75 in June, they did 75 again in July. And it looks like they may do 75 in September.

But more importantly, for us since we're mortgage investors, on the right-hand slide, what we're showing here is the spread of the current coupon mortgage to the 10-year Treasury. Now there's a lot of different ways you can look at mortgages versus swaps, versus a [5 10] [indiscernible]. You can look at LAS.

But I like to look at this just because it seems to work better over long periods of time, and what we don't show here, since this data really only goes back to the beginning of 2020 is where these numbers were.

This is the spreading into the 10-year Treasury, where that spread was Where that spread was in the years prior to that? And if you do look at that data, you can go back 5, 6, 7 years, and mortgages traded at an extremely well defined range between 60 and 80 basis points for years.

And so then you have this spike in March and then rally, because of course the Fed was buying you had QE, and you got to a very, very tight level. And then we started to see the sell-off.

And as you can see on the right hand side of the page, that spike up, that was June, right after the CPI number, that day in the next two days mortgages did horribly. Just to give you some numbers, I think the 10-Year Treasury over that three day period was down something like a point -- not even a point and a half.

And for instance, Fannie 3s were down multiple points, so meaningful underperformance. They've since rallied in July. But the point I want to make here is if you look at where mortgages are trading in around 120 basis points spread, even though that's off the extremes, it's still very attractive versus long-term range of 60 to 80 basis points.

And that's why we're very comfortable where we are as the managers of the mortgage portfolio, because we really like the look of the market going forward.

Data like today, which implies the Fed's going to have to hike even more, probably just increases the chances that that hiking leads to recession, which is going to get the long end of the curve ultimately to rally. And being owners of mortgages, I think mortgages are poised to do very well.

As I just mentioned, they are trading at attractive levels versus the long-term norms. They don't have any credit components. So to the extent we do enter into a recession, unlike investment grade corporates or high yield, which could widen even further in the event of a recession, mortgages should do well.

And I don't think that the Fed is likely to be selling mortgages certainly next year if it looks like the economy's about to move into a recession. So we think the market -- the mortgage market is poised to do well for the balance of this year and into next.

And then more specifically, with respect to Orchid, and we'll get into this more a little bit further in the call, Orchid has retained high concentration in 30-Year fixed rates, what we would call belly coupons, 3s and 3.5s as in contrast to say 2s and 1.5s or 2.5s, or higher coupons, current production coupons.

And we think they'll do well in a rally. And we also like the securities again, I'll say more about that in a moment. We -- the takeaway from this slide is that mortgages look attractive and given the way we see things playing out over the next year and year and a half, we think mortgages as an asset class could do quite well.

And we like the way Orchid in particular is positioned for outcome to the extent it happens. Just moving through the balance of the slides, we've shown this slide for a long time, it just gives you a proxy for the shape of the curve.

As you can see, we did get inverted as we speak, we're much lower than 33 basis points, on the 5s, 10s spread, and are likely to stay this way for the time being.

Slide 10 is another slide that's kind of new, and the reason we just threw this in here -- what we're trying to show is the holdings of agency mortgages by -- in the case of the red line, the Fed, in the case of the blue line, as your commercial banks, this is predominantly the 25 largest banks -- commercial banks in the US.

And as the Fed went through QE and added add, they of course were depositing or putting reserves into the system, system means that the banks that hold these reserves were investing those reserves in mortgages. And so these were the two largest buyers of mortgages by far up until not long ago.

Obviously with the Fed entering into QT, they're going to be draining, not -- not going -- only be not buying as many mortgages, but they're going to be draining reserves from the system, which means that the banks will probably be relatively -- not necessarily selling, but buying a lot less.

And this means that the onus to support the mortgage market is going to shift to money managers and rates, and we expect that to be the case as we move into 2023. But again, we very much like the market in spite of this and are expecting the mortgage market to perform well.

Just to give you a little more history on Slide 11, the top left just shows you the performance of certain mortgages, and these are all 30-year fixed rate mortgages, 3.5s, 4s and 4.5s over the course of the second quarter and into July.

And let make sure you notice that the scale on the left, we normalize these things to a 100, but when you look at that trough, that's right on at June 14, not so many days immediately after that CPI number in mid-June. Notice that in the case of 3.5, they're down over 6 points, that's a big move in a short period of time.

They've since recovered quite a bit, but still a big, big move for the mortgage markets in June. Below that are the roll markets, the blue line is the 3.5 coupon, that roll has been special on a normal for several weeks. Other than that, these roll levels are not necessarily exceptional, nothing like we saw when the Fed was doing QE.

And I think that's the takeaway, lower coupon rolls are essentially zero. So the roll market while it's still reasonably attractive, it's not as attractive as it was back in the days, the haydays of QE. And such is the case with the specified market where those levels still remain quite subdued.

On the top right, we show what we call probably the highest quality spec pull in 85-K loan pool, and we show it for three coupons. As you can see, those payoffs are fairly subdued.

Although, this week we did have our origination cycles, they happen to occur on Tuesday, which was a very volatile day for the market, a big selloff, and there were approximately 10 billion in spec pulls auctions, and they actually did fairly well. So that's a good sign for the spec market.

I think there's a shift underway away from the roll market more towards specs, and maybe not playing out to the extent we would like in the next few months, but as we think going forward in the next year, especially if the economy were entering into a recession, that that trend would continue.

Slide 12, the ball market, we're using three month by 10-Year normalized volume is a proxy here. As you can see, it's elevated. I think it still is, this ends on end of June, Vol today is high.

And given where we are with respect to the Fed, and the chairman's statement that they're going to be data dependent just really means that the market will be hyper focused on the meaningful data points such as today, next month's nonfarm payroll number, CPI.

And so anytime any of that data prints come outside of the expected range, you're going to see all Vol be well bid. And I would be surprised if Vol were to decline meaningfully at least through the end of September, but it could stay elevated for the balance of the year.

Beyond that, it's too hard of a call, but I would expect Vol to be remained well bid. Slide 13, I'm not going to spend a lot of time on this. This is just historical information. OES levels are, at least for production coupons I guess would be the takeaway here, are much more attractive than they were when the Fed was conducting QE.

That would've been for instance in 2021 when Fannie 2s and 2.5s where the production coupons, and you can see those OES levels were negative. Now we're producing 4s and 4.5, and they're at least positive. So the market looks much better in that regard, and then just more on spec pulls stuff. Moving on to Slide 14, don't need to say a lot.

Obviously, the second quarter was a very bad quarter for risk assets. Well, for the quarter in the year, I think one thing that's very noteworthy and this has been talked about quite a bit, it's very unusual.

If you look at the bottom side of this page, if you look at the year to date returns through the end of the second quarter, you see the Treasuries had a very negative return as it stocks. Those two things are normally negatively correlated, at least to some extent.

It's very unusual that they would move in the -- not move in the opposite direction, but they did and meaningfully.

And that just goes to show you that we have this odd combination of high inflation probably a by-product of something that is likewise unusual, the pandemic, which required an outsize and irregular responsible from the Fed and the government, which eventually led to outsized inflation, something we haven't seen in decades, which then led to a very aggressive Fed and probably a slowing of the economy.

And I think that's the only way you really can explain how both of that -- asset classes would do so poorly. With respect to mortgages, obviously they're on the low end of the risk spectrum. They did poor, they were negative, but especially on a year to date basis relatively well compared to other asset classes.

It's also notable that in July, there was a big turnaround with respect to risk. I don't have those numbers in the slide deck, but pretty much every asset class across all of the financial markets inclusive of commodities had a very, very good July.

August obviously remains to be seen, but July was a recovery month in a big way especially in the higher risk asset category. So we'll see what happens beyond that. Turning to Slide 15.

Again, we're showing you kind of what I call the pandemic period, trying to grab this data over the period that more or less coincides with the onset of the pandemic through today. And as you can see on the top left, for instance, mortgage rates are high, they're -- most of the recent data point was 4.99% on a 30-year fixed rate mortgage.

So it's come well off the highs of six, but still well above where it was prior to 2022 and then the percent of the mortgage market or the refi index is very, very low. One thing I would say on the bottom chart there where it shows the percent of the mortgage universe that's in the money, essentially zero.

There hasn't been high production so far in 2022, but what we have seen is predominantly coupons in the 4%, 4.5% and 5% range, even some 5.5%. It wouldn't take much of a rally for those securities to get in the money.

So, we could in the event of a recession and a rally in the long of the curve, start to see a decent size of the market become refinanceable, which of course wouldn’t affect the quality of the carry of those assets. Lower coupons are discounts.

And so, the fact that we could rally is just upside for them, just because you're accreting discount versus advertising premium. Now I'll just go into our financial results, on Slide 7, we always show this slide.

We kind of decompose our results between mark to market gains and losses, and just carry -- we were at about $0.12 versus the dividend of $13.05. These numbers don't capture premium or discounting amortization and hedging costs. I'll say a little bit more about the latter in a moment.

But now that we are in a position where our portfolio is all at a discount and we tend to own seasoned bonds, they're paying in the high-single-digit. So we're actually a cleaning discount, which adds to these a little bit. And then our hedges are now finally in the money. So those are helpful from an income perspective.

Obviously with respect to the returns for the quarter with the meaningful selloff and the widening of mortgages, fixed trade mortgages did very, very poorly IOs did well, but not nearly enough to compensate for the poor performance in the pass through portfolio. Slide 18. This is kind of where you start to see the impact of our hedging.

You can see that the blue line there is just the yield on assets and it's trending slightly up. Obviously, our funding costs are going higher, but the red line is our economic cost of funding. And you can see while it's increasing, it's increasing in a slower rate, just captures the fact of swaps and so forth, kicking in.

And as a result, our economic net interest in spread is actually increasing slightly. We'll see how much longer that can go. We are -- obviously the Fed's going to be very, very aggressive and has been so far in the second quarter, and we'll be probably in the third.

So definitely, we’ll challenge the effectiveness of our hedges, but we are seeing so far very -- the performance is holding in quite well. Slide on 19. Again, I really don't have to dwell on that. That's just the same thing. You could see, some slight segregation in the core earnings per share, but I kind of addressed that already.

Finally, couple slides that are new. The leverage ratio on slide 20, that number is 7.8 as of the end of the quarter. We have not reinvested pay downs of late and our book value has recovered. Our book value recovery quarter-to-date is in the mid to high single digits. It was close to 9%, approximately 9% as of Wednesday.

Today, I don't know, mortgages are having a very rough day. They didn't have a great day yesterday. So I won't say that's why I kind of say mid to high single digits. But it can change on any given day, but we have had a very nice recovery quarters date. And as a result, our leverage ratio is probably just under 7 as we speak. So it's in the high sixes.

On the right side, we show our leverage ratio versus our peers. And as you can see, we're the blue line there and we are on the high end of the range, and we are going to take steps to bring it down, maybe not all the way, as far as our peers, but we are going to bring it down slightly, and try to eliminate some of the book value volatility.

So we will be trending down. I mentioned we're at 6.8. We may let that get back up above 7, but we're not looking to get that number up to 8. So we are going to be bringing the leverage ratio down back closer to our peers over the balance of the year and the quarter. Slide 21. You see our dividend versus our peers again, quite a bit higher.

And we describe who our peers are on the bottom of the page. I will say that we are anticipating an adjustment to the dividend in the near future. And the rationale is to bring the dividend into line with our book value. We think we need to get that into the lower double digits, maybe not as low as our peers, but much closer.

So that's just really reflective of a few things, obviously, bringing our leverage ratio down is going to be a factor, but also just the fact that the curve is inverted, the Fed is likely to be very aggressive in the tightening. And while our hedges are working, it's not a 100% effective.

And so we're just going to adjust the dividend to bring it in line with our leverage ratio, our rate yield to book, and just what we view as the current earnings environment. So that is likely to occur in the near future., Finally -- finally moving on a few more slides, our allocation of capital, just stable. I don't need to get into the details here.

Our allocation between the two portfolios has remained the same. And the portfolio on the right hand side, just reflected the fact that we had an adverse market conditions and the portfolio did shrink some. I mentioned we have not been reinvesting pay down, so even though the allocations across capital are the same, the portfolio is slightly smaller.

Now moving on to the portfolio itself on Slide 24. I’m going to skip right to the takeaway, the takeaway is not much changed. There have been some changes to the 30 year fixed rate portfolio. We've basically eliminated our small position in 2.5s, the 3s, which is by far the biggest holding, is roughly the same percentage wise.

3.5s maintained, and we've added our allocation to 4s, it's up to 6.9%. So that's quite an increase. We may increase that a little bit further. We did shift our small 15 year holdings from 2.5s to 3.5s.

And with respect to the IO portfolio, we basically just harvested some profits because the market had sold off and we got to the point where these IO positions really didn't have much upside left in them. So we just harvested those profits. And so other than that, the portfolio is relatively the same as it was last month.

With respect to speeds, so everything is slow as you would imagine. The universe -- we had speech come out last night, they dropped quite a bit high teens. We continue to see meaningful declines in speeds, reflecting rates.

We did have a rally in July, but now we're selling off in August and net of all that, I don't think given the fact that we're moving into the late summer, is likely to be meaningful. So I would expect speed to stay on the slow side.

One thing I do want to point out though, with respect to our portfolio, if you look on Slide 26, obviously the yield on the 10-year is very high to where it was back in 2013 and ‘14.

But if you look at the green line, which represents our portfolio's performance, back in ‘13 we were very, very low, that reflects the fact that at the time we owned a lot of discounts that were new. Now we still own discount securities, but they're seasoned. So they're paying a little faster.

And as a result, we're able to accrete a little more discount, which is beneficial from an earnings perspective. And it's always good to have good carry bonds. And we also like these bonds, as I said, going forward. What we tend to own in fixed rate space are a lot of spec pulls.

As we said many times, the pay ups on those specs are quite low and this all leads to the fall and conclusion, and that is that the convexity of these assets is very attractive.

Because the payoffs have been basically depressed to zero and these securities have extended for the most part in the rate -- in the rates sell off, they should do fairly well. And they're fairly easy to hedge in the event of a rally.

Obviously, their duration can extend because the spec pull pay ups will increase in value, and obviously that's not a small value, that would have to be something of decent size. But in a meaningful rally, they would do very, very well. And so combination of owning these more seasoned bonds means we get better carry today.

The portfolio is prepaying in the high-single-digits versus new issue, which are in the low-single-digits, but also we retain very good convexity. And as a result, we're very bullish on the portfolio going forward for the balance of 2022 and into ’23. Turning onto our funding, new slide here on page 27. This again goes back to the beginning of 2020.

We show the gray line, which is just one month SOFR. You can see it's rising rapidly. The blue line or the red line is our cost of funds, but as you can see, the blue line is our economic cost of funds, which is now below our actual cost of funds. And that just reflects the fact that the hedges are kicking in.

Obviously, SOFR is going to continue to rise quite a bit. This only goes through the end of June, needless to say, we're already -- SOFR is up near 150 and – no, I'm sorry, over 2%. So this number's going to continue to rise.

But our hedges are effective in their -- basically minimizing or counteracting to an extent possible, this rise in our funding costs. With respect to our hedges, on the next slide. Again, the takeaway is not much has changed. We did add some TBA shorts and Fannie 2s, very, very minimal adds to our Futures.

And some of the swaps just rolled down, we have two buckets there, kind of a 3 to 5 year -- greater than five year. Few of them rolled from over 5 to under 5 years, and that's pretty much it. So that's pretty much of it. I just want to make a few concluding remarks.

Three basic points, one, we've had some book value recovery, we like the portfolio going forward. We think the convexity of the portfolio is quite good. We think what's going on in the market boats well for us, and mortgages generally.

We are going to be adjusting the dividend as I mentioned, to bring it into line with a combination of a lower leverage ratio, a more reasonable yield to our book value and just more in line with the earnings available in the market today.

And then one final point, which I haven't mentioned is that we are considering a reverse split just to recognize the fact that the stock has traded down to three or even in the high 2s. So we are considering doing a reverse split of the stock.

I know we've seen several of those in the space over the last few months, but there's a good chance you will see one of those from us. That's pretty much it for my prepared remarks. Operator, we can open up the call to questions..

[Operator Instructions] We'll take our first question from Jason Steward with Jones Trading..

Appreciate all the color and remarks as always.

Bob, where do you see terminal Fed funds ending up in this environment?.

Well, it's probably going to be in the mid 3s or slightly higher. It's hard to say though. Like today for instance, the data looks to be so strong, and the market's reaction is obviously very strong, but a dive deeper into the data the establishment survey showed a gain of 528,000 jobs. The household survey was only 179 last month.

The household survey was negative. So it's hard to believe that the economy can really be adding in my opinion, jobs like that. I think you're starting to see the pervasive evidence that I see that the economy is slowing, it is too hard to ignore.

And again, in spite of today's data, I think we're going to slow and continue to slow through the balance of the year. And while the Fed, I think, has to be aggressive they certainly has to maintain that image in the eyes of the public in the markets. I just think it's going to be hard to be it tightening aggressively beyond this year.

So do we get another a 100 bps this year? Probably, it's just a question of what you get next year. Maybe you get one more, but I just -- I have a hard time seeing it getting up to 4%. That being said, some of the evidence on the inflation side is troubling.

You're seeing commodity prices come off, but you're seeing evidence of wage pressures becoming ingrained. That would be the risk to my thesis, if you will, that they can't go that much more at the extent I'm wrong there and you really see inflation become fully ingrained.

Then the fed -- then you get more like that vulgar kind of scenario where they have to really slam on the brakes and that'll get you to 4% maybe beyond. And -- but I'm sticking with my theory for now..

Jason, I think that plays into why we've held off on the dividend. Bringing -- cutting the dividend back a little bit as well is just a tremendous amount of uncertainty right now. I mean, six months ago, people would've told you, you were crazy if you'd said that they were going to -- that the fed was going to hike 75 in June and July.

And then here we are. So as it relates to that, I think we were trying to get a little bit more time to pass and see how that played out and how that affected the portfolio..

And then second, on the mortgage origination industry, what's your view on capacity right now and how that's going to impact prepays going forward if that plays out as you expect?.

Well, I would assume they're struggling to maintain it. What's been originated is the low hanging fruit now to the extent we see a rally. Catch out refis are as you know, declining very rapidly. I think they're going to struggle to maintain it. And I think that you're already seeing evidence of that.

We're in very hot housing market here in Florida for many reasons, not just the economy, people moving away from some of the high tax states to here. Clearly seeing scientific slowing, very clear signs. Inventory levels are rising. They're not troubling yet, but they're rising.

So I think they're going to be hard pressed to maintain staffing levels and eventually that's going to come off..

[Operator Instructions] And next we'll go to Mikhail Goberman with JMP Securities..

You mentioned some book value recovery, I was wondering if there's a number to that thus far in Q3?.

Well, like I said, it was high single digits until Wednesday. Yesterday, we were soft. And then today, it's really hard to say. When I came in here, mortgages were underperforming by a lot of ticks, eight or 10 ticks, that would bring it down closer to 6% or 6.5% maybe. But it's been a good recovery.

We own, as I mentioned, lot of belly coupons and they've had a good run. There's been mostly specs, and specs have hung in fairly well. But it's been mostly on the TBA front. So, I would've -- Wednesday, like I said, it was very high single digits, but it's probably more than the 6% to 7% or maybe today with the underperformance of mortgages..

Just one more question if I may, on expenses and noticed, expenses up a little bit to just under 5 million this quarter versus about 4.7 last quarter.

Are there any one time items in there? And also kind of a second part to that, given your comments on the dividend, probably coming down and a smaller portfolio of the core earnings run rate trending lower, what sort of expense ratio or expense run rate level are you targeting if at all? And is there any plan -- are there any plans in the works to kind of get that 5 million down a little bit? Thanks..

Well, probably on the high end of the range where we'd like to see it. The one-off changes that we internalized are repo operations and back office. I think we talked about that late last year, earlier this year, and there are some costs associated with getting that online. Those are mostly at the epiphany level though.

But there is an overhead reimbursement arrangement, so some of it does filter through. I would expect that to come down. But to the extent that our -- we can recover some more book and even with a slightly lower leverage ratio would probably net-net be able to get the portfolio a little larger which cover some of that.

We were at a point late last year or early this year when the portfolio was north of 6 billion, obviously that was a very comfortable point from an expense ratio perspective. We had -- we've obviously shrink relatively quickly, because of the market. So it's now on the high end of the range.

But I don't think, we have to do anything drastic at the moment, but we would like to see that ratio come down..

[Operator Instructions] Next we'll go to Christopher Nolan with Ladenburg Thalmann..

Bob, what's sort of leverage range are you thinking about, I know you sort of referred that as coming down, but anything --.

Probably, low 7s. I mean, low 7s, it's not a hard number. I mean, we’re looking at the market, we're looking at our holdings, we're looking at our hedges. I’ll let Hunter talk about this as well, but just a little on the lower end of the range. We’ll just try to maybe bring some of the book value volatility down, which has obviously been high of late.

And we think we should be able to run with a lower dividend yield as a percentage of book value. We've been in a very high premium to our peer average and don't think that that is necessary or prudent. So that's kind of what's going on here..

And then follow up. Please go ahead..

No, I would just add it's really a by-product of the time we're in. And when we see, I think as Bob was alluding to a moment ago, Wednesday, our book value was up high single digits on the quarter. And a couple of bad days can put that back to mid-single digits.

That's an incredibly volatile operating environment, and we tend to take our queues from the market and adjust our leverage ratio accordingly..

And then as a follow up on the repo financing, are you guys getting any hints in terms of where the banks are thinking about how they're trying to manage their risks? I mean, are they changing their haircuts or other things? And that's it for me..

Go ahead, Hunter..

No, we haven't seen any signs of that. We have ample balance sheet availability. I don't think anyone in our space has been in trouble as sloppy as this market has been over the last six months.

We haven't seen any agency REITs stubbed their toes in the way that they did in early days of the pandemic, and we're always in constant contact with our lenders and all seem to be pretty comfortable at this point in time..

And there are no further questions at this time. Mr. Cauley, I'll turn the call back over to you for any additional or closing remarks..

Thanks, operator. Thank you everyone for taking the time, as always we're available in the office for follow-up questions. Our number is 772-231-1400, to the extent to get -- have to listen to the replay, and you have questions again, we'll be more than willing to take any more questions. And otherwise, we look forward to talking to you next quarter..

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