Good morning and welcome to the Second Quarter 2015 Earnings Conference Call for Orchid Island Capital. This call is being recorded today July 30th, 2015. At this time, the company would like to remind the listeners that statements made during today’s conference call, relating to matters that are not historical facts are forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigations Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management’s good faith, belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements. Important factors that could cause such differences are described in the company’s filings with the Securities and Exchange Commission, including the company’s most recent annual report from Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference over to the company’s Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Thank you, operator. As we entered the second quarter, our portfolio had a significant allocation to prepayment-sensitive securities. In the case of our pass-through portfolio, this made high coupon fixed rate securities with our capital allocation to structured securities, this made interest only in inverse interest-only securities. In sum, we were positioned for continuation of some good prepayments fees as we have business early 2014, given the rally and rates that peaked in late January, early February, we expected an uptick in prepayments early in the second quarter. This in fact is what incur and the prepayment -- this is expected what is occur and the prepayment speed of portfolio from March recorded in early April jumped by almost 50% over the February level. The magnitude of this increase was slightly above our expectations, but the significance of the increase was tempered by our expectation that would continue for a relatively short period of time. We had already observed a spike in a Mortgage Bankers' refinance index in January, but the index value had quickly retreated below the 2000 level six weeks later. We expected April speed released in early May just after our Q1 earnings call might still be elevated, but we expected to be in subsequent months to retrace just as the refi index has. This had been not the case. April speeds were essentially equal to March speeds and May and June speeds while lower than March and April were still 40% above the levels we experienced in late 2014, early 2015. First, I would like to discuss what we think speeds have remained elevated. Most market indicators we look at indicate speed should have slowed by now. The MBA refi index as mentioned above has retreated to approximately 1,400, the average level we observed for the…

[Operator Instructions] And I'm showing the question coming from the line of David Walrod. Your line is open.

Just wanted to talk a bit about the capital allocation between the structured and the pass-through. Obviously, as you mentioned it was skewed more towards structured this quarter. Can we expect that to go to more 50-50 level or what is your expectations there?

Thank you. It’s going to move slightly more so, Dave, I don’t know that materially, so -- I don’t know if we'll get all the way to 50-50. But I would say that the pass-through portfolio. We talked about the coupon mix, we have been adding 4.5. I think that is IOs which look very attractive in this environment until less fixed rate IOs, will get little more appealing. So it will probably cause us to move little bit in that direction. But I don’t think it’s going to be a material move.

The move in the second quarter was largely related to the fact that, as we moved farther out the curve in the pass-through portfolio, we felt more comfortable, taking risk in inverse IOs to the belly of the curve. And the nature of the inverse IOs were long -- sort of the intermediate part of the curve which should short the long run, so we felt like that was a good offset given the rolling of the pass-through portfolio into more lower coupon, higher duration assets. And also they’d lagged -- in the June sell up they really lagged IOs with little bit of a relative value play as well. So we will see how those do in the coming months, if they slow down like we think they are going to, they can have some nice income earning capacity or we may choose to just take chips off the table to the extent they tied back up.

Okay, great. And then the share buyback, can you talk about, I guess, how the Board is going to way repurchasing stock versus reinvesting proceeds back into your portfolio?

Well, given the current discounts of book which was approaching 65% to 66%, obviously buying back the shares, stock at nearly a 50% return, we cannot replicate that in the portfolio. I mean, if we did we would be paying a 50 seven-month dividend. So for now it looks pretty compelling. So the other thing is to keep in mind, we set the program limit at 2 million shares and we are still pretty small company and our capital base, while its grown a lot in last year and a half. It’s still not that large and that matters, not so much necessarily for equity investors, which in some cases still does, its only matters for credit counterparties and we want to maintain a certain element of critical mass, if you will. And so that's probably going to limit how we do. But will be accretive to book value and there is no question of that. I would say, more so than share sales previously given the current discount to book.

Just to add a note on that, we will sell more assets in order to do that so to serve it, to certain extent. So it’s not as if we are going to increase our leverage. I think that's another important to note when we kick off share buybacks that it’s not just going to be an explicit increase in leverage. We will sell some bonds; raise some capital to do that. That being said, we do have ample cash. Right now our cash and unencumbered securities is roughly $140 million. $100 million of that is just cash. So they have nearly half of our equity base so they can cash. So we can act relatively quickly for the share buyback plan as soon as we are out of any of our blackout period and that sort of thing that we are subject to.

Okay, great. Thanks a lot guys.

Thanks Dave.

And I have a question coming from the line of Christopher Testa of National Securities. Sir, your line is open.

Good morning. Thank you for taking my questions. Just what the core earnings number, what were the unrealized losses on derivatives for this quarter?

Well, about 800,000, I believe.

800,000?

Net of the treasury futures and Euro/Dollar futures.

Okay, so that was for core earnings that -- is that $0.83?

No. Well, we don’t release core earnings. The way we typically -- if we were to try to back into a number, you start with the top of the income statement. So interest income and interest expense, you back out -- since we don’t amortize premium, the closest number we have to that is premium loss through the pay downs. That was $5.656 million and then expenses of -- I think which was around $2 million. So I came with -- you’re doing that math, I come up with number about $0.38.

Okay. Yes, because lot of the GAAP…

That number has…

The GAAP number also -- $2.8 million you have the unrealized losses on MBSs about $13.3 million and then you have about $7.5 million premium loss through to pay downs. Correct?

I believe that's the case. But I did always have doubts. So I'm going to take your word for it.

Okay. And just with regards to the repurchases, what are the restrictions in terms of the timing and the size that you are allowed to kind of purchase at the time? What's the -- when does that open?

We are blacked out now. I think we can start next week. Its standard industry, and obviously SEC, REGs, you can't be anecdotally open and close. You are limited on how much of the volume you can be. I don’t have those numbers in front of me. But it’s -- there is a 10b5 and 10b-18 program. This is going to be a 10b-18, all of them they are subject to these same restrictions and terms of what the things you just alluded to. If you want, I can get to those. But it’s not our rule. We’re going to follow whatever the REGs are and that's that.

Okay. And given that you are looking to add to 4.5% coupons, bit higher rates, what type of a balance sheet are you comfortable with. I know you are at 7.1 times now. What's the maximum that you think that you would take that up given the prepayment environment you are looking at and the capital allocation?

I would say we are above it really. We’re probably going to go down some. And we are down slightly from where we are at quarter end. So, I mean, we've been historically between 6.75 until very recently, we will probably get it moved closer to 6.5.

Okay. And what would be, I guess, the biggest risk, what should we be looking at in terms of prepayments continuing to speed up. I know, Bob, you had mentioned that. This was really the cause of turnover and not rates. Given where housing is, we had existing home sales really strong last week. What's going to cause this to continue to accelerate and what could cause this to really normalize?

Well, turnover is what I was referring to, that's been driven by strong housing fundamentals and I expect that…

Right.

As far as refinancing activity, I don’t know that that -- it will take a pretty meaningful move lower in rates. I think well below 2.20 on tens. You need to get the survey rates, for instance, comfortably under 4%, probably pushing 3.5%. So figure it this way, we were in a very low rate environment for long period of time, so anybody that could refinance basically could, did. And then we have this period in late 2013 early 2014 when rates spiked higher and there were lot of higher coupon mortgages originated. Over the course of 2014 rates fell and then early 2015 stay there for a while briefly. So those borrowers that put their mortgage in place in basically 2013 or 2014 were now exposed to lower rates and they refinanced. Rates have backed up a little since then. So in terms of like who is left to refinance, it’s probably not the pure rate guys. Now what you are probably seeing are the credit guys, guys who just have been locked out of refinancing because of negative equity, that's being driven by home price appreciation. That's where you see some pent up demand guys who just have been in a house for years and couldn’t move because they just couldn’t get another mortgage. Now that's starting to free up, and so you are starting to see those types of refinancings and that can really turnover, just people trading not because their rate on the new loan is that great, but just because they want to move. And anecdotally, things we hear around here -- we talked to you about the survey rate and how far in or out of the money your mortgage is. We are also starting to hear about more creative forms of financing. People are able to buy all cash out refis, people getting lower than 20%. So even if they are slightly out of the money they may be able to find their way to finance a new home. So you will see now on what you might call economic rate refinancings as well.

Chris I would just add that, that the last time we saw our rate environment as low as the one that was -- that surfaced in the first half of the year was -- back around the time when we did our IPO. And if you recall back then our earnings rate was about -- I think we paid a dividend stream of $0.305, rates went up, speed slowed down, earnings capacity of the portfolio had expanded. That wasn’t in play. So we retouched those levels and saw a corresponding increase in our prepay speeds. That was really sort of a challenging environment to invest, because we had 4.5 as we alluded to that we were seasoning and starting to become faster and faster and in the money, and prepay speeds really sort of coming up the ramp and responding to refi incentive. And we were really left with a difficult decision, which is accept some faster prepay speeds in the portfolio or increase their duration in order to hide from it and based on some of the other earnings releases we've seen this quarter, it seems like a lot of people struggle with that same decision and that turns out that, wow, faster speeds would hurt earnings little bit. The alternative would have been more duration and more book value erosion. So we would like to get back into a lower duration portfolio as fast we can. But those just weren’t available in the first and second quarter really.

To the extent we like.

Yeah.

Okay. Thank you. Thanks helpful. And just one is the Q going to be filed?

Today.

Okay, great. Thank you.

Thank you. [Operator Instructions] We do have a question coming from the line of Michael Diana from Maxim Group. Your line is open.

Thanks. I understand you said you don’t give dividend guidance. When you set the $0.42 dividend where you assuming a Fed Funds rate increase to 25 basis points and buybacks that involved selling assets as you mentioned earlier in the call?

No, we were not in both counts. So we tried to set that dividend rate basically equal to where we were at that point in time. We absolutely didn’t contemplate share buybacks in the portfolio changes, because we would assume that those would be such -- to the extent we had to shrink the portfolio be such that we maintain the same profile. And as far as the Fed goes, we are still pretty much like anybody else, we are not sure if they are going in September or December. But that will probably, even if they gone in September wouldn’t really affect our funding in a meaningful way until October and beyond.

That being said, when we do our projections -- dividends are based on taxable income which is a fiscal year -- calendar year really event. And so to the extent that we have hedges in place, we know where they are in terms of being either in or out of money versus rate hikes later in the year. So to the extent our Euro/Dollar positions we are pricing in some gains and losses associated with where we -- the difference between where we originally struck them and where current market expectations are for the any Fed rate hikes. Those are baked into that analysis.

Okay. Thank you very much.

[Operator Instructions] And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Cauley.

Thank you, Operator. And again thank you for your time. To the extent anybody has any questions that come to mind after the call, please feel to call, so we will be here all day. Otherwise we look forward to talking to next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect.