Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Ellington Residential Mortgage REIT third quarter 2015 financial results conference call. [Operator Instructions] It is now my pleasure to turn the floor over to [ph] Anya Pritchard of Investor Relations. You may begin.

Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our Annual Report on Form 10-K filed on March 12, 2015, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I have with me today on the call Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. With that, I will now turn over the call to Larry.

Thanks, Alia. It's our pleasure to speak with our shareholders this morning, as we release our third quarter results. As always, we appreciate you taking the time to participate on the call today. First, an overview. It was another challenging quarter for Agency mortgage REIT, as global volatility and falling interest rates led to significant yield spread widening across most sectors of the fixed income markets, with Agency RMBS spared little of the damage. At EARN, we tend not to run a significant net long duration position, the way many other mortgage REITs do. Furthermore, earlier on in the third quarter, as the mortgage base cheapened, we had reduced our TBA hedges somewhat in favor of interest rate swaps. Then later on in the quarter, with more interest rates swaps and fewer TBA short positions, the combination of sharply falling and volatile interest rates and a widening mortgage basis, it is harder than it otherwise would have. We lost $4.8 million or $0.53 per share on a fully mark-to-market basis. Core earnings even after backing out catch-up amortization adjustments was a healthy $0.59 per share, comfortably covering our $0.45 dividend. And we believe that the outlook for our core earnings is even stronger, following the substantial widening in Agency RMBS yield spreads that hit our book value during the third quarter. Our $0.45 dividend represents an 11.1% annualized yield based on our September 30 book value and an annualized yield of more than 14% based on November 2 closing price. Our portfolio of agency specified pools performed well relative to their generic pool counterparts, as they prepaid slowly and as pay-ups increased more or less as expected. And given how low interests are, we think that they currently offer tremendous value. Meanwhile, as Mark will discuss later, we're seeing a…

Thank you, Larry, and good morning, everyone. In the third quarter, we had a net loss of $4.8 million or $0.53 per share. The components of our net income were as follows. Our core earnings totaled approximately $6.3 million or $0.69 per share, net realized and unrealized gains from our mortgage-backed securities portfolio were $5.5 million or $0.60 per share and we had net realized and unrealized losses from derivative of $16.6 million or $1.81 per share, excluding the net periodic cost associated with our interest rate swaps. In comparison, in the second quarter we had net income of $0.2 million or $0.02 per share. Our second quarter net income was comprised of core earnings of $5.2 million or $0.57 per share, net realized and unrealized losses on mortgage-backed securities of $16.3 million or $1.78 per share and net realized and unrealized gains on our interest rate hedging derivative of $11.3 million or $1.23 per share. Our core earning increase quarter-over-quarter approximately $1.1 million or $0.12 per share to $0.69 per share. The increase was the result of two main factors. First, our interest income increased approximately $1.5 million or $0.16 per share. And second, our cost of funds increased approximately $350,000 or $0.04 per share and partially offset the increase in interest income. Our third quarter interest income included a catch-up premium amortization adjustment of approximately $900,000 or $0.10 per share. For the third quarter, slower prepayment speeds in our agency RMBS reduced our amortization of bond premiums. In the second quarter, we had a negative premium catch-up adjustment of approximately $440,000 or $0.05 per share as prepayments speeds increased in our portfolio. If we exclude these catch-up premium amortization adjustments in each quarter, we can see that our third-quarter interest income increased slightly by about $130,000 or $0.01…

Thanks, Lisa. There was substantial interest rate volatility during the third quarter, as weakening fundamentals in many emerging economies, especially China, raised concerns that weakness abroad will hurt the U.S. economy. Interest rates trended lower during the third quarter, and this accelerated when the Federal Reserve decided not to raise the target Fed funds rate in September, and this decision reinforced the view that problems overseas were posing significant risk to the U.S. economy. This view was further supported by the very weak September employment report released in early October. In addition, for nearly 50 basis point decline in the 10-year swap rate over the third quarter, there were numerous telltale signs in the market that balance sheet was in short supply as we approach quarter end. Interest rate swap spreads showed unusually high levels of volatility during the quarter. And the 10 year swap spreads actually became negative for the first time since late 2010. One dealer strategist called it a perfect storm, with heavy fixed income issuance alongside central bank selling of U.S. treasuries, all stressing dealer balance sheets right before the quarter end. In September alone, the 10 year swap rate tightened by about 8 basis points on unusually large one month move. Against this backdrop, agency RMBS substantially underperformed swap hedges during the third quarter. In a rally, the most common culprit for agency RMBS underperformance is an increase in prepayment speeds, either actual or anticipated. In the third quarter though, market prepayment speeds were actually slower than they have been in the second quarter. The culprit in this case for the underperformance was a general risk-off move and a scarcity of balance sheet. Quarter end has taken on increased significance for the systemically important financial institutions known as SIFI's, as their quarter end balance sheet…

Thanks, Mark. By any measure, this was a really tough quarter for hedged agency mortgage portfolios. Many of our agency mREIT Peers choose to run with a positive duration gap. And yes, that worked out for them this quarter. Even Freddie Mac just reported their first loss in four years. And even their boatloads of guarantee fee income couldn't overcome the losses on their hedge mortgage portfolio. We've deliberately stayed the course so far in the fourth quarter, and the markets are in fact recovering somewhat. To conclude, I want to touch a little on our dividend and our repurchase program. Our new $0.45 dividend is an 11.1% annualized yield relative to our September 30 book value of $16.20. And as I mentioned, we're comfortable that our core earnings will continue to cover that dividend. And as to our repurchase program, the program was live, only for about a month. Basically from right after our last earnings call until mid-September, when we hit our blackout period. And while it was live, we laddered down our purchases, entering an order at a certain price limit. And once we feel that order, entering a new order at a lower price limit et cetera. We ended up repurchasing about a 0.25% of our outstanding common shares before our trading window closed. Dividend adjusted, our common shares are now trading a bit higher than they were when we were last repurchasing shares. So I wouldn't expect to see much repurchasing activity from us unless common our shares trade lower from here. As I mentioned on last quarter's call, we're small company and we always have to be mindful of the effect that shrinking our capital base will have on our expense ratios and on the liquidity of our stock. This concludes our prepared remarks. And we're now pleased to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Douglas Harter of Credit Suisse.

This is actually Sam Choe filling in for Doug Harter. I was wondering how you guys were thinking about leverage going forward? Do you see that trending up as you consider opportunities in the agency MBS space?

I would say that while valuations are attractive now, given the fact that you haven't seen the Fed act. So you haven't seen how the market is going to react to a fed action, I would not expect to see leverage increase right now. I feel like the potential December hike coming right in front of yearend can cause some volatility. And as you saw for this past quarter, with the leverage we have now, we're able to generate sufficient core earnings to cover the dividend. So I think the time to consider changes in leverage or a possible increase in leverage would come after we've seen how the market reacts to Fed rate increase.

So it's safe to assume that you guys will continue the defensive positioning?

Yes, I wouldn't really characterize our positioning right now was defensive. I think it sort of appropriate given the opportunities in the market and given the potential volatility that is possible for the market to have to trade through.

And if I could add one thing to that. One way that you can see that our position isn't quite as defensive is that we're not long as many TBAs -- I'm sorry, we're not short as many TBAs in terms of our hedging portfolio as we were before. That's because we were constructive on the basis. So I think one good measure of how defensive we are is what portion of our hedges is comprised of short TBAs as opposed to interest rate swaps and similar instruments.

Your next question comes from the line of Trevor Cranston of JMP Securities.

I think you guys touched a little bit on the kind of phenomenon of swap spreads going negative in the third quarter. Looking at them quarter-to-date, it looks like that's kind of continuing, like the 10 year swap spread has gone increasingly negative. Can you just comment on how you guys are thinking about that and how it impacts? How you think about the portfolio, in particular the hedged positions over the near-term?

That's a great question, and that's definitely the biggest issue we've been wrestling with. I think that, if you have the view that this pricing structure is going to continue and swaps are going to get more negative, then you have some options, right. You can increase TBA shorts and you can increase our treasury shorts. We've always had small amount of treasury shorts. And those are liquid. They are easy to repo. You can certainly increase those. You can do it in treasury futures. The attractiveness of the interest swaps is that the one that over the long run, it's probably going to be most closely tied to our repo, our repo borrowing. And these things can reverse. So moving a big portion of the hedge from swaps into treasuries, then you're taking some risk that your funding costs over time can be decoupled from your interest rate hedge. But I think this movement in swap spreads is definitely emblematic of a trading environment now, where a lot of a big trading counterparties and this is one thing I mentioned in the prepared script have our operating under value at risk constraints and balance sheet constraints that make it difficult for them to balance sheet the amount of risk that different customers want to move around the market.

Larry, ultimately these are judgment calls, whether it's how long we're going to be the mortgage basis, whether we're going to hedge with interest rate swaps, futures, treasuries, these are judgment calls, and I think that there is a lot of technical factors that are involved. It's really hard to predict where this is going to go. Some people view this as a bubble, but it's always hard to see bubbles, while they're happenings, so it's really hard to know where this is going to go. End of Q&A

There are no further questions at this time. Ladies and gentlemen, this concludes Ellington Residential Mortgage REIT's third quarter 2015 financial results conference call. Please disconnect your lines at this time. And have a wonderful day.