Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2016 Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor off to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Paula. 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 10, 2016, 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 on the call with me today Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, earnreit.com. Management's prepared remarks will track the presentation. Please turn to slide 4 to follow along. As a reminder, during this call, we’ll sometimes refer to Ellington Residential by its New York Stock Exchange ticker, E-A-R-N or EARN, for short. With that, I will now turn the call over to Larry.

Thanks, Maria. It's our pleasure to speak with our shareholders this morning, as we release our second quarter results. As always, we appreciate your taking the time to participate on the call today. First, an overview. For the second quarter, Ellington Residential generated $0.38 per share on a fully mark-to-market basis. Our highly targeted asset selection process delivered solid performance this quarter, as our agency specified pools and our hedging strategies performed well in the face of the historic market moves, following the unexpected result of the Brexit vote. Investor demand for agency RMBS, particularly from foreign investors, increased greatly in the wake of the Brexit volatility. This was largely because agencies, with their liquidity, strong credit quality and higher yields, represented attractive alternatives when compared to the substantially lower and even sometimes negative yields on the highest credit quality sovereign debt. Globally, the sheer magnitude of bonds that have gone to 0% yield or below is leading investors to search for yield, by reaching up in duration, down in credit quality, down in liquidity, down in convexity or across currencies towards US dollar-denominated assets. For agency RMBS, investors can find that additional yield without having to sacrifice credit quality or liquidity. Long-term US Treasuries, US corporate bonds and public equities are all currently at or near post crisis highs. In such an environment, we need to remain disciplined in our hedging approach and believe that maintaining a liquid portfolio will service extremely well should market conditions reverse. We’ll follow the same format on the call today as we have in the past. First, Lisa will run through our financial results. Then, Mark will discuss how the residential mortgage-backed securities market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. Finally, I'll follow with some additional remarks before opening the floor to questions. Go ahead, Lisa.

Thank you, Larry. Good morning, everyone. In the second quarter, we had net income of 3.5 million or $0.38 per share. The components of our net income were as follows. Our core earnings totaled approximately $2.9 million or $0.32 per share. Net realized and unrealized gains from our securities portfolio were $8 million or $0.88 per share and we had net realized and unrealized losses from derivatives of $7.4 million or $0.82 per share, excluding the net periodic costs associated with our interest rate swap. Our core earnings includes the impact of catch-up premium amortization, which in the second quarter, decreased our core earnings by $1.5 million or $0.16 [ph] per share. Catch-up premium amortization is calculated based on interest rate level and prepayment projections at the beginning of each quarter. If we add back the catch-up premium amortization adjustments, which tends to be volatile from quarter-to-quarter, our core earnings amounted to $4.4 million or $0.48 per share in the second quarter. On that same basis, our first quarter core earnings was $0.53 per share. The quarter-over-quarter decrease in our core earnings, adjusted to exclude the impact of catch-up premium amortization was principally the result of a decline in our interest income. If we exclude the impact of this adjustment from our interest income, in the second quarter, our interest income was $9 million as compared to $9.3 million in the first quarter, the difference equating to $0.04 per share. The decrease in our interest income was primarily because the weighted average yield on our portfolio declined to 2.93% on an annualized basis in the second quarter from 3.04% in the first quarter, each adjusted to exclude [ph] the impact of a catch-up premium amortization. In addition, while at the end of the second quarter, our overall portfolio was larger,…

Thank you, Lisa. Similar to the first quarter, the interest rate volatility in the second quarter was elevated. But unlike the first quarter, agency MBS were consistently well bid throughout. Imagine that you had not been following the markets for the past three months and someone told you about the surprise of the Brexit vote, the magnitude of the ups and downs in rates and that the 10-year U.S. treasury yield ended the quarter at 1.47%. You’d probably assume it was a period of very weak ABC mortgage performance, relative to swaps and hedges. However, the opposite was true and mortgages performed extremely well for investors that dynamically adjusted their durations. What was impressive about mortgage performance this quarter was that it happened in the face of increasing prepayment uncertainty, resulting from the lowest mortgage rates in three years. When mortgage rates remain range bound, prepayments are much easier to predict than when they break out of a range. The drop in mortgage rates led to a pickup in refi driven supply and these powerful forces of cyclical supply and prepayment risks are met by consistent demand from global investors seeking alternative to negative sovereign yields. We talked about this technical phenomena last quarter. Agency MBS has transitioned into a global investment class because of their high yields and great liquidity. So while our own central bank has not been a net buyer of treasury and mortgage bonds since October 2014, mortgages are still benefiting from a different source of quantitative easing, namely, the quantitative easing that's been done by the European Central Bank and the Bank of Japan to crowd their country’s investors out of Japanese and European sovereigns and into US agency MBS. Take a look at slide 7. We had the presentation -- we had this in…

Thanks, Mark. By the end of the second quarter, our stock price had increased to 85% of our $15.38 second quarter book value. After quarter-end, EARN’s stock prices continued to move even higher. When our stock price was closer to book value, share repurchase have become less attractive and less accretive for shareholders. as a small company we have to balance share repurchases carefully with the FX shrinking our capital base has on our expense ratios and liquidity of our stock. In light of the upward trend in our stock price this quarter, we did not purchase any shares but we do intend as always to be mindful going forward of the price of a stock as we opportunistic with share repurchases. You may have noticed that we lowered our dividend by $0.05 in the second quarter to $0.40 per share. This allowed for our core earnings excluding the catchup premium amortization adjustment to comfortably cover our dividend this quarter, while our book value per share was basically flat from last quarter. Rather than pay dividends at a book value, we want to generate sustainable income that covers our dividend. And we believe that most of our shareholders share that view. While the long-term impact of the negative interest rate policies of global central banks is unclear. Over time lower borrowing costs should create opportunities for companies and households. As Mark mentioned there can be significant lags between drops in interest rates and peak levels of repayment activity. As it can take a while for the mortgage banking industry to expand its refi capacity to meet demand. As a result, we expect the prepayment activity spurred by the sharp decline in interest rates that occurred toward the end of the quarter may be hiding for a sustained period in the…

[Operator Instructions] Your first question comes from Steve DeLaney of JMP Securities.

Mark you touched on rates a little bit, I'm just curious if you have thoughts, you know, we’ve noticed LIBOR moving higher while obviously the Fed has done nothing at [indiscernible], so my naive conclusion is it must have something to do with Brexit or the Eurozone. I’m curious if you have any thoughts what's behind this 11 to 12 basis points move wide in three-month LIBOR since June that’s the first part of the question. And I guess tying it into the comments about money market reform and the increase in requirement to hold more government paper. Is there a possibility where I'm really going, is there a possibility for us to see agency REPO consistently been priced inside of LIBOR over the next 6 to 12 months? Thank you.

Thanks Steve, these are great questions and we have been watching this closely, LIBOR creep, a lot of people have been paying attention but interesting because it's almost a monotonic increase in three-month LIBOR for the last two weeks. So one thing we've doing about for the last nine months or so most of our repo borrowings we are putting out 90 days, three months because what we've found is that the repo rates we've been getting on pools for the last 8, 9 months track - when we get to three-month repo rates from our lenders they track very closely to the three-month LIBOR and that’s we get paid on floating legs of the swaps you receive, or is if we think, where one month LIBOR versus one month repo there one month repo are a lot higher than one-month LIBOR. So I've seen in the past several months, our three month repo rates are within a couple of basis point of three-month LIBOR, so I think this LIBOR creep up as a mentioned in the prepared remarks is largely a function of this money market reforms where prime funds are seeing outflows so prime funds are not either not rolling commercial paper or having to sell commercial paper. And I do think the agency repo market is going to be the beneficiary as the government funds are getting big capital inflows and they are providing repo. So while in last several months, our repo cost have been a couple of basis points higher than three-month LIBOR. I think there is a very good chance going forward that agency mortgage repo as you mentioned. I think it will dip below three-month LIBOR which is going to be a big benefit to us and that if you get agency three-month repo 10 basis points below three-month LIBOR that’s essentially going to improve net interest managing margin on everything hedges swapped by 10 basis points. So, I think…

And eight times levered, you’ve got - almost 1% on your ROE, right?

So it is going to be, we are going to be doing our next series of rolls in the next two weeks, not only very interested in seeing what sort of rates we get relative with LIBOR. I expect the repo rates that we get are going to be very similar to the repo rates we got a month ago, in which case there will be below three-month LIBOR. So this is sort of I think a definite upside to you can see in agency REITs right now that's not priced in. And also the other thing I mentioned in the prepared remarks potentially we've seen it on the shorter tender swaps like five years NIM of making swap spreads less negative or positive on the short end, we've already seen some of that, so.

That's helpful color I really appreciated it. Your spec pool strategy and you’re kind of dynamic hedging is obviously serving you well in terms of your ability to cover the dividend, $0.48 of earnings excluding the catchup, so is that fit, I mean it’s almost surprising to me frankly that the returns are as good as they given how much yield curve flattening that we’ve seen over the past year which is really a sign that you really are managing the basis and hedging is opposed to just taking blind industry risk. But as we sit today, I mean what is the biggest risk to your spread and your ROE as you see it, as you look at this volatile market that we have out there, it sounds like things since your prepayment risk is being managed, your funding is kind of improving, is there something out there that we're missing.

I just, I want it, before I’m going to let Mark answer that from the risk perspective but I just did want to make one point which is not every industry mortgage REIT I believe is as disciplined as we are about using swaps all out of the yield curve to hedge and straight risk. So and back in 2013 that really hurt a lot of them that were focusing just in the short end, say two year swaps, we had 10 and 30 year swaps lots of them and that really helped us obviously get through the…

Taper Tantrum.

It’s like Taper Tantrum with minimal damage. So, when it comes to a flattening yield curve, I would just sort of say that car layer of that does not - for us right hedging all along and including the longest end of the yield curve that does not necessarily hurt our net interest margin when the curve flats, I just wanted to make that point.

I think a challenge we face in this environment and it manifests itself in the second quarter. it wasn't significant enough headwind to deter what was a good quarter but when you get a lot of interest rate volatility even if rates end up at the same point where they started, that’s still a cost to the company right because the company needs to adjust its duration dynamically. So if you remember before the Brexit vote there was almost universal consensus that remaining was going to win, so interest rate had gone from like 10-year, it’s like 150 to 175 than they immediate rallied back to 150. So moves like that sharp up and down, moves require some delta hedging and that almost by nature it’s an expense. So I think that quick moves in rates even if the revert back we are seeing more of those then what we use to see having in part because liquidity in the market side is not as good, also in part, because a lot of these rate moves are driven by Central Bank behavior so you get sort of like news event days and sometimes they will behave in ways which is different than what the expectation was. So I think that's a little bit of a headwind. The other thing we've seen is that as a roll, focus on rolls have come down a lot and we showed the example of Fannie 4, but it's true basically 3.5, 4, 4.5., 5. You’re seeing many of the bigger asset management platforms not lead but just you know traditional money manager are managing mortgage portfolios versus the Barclays agg or whatnot have been exiting TBAs and going into specified pools. So it’s a little bit more competition for specified pools than they used to be but in terms of net interest margin, mortgage has performed well this quarter, it’s a good environment because a lot of what we buy is prepayment protected, can stay on the books but it's a high enough coupon, so it's anchored to a TBA and that TBA is relatively short duration. So we can hedge with a relatively short duration flock which are very low in rate. So I think the NIM potential is good, the active trading potential now I good. I think with moves in interest rates that mean revert, we've seen more of those than used to, that’s a little bit of a headwind and there is a little bit more competition for pools but all in all I think it's been a pretty good environment right now.

And I just want to add one more thing which is that this level of rates right, the whole mortgage market, the whole specified pool market is trading at much higher prices than they were before. And repayments are high potentially poised to go higher so even saying what the yield is on a specified pool, four and a half or something like that is not so easy, right and there is going to be divergence of use in the market, so when you talk about buying pools and capturing net interest margin, what we hope to do is to be buying that other people are selling because the word about repayment risk that that our experience in models are telling us are going to actually have a really good yield. So when everything is trading near par, no sort of difference of opinion in terms of what yields are but, things are $105, $106 price and you’ve got a potential prepayment wave coming that's really where you can differentiate yourself and we can capture hopefully a big net interest margin by identifying pools that are going to have really good yields in this environment even with our high dollar prices.

[Operator Instructions] Your next question comes from Douglas Harter of Credit Suisse.

Just a follow-up on that last point you were making around specified pool prices, how do you see the kind of efficiency of the pricing of those today you still see sort of attractiveness in those prices relative to your prepay expectations?

Yes, yes we do, so they are definitely up and there are certain parts of the pool market that are relatively commoditized but when you see an increase in payment, it was nice for us is that means they is an increase in supply right so every borrower that’s refinanced out of their mortgage now there is a mortgage company that selling their new mortgage, right. So, there is a increase in supply and we are able to source through new originations, newer pools that have very favorable characteristics. So I think there is certainly parts of the pool markets that are relatively fully priced and commoditized but there is many, many corners of the market that offer very good value versus more generic mortgages.

And then, have you or do you expect to need to make any changes further changes to hedge portfolio or would you be more willing to take on more risk given the changes that we've seen in the rate environment and the expectation that we are kind of lower for longer?

I mean I think one thing that, as I mentioned we are always looking at is to what extent we want to be hedged with TBAs, Mark mentioned the cost of delta hedging, when you’re hedged with TBAs that mitigates that to a larger extent of course in a stable rate environment you’d rather be hedged within straight swaps so that's something that we look at all the time where is the mortgage space, where is the right place for us to be short whether it's TBAs or swaps and treasuries. So, but in terms of saying okay, we are coming to some conclusion that now there is a low probability, our rate is going up, so we are going to lift a lot of our rate hedges generally, no, that's not something that I think we would consider and that we have, you know, that’s just not – that’s not our style and that is I think part of how we frankly ran the company.

And given where rates are now, it doesn't even make you that much money, right like the cost of not, as rates drops it means the cost of not taking interest rate risks is lower and lower. So…

And the cost of having it on is low right now, right I mean, so we could take that risk and yes maybe we would earn an extra [indiscernible] many hundreds of basis points a year, if we lifted all of our hedges but that's not - that's just not our philosophy.

Ladies and gentlemen that does conclude today's conference call. Thank you for your participation, you may now disconnect.