Good morning ladies and gentlemen, thank you for standing by and welcome to the Ellington Residential Mortgage REIT's first quarter 2017 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 hand the program over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks and good morning. 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 1(a) of our annual report on Form 10-K filed on March 13th, 2017 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 first 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 will 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 first quarter results. As always we appreciate your taking the time to participate on the call today. Once again, Ellington Residential had a very solid quarter. Adjusted core earnings remained strong at $0.53 per share up, $0.06 from the prior quarter. We paid and maintained our $0.40 dividend. Book value per share decreased only slightly and our adjusted net interest margin for the first quarter improved to a very healthy 1.76% up from 1.6 9% in the fourth quarter. The first quarter market environment was in many ways completely different from that of the fourth quarter. If you recall, volatility surged tremendously in the fourth quarter of last year. We had just come off of third quarter that saw a near record low mortgage rates and the highest market wide level of prepayments since 2013. And then, in the fourth quarter, long term interest rates had one of their largest spikes in over 20 years. The agency mortgage market experienced an extreme whipsaw from an environment at the beginning of the quarter where our investors were worried about a refinancing wave and watching their yields and duration strength to an environment at the end of the quarter where refinancings were coming to a screeching halt and their portfolio durations at all of a sudden become longer than they had planned for. The 30-year mortgage rate increased 90 basis points over the course of the fourth quarter, leaving the majority of 30-year agency mortgages out of the money for refinancing. Contrast all that with this first quarter when interest rate volatility did a complete [about face] from the fourth quarter. The 10-year treasury traded within a mere 31 basis point range during this past quarter…

Thanks, Larry and good morning everyone. In the first quarter we had net income of $2 million or $0.22 per share. The main components of our net income were core earnings of $7.4 million or 0.81 per share, net realized and unrealized losses from our securities portfolio a $5.3 million or $0.58 per share and essentially flat net realized and unrealized gains and losses from our derivative. By this measure, net realized and unrealized gains from our derivatives excludes the net periodic cost associated with our interest rates swaps if they are included as a component of quarter earnings. Our core earnings includes the impact of catch-up premium amortization, which in the first quarter increased our core earnings by $2.6 million or $0.28 per share. After backing out the catch-up premium amortization from interest income in both the first quarter of 2017 and the fourth quarter of 2016, we arrive at our adjusted core earnings of $0.53 per share and $0.47 per share respectively. The main factors driving the net increase in our quarter-over-quarter adjusted core earnings were higher interest income - the increase in our quarter-over-quarter adjusted core earnings were higher interest income partially offset by higher cost of funds and expenses. The increase in this interest income in the first quarter was due to an increase in the average book yields on our assets given a decrease in our prepayment expectations coupled with a 3% increase in our average portfolio holdings. This increase was partially offset by an increase in our weighted average cost of funds coupled with a 2.1% increase in our average outstanding borrowings. Quarter over quarter, our weighted average repo borrowing rate rose 13 basis points as LIBOR increased during the period and our total cost of funds increased 17 basis points. Based on the…

Thank you, Lisa. In sharp contrast to the fourth quarter, the first quarter had limited interest rate moves. In mid-March, the bond market tested the high end of the range in interest rates with 10-year swaps at 2.6% but quickly rallied back. Since then markets have settled into a level about 50 basis points higher than our Election Day, but about 30 basis points lower than the March high. This range bound market helped first quarter performance and it's continuing to present a favorable backdrop. It isn't just reduced volatility that makes this a good earnings environment for mortgage REITs. It's also the absolute level of rates which right now are very mortgage investor friendly. Because problems for some managers in the fourth quarter was merely mortgages behaving like they typically behaved when rates break out of a range. When rates make new lows, you have to worry about prepayment risk. When rates make new highs, you have to worry about extension risk. Those kinds of gyrations can hurt book value if you have a lot of leverage, if you aren't diligent about your hedging and if you don't have the right mix of hedges. We managed this gauntlet of volatility very well in the fourth quarter and we were able to emerge into this more hospitable bull environment without a scratch. In contrast, [the body blows to other stuff]. Reaching now about 40 basis points away from having the market really focus on extension risk, we're about 40 basis points away from worrying about prepayment risk. Net interest margins wide and rates have to move a decent amount before the situation changes. With delta hedging cost currently low, a lot of spread income drops to the bottom line. We show another positive on Slide 7. Most of the mortgage…

Thanks, Mark. For many agency mortgage REITs, the fourth quarter and first quarter was a rollercoaster as they rode the fourth quarter down and then rode the first quarter up. Many still haven't recovered their fourth quarter losses. But Ellington Residential is different. We trade actively. Our portfolio turnover is high and we're flexible. This lets us not only take advantage of short-term trading opportunities but it also enables us to adapt quickly the fast changing market environments like what we saw in the fourth quarter and our style also enables us to adapt to longer term trends in the markets. All the while we are laser focused on risk management and book value preservation. Our hedging style is disciplined and dynamic. We hedge across the entire yield curve. We rebalance our hedges when we should and we are unique in the peer group and the extent to which we have used TBA as hedging positions, which has significantly reduced many portfolio risks. We're not afraid to dial our mortgage base's exposure up and down, especially when markets look shaky like they did late last year. Of course, assets selection is key as well. And here we take advantage of Ellington's 20-plus-year history in these markets, modeling and managing prepayment risk and identifying the right entry and exit points. We do all this because we're not in the business of Fed policy prognostication or interest rate prophesies. Staying out of that business helps us sleep better at night. Thanks to our hedging strategy, we're more insulated from interest rate spikes and we're more insulated from widening yield spreads. A flatter yield curve doesn't bother us. We're also more insulated from prepayment shocks. And that's a function not only of our use of TBAs to hedge but it's also a function…

[Operator Instructions] Our first question comes from Doug Carter with Credit Suisse.

You talked about removing some of the TBA hedges in April. Did you replace those with interest rate hedges? Just kind of want to better understand the risks that you're comfortable taking today.

Sure, thanks. Thanks for the question, Doug, it's Mark. So yes when we bought back TBA hedges, we replaced them with interest rate hedges either interest rate swaps, treasuries or treasury futures. So in terms of risk we're comfortable taking and risk we're not comfortable taking, so risks we're not comfortable taking is to expose the portfolio to a lot of interest rate risk. We feel like interest rate risk is prone to a sharp movement from exaggerators factors that are very difficult to predict - Central Bank activity, geopolitical events. So we don't generally expose the portfolio to interest rate risk. We will expose the portfolio to different amounts of levered agency mortgage exposure relative to swaps and treasuries, right. And by doing that we're also implicitly exposing the portfolio to different levels of volatility risk, right. So in the fourth quarter the TBA hedges really helped a lot because as interest rates were selling off and the assets we hold were extending in duration as the market was anticipating for slow prepayment speeds, the TBA portion of our hedges were also extending in duration as a result the market anticipation of slower prepayment speeds, that helped a lot. Now that we're in this range bound environments, pretty far away as I mentioned in the prepared remarks from concerns about prepayment risk or extension risk, we decided to reduce some TBA hedges. It's a little expensive. It's a less expensive mix of hedges we have on the books now. I think for all the reasons we articulated this current environment, that positioning makes sense and it should manifest itself into a little bit higher earnings.

And I guess just looking forward obviously, we don't exactly know how it plays out but if we assume that you see some additional widening once the Fed announces the reinvestment plans, is that something where you could further reduce the TBA hedges? Would that kind of be the thought process?

Oh yeah. I mean there are plenty of companies in this space. Most companies operate with no TBA hedges and they just have more volatility exposure and more levered MBS exposure. So if we got to the point where mortgages were significantly more attractive relative to swaps and treasuries than they are now, we could we could adopt that positioning and just to choose to more frequently Delta hedge the interest rate risk in the portfolio. I think for us a lot will depend on the specifics you get of how the Fed is going to taper. So there's certainly tapering scenarios they could articulate that we think mortgages would need to widen from here to compensate investors for increased supply and there is certainly tapering scenarios they could articulate but we think the current levels of spreads are sort of excessive compensation and then we might add more mortgage basis.

If you look over time, Mark, tell me if you agree with this, I would say that for Ellington Residential, we've probably never gotten above 50% TBA hedge and we probably never gotten below 20%. And I think that we also haven't had the type of basis widening that we saw in 2009, right?

Right.

And if that happens and I think we could move outside the lower end of that range. But I think that's a pretty good, granted it's a wide range, but I think that's a pretty good indication of kind of where we usually max out and where we min out. And, Mark, I don't know if you want to give - we were at 45% roughly at quarter end, we were at 40% at the end of the year. If you want to give a little more color in terms of roughly, maybe where we've been since April dialing down a bit - dialing up the exposure or down the TBA hedge.

Right. We dialed down the TBA hedge incrementally another 5% or 10%. The one thing I would add is that if you compare an agency mortgage strategy to a credit strategy, in an agency mortgage strategy, if mortgages underperform swaps and treasuries, then it's a short-term book value hit but you're getting a long-term better net interest margin that you sort of earn out that book value hit over time. In a credit strategy, if you're wrong on credit and there is an increase in credit losses greater than expectations, that's a loss that doesn't come back to you. So it's just a fundamental difference that when mortgages widen, it's a short term headwind but there's a long term benefits of that to NIM and potentially dividend.

And let me add one more thing, which is [that] I think that when you think about almost you can look at this as sort of an overlay of several different risk that we're taking. But I think that to what extent are we exposed to the mortgage basis is obviously a risk that we dial up and down. And I think they are we have conviction that can raise from extremely high convictions to you know much lower convictions. But except in exceptional circumstances, I think generally speaking our convictions on the mortgage basis are not going to be as high as our convictions on the relative value of many specified pool sectors versus TBAs and our ability to sort of capture that Alpha and I think that so you've got basically the sort of what we look at as very high conviction on specified pools versus TBA is very often. And I think that we're more comfortable taking lots and lots of that risk and in terms of the mortgage basis I think we are comfortable obviously taking that risk and dialing up and down. But we generally think of that is except in exceptional circumstances a lower conviction positioning, so trade. So that's where we think that we can generate the best returns for investors, risk-adjusted returns for investors over cycles.

Makes sense. Thank you.

[Operator Instructions] At this time we have no further question. Ladies and gentlemen, we do thank you for participating in today's conference call. You may now disconnect your lines.