Good morning, ladies and gentlemen thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2017 Second Quarter Financial Results Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Stephanie and good morning, everyone. 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 13, 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 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 that 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 3 to follow along. As a reminder, during this call we'll sometimes refer to Ellington Residential by its New York Stock Exchange ticker EARN or EARN for short. With that, I'll 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. The most remarkable thing about the second quarter was the continued absence of volatility. To give you an idea of just how low volatility was this past quarter on a historical basis, the VIX stepped to a 23-year low and the MOVE, Merrill Lynch's option volatility estimate touched a 4-year low. The 10-year treasury traded in about a 30 basis point range, an even tighter range than last quarter and in fact, it was the second tightest range for a quarter in the past 40 years. Yield curve continue to flatten by 22 basis points which was double the flattening of the first quarter. Limited volatility can be somewhat of a double-edged sword, while it was supportive of our earnings as the cost to rebalance our interest rate hedging portfolio was lower, the low volatility led to be underperformance of our prepayment-protective specified pools, relative to our TBA hedges. In an environment where many investors are lulled into thinking that interest rates are range bound for good, prepayment protection just doesn't respect it deserves. That's okay. The prepayment insurance is on sale now at incredibly attractive levels, we're happy to buy it. We believe, that many investors don't appreciate, even though volatility is low, the bull flattening yield curve we've seen in the second quarter, may actually be signaling an increased probability of lower mortgage rates in the future. Meanwhile, current low levels of volatility are making dynamic duration hedging much less costly and this is reflected in the option-adjusted spread levels for Agency RMBS which remain one of the few fixed income asset classes trading at…

Thank you, Larry and good morning, everyone. In the second quarter, we had net income of $1.6 million or $0.15 per share. The main components of our net income were core earnings of $4.8 million or $0.45 per share. Net realized and unrealized gains from our securities portfolio of $3.8 million or $0.35 per share and net realized and unrealized losses from our derivative, of $7 million or $0.65 per share. By this measure, net realized and unrealized gains from our derivatives excludes the net periodic cost associated with our interest rate swaps, since they are included as a component of our core earnings. Our core earnings includes impacts of catch-up premium amortization which in the second quarter, decreased our core earnings by approximately to $275,000 or $0.02 per share. After backing out the catch-up premium amortization from interest income in both the second and first quarters of 2017, we arrived at our adjusted core earnings of $0.47 per share and $0.53 per share, respectively. As Larry mentioned, we completed a follow-on equity offering during the quarter, whereby we issued 3.23 million shares and we raised capital of approximately $45 million net of offering cost and underwriting discounts. As a result, of the offering, quarter-over quarter, our weighted average shares outstanding increased by 18% to 10.7 million shares and our ending shares outstanding increased to 12.4 million. While as of the end of the quarter, we had fully deployed the proceeds from the offering. Those proceeds were invested over the course of the second half of the quarter and we estimate that the related drag for the quarter on our net income core earnings and adjusted core earnings, was roughly $0.02 per share. The other primary factors driving in that decrease in our quarter-over quarter adjusted core earnings per share…

Thank you, Lisa. In many ways, the second quarter felt like a continuation of the first quarter. Rates did not move a lot, mortgage spreads did not move a lot and credit spreads ground tighter. Strengthening the relative value argument for Agency MBS. Despite the constant bombardment of geopolitical headlines, the 10-year swap rate only moved in a 30 basis point range to rate volatility was low, just like Q1. We did have some volatility in the shape of the curve which flattened in response to a lackluster inflation data and the Federal Reserve's continued gradual march towards policy normalization. The overall lack of price movement pushed various measures of implied volatility to their lowest measures on record. With mortgage spreads relatively wide and delta hedging costs continuing to be low, as Lisa mentioned, we generated a positive economic return if you add back in the dilution from our capital raise. We also overcame the temporary drag on our net income created by the increase in cash in our balance sheet from the capital raise. We worked quickly, but purposefully, to deploy the new capital. By the end of the quarter, as you'll see in the portfolio slide, the proceeds of the raise were completely invested and the portfolio had reached its full size to generate earnings. During the quarter, the Fed provided a lot of clarity on the pace with which they will decrease the size of their MBS and treasury portfolio. While the start date is uncertain, but likely in Q4, the pace of the unwind was finally quantified. The agency portfolio will start to passively shrink at a rate of $4 billion a month, increasing to a maximum rate $20 billion a month after a year. The two aspects of the schedule are more mortgage friendly than…

Thanks, Mark. As Mark just mentioned, as we move further into the second half of 2017, the low volatility trends of the first and second quarter's could start to evaporate. It's hard to imagine their volatility will decline further from here. Mixed signals are all around us. Additional Fed rate hikes, are on the table in the near future, provided the economy holds course. Tax reform will probably be the next focus for Washington. And if it does happen, there will undoubtedly be winners and losers. No less than Alan Greenspan the other day, even predicted the return of stagflation. It can be daunting for an investor who try to take any course of action with all these crosscurrents. But at Ellington Residential, we structure our portfolio differently. We're nimble and ready to adapt, as our hedging strategy sets us apart from our mortgage REIT peers. With our heavy use of TBA short positions, with our hedging interest rates so thoroughly all along the yield curve. Our strategy is designed to inflate us from big swings in interest rates and to protect us from dramatic spread widening. We model and manage prepayment risk, drawing on 20-plus years of models and experience, to identify specified pools with the most attractively priced prepayment characteristics. In the coming quarters, as the Agency RMBS market start to feel effects of Fed tapering, we expect our specified pool portfolio to do very well. The Fed's constant buying of TBAs, has essentially provided a steady stream of demand for those cheapest to deliver pools in the Agency RMBS universe. As the Fed is relatively indifferent to what kinds of bulls that actually gets delivered when it buys TBAs. As this Fed support, gradually diminishes, we believe that payoffs for specified pools over TBAs will benefit. As…

[Operator Instructions]. Our first question comes from the line of Doug Harter with Crédit Suisse.

This is actually Josh on for Doug. Looking at the quarters leverage level, you guys ticked up a little bit, I'm curious is that a good run rate going forward? And if we don't see an increase in volatility, you think that level can tick up in the coming quarters?

Yes. So first of all, in terms of the increase in our leverage I think if you consider the fact our leverage went up by 0.3 right, if you adjust for unsettled purchase from sales. So if you think about the fact that our increased equity base was all deployed in our Agency strategy, with let's say an 8-ish leverage, as opposed to, there was little bit of our portfolio before that was in the non-Agency strategy and still is. And that had zero leverage on it. I think, if you adjust for that, you see that our leverage didn't increase other than the fact that more -- little bit more of our strategy now is Agency as opposed to non-Agency. So I just wanted to make that point. And then Mark, you want to handle the other part?

Sure. About the run rate?

Yes or just how are you seeing about leverage going forward? Would -- if you see volatility stay where it is, would you guys be willing to increase leverage or are you comfortable at these levels?

I guess our view was that, getting clarity on the specifics of how the Fed was going to taper, that was very important. That was a big piece of uncertainty that was hanging over the market and if they had chosen to taper in a much more aggressive way, it probably would've caused mortgages to underperform treasuries and spots, right. So I think, when they start tapering, to me it's less important than clarity on the pace of which they're going to taper. So getting that clarity, I could see us increasing leverage slightly in response to that if -- especially when they actually start to taper, if it seems that the incremental sort of passive supply they're putting in the market is well subscribed if we expect to be.

I think we have some room to increase leverage, if we want to, given the way that we managed the portfolio with the amount of TBAs, with our duration as well. So I think they could increase a little bit. But we've been pretty steady, in terms of our use of leverage if you look at it strategy-by-strategy. So -- but we definitely given where repo hair cuts aren't given sort of how risk controlled we think that our strategy is from a book value perspective, I think, we're -- we could have some room.

Yes, I also think that, with the TBA hedge -- a little bit more leverage with the TBA hedge is sort of the same kind of risk parity as a little bit less leverage and less TBA hedge. So I don't think about the leverage just as an absolute number. I think about what that leverage number in conjunction with what portion of our interest rate risk is hedged with mortgages early.

[Operator Instructions]. At this time there are no additional questions in queue. This concludes today's conference call. You may now disconnect.