Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the Ellington Financial Fourth Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time all participants have been placed on a listen-only mode. Then the floor will be opened 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 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 1A of our Annual Report on Form 10-K filed on March 11, 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 Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website ellingtonfinancial.com. Managements prepared remarks will track the presentation. Please turn to Slide 4 to follow along. With that, I will now turn the call over to Larry.

Thanks Maria and welcome everyone to our fourth quarter 2016 earnings call. We appreciate your taking the time to listen to the call today. The fourth quarter was an incredibly volatile one on numerous levels. Long-term interest rates surged as quickly as they had in many, many years and the equity markets had new highs, while the credit sensitive fixed income markets were similarly pulled in multiple directions. Ellington Financial was able to generate a modest amount of positive net income despite all the challenges presented in the markets this quarter and that was noteworthy. We are focused on executing our long-term strategy and this past quarter, we made steady progress towards completing the portfolio transition of the past several quarters. Mark and Lisa will run through our particular results for the quarter in more detail later. On this part of the call, I'm going to focus first on the full year that just ended and then more importantly the year that's ahead of us. We said going into 2016 that it was going to be a transition year for the company and it was. In fact I'm really optimistic on where the company is situated here today as I’ll elaborate on later on in the call. But 2016 ended up being a tough year for us. Our assets performed well, but our credit hedges did not, specifically our results were significantly dragged down by our high-yield credit hedges which were positioned against all of the credit sensitive components of our portfolio including of course what has had historically been our biggest strategy by far our non-agency RMBS strategy. These high yield corporate credit hedges were very substantial in size during the entire first half of last year. Our positioning reflected our concern that the credit markets were vulnerable to…

Thank you Larry and good morning everyone. On our earnings attribution table on Page 4, you can see that in the fourth quarter our credit strategy generated gross income of $5 million or $0.15 per share and our agency strategy generated gross P&L of $1.8 million or $0.05 per share. After expenses of 5.1 million or $0.15 per share we had net income of 1.7 million or $0.05 per share. The following is a brief overview of the drivers of our credit and agency results. With respect to our credit strategy when you compare our third and fourth quarter results, you can see that our gross income increased to $0.15 per share in the fourth quarter from $0.05 per share in the third quarter. In the fourth quarter we had slightly higher interest income and other income which was partially offset by net realized and unrealized losses on our investments. Whereas in the third quarter, we had net realized and unrealized gains on our investments in addition to our interest income and other income but net losses on our credit hedges. During the fourth quarter, total interest income and other income and total realized and unrealized gains amounted to $0.20 per share which compares to $0.63 per share in the third quarter. The biggest contributors to the quarter over quarter decline of $0.43 were our translation and - foreign currency translation and transaction losses on our European investments as well as net valuation declines on consumer loans related to one low agreement. In addition, we had a lower contribution from our US non-agency RMBS in the fourth quarter. Partially offsetting these declines were increased contributions from our small balance commercial loans, residential non-performing and sub-performing loans and CLOs. In the fourth quarter as I mentioned we had foreign currency translation…

Thank you Lisa. During one of the most volatile quarters in years, EFC was able to generate positive economic returns. Our credit portfolio not only grew in size but also continued to replace lower yielding assets with higher yielding ones. Our agency strategy put in another good quarter with the return on capital for the quarter of about 2%, so about 8% on an annualized basis. Given what happened to interest rates, we view this is as extraordinarily good performance for an agency focused strategy. Meanwhile, our steady and deliberate focus on diversifying sources of revenue and securing through EFC a pipeline of proprietary investments demonstrated its value this quarter. Because we avoided overall losses this quarter, we were able to play offense. We added to our credit portfolio even while we continued to print some assets that have hit their targets spread and now offer less interesting total return. At EFC, we see portfolio management at simultaneously balancing two objectives. Firstly, source and managed high yielding assets to drive our dividend payment, and secondly, to keep a watchful eye on risk in every form to protect book value. The risk to book value can come from internal risks, say poor delinquency performance on a credit sensitive asset or from external shocks [indiscernible] this quarter when the surprising election results led to a movement in financial assets that caught many investors off guard. In a matter of days, the lower for longer mindset which had driven asset pricing for years was called into question and then rejected. This past quarter, I'm particularly heartened to see that in this volatile market we had a positive economic return and we continued to grow the size of our portfolio. This positive momentum continued into January as you can see by our estimated book…

Thanks Mark. Our focus 2017 will be on the growth of our loan portfolios. This depends not only on the strength of our pipeline but also on our long financing arrangements. Since the start of 2016 we have added facilities for small balanced commercial loans non-QM mortgage loans, residential NPLs and consumer loans. We tend to be pretty conservative on our use of leverage. But even for our standards, we're still underleveraged. The good news is that we've got lots of free cash in our balance sheet. We've got the ability to free up even more capital as needed. The pipelines of incoming loan assets look good and we already have the financing lines in place. Let's review the status of our loan businesses starting with small balance commercial mortgage loans. These loans which we define as small and they’re under roughly $20 million in size have been a key driver performance like the financial strategy for the past several years. We have a financing line for both distressed loans and the bridge loans that we originate. With this line, we have more room to add assets and what has been our best performing strategy including originating more bridge loans that otherwise might not quite reach our ROE targets. We have an active pipeline of originations and expect that this will be a strong growth area for us going forward. For the next two years we estimate that there are almost $100 billion of CMBS loans originated during the pre-crisis boom that are scheduled to hit balloon payments at their maturity and we expected a significant portion of those will not be able to make those payments. This should provide ample opportunities to add to our portfolio, which as Mark described, is another area where we believe we benefit from…

Your first question comes from Doug Harter of Credit Suisse.

Thanks. On the consumer loan agreement you terminated, can you talk about how much exposure you still have in terms of loans on your balance sheet?

It’s approximately 13 million, Doug.

Okay. And can you talk, I mean were there differences in underwriting quality that we're slipping or is it the loan performance. Just to understand a little bit more about your thinking and understand when you notice the difference, the performance and just how to think about that going forward?

Doug, it’s Mark. So we track the performance of all our loan agreement versus projections that we establish. And for this seller, we saw that their performance was tracking higher than our expectations. We suggested corrective actions. They took some corrective actions that didn't mitigate the problem, it didn't mitigate the problem to a significant enough extent that we wanted to continue the purchases. So we decided to terminate.

We noticed with our originators, Mark, correct me if I'm wrong here, but we see sometimes a tendency for defaults to start out of the box low ramp up and then decline over time after that, right. Pretty typical in terms of a default curve. And that's what we've seen by and large in our other flow agreements. In this particular flow agreement, we saw that ramping up, but then we didn't see that ramping down afterwards. So basically the default rates were more persistent than we had projected and that we've seen in our other arrangements and that's what led to the termination.

Your next question comes from Bose George of KBW.

Thanks. Good morning. It's Eric on for Bose. I'm hoping you can expand a little on your comments around potential deregulation, specifically regarding any changes around bank capital requirements. I think a lot of folks are accustomed to seeing Ellington take advantage of some of the more esoteric areas of the credit market, which may have seen a reduced footprint from large financial institutions after the financial crisis. So I'm kind of curious how you might adapt to that if there are any changes on that front, on both the asset and funding side?

Well, on the funding side, this is Larry, I think that we've mentioned on other earnings calls that the non-agency funding has actually continued to improve because that -- even with the new capital requirements that as it represents a good return on equity for the banks, if those capital requirements get reduced, then it will be even better and I think it will have the effect of compressing spreads there. In the agency sector, there, you've got low returns on equity and we've been both I would say pleasantly surprised that some banks, not all, some of the big banks have stayed in that sector and the slack has been for the banks that left, because the return on equities are low with current capital requirements, it’s been picked up by Asian banks, Canadian banks and other participants, including non-banks So again, we were concerned about the availability of financing when these rules were starting to take effect, but it turned out not to be an issue. On the assets side, I think the big issue is the Volcker rule more than any other and you don't hear a lot about that. I think it's very hard to predict where Dodd Frank will be rolled back and to what extent in the place where it is rolled back. I think the Volcker rule clearly has benefited us and other non-insured capital basis. So we'll just have to wait and see. Again, I think there hasn't been a lot of talk about that as in my opinion, as a real target towards the regulation. I think the fact that lending has been curtailed, I think that's more of an issue and I think that there are a lot of clear steps from a regulatory standpoint that can be taken to increase the lending potential of banks and the lending activity of banks, but in terms of prop trading, sure, it could happen. But there hasn't really been a lot of talk on that and we're going to just have to take a wait and see attitude. Mark, is there anything you want to add for that?

I would just add that there is a potential that government support for the agency mortgage market, that could change, right. I mentioned in the script how on inauguration day, the administration rolled back a -- would have previously been announced the reduction in the mortgage insurance premium. So if gee fees go up, mortgage insurance premiums go up, that makes long term a lot more interesting. So I think there's a lot of things that can happen, but to predict any of them or all of them is too difficult. So we need to sort of follow the situations closely and adapt as they occur.

And some of these, I would just want to add one more thing, some of the things that you've seen where the banks have gotten out of spaces are not just regulatory reasons, but for a combination of regulatory shareholder and reputational reasons. Right? So I think that as you see banks get out of, for example, certain lending spaces or the reverse mortgage space for example where you're dealing with senior citizens, I mean, those are the types of things which I don't think are going away even if the regulatory environment relaxes.

Your next question comes from Jessica Levi-Ribner of FBR and Company.

Hey. Thanks so much for taking my question. Around the originators on both the consumer loan and the non-QM loans, what's the outlook for adding more originators, how's the activity been since the election and what does the pipeline look like a couple months out even with maybe higher rates or something like that?

I mean I think in consumer loans, we said 50 million is where our projection for the next couple of quarters and that's without that one new originator that we’re in active negotiations with. And in non-QM, we don't have any plans to add another originator there. We view our partner there as extremely capable in terms of their credit underwriting. So I think we said that at year end, we had about a little over 70 million in non-QM loans and that was up from 30 unchanged million at the end of the third quarter. So we think origination is ramping up. So we're looking at getting to 150 million critical mass for securitization. Obviously, that's going to depend upon where the debt is can be issued in the market at that time and other factors, but I think if you extrapolate those numbers with the growth that we expect, you can see hopefully something around mid-year there.

Okay. Is there, I know that you just said that you’re happy with the credit quality and the underwriting from the resi originator?

It’s been pristine. I mean barely a hiccup. I mean it's quite amazing actually.

Okay. So you’re not looking for another originator there?

We're not, we're not.

Your next question comes from Lee Cooperman of Omega Advisors.

Thank you. I have four questions. I can get them out. The rule from like 30,000 feet, you guys are clearly very entrepreneurial in how you run the portfolio, which is giving difficulty to people in valuing the company. I'm happy with your entrepreneurial nature, because I think you’re very smart guys. But over a cycle, your 19.46 [ph] current book value, what is the reasonable return for investors to anticipate gross and net after expenses. That would be question number one. Two, what does the board look at to determine the dividend payout in any one particular quarter going forward. Third, if you could be more specific in terms of the repurchase attitude. It looks like, you kind of want to buy when it's 15% or 20% below book value, but what is the authorization and how much flexibility do you have. In other words, do you have a specific authorization or are you just going to keep buying until. And fourth, if you could kind of have discussed your exposure to rising rates. If I said to you in two years, fed funds would be 2% and net income would be 4%. How would portfolio act in that environment? Thanks for the help it could be?

All right. Thank you, Lee. Always great to take your questions. Okay. Let me hit these in, not necessarily the same order. So repurchase attitude, we are currently under a program that was established a while ago, 1.7 million shares. We still have, I think, let’s call it, 500,000 shares left, but I can’t speak for the board, but I have full confidence that as we get closer to hitting that authorization that we would that we would get reauthorization. You're right. In terms of where we have generally been repurchasing shares and we've been I think pretty transparent on this. So when we get to 85% and above, we haven’t repurchased shares recently and that’s certainly I think to be expected going forward. When we get below 80, I think we're very interested in repurchasing shares and I think we've also demonstrated that. In between 80 and 85, it's very much, I think, you've got -- the curve is going to slope between those two numbers in terms of what our repurchasing activity is going to be and it's going to depend upon about a number of factors, even could include where the whole space is trading in terms of our competitors from sort of a timing perspective. It could depend obviously on the investment opportunities which we've seen. We want to be flexible certainly within that range and obviously I reserve the right and the board reserves the right to reevaluate that range. But I think those are, I think that's a good place to start from is that under 80, pedal to the metal, 85 and above, not purchasing and in between, kind of, we’ll see. In terms of dividends and how the Board has done it, we've typically not liked to alter our dividend policy too…

You got them. Other than exposing it to the rising rates. You can discuss them more.

So, Mark you want to hit what would happen to fed funds, 1% to 2% for example.

Yeah. Hi, Lee. So, I mean this quarter, rates went up about 100 basis points in two weeks and you can see that that move didn't damage the portfolio because we have not positioned with this belief that lower for longer is the way to pay the dividend and having a lot of interested with we think long term isn't going -- doesn’t give consistent earnings. So rates would go up to 4% and 10-year note and fed funds, 2%. The dividend stays where it is. I think it's actually easier to pay the dividend, because the non-agency holdings we have are primarily floating rate. They're just the rate mortgages in that six month to one year LIBOR. We saw all those coupons go up about 60 basis points last year as LIBOR rose. So presumably, those coupons would go up another 100 odd basis points. Same thing on our CLO debt positions. They're all indexed off a three month LIBOR, so they get another 100 to 150 basis point increase in coupon. The non-QM loans, our programs are, there are seven ones, so fixed are seven years and float thereafter. And we generally move our pricing with movements in the 30-year mortgage rate. So we'd be able to get a little bit higher coupon there, probably 100 basis points higher there and we have enough tools between interest rate swaps, TBA mortgages, treasuries and treasury futures to manage the interest rate risk. So I think a movement up in rates would, if we kept the dividend the same, it’d be a little bit easier to hit the target. What you might see then is maybe you'd see a little bit slower turnover of investments, right that there might be lower refinancings and things like that. So maybe some of the loan origination volumes would drop, but that in and of itself, that's an environment I think we should be able to manage through.

Yes. I think if you look at our performance last year over now our almost ten-year history at Ellington Financial, you look at even our other company, Ellington Residential EARN and how it performed last quarter. That's an agency portfolio which you would think would be extremely in straight sense and I think we've really distinguished ourselves in terms of our ability to really shrug off these large and straight moves. And as Mark mentioned, after the dust settles from a big in trade move, the assets that we have in the portfolio, including the ones the pipeline that's coming in and the ones we have are pretty elastic in terms of pricing. So I think we’ll do great.

Your next question comes from Jim Young of West Family Investment.

Yeah. Hi, on slide 13, you mentioned the estimated yield on the credit portfolio based on your Ellington’s HPA forecast and I'm curious as to what HPA forecast are you using at the end of the year to get to the 10.66% yield and what’s the sensitivity plus or minus 100 basis points and lastly have you changed HPA forecast in 2017? Thank you.

Yeah and it’s so funny. We were just discussing that this was going to be the last quarter that we put in that qualifier, the Ellington HPA forecast because if you look at the -- in the weeds here, if you look at the footnote below, you'll see it talked about a lot of other things that go into those market yields, which are model based in many cases. But when our portfolio was much more non-agency RMBS based, that was a very, very significant factor in our models in terms of that it's your HPA forecast that's going to drive the severities on the loans and defaults in the underlying non-agency RMBS. Now as you look at the portfolio, the non-AG RMBS has shrunk, so yes, absolutely. We update our HPA forecast, but that is so much smaller. Residential loans are largely, again these totally pristinely performing non-QM loans, yes, we have some NPLs in there as well but -- and they absolutely are going to be tied to HPA, but a very small portion of the portfolio right now. So not a, what I would say is that HPA is no longer really that significant a driver of our returns in most of these areas. Of course, HPA is correlated -- home prices are correlated with other things going on in the credit markets that could impact performance on all the other credit sensitive fixed sectors in which we participate, but at this point, it's not really -- we use our models for the sectors where it's relevant. It's becoming less relevant in obviously many other sectors, but we still rely on our forecasts and models in terms of where we see defaults and delinquencies going on all the sectors, even if they're not HPA driven. So I hope that answers your question.

At this time, there are no further questions. This will conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.