Ellington Credit Company

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage 2021 Fourth Quarter Financial Results Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press the star 1 on your telephone keypad. At any time, if your question has been answered, you may remove yourself by pressing the pound key. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Jason Frank, Deputy General and Deputy General Counsel and Secretary. Sir, you may begin.

Thank you, and welcome to Ellington Residential's fourth quarter 2021 earnings conference call. Before we begin, 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, 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. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellington Residential, Mark Takotsky, our Co-Chief Investment Officer, and Chris Smirnoff, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, EarnWeek.com. Our comments this morning will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. We appreciate your time and interest in Ellington Residential. To begin, please turn to slide three. The fourth quarter was a challenging one for agency RMBS, as an increasingly hawkish Federal Reserve, a flattening yield curve, and elevated volatility weighed on the sector. Prior to the fourth quarter, the Fed's position on inflation was that high inflation would be transitory, but that view was challenged by consistently high inflation reports. As the bond market struggled with this inconsistency, actual and implied volatility rose, and the Fed finally acknowledged that higher inflation would likely not be transitory. The Fed began tapering its asset purchases in November, but then accelerated the pace of that tapering schedule in December after revising its inflation outlook. Rising inflation also increased expectations of earlier and more frequent Fed rate hikes in 2022, as well as an acceleration of Fed balance sheet runoff and perhaps even outright asset sales from the Fed. These shifts drove not only an increase in volatility, but also a sharp flattening of the yield curve, as you can see on slide three. The yield on the two-year treasury increased by 46 basis points to 0.73%, which was its highest level since the beginning of the COVID-19 pandemic, while the yield on the 10-year treasury was essentially unchanged. As a result, mortgage yield spreads widened, and most agency RMBS underperformed treasuries and interest rate swaps. higher coupon specified pools, and other shorter duration RMBS underperformed in particular in light of the flattening of the yield curve. Please turn to slide four. For the fourth quarter, Ellington Residential generated an economic loss, but as with other periods of market volatility, our dynamic interest rate hedging and lower net leverage helped limit that fourth quarter loss to a moderate 21 cents per share. We had net gains on our interest rate hedges which included gains in our high-coupon TBA short positions, as well as on our Treasury hedges and interest rate swaps, and these offset most of the net losses on our portfolio. We finished the year with a debt-to-equity ratio below 7 to 1, still well below our pre-COVID levels. We generated core earnings of $0.28 per share for the fourth quarter, and we finished the year with a net interest margin of 1.81%. While core earnings did decline quarter over quarter, that was mainly because our average holdings were smaller. And we think that the prospects to expand our net interest margin and grow core earnings per share are currently quite strong, with significantly higher reinvestment yields today. Turning now to 2022, we've seen the market's intense reaction to the hawkish pivot from the Fed, intensifying so far this year. just as other evolving macro and geopolitical factors have driven a general risk-off sentiment in the market. Volatility has continued to surge, interest rates have continued to increase, especially at the front end of the yield curve, and the agency mortgage basis has widened substantially. Agency MBS current coupon spreads are 30 to 40 basis points wider year-to-date, and pay-ups for prepayment-protected specified pools have declined meaningfully. This weakness has not been limited to the agency markets either. Fixed income yield spreads have widened across the board, including investment-grade corporates, high-yield bonds, and non-agency and non-QM CMOs. And, of course, the major equity indices are also down considerably so far this year. We've definitely been taking advantage of opportunities by actively trading and repositioning the portfolio. but we are also laser focused on risk management so that we can maintain appropriate liquidity and leverage levels to guard against further volatility and yield spread widening, and so that we can be in a position to play offense when the time is right. These risk management measures have served us very well during previous times of stress, most recently during the COVID-related market volatility in 2020. In his remarks, Mark will elaborate further on how EARN is positioned going forward, but first I'll pass it over to Chris to review our financial results for the fourth quarter in more detail. Chris?