Good afternoon, and welcome to the Anworth Mortgage Second Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Before we begin the call, I will make a brief introductory statement. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we hereby claim the protection of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, with respect to any such forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words may, will, believe, expect, anticipate, intend, estimate, assume, continue or other similar terms or variations on those terms or the negative of those terms. You should not rely on our forward-looking statements because the matters they describe are subject to assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Statements regarding the following subjects are forward-looking by their nature: our business and investment strategy; market trend and risks; assumptions regarding interest rates; and assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties including, but not limited to, change in interest rates; changes in the market value of our mortgage-backed securities; changes in the yield curve; the availability of mortgage-backed securities for purchase; increases in the prepayment rates on the mortgage loans securing…

Thank you very much. I'm Lloyd McAdams, and I welcome you to our earnings call today in which we will discuss our recent operations, which were presented in our earnings press release that was issued yesterday afternoon. Also with me here today is Joe McAdams, our Chief Investment Officer; Brett Roth, Portfolio Manager; and Chuck Siegel, Senior Vice President of Finance. Before our comments and details about our current portfolio and outlook, I will provide overview of our evolving portfolio strategy of increasing our emphasis on credit risk and reducing the emphasis on interest rate risk during this phase of the interest rate cycle. While the results from one quarter never guaranteed a future, we were satisfied that our efforts of this area resulted in only a 1% decline in book value while interest rates were increasing during the past quarter. As you know, our dividend for the second quarter was again $0.15 per share. I believe that ours is amongst the highest dividend yields in the group of stocks that I hear some market commentators described as “bond like equities.” Materially supporting this dividend level is our non-agency and credit sensitive portfolio. Next I would like to comment on our portfolio in the context of this broader strategy. During the quarter, our credit portfolio of mortgage-backed securities increased from $376 million to $569 million and the equity supporting this portfolio increased from $140 million to $203 million, which is 28% now of our $727 million of common and preferred equity. As I believe everyone knows, we use substantially less short-term financing and leverage in our non-agency portfolio than we do in our agency portfolio. Also during the quarter, we acquired our first position of whole loans by purchasing for $25 million of subordinated interests in a securitized loan pool,…

Thanks. This is Joe McAdams. For the quarter, we reported $15.4 million of core earnings that’s up $0.15 per share. The GAAP income available to common shareholders was slightly higher than that, as our derivative liabilities and hedges are accounted for on a mark-to-market basis through GAAP income. But again, if you take into account comprehensive income, which also looks at unrealized gains and losses and for this quarter losses on the asset side with our agency and non-agency portfolio, you wind-up with core comprehensive income, $0.10 below the level of core earnings. Turning to the composition of our assets. As discussed in our earnings release, you will see as we continue to increase our investment in mortgage credit, we see a smaller exposure to Agency MBS assets, down approximately $400 million on the quarter to $7.04 billion. As we discussed, our non-agency investments are increasing and we have a new line item on our balance sheet, residential mortgage loans which again reflects the consolidated interest and a new mortgage securitization. Anworth’s net investment on a non-recourse basis, the value of the loans minus the value of the securities sold is approximately $25 million. So while the total portfolio size appears to increase on the quarter, that's really just a function of the consolidation of the securitization. The net assets on our balance sheet decreased slightly on the quarter, reflecting the shift from agency to non-agency investments, mortgage credit investments as a whole and obviously, increased our equity allocation as Lloyd discussed to mortgage credit investments. I'm looking at some of the key statistics involving our Agency MBS portfolio. Clearly, our portfolio continues to be invested in a majority of adjustable-rate mortgages with 29% of the Agency MBS in currently resetting ARMs. And the allocation to fixed-rate MBS predominantly 15-year…

Thanks, Joe. I will give a description of the details behind what happened with the non-agency portfolio. As Lloyd mentioned, overall the portfolio grew over the quarter $215 million, $25 million in this new securitization and $190 million in legacy CUSIP's. Specifically within the legacy CUSIP area, in terms of dollars, the largest area of growth of our portfolio was in assets backed by Alt-A collateral. On a percentage basis, we grew both the Alt-A and prime portfolios or assets backed by those that collateral type equally within our portfolio. In terms of performance in the marketplace over the quarter, over the course of the second quarter we initially beat the sauce spreads continue to tighten. And then in June, we began to see spreads widen out. We were in a position to take advantage of that widening and that is a significant portion of our legacy CUSIPs that were added during the quarter, in the month of June approximately 40% actually. Moving on a little bit, now I want to talk a little bit of an overview of the non-agency -- the new securitization that we did in the non-agency portfolio. Basically, I will tell you a little bit about the type of collateral that we worked with. So what we purchased is not a prime jumbo pool of assets, approximately $360 million of jumbo loans. To give you an idea of the credit quality of the pool, the average loan balance was $706,000 with the gross lack of 4.185. The portfolio was made about 93% of owner occupied properties. The LTV on this -- weighted average LTV was 70.8 with no loans greater than 80% LTV. The weighted average FICO was 7.61 and the weighted average DTI of 33%. So clearly what we’re describing here is a very high credit quality pool of loans and we are seeing very high performance as we’ve owned this class so far. That’s my brief overview. Thanks, Joe.

Thanks, Brett. Turning to the portfolio financing and leverage, as you would expect given the shift in investments on the quarter we saw a decrease in overall repurchase agreement borrowings as well as a shift from less agency collateralized repo and more non-agency collateralized repo. The average interest rate on our repos increased from 41 to 46 basis points, driven primarily in the fact that the shift of the composition of repo went from relatively lower cost agency repo to higher cost non-agency repo. There also was a 2 basis point increase in the average rate that we pay on our agency repo. After adjusting for our interest rate swap hedges, 1.15% was our average borrowing cost at June 30, with the average maturity of 691 days adjusting for the swaps. With rates moving higher, particularly at the end of the quarter our portfolio duration extended slightly to approximately 2.3 years at June 30. So our asset liability gap at that point was approximately 0.4 of a year. Since then, we’ve had some decrease in the duration of the portfolio, given market moves quarter-to-date and our asset liability gap is currently approximately quarter of a year. At June 30, our leverage multiple was 7.8 times, again that’s calculated by dividing our repo borrowings that excludes the liabilities associated with the consolidated VEI by the some our common shareholder equity preferred stock and junior subordinated notes. Our effective leverage also includes the implied financing embedded in TBA dollar rolls was 8.7 times leverage at June 30. Both of those measures were unchanged from the quarter before. Our interest rate swap portfolio, you can see the breakdown in the press release is relatively unchanged from the quarter. I would point out that of the balance swaps we only have a $100 million…

Thank you very much, Joe. We look forward operator to taking questions from the audience.

[Operator Instructions] Our first question is from Douglas Harter at Credit Suisse.

Thanks. Can you talk a little bit about the jumbo securitization that you did, have you sourced the assets and also sort of how the returns on that compared to some of the other non-agency assets you are looking at?

Sure. We worked directly with a partner -- banking partner, in terms of sourcing the asset. We’re doing the pool of assets that were put in front of us. And determining that they were within our credit criterion and that we were comfortable with the credit quality of the underlying pool of assets. Relatively speaking in terms of the return, as Joe mentioned, we retained $25 million, which is the sub-stack of the securitization. In terms of owning the entire stack, a return is on the higher side of the yield of what we’re earning on within the non-agency portfolio. And at this point, so we do own the -- as we said the entire B1 to B5, which incorporates the both B1 and B2 which are lower yielding assets and which are assets that we may choose to sell going forward, which would increase the yield on the remainder portion of the portfolio.

And on that, would you be interested in setting up a conduit to set to source the loans going forward or is this working with the banking partner more attractive for you at this point?

So, I think the key to what you just said half was at this point. I think that’s an evolving answer. Certainly a conduit is an opportunity that we are thinking about and talking about. And as the opportunity present itself and the timing is correct, it’s something we would definitely be looking at.

Great. Thank you.

The next question is from Mike Widner at KBW.

Hey, thanks guys. So just a quick follow-up on that securitization, what deal shelf was that on? And was that sort of identify upward?

TSMLT and it’s a 2015-1.

Okay. Excellent. So, let me ask you a question on the Eurodollar futures -- you should have a bunch of coming up in turning next two quarters, sort of maturing. Just thinking about how those will flow through the income statement as they kind of mature or settle? And I guess the first part of it is I would assume that if they go to the settlement date, they would flow through interest income, or your definition of core income. Yeah, so, I mean that's right or if that's a wrong assumption. And second, how do you think about whether to liquidate those beforehand or allowing to go all the way through?

Sure, Mike. This is Joe. The first part of the question, if you turn to the last page of our earnings release and as a reconciliation of core income and GAAP income, you’ll see a line item loss on expiration of Eurodollar futures contracts. That’s exactly a positive number, maybe these are the core earnings. The adjustment is positive because on the page before you’ll see a negative, a loss from the expiration. So as you mentioned, that would be -- the way we would think about it is an individually contract is looking to hedge ineffective three month borrowing at some point in the future. So while the GAAP accounting for this is that all unrealized changes or losses of all the contracts flow through GAAP income, we think the way they’ll be most analogous to how we account for this swaps and core income would be to have the ultimate net gain or loss upon settlement of each individual contract flow through core earnings for that specific quarter that they were providing the hedge for. So that's why you see that number for this quarter that reflected that the contracts would expire. I guess the bigger part of your question is looking forward, we do have on aggregate, a Eurodollar Future position that has an embedded three-month LIBOR of 90 basis points, which is above where LIBOR is now. So that will reflect. If LIBOR doesn’t rise over the next 12 months, which I think would be unlikely but there would be a negative net cost of those Eurodollars going to income. If three-month LIBOR would arise over the next 12 months, that could ultimately be a positive net settlement. So, we don't view the Eurodollar position necessarily as long-term or as static as we might view our swap position. We are really looking to manage unexpected changes in short-term costs versus the adjustable portion of our portfolio. So, I do think that it’s a bit of a dynamic portion of the portfolio. But we would expect to see in the near-term, some additional net loss on settlement because simply, when many of these contracts were put on, the expectation was that the fed would have already been raising rates by now.

Yeah. Yes. I think that certainly makes sense and it's just the obvious. I guess the issue is that, if you sell them before they mature, then it tends to be a non-core thing to be realized with whatever. I guess, so I'm just trying to capture as best I can what to expect there over the next couple of quarters and I know you break this whole thing $5.3 billion is having less than 12 months and then by our math, the vast majority of that is the next six months. Just wondering if you have any -- if you could provide a little more detail on sort of the quarter-by-quarter amount?

I don't have that. I don't have additional information for you beyond what I think we are going to have in this earning release and in our 10-Q, which will be coming out subsequently. We have been -- again, we do continue to roll some of these contracts out. So, it is currently spread pretty evenly over the next 12 months. But again this is -- I don't have a particular expectation quarter-by-quarter to give you at this point.

Okay. So then but -- so I was going by sort of prior quarters in kind of looking at the roll through of that, but it sounds like what you're saying is you've actually rolled the number of the ones from the past.

Some we have, yes. So, the entire -- the amount that settled during this quarter, there have been points in the past where we had more contracts on for June expiration that ultimately expired.

Okay. Got you. So it's going to be a big gas basically for me is I think what it comes down to at the end.

Yeah. It’s obviously a much smaller component of our average adjusted cost of funds than the swaps, and I guess you're right. We do have a little less granularity given the short-term nature of those contracts.

Yeah. I mean, it could be a couple of cents either way in a quarter, given quarter's, kind of what I'm wrestling with. I think the only other question I had is just a lot of movement, again in the last several quarters and this quarter and in different mortgage REITs gaining FHLB memberships. So just wondering what your currents thoughts there are.

It’s certainly something that we're monitoring. We do not have a membership in any of the home loan banks. As we are making the shift into more mortgage credit investments, I think over the longer run there are some benefits to home loan bank advances versus loans in particular versus alternatives as you would have through the repo rate or traditional warehouse line market. So that’s certainly something we're monitoring. It’s not something that we've in the past viewed as providing a significant benefit versus the majority of our borrowings, which are versus agency repo. But as we are increasing our exposure to mortgage credit investments, I think it make sense, that’s an avenue that we’ll be certainly investigating.

Great. Appreciate all the comments as always and nice quarter, guys. Thanks.

Our next question is from Lucy Webster at Compass Point.

Good afternoon. Thanks for taking my question. I just wanted to touch on share repurchases. The run rate so far in 3Q looks like it’s slowed a little bit. And any color you can give us there on what to expect for 3Q and going forward would be great?

This is Lloyd. Each day we evaluate and many days we do repurchase shares. The biggest goal that we have is to address the discount to book value itself. Repurchasing shares will not address the book value per share discount. What will affect it is changing the nature of our income and creating a much more stable source of income that is less sensitive to interest rates. So in that regard, we allocate our equity capital that pays down to us each quarter between repurchasing shares and purchasing additional securities for our credit portfolio. We have not been allocating capital to our agency portfolio. And so of the three places that we can use our capital right now we only use it for repurchasing shares and buying additional assets in our credit portfolio. Clearly, if they were not attractive investments in our credit portfolio, we would probably be repurchasing more shares. So we consider this to be -- we want to execute a strategy as I said earlier that we think the market will value greater than 20% discount to book.

All right. Thanks, Lloyd.

At this time, we show no further questions. And I would like to turn the conference back to Mr. McAdams for closing remarks.

Well, thank you very much for attending and we look forward to having opportunity to have this call again with you next quarter. These are interesting times in the interest rate world. This may will be an important inflection point over longer-term cycles. As I said earlier, we intend to preserve the collateral value of our assets and we certainly look forward to continuing the opportunity to become one of the higher yielding stocks in the world of equity investment. So thank you again. We look forward to speaking with you about this time next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.