Lloyd McAdams - CEO Joe McAdams - Chief Investment Officer Brett Roth - SVP & Portfolio Manager Chuck Siegel - SVP Finance.

Doug Harter - Credit Suisse Mike Widner - KBW.

Good day, and welcome to the Anworth Mortgage Third Quarter Earnings 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] Please note this event is being recorded.

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 our mortgage-backed securities; our ability to use borrowings to finance our assets and, if available, the terms of any financing; risks associated with investing in the mortgage-related assets; changes in business conditions and the general economy, including the consequences of actions by the U.S.

government and other foreign governments to address the global financial crisis; implementation of or changes in government regulations affecting our business; our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; our ability to maintain an exemption from the Investment Company Act of 1940 as amended; risks associated with our home rental business; and the managers' ability to manage our growth.

These and other risks, uncertainties and factors, including those discussed under the heading Risk Factors in our annual report on Form 10-K and other reports that we file from time to time with the Securities and Exchange Commission, could cause our actual results to differ materially and adversely from those projected in any forward-looking statements we make.

All forward statements speaks only as of the date they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us.

Except as required by law, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement that may be made today or that reflects any change in our expectations or any change in events, conditions or circumstances based on which any such statements are made. Thank you.

I would now like to introduce Mr. Lloyd McAdams, Chairman and Chief Executive Officer of Anworth. Please go ahead, sir..

Allison, thank you very much. I would like to introduce those with me here today Joe McAdams, the Chief Investment Officer of the Company; Mr. Brett Roth, Senior Vice President and Portfolio Manager; and Chuck Siegel, Senior Vice President of Finance.

I will make my comments towards the end of the call and what I would like to do now is turn the call over to Joe McAdams and Brett who will discuss the activities during the quarter..

Thanks, moving onto our reported financial results for the quarter. The Company recognized $14.5 million or $0.14 per share of core earnings.

This was a decrease from $0.15 of core earnings in the prior quarter and was driven largely by an increase in borrowing rates on our agency MBS in advance of the fed September meeting when rates were indecently left unchanged.

When taking into account the change in fair value of the Company's assets and liabilities, comprehensive income for the quarter reflected a $0.08 per share loss as the net decline in fair value more than offset the core earnings for the quarter, so this $0.08 comprehensive loss in the quarter resulted in a decrease in book value per share of $0.22 after the declaration of the Company's $0.15 quarterly dividend.

The comprehensive loss and decline in book value on the quarter were primarily attributable to the underperformance of our interest rate swaps relative to assets as swap rates decreased more than other asset yields during the third quarter.

This trend has not continued into October as we would estimate book value currently as being higher by a few cents quarter-to-date.

While the quarterly decline in book value and earnings was disappointing, we continue to be encouraged by our allocation of capital to residential credit investments, which we expect to demonstrably reduce the sensitivity of both earnings and book value to rising interest rates in the near term.

As you can see on the table of portfolio allocations, 8% of assets are now invested in non-agency MBS with an additional 9% in residential mortgage loans consolidated onto the balance sheet and these combined efforts are supported by an allocation of approximately 35% of the Company's capital as of September 30.

Relative to the agency MBS portfolio I would -- the highlight as we have in the past, the fact that fully one-third of the agency MBS are backed by adjustable rate mortgages whose coupon rates adjust to market interest rates in the next 12 months and annually thereafter.

The average cost of our agency MBS was 103.22 and amortization expense related to this premium increased to $12.6 million for the quarter.

Agency MBS prepayments increased to 21 CPR up from 19 CPR in the prior quarter, but these prepayment rates began falling during the quarter and the most recently reported monthly prepayment data subsequent to quarter end was 16 CPR for our agency MBS. Next to discuss our residential credit investments, I will turn the call over to Brett Roth..

Thanks Joe. I will just begin with the some brief statements about the non-agency market in general and then I will go into our portfolio in particular. Overall during the quarter, we saw strength in the non-agency market continue to widen out across all sectors.

We were able to take advantage of that adding across all sectors to our portfolio at attractive yields. On the financing side, we did see actually our cost of funds remained relatively stable with increased opportunities to add additional providers of financing to the non-agency portfolio.

Specifically talking about our portfolio, as I mentioned the non-agency portfolio did continue to grow over the quarter. Our next growth was approximately 180 million over Q2 to Q3. We continue to grow our legacy CUSIP portfolio, investing approximately 98 million in proceeds.

The growth was fairly evenly distributed amongst the various sectors into the legacy non-agency market with the largest dollars of increase being added in the [indiscernible] sector. Overall the weighted average purchase price on our legacy CUSIP remains in the low 80s.

In terms of performance, the performance of our portfolio has been as good if not better than we had anticipated when we were modeling our purchases with voluntary prepayments coming in faster and out defaults coming in lower than has been modeled in.

Moving over to the residential loan side of the portfolio, we were involved in our second securitization during this quarter. Where we were able to obtain an additional 25 million of subs on our balance sheet.

From the first transaction that we were involved in Q2, these assets came in at slightly higher yield about 9 basis points higher than we’re able to add the assets in the first quarter. Pay downs on these obviously these are very early in their lifecycle.

However, as we would expect our default are running at zero and in terms of the voluntary we’re seeing on our first yield the three month is coming at about 10 voluntary and on the second deal about 15 on the voluntary. So again performing as we would have expected and we’re very pleased with additions to the portfolio. That’s it Joe..

So turning back to the company’s financing and related hedges. You’ll see that while the total repo balance decline from 6.1 billion to 5.8 billion at September 30th. The notional value of our interest rate swaps increased to 3.9 billion or approximately two-thirds of the total repo balance.

When you take into account that a third of our agency MBS portfolio as discussed its annually adjustable rate mortgages. You’ll see that our portfolio has limited exposure to rising short-term interest rates on net interest income. And increased in our interest rate swaps, we also repositioned some of these hedges to shorter term maturities.

So that the average remaining terms of our swaps decreased from 3.5 year to 2.9 years on the quarter.

The combined effective more hedges with slightly less remaining term resulted in an unchanged hedge duration or interest rate sensitivity with the gap between portfolio assets and liabilities slightly less than one quarter of a year at September 30th.

In addition, these repositioned swaps now carrier average fixed pay rate of 1.3% versus 1.56% from the quarter end prior. This is a positive for repo income going forward, all those equaled and can be seeing in the fact the average hedge cost of funds increased only 3 basis points on the quarter to 1.18%.

Despite average repo rates increasing 8 basis points to 54 basis points or 0.54% at September 30th. Turning to the portfolios effective net interest rate spread, you’ll see that a 19 basis points increased in average effective cost of funds to 1.38% on the quarter resulted in a net spread decrease of 10 basis points to 1.01%.

This drove the reduction in core income on the quarter. However as we just discussed the majority of this cost of funds increase had been offset by quarter end due to the repositioning our interest rate swaps. The quarterly dividend was unchanged at $0.15 for the quarter, resulting in a 12.1% yield at September 30th.

As discussed previously book value decline to $6.26 per share, which was open in a negative 1% return on equity for the quarter and brought the year-to-date return on equity to a positive 3.6%.

The company repurchased approximately 1.5 million shares on the quarter based on the discounted book value of these shares, approximately $0.02 per share of book value is added through these purchases and an additional 1.4 million shares or repurchase during the month of October as well. With that, I will turn the call back over to Lloyd..

Thank you, Joe and Brett. I believe that we have provided a good picture of our ongoing allocation of assets away from the more interest rate sensitive agency strategy to the less interest rate sensitive credit strategy. Strongly believe that this was serve our shareholders very well in the future.

From my perspective, I would like to briefly point out, what I believe with the three bullet point takeaways from our activities during the third quarter. The first is earnings per share. The negative was an increased repo rate on the agency portfolio.

The positive was more asset allocated to the non-agency strategy, whose return during the quarter was higher than the agency strategy, the net of this is that earnings per share were down $0.01 per share. Second takeaway is the book value. The prices 15 fixed rate mortgage backed securities were up almost a point during the quarter.

The ARMs and our portfolio which we’ve already alluded to were a stable in value as would have been expected. Premium amortization was also relatively stable, yet it was the decline in the value of our LIBOR based swaps that exceeded all of the above and the net is that book value was down 3 plus percent for the quarter.

The third and final takeaway is we do continue to implement our share repurchase program and like the gains generated in the past quarters. The net that we have generated during the third quarter was $0.02 per share of economic gain to stockholders.

As in the side, when we started our recent program in 2013 of repurchasing shares, we had north of 140 million shares outstanding and I expect that the end of this year we will have less than 100 million shares outstanding.

And as Joe pointed out all of these shares have been purchased in excess of $1 per share discount and that is -- it is pretty easy to multiply all that see that during this period as the benefit to shareholders through increase in value has been quite substantial.

And with that we will begin the question-and-answer session and turn the call over to our operator, Allison. Allison, thank you very much..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Doug Harter from Credit Suisse. Please go ahead..

Thanks.

As you guys look to continue to buy back stock in the fourth quarter, can you talk about your expectations for leverage and I guess we’ll leave it at that for now?.

Sure Doug, this is Joe. There is I guess three factors that we’re taking into accounts, there is repurchase in shares, which are obviously accretive to book value, given where the stock is trading and there is also allocating capital towards, our residential credit investments, which we continue to do and the third is relative the agency portfolio.

We have been for the most part utilizing pay downs of the agency portfolio to allocate capital to both residential credit as well as share repurchases, at the same time as spreads widen in residential credit and opportunities there continue to be attractive, we’re also looking at and have during the fourth quarter sold some additional agency assets to allow us to continue to increase our exposure both to residential credit as well as to make additional share repurchase, so the overall portfolio leverage is really driven more by the mix of the allocation between credit and agency with our credit portfolio typically operating with closer to two times leverage.

So I would expect to see our portfolio leverage decrease overtime as we increase our allocation to residential credit..

Great, thank you.

And can you just talk about how much -- what more flexibility you have to continue to shrink the agency portfolio before you might run into ‘40 Act limitations?.

Well, the majority of our agency portfolio consists of whole pools and under the ‘40 Act, as long as the majority -- 55% or more of your assets are whole pools you don't have any issues with ‘40 Act.

I’m thinking about moving forward with residential credit investments, legacy non-agency MBS, don't help you with it ‘40 Act, but as we would move forward and expect to look into both in the acquisition of loans and the retention of loans through securitization that -- those sort of investments do qualify.

So that something we’re watching, it’s something that we have -- still as you see from the table and the press release we’re still talking about having 75% of our assets being ARMS and fixed rate pools, not all of those are whole pools, but we certainly have flexibility within that sector to maintain the majority of our assets and good for the ‘40 Act..

Great thank you..

Our next question comes from Mike Widner from KBW. Please go ahead..

Let me just ask a quick one on the euro-dollar future, I see there is 5.3 billion of those and they are all kind of under 12 months at this point, just wondering if you get kind of give us a little more granular, when I think over the next two quarters, when are most of those rolling off and then related to that it looks like you included those in your interest, your effective cost of funds calculation, I just want to make sure I know how to think about those rolls through?.

Sure, just big picture. The way you think is best to view this euro-dollar future is we have a significant number of the agency adjustable rate mortgage, but especially when you think about near term and when we are in this mode of thinking, meeting to meeting in terms of where interest rates might go, you want to -- your ARMS reset once a year.

So each year, you are going to reset the 12 month LIBOR which at the time, you could argue is the market reflection of where they think short term LIBOR is going over the 12 months, but during that 12 month period for those particular securities you have exposure to unexpected changes and to short term rate.

So we review primarily this euro-dollars as being hedges for those sorts of moves, unexpected changes in short term rates versus where the expectations had been a year or less prior when ARMS were resetting, so I would view the overall position in euro-dollar as overtime probably getting smaller as our agency MBS position get smaller.

But in terms of the specifics of our position, you are right they are all within 12 months for that reason. I believe it was $540,000 of loss on the quarter relative to the expiration of futures during the quarter and as it stands now, the ways to go between now the middle of December when this quarter's euro-dollar futures expire.

But based on current market levels we'd expect a similar sort of loss on expiration today. There obviously could be a fair amount of volatility between now and then given the Fed meeting.

But that's you know I wouldn't expect a substantially different input into our core income unless there is a significant shift in expectations towards the next few Fed meetings between now and then..

Okay so just, let me a relay a little of that back to make sure I understand it right.

You know as those roll off, as they expired if you will, it sounds like you're adding additional ones and just kind of keeping the overall set based on the size of the current reset arms in the portfolio and just sort of trying to hedge the delta between rate expectations and you know I guess the lag in those coupons sort of catching up a breakthrough move.

Am I sort of --..

Exactly right, and the reason -- let’s say in the third quarter that was a cost, was when you look back over the past 12 months these market expectations of where rates would have been in September would have been higher than where they actually wound up which was unchanged.

As we go forward, if rates are increasing by more than were expected at the time than that will obviously be a positive contributor for income..

Got you, and I guess just one final one on that. I mean if I look back at the balances from you know say nine months ago or Q1 of this year. There was a euro-dollar future balance and most of it was less than 12 months to maturity at the time.

You know if I took a simplistic approach I'd say well if they were less than 12 months at that time then they've got to be real close to expiration now, but I think based on what you're telling me is that's probably not a safe way to run the math because there's, you know you could be selling and then adding new ones that are further out and that we shouldn't necessarily just think of them as you know, they're going to roll down and expire and they're all going to expire and you might actually be liquidating and replacing along the way.

Is that fair or no?.

Could be liquidating or also, as happened last quarter and the quarter before, a certain amount will expire and given that we have new ARMS. The ARMS are resetting for another year, we're going to be putting on additional 12 month in end contracts as the old contracts expire..

And because the overall balance hasn't changed much and I guess what I'm trying to really just figure out for purposes of how they flow through is whether, is whether you know the preponderance of them are allowed to just sort of expire and then you add new ones, or if there actually is selling and then adding new ones?.

It's been -- some of those..

And then, thank you, and then I guess just you know going back quickly to non-agency, the non-agency portfolio and the capital allocation to it. But I think you said you know you were somewhere around 35% of capital allocated to that. I mean any idea of kind of you know where you would like to take that.

Is it 50-50 or is there some target mix, or is it just kind of play it by ear as you look at asset avail opportunities..

I think it will evolve over time and sort of relating a little bit to Doug's question previously. If you think about how the balance sheet looks now the majority of our residential credit investment is coming through legacy non agency. I think having a mix of 50-50 may be a little more than 50% of agency and a little less from credit.

Is a place where we've been heading but over a sort of a more intermediate term, the more opportunities arise on the loan and securitization front those would be opportunities that I don't think we would want to constrain ourselves to our allocation to residential credit if those sorts of opportunities arrive and they're obviously accretive to earnings..

Okay, great, makes sense, and then actually just on the securities -- the jumbo securitization you guys did this quarter, what shelf is that on, or what was the figure for that deal..

TSMLT 2015-2..

Okay, great, thank you..

This concludes our question and answer session. I would like to turn the conference back over to Mr. Lloyd McAdams for any closing remarks..

Thank you very much for attending today's call. We look forward to a call again about three months from now and any questions or things you want to find out please don't hesitate to contact us. We'll do the best we can to address your issues from a shareholders relations department. So thank you again, have a great day everyone..

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