Ellington Financial Inc. (NYSE: EFC) ("we," "us," or "our") today reported financial results for the quarter ended September 30, 2023.

Highlights

• Net income attributable to common stockholders of $6.6 million, or $0.10 per common share.¹
  • $14.2 million, or $0.21 per common share, from the investment portfolio.
    • $24.8 million, or $0.37 per common share, from the credit strategy.
    • $(10.5) million, or $(0.16) per common share, from the Agency strategy.
  • $4.1 million, or $0.06 per common share, from Longbridge.
• Adjusted Distributable Earnings² of $22.5 million, or $0.33 per common share.
• Book value per common share as of September 30, 2023 of $14.33, including the effects of dividends of $0.45 per common share for the quarter.
• Dividend yield of 14.2% based on the November 6, 2023 closing stock price of $12.70 per share, and monthly dividend of $0.15 per common share declared on October 6, 2023.
• Recourse debt-to-equity ratio³ of 2.3:1 as of September 30, 2023, adjusted for unsettled purchases and sales. Including all non-recourse borrowings, which primarily consist of securitization-related liabilities, debt-to-equity ratio of 9.4:1⁴.
• Cash and cash equivalents of $174.7 million as of September 30, 2023, in addition to other unencumbered assets of $394.6 million.
• Subsequent to quarter-end, we announced the mutual termination of our previously announced merger with Great Ajax Corp. We expect to close our pending merger with Arlington Asset Investment Corp. during the fourth quarter.

Third Quarter 2023 Results

“In the third quarter, Ellington Financial generated net income of $0.10 per share and Adjusted Distributable Earnings of $0.33 per share,” said Laurence Penn, Chief Executive Officer and President. “Our positive results, in an extremely volatile market, were driven by steady performance from our residential transition loan, non-QM, commercial mortgage bridge, and credit risk transfer portfolios, along with significant gains on our interest rate hedges, which exceeded net losses elsewhere in the portfolio.

“During the quarter, we took advantage of continued wide yield spreads by increasing our residential loan investments—most notably non-QM, residential transition, and proprietary reverse mortgage loans—as well as Agency RMBS, while continuing to ratchet down our commercial mortgage bridge loan portfolio. While our overall leverage ticked up incrementally, we still finished the quarter with additional borrowing capacity and ample liquidity.

“We have always endeavored to hedge EFC’s interest rate exposure. This positioning was critical in the third quarter, and with rates rising sharply, the profits on our hedges were substantial. If we are indeed in a ‘higher-for-longer’ interest rate environment, I believe that we are well positioned with our hedging expertise and short duration, high-yielding loan portfolios.

"As we look ahead, we continue to progress toward completing the Arlington Asset Investment Corp. merger, which we expect to close by year end. As a reminder, we have highlighted several strategic benefits to this transaction. First, we will be adding a sizable portfolio of low-coupon Agency mortgage servicing rights, which should perform well in a higher interest rate environment and further diversify Ellington Financial’s earnings stream. Second, we will be able to tap into Arlington's substantial dry powder to deploy in a market rich with opportunities, both by financing Arlington’s currently unlevered Agency MSR portfolio, and by monetizing Arlington’s liquid assets and rotating that capital into higher-yielding investments. Third, we will significantly increase our capital base in a highly efficient manner, not only with common equity, but also with low-cost preferred equity and unsecured debt.

“In addition, we expect that ongoing dislocations in the banking sector will continue to generate compelling opportunities for us, both to capitalize on distressed asset sales and to add market share at our originator affiliates. We have always focused on sectors where banks are less active and where there is less competition, and we have built up deep and experienced teams and strong track records in these businesses across market cycles.”

Financial Results

Investment Portfolio Summary

Our investment portfolio generated net income attributable to common stockholders of $14.2 million, consisting of $24.8 million from the credit strategy and $(10.5) million from the Agency strategy.

Credit Performance

Our total long credit portfolio, excluding non-retained tranches of consolidated non-QM securitization trusts, increased slightly to $2.48 billion as of September 30, 2023, from $2.45 billion as of June 30, 2023. Our non-QM and residential transition loan portfolios increased sequentially, as net purchases exceeded principal paydowns, and we also net purchased non-Agency RMBS during the quarter. Conversely, our commercial mortgage bridge loan portfolio continued to shrink, as loan paydowns in that portfolio again significantly exceeded new originations during the quarter.

Higher net interest income⁵ and significant net gains on our interest rate hedges drove the positive results in the credit strategy. A portion of this income was offset by net realized and unrealized losses on our consumer loans, non-QM loans, commercial mortgage bridge loans, and CMBS. Our residential and commercial mortgage loan portfolios continue to experience low levels of credit losses and strong overall credit performance, although we have seen an uptick in delinquencies in these portfolios recently and are monitoring developments closely.

During the quarter, borrowing costs on our credit investments increased, driven by higher short-term interest rates. At the same time, our asset yields also increased, and we continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate. As a result, the net interest margin⁶ on our credit portfolio increased slightly quarter over quarter to 2.95% from 2.91%.

Agency Performance

Our total long Agency RMBS portfolio increased by 5% quarter over quarter to $964.3 million, as opportunistic purchases exceeded sales, principal repayments, and net losses.

In the third quarter, Agency RMBS faced the significant headwinds of elevated market volatility and rising long-term interest rates. Yield spreads widened and Agency RMBS significantly underperformed U.S. Treasury securities and interest rate swaps for the quarter, with the most pronounced underperformance coming on lower coupon RMBS. Meanwhile, our delta-hedging costs, which are tied to interest rate volatility, remained high. Overall, net losses on our Agency RMBS and negative net interest income exceeded net gains on our interest rate hedges, resulting in a net loss in our Agency RMBS strategy for the quarter.

Average pay-ups on our specified pools decreased slightly to 0.75% as of September 30, 2023, as compared to 0.78% as of June 30, 2023.

In the Agency strategy, the increase in our cost of funds exceeded the increase in our asset yields; as a result, the net interest margin⁵ on our Agency RMBS, excluding the Catch-up Amortization Adjustment, decreased to 1.05% from 1.31%.

Longbridge Summary

Our Longbridge portfolio generated net income attributable to common stockholders of $4.1 million for the third quarter, driven primarily by net gains on interest rate hedges, partially offset by net losses on our HMBS MSR Equivalent⁷ and MSRs (collectively, our "MSR-related Net Assets"), net losses on proprietary loans, and a net loss in originations. In originations, the combination of higher interest rates and wider yield spreads negatively impacted gain-on-sale margins on both HECM and proprietary loans, which more than offset a modest uptick in overall origination volumes.

Net losses on our MSR-related Net Assets consisted primarily of an aggregate mark-to-market loss of $8.2 million, as a significant mark-to-market loss on our existing MSR-related Net Assets was partially offset by a significant mark-to-market gain on the MSR portfolio we acquired out of a bankruptcy proceeding on July 1^st. The mark-to-market loss on our existing MSR-related Net Assets resulted from our adoption of more conservative valuation assumptions in light of current market conditions. These revised assumptions included both higher NPV discount rates (reflecting higher market interest rates and reduced liquidity in the reverse mortgage sector) and reduced projected cash flows (reflecting upward adjustments to assumed sub-servicing expenses and downward adjustments to projected income from tail securitizations). The mark-to-market gain on the MSR portfolio we acquired out of bankruptcy resulted from our application of our revised, more conservative valuation assumptions to that portfolio, which we were able to purchase out of bankruptcy at a distressed price.

Our Longbridge portfolio increased by 14% sequentially to $488.2 million as of September 30, 2023, driven primarily by proprietary reverse mortgage loan originations and the July MSR portfolio acquisition. These increases were partially offset by the above-referenced mark-to-market loss on our existing MSR-related Net Assets.

Corporate/Other Summary

Our results for the quarter reflect a significant gain, driven by higher interest rates, on the fixed payer interest rate swaps that we held in connection with the then-pending merger with Great Ajax Corp.; partially offset by a net loss, also driven by higher interest rates, on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt, or "Senior Notes," and our preferred equity. Our results for the quarter also reflect expenses related to our pending merger with Arlington Asset Investment Corp. and our then-pending merger with Great Ajax Corp.

On October 20, 2023, we announced the mutual termination of our previously announced merger with Great Ajax Corp. Including activity both in the third quarter and through October, the net gains on the hedges we held in connection with this transaction covered all of our costs associated with this transaction, including mark-to-market losses on our termination-related investment in the common shares of Great Ajax Corp. When the merger was mutually terminated, we neutralized the associated hedges.

We expect to close our pending merger with Arlington Asset Investment Corp. prior to year end.

Credit Portfolio⁽¹⁾

The following table summarizes our credit portfolio holdings as of September 30, 2023 and June 30, 2023:

Agency RMBS Portfolio⁽¹⁾

The following table summarizes our Agency RMBS portfolio holdings as of September 30, 2023 and June 30, 2023:

Longbridge Portfolio⁽¹⁾

Longbridge originates reverse mortgage loans, including home equity conversion mortgage loans, or "HECMs," which are insured by the FHA and which are eligible for inclusion in GNMA-guaranteed HECM-backed MBS, or "HMBS." Upon securitization, the HECMs remain on our balance sheet under GAAP, and Longbridge retains the mortgage servicing rights associated with the HMBS, or "HMBS MSR Equivalent." Longbridge also originates "proprietary reverse mortgage loans," which are not insured by the FHA, and Longbridge has typically retained the associated MSRs. The following table summarizes Longbridge's loan-related assets as of September 30, 2023 and June 30, 2023:

The following table summarizes Longbridge's origination volumes by channel for the three-month periods ended September 30, 2023 and June 30, 2023:

Financing

Our recourse debt-to-equity ratio², excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, increased slightly to 2.3:1 at September 30, 2023 from 2.1:1 at June 30, 2023. Our overall debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, also increased during the quarter, to 9.4:1 as of September 30, 2023, as compared to 9.2:1 as of June 30, 2023.

The following table summarizes our outstanding borrowings and debt-to-equity ratios as of September 30, 2023 and June 30, 2023:

The following table summarizes our operating results by strategy for the three-month period ended September 30, 2023:

The following table summarizes our operating results by strategy for the three-month period ended June 30, 2023:

About Ellington Financial

Ellington Financial invests in a diverse array of financial assets, including residential and commercial mortgage loans, reverse mortgage loans, residential and commercial mortgage-backed securities, consumer loans and asset-backed securities backed by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, debt and equity investments in loan origination companies, and other strategic investments. Ellington Financial is externally managed and advised by Ellington Financial Management LLC, an affiliate of Ellington Management Group, L.L.C.

Conference Call

We will host a conference call at 11:00 a.m. Eastern Time on Wednesday, November 8, 2023, to discuss our financial results for the quarter ended September 30, 2023. To participate in the event by telephone, please dial (800) 343-4849 at least 10 minutes prior to the start time and reference the conference ID EFCQ323. International callers should dial (203) 518-9848 and reference the same conference ID. The conference call will also be webcast live over the Internet and can be accessed via the "For Our Shareholders" section of our web site at www.ellingtonfinancial.com. To listen to the live webcast, please visit www.ellingtonfinancial.com at least 15 minutes prior to the start of the call to register, download, and install necessary audio software. In connection with the release of these financial results, we also posted an investor presentation, that will accompany the conference call, on our website at www.ellingtonfinancial.com under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Wednesday, November 8, 2023, at approximately 2:00 p.m. Eastern Time through Wednesday, November 15, 2023 at approximately 11:59 p.m. Eastern Time. To access this replay, please dial (888) 562-3381. International callers should dial (402) 220-1189. A replay of the conference call will also be archived on our web site at www.ellingtonfinancial.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek" or similar expressions or their negative forms, or by references to strategy, plans, or intentions. Forward-looking statements are based on our beliefs, assumptions and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our investments, market volatility, changes in mortgage default rates and prepayment rates, our ability to borrow to finance our assets, changes in government regulations affecting our business, our ability to complete our pending merger with Arlington Asset Investment Corp. in a timely manner or at all and our ability achieve the cost savings and efficiencies, operating efficiencies, synergies and other benefits, including the increased scale, and avoid potential business disruption from such pending merger, our ability to maintain our exclusion from registration under the Investment Company Act of 1940, our ability to maintain our qualification as a real estate investment trust, or "REIT," and other changes in market conditions and economic trends, such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations. Furthermore, forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A of our Annual Report on Form 10-K, which can be accessed through our website at www.ellingtonfinancial.com or at the SEC's website (www.sec.gov). Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q, 10-K and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Reconciliation of Net Income (Loss) to Adjusted Distributable Earnings

We calculate Adjusted Distributable Earnings as U.S. GAAP net income (loss) as adjusted for: (i) realized and unrealized gain (loss) on securities and loans, REO, mortgage servicing rights, financial derivatives (excluding periodic settlements on interest rate swaps), any borrowings carried at fair value, and foreign currency transactions; (ii) incentive fee to affiliate; (iii) Catch-up Amortization Adjustment (as defined below); (iv) non-cash equity compensation expense; (v) provision for income taxes; (vi) certain non-capitalized transaction costs; and (vii) other income or loss items that are of a non-recurring nature. For certain investments in unconsolidated entities, we include the relevant components of net operating income in Adjusted Distributable Earnings. The Catch-up Amortization Adjustment is a quarterly adjustment to premium amortization or discount accretion triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. Non-capitalized transaction costs include expenses, generally professional fees, incurred in connection with the acquisition of an investment or issuance of long-term debt. For the contribution to Adjusted Distributable Earnings from Longbridge, we adjust Longbridge's contribution to our net income in a similar manner, but we include in Adjusted Distributable Earnings certain realized and unrealized gains (losses) from Longbridge's origination business ("gain-on-sale income").

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our investment portfolio, after the effects of financial leverage and by Longbridge, to reflect the earnings from its reverse mortgage origination and servicing operations; and (iii) we believe that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT and mortgage originator peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items that may impact the amount of cash that is actually available for distribution.

In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.

Furthermore, Adjusted Distributable Earnings is different from REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders, in order to maintain our qualification as a REIT, is not based on whether we distributed 90% of our Adjusted Distributable Earnings.

In setting our dividends, our Board of Directors considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Directors may deem relevant from time to time.

The following table reconciles, for the three-month periods ended September 30, 2023 and June 30, 2023, our Adjusted Distributable Earnings to the line on our Condensed Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable U.S. GAAP measure: