Overview of the Company’s Financial Performance

Ellington Financial Inc. is a specialty finance company that invests in and finances residential mortgage assets. The company had total assets of approximately $11.1 billion as of June 30, 2024, with $9.2 billion or 83% of those assets in residential whole loans.

For the second quarter of 2024, Ellington Financial reported net income available to common stock and participating securities of $33.7 million, or $0.32 per basic and diluted common share. This was an increase from $15.0 million, or $0.14 per share, in the first quarter of 2024. The increase was primarily driven by higher mark-to-market gains on the company’s residential whole loans and securitized debt, as well as higher net interest income.

For the first six months of 2024, Ellington Financial reported net income available to common stock and participating securities of $48.7 million, or $0.47 per basic common share and $0.46 per diluted common share. This was up from $30.4 million, or $0.30 per basic common share and $0.29 per diluted common share, in the first six months of 2023. The increase was mainly due to higher net interest income and other income.

Revenue and Profit Trends

Ellington Financial’s net interest income increased by $5.7 million to $53.5 million in the second quarter of 2024, compared to $47.8 million in the first quarter. This was primarily due to higher net interest income from the residential whole loan portfolio, as well as higher interest income from cash investments and the securities portfolio.

For the first six months of 2024, net interest income increased by $17.4 million, or 20.8%, to $101.3 million compared to $83.9 million in the same period of 2023. This was driven by higher yields and average balances in the residential whole loan portfolio, as well as higher interest income from the securities portfolio and cash investments.

The company’s other income, which includes mark-to-market gains and losses, also contributed to the improved financial performance. Other income was $29.8 million in the second quarter of 2024, up from $22.4 million in the first quarter, primarily due to higher mark-to-market gains on residential whole loans and securitized debt. For the first six months of 2024, other income increased by $5.5 million to $52.3 million compared to the same period in 2023.

Strengths and Weaknesses

One of Ellington Financial’s key strengths is its diversified portfolio of residential mortgage assets, including non-qualified mortgage (Non-QM) loans, business purpose loans, and legacy re-performing and non-performing loans. This diversification helps mitigate risk and provides opportunities for higher-yielding investments.

The company’s focus on sound underwriting standards, including low loan-to-value ratios, also helps to mitigate credit risk in its business purpose and Non-QM loan portfolios. Additionally, the discounted purchase prices paid on legacy re-performing and non-performing loans help offset potential losses.

However, Ellington Financial’s performance is subject to various market risks, including interest rate changes, prepayment speeds, and credit performance of its assets. Increases in interest rates can lead to higher funding costs, declines in asset values, and slower prepayment speeds, which can negatively impact the company’s earnings. Conversely, decreases in interest rates can result in faster prepayment speeds, accelerating the amortization of purchase premiums and the accretion of purchase discounts, which may also affect earnings.

The company’s reliance on short-term financing agreements, some of which have mark-to-market collateral provisions, also exposes it to liquidity risk. Margin calls from lenders based on changes in the value of the underlying collateral could put pressure on Ellington Financial’s cash position and require it to pledge additional assets or cash as collateral.

Outlook and Future Prospects

Looking ahead, Ellington Financial expects that its origination volumes at its subsidiary, Lima One, will decline over the next several quarters due to increased industry competition in single-family lending and the company’s decision to temporarily refocus resources away from multifamily lending.

The company continues to closely monitor the actions of the Federal Reserve regarding interest rates and the potential impact on inflation, the overall economic environment, and its business. Ellington Financial believes that sound underwriting, diversification, and the use of securitization and other financing structures will help mitigate risks and support its future performance.

As of June 30, 2024, the company had unused financing capacity of approximately $2.7 billion across its various financing arrangements, providing it with flexibility to continue investing in residential mortgage assets. Ellington Financial also has access to capital markets through its universal shelf registration statement and “at-the-market” equity offering program, which could be used to raise additional funds for investment and growth.

Overall, Ellington Financial’s diversified portfolio, focus on risk management, and access to financing and capital markets suggest that the company is well-positioned to navigate the current market environment and continue delivering value to its shareholders.

Key Financial Highlights

• Total assets of approximately $11.1 billion as of June 30, 2024, with $9.2 billion or 83% in residential whole loans
• Net income available to common stock and participating securities of $33.7 million, or $0.32 per basic and diluted common share, in Q2 2024, up from $15.0 million, or $0.14 per share, in Q1 2024
• Net income available to common stock and participating securities of $48.7 million, or $0.47 per basic common share and $0.46 per diluted common share, in the first six months of 2024, up from $30.4 million, or $0.30 per basic common share and $0.29 per diluted common share, in the first six months of 2023
• Net interest income of $53.5 million in Q2 2024, up from $47.8 million in Q1 2024, and $101.3 million in the first six months of 2024, up from $83.9 million in the same period of 2023
• Other income (including mark-to-market gains and losses) of $29.8 million in Q2 2024, up from $22.4 million in Q1 2024, and $52.3 million in the first six months of 2024, up from $46.8 million in the same period of 2023
• Unused financing capacity of approximately $2.7 billion as of June 30, 2024
• GAAP book value per common share of $13.80 and non-GAAP economic book value per common share of $14.34 as of June 30, 2024

Conclusion

Ellington Financial delivered strong financial results in the second quarter and first half of 2024, driven by higher net interest income and other income. The company’s diversified portfolio of residential mortgage assets, focus on risk management, and access to financing and capital markets position it well to navigate the current market environment and continue generating value for shareholders. While the company faces various market risks, its proactive approach to managing these risks and its financial flexibility suggest a positive outlook for Ellington Financial’s future performance.