Ellington Financial Delivers Solid Performance in Third Quarter

Ellington Financial Inc. (the “Company”) reported strong financial results for the third quarter of 2024, driven by positive performance across its investment portfolio and Longbridge reverse mortgage business. The Company generated net income attributable to common stockholders of $16.2 million, or $0.19 per common share, for the quarter.

Diversified Investment Portfolio Generates Consistent Returns

Ellington Financial’s investment portfolio continued to perform well, with net interest income of $35.9 million and total other income of $6.5 million for the quarter. The credit portfolio, which excludes Agency residential mortgage-backed securities (RMBS), was the primary driver of these results, generating $80.5 million in interest income. This was due to higher average asset yields and the larger size of the credit portfolio compared to the same period last year.

The Company’s Agency RMBS portfolio contributed $5.4 million in interest income, down from $10.5 million in the prior-year quarter, reflecting the significantly smaller size of this portfolio. Ellington Financial’s overall portfolio yield, excluding the impact of a positive “catch-up” adjustment, was 7.07% for the quarter, up from 6.58% in the prior-year period.

The credit portfolio benefited from net realized and unrealized gains of $98.5 million on securities and loans, primarily in non-QM loans, non-Agency RMBS, closed-end second lien loans, and non-Agency commercial mortgage-backed securities (CMBS). These gains were partially offset by net unrealized losses of $58.0 million on other secured borrowings related to the Company’s securitized non-QM loans.

Longbridge Reverse Mortgage Business Delivers Strong Results

Ellington Financial’s Longbridge segment, which originates and services reverse mortgage loans, also contributed significantly to the Company’s performance in the third quarter. Longbridge generated a net loss of $2.5 million, but this was more than offset by positive results in its origination business.

Longbridge had a mark-to-market gain on its HMBS (HECM-backed mortgage-backed securities) mortgage servicing rights (MSR) equivalent, but this was muted by wider HMBS yield spreads, which resulted in a net loss on this position after accounting for related interest rate hedges. In HECM (home equity conversion mortgage) originations, a decline in origination margins was partially offset by higher volumes, while in proprietary reverse originations, net gains related to a securitization in July, along with improved origination margins and higher volumes, led to strong profits.

Longbridge’s portfolio, excluding non-retained tranches of a consolidated securitization trust, decreased by 5% sequentially to $494.2 million as of September 30, 2024, driven primarily by the completion of a securitization of proprietary reverse mortgage loans, partially offset by new proprietary reverse mortgage loan originations during the quarter.

Hedging and Financing Strategies Manage Risks

Ellington Financial actively manages its interest rate and credit risks through the use of various hedging instruments, including interest rate swaps, TBAs (to-be-announced mortgage-backed securities), and credit default swaps. For the third quarter, the Company reported net realized and unrealized losses of $31.0 million on its financial derivatives, primarily related to interest rate swaps, TBAs, and U.S. Treasury futures, driven by the decline in interest rates.

The Company’s recourse debt-to-equity ratio, excluding U.S. Treasury securities and adjusted for unsettled purchases and sales, increased to 1.8:1 as of September 30, 2024, compared to 1.6:1 as of June 30, 2024. This increase was primarily driven by an increase in borrowings on the larger credit portfolio, partially offset by a decrease in borrowings on the smaller Agency portfolio, the proprietary reverse mortgage securitization, and an increase in shareholders’ equity.

The average cost of funds on Ellington Financial’s secured financings increased to 5.94% for the third quarter, up from 5.73% in the prior quarter, while the average cost of funds on its unsecured financings decreased to 5.59% from 6.15% over the same period. The Company’s overall average cost of funds, including both secured and unsecured financings, increased to 5.92% from 5.76%.

Outlook: Navigating a Changing Market Environment

Ellington Financial’s diversified investment strategies and active risk management approach have enabled the Company to navigate the evolving market environment. The decline in interest rates during the third quarter benefited the performance of the Company’s credit portfolio, while the Longbridge segment faced some headwinds from wider HMBS yield spreads.

Looking ahead, the Company remains focused on identifying attractive investment opportunities across its target asset classes, which include Agency RMBS, non-Agency RMBS, commercial mortgage loans, consumer loans, and reverse mortgage loans, among others. Ellington Financial’s flexibility to adjust its asset allocation and hedging strategies in response to changing market conditions is expected to continue supporting its ability to generate consistent returns for shareholders.

The Company’s strong liquidity position, with a recourse debt-to-equity ratio of 1.8:1 as of September 30, 2024, provides it with the financial flexibility to capitalize on new investment opportunities as they arise. Ellington Financial’s management team remains committed to prudent risk management and disciplined capital allocation to drive long-term value for its shareholders.

Overall, Ellington Financial’s solid third-quarter performance, diversified investment strategies, and proactive risk management approach position the Company well to navigate the evolving market landscape and continue delivering consistent returns to its shareholders.