Market Overview

Ellington Financial LLC Reports Second Quarter 2018 Results

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Ellington Financial LLC (NYSE:EFC) today reported financial results for
the quarter ended June 30, 2018.

Highlights

  • Net income1 of $21.2 million, or $0.69 per basic and
    diluted share.
  • Book value per share as of June 30, 2018 of $19.57 on a diluted basis,
    after payment of a quarterly dividend of $0.41 per share, as compared
    to book value per share of $19.25 on a diluted basis as of March 31,
    2018.
  • Credit strategy gross income of $24.9 million for the quarter, or
    $0.80 per share.
  • Agency strategy gross income of $1.7 million for the quarter, or $0.06
    per share.
  • Net investment income of $11.0 million for the quarter, or $0.36 per
    share; adjusted net investment income2 of $11.0 million for
    the quarter, or $0.36 per share.
  • Announced a dividend of $0.41 per share for the second quarter of
    2018, equating to an annualized dividend yield of 10.0% based on the
    August 3, 2018 closing price of $16.34 per share; dividends are paid
    quarterly in arrears.
  • Repurchased 242,161 common shares during the quarter, or approximately
    1% of our outstanding common shares as of the beginning of the
    quarter, at an average price of $14.98 per share.
  • Debt-to-equity ratio, excluding repo borrowings on U.S. Treasury
    securities, of 2.77:1 as of June 30, 2018.
1   Increase (decrease) in shareholders' equity from operations, or "net
income (loss)."
2 Adjusted net investment income for the quarter ended June 30, 2018
is equal to net investment income of $11.0 million, plus incentive
fees accrued of $0.3 million, which reduced net investment income,
less the quarterly adjustment to premium amortization 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) of $0.3 million, which increased
interest income. We believe that adjusted net investment income
provides information useful to investors because it is one of the
metrics that we use to assess our performance and to evaluate the
effective net yield provided by our portfolio. However, because
adjusted net investment income is an incomplete measure of our
financial results and differs from net investment income computed in
accordance with GAAP, it should be considered as supplementary to,
and not as a substitute for, net investment income computed in
accordance with GAAP.
 

Second Quarter 2018 Results

"In the second quarter, Ellington Financial had net income, including
the full impact of mark-to-market adjustments, of $21.2 million, or
$0.69 per share," said Laurence Penn, Chief Executive Officer and
President. "We were able to build on the strong momentum of the first
quarter as we continued to benefit from our larger credit portfolio,
which grew another 9% this quarter. As a result, net investment income
is also growing nicely, increasing to 36 cents for the quarter. Overall,
Ellington Financial generated an economic return of 3.8% in the second
quarter, and 8.2% through the first half of the year, or 17.1%
annualized.

"The growth and performance of our securitizations continues to be a key
driver of our results. This past quarter, we participated in our third
Ellington-sponsored corporate CLO, achieving tighter pricing and a
longer investment period than our previous issuances, even in the face
of a softer overall CLO new issue market. Meanwhile, S&P upgraded three
classes of our non-QM securitization; in fact our deal has the highest
perfect payer percentage of all non-QM securitizations in its vintage,
as reported by Bloomberg.

"Moving into the second half of the year, our primary focus is on
executing our business plan, and in particular continuing to grow our
credit portfolio, emphasizing high-yielding, short-duration assets, and
thereby continuing to grow our net investment income to provide
stability of earnings and dividend coverage. If the volatility that we
saw earlier this year returns, we believe that we are well positioned to
take advantage by adding assets at higher yields and trading out of some
of the more liquid parts of the portfolio, while at the same time
relying on our hedges and liquidity management to protect and preserve
book value.

"In addition, as we've discussed previously, we continue to actively
evaluate possible changes to our tax status as a publicly traded
partnership. Our options include potential conversion to a C-Corp,
potential conversion to a REIT, and of course remaining a publicly
traded partnership."

Market Overview

  • In June, the Federal Reserve raised the target range for the federal
    funds rate by 0.25%, to 1.75%–2.00%, its seventh rate increase since
    December 1, 2015 and its second rate increase so far in 2018. LIBOR
    rates, which drive many of our financing costs, increased in sympathy,
    with one-month LIBOR increasing 21 basis points to end the second
    quarter at 2.09%.
  • In April and July, the Federal Reserve continued to increase the
    amount of the tapering of its reinvestments in line with the schedule
    it had laid out in September 2017. The tapering of Agency RMBS
    purchases increased to $12 billion per month in April and to $16
    billion per month in July. The tapering of U.S. Treasury purchases
    increased to $18 billion per month in April and to $24 billion per
    month in July.
  • The yield curve flattened for the sixth consecutive quarter: the
    2-year U.S. Treasury yield rose 26 basis points to end the second
    quarter at 2.53%, while the 10-year U.S. Treasury yield rose 12 basis
    points to 2.86%. The spread between the 2-year and 10-year tightened
    to just 33 basis points, as compared to 47 basis points at the end of
    the first quarter.
  • Mortgage rates increased in the second quarter, with the Freddie Mac
    survey 30-year mortgage rate rising 11 basis points to end the quarter
    at 4.55%.
  • Overall Agency RMBS prepayment rates continued to be muted during the
    quarter. The Mortgage Bankers Association's Refinance Index, which
    measures refinancing application volumes, fell 11.9% quarter over
    quarter, dropping intra-quarter to its lowest seasonally-adjusted
    level in more than 17 years.

The second quarter of 2018 saw the extreme equity volatility of the
first quarter subside, but interest rate choppiness and yield curve
flattening continue. During the first part of the quarter, interest
rates continued their recent upward trend, with the 10-year U.S.
Treasury yield rising 37 basis points to an almost seven-year high of
3.11% on May 17th. Over the next two weeks, this trend
reversed, as investors reacted to a possible trade war and political
uncertainty in Italy; by May 29th, the 10-year U.S. Treasury
had rallied nearly back to where it started the quarter. The flight to
quality was short-lived, however, and the 10-year U.S. Treasury yield
finished the quarter 12 basis points higher overall. The yield curve has
lately been the flattest it has been since 2007, when it actually
inverted during the early part of the year.

Performance was mixed for the quarter across the various
credit-sensitive sectors. Investment grade and high yield corporate
credit spreads tightened during April but then widened in May and June,
and finished the quarter approximately flat. Meanwhile, CMBS credit
spreads generally tightened during the quarter (with especially strong
demand for higher-yielding, non-investment grade CMBS securities), and
the legacy non-Agency RMBS market continued to be well supported. The
continued increase in LIBOR boosted coupons of floating-rate debt
instruments, benefiting CLOs, leveraged loans, and other structured
credit products.

Despite higher rates and the continued increase of Fed tapering, Agency
RMBS spreads generally held firm over the quarter, continuing to benefit
from a muted prepayment environment. As measured by the Bloomberg
Barclays U.S. MBS Agency Fixed Rate Index, Agency RMBS generated a total
return of 24 basis points for the quarter, and an excess return (on a
duration-adjusted basis) over the Bloomberg Barclays U.S. Treasury Index
of 15 basis points.

Financial Results

Credit Summary

As of June 30, 2018, our total long Credit portfolio (excluding
corporate relative value trading positions, hedges, and other
derivatives) was $1.224 billion, which was an increase of approximately
7% from $1.146 billion as of March 31, 2018. Our total long Credit
portfolio was $1.123 billion3 as of June 30, 2018, which was
an increase of approximately 9% from $1.032 billion3 as of
March 31, 2018. During the second quarter, our Credit strategy generated
total gross income of $24.9 million, or $0.80 per share.

The growth of our Credit portfolio primarily came from net purchases in
the following target strategies: consumer loans and ABS, residential
mortgage loans and REO, European RMBS, and retained tranches in CLO
securitizations. Our corporate debt and equity portfolio decreased in
size during the quarter. We also sold a portion of our more liquid,
lower-risk assets, such as certain U.S. non-Agency RMBS and CLO note
investments, and rotated that capital into our higher-yielding
strategies.

At the end of the second quarter, we held $150.2 million of
unsecuritized non-QM mortgages, and we are optimistic that later this
year we will be able to complete our second non-QM securitization. In
our CLO securitization strategy, we participated in our third
Ellington-sponsored CLO, which priced in June and closed in July. In
addition, the liquidity of certain of our retained tranches from our
prior CLO securitizations benefited from a ruling by the United States
Court of Appeals for the District of Columbia Circuit, which ruled that
U.S. risk retention rules do not apply to managers of open-market CLOs.

Our Credit portfolio performed very well during the quarter and
continued to be the primary driver of our earnings. During the second
quarter, our Credit strategy generated gross investment income of $12.1
million and net realized and change in net unrealized gains of $11.2
million. We benefited from strong performance in several of our
loan-related strategies, including consumer loans, small balance
commercial mortgage loans, European non-performing loans, and non-QM
loans. Among our securities strategies, U.S. and European CLOs, U.S.
CMBS, corporate credit relative value, and European RMBS all contributed
strong results.

3   For our consolidated non-QM securitization trust, only retained
tranches are included in this figure (i.e., excludes tranches sold
to third parties).
 

In the second quarter, our credit hedges modestly reduced profitability.
The interest rate hedges in our Credit strategy, which currently consist
primarily of interest rate swaps, had no material impact on our
results. We had net losses on foreign currency-related transactions and
translation, but these were more than offset by net gains on our foreign
currency hedges.

In our corporate credit relative value strategy as of June 30, 2018, the
market value of our long corporate bonds was $65.2 million, the
aggregate market value of our short corporate bonds was $(50.2) million,
and the aggregate notional amount of our credit default swaps where we
were long protection and short protection was $81.8 million and $(122.4)
million, respectively. As mentioned above, this strategy performed well
in the second quarter. As of March 31, 2018 in this strategy, the market
value of our long corporate bonds was $74.2 million, the aggregate
market value of our short corporate bonds was $(46.4) million, and the
aggregate notional amount of our credit default swaps where we were long
protection and short protection was $122.8 million and $(162.4) million,
respectively.

Agency Summary

As of June 30, 2018, our long Agency RMBS portfolio increased
approximately 2% to $948.5 million, from $928.2 million as of March 31,
2018. During the second quarter, our Agency strategy generated gross
income of $1.7 million, or $0.06 per share. Agency RMBS prices declined
again during the quarter, which led to net realized and unrealized
losses on our portfolio of $(5.7) million. However, these losses were
more than offset by net interest income from the Agency portfolio of
$3.9 million and gains on our interest rate hedges and other activities
of $3.4 million. Our results were also dampened by the outperformance of
TBAs relative to specified pools during the quarter, driven by strong
TBA dollar rolls and muted prepayments. We continued to concentrate our
long investments in specified pools and hold net short positions in TBAs
as a significant component of our interest rate hedging strategy.

Average pay-ups on our specified pools were unchanged at 0.61% as of
June 30, 2018 as compared to March 31, 2018. Pay-ups are price premiums
for specified pools relative to their TBA counterparts. As of June 30,
2018, the weighted average coupon on our fixed-rate specified pools was
4.1%.

During the quarter we continued to hedge interest rate risk in our
Agency strategy, primarily through the use of short positions in TBAs,
and to a lesser extent interest rate swaps and short positions in U.S.
Treasury securities and futures. For the quarter, we had total net gains
of $3.4 million from our interest rate hedges and other activities, as
interest rates increased. In our hedging portfolio, the relative
proportion (based on 10-year equivalents4) of short positions
in TBAs decreased slightly quarter over quarter relative to interest
rate swaps.

Portfolio turnover for our Agency strategy was approximately 9.4% for
the quarter (as measured by sales and excluding paydowns), and we had
net realized losses of $(1.5) million, excluding interest rate hedges.

4   "10-year equivalents" for a group of positions represent the amount
of 10-year U.S. Treasury securities that would be expected to
experience a similar change in market value under a standard
parallel move in interest rates.

The following table summarizes our operating results for the quarters
ended June 30, 2018 and March 31, 2018 and the six-month period ended
June 30, 2018:

                                   

Quarter
Ended
June 30,
2018

Per
Share

% of
Average
Equity

Quarter
Ended
March 31,
2018

Per
Share

% of
Average
Equity

Six-Month
Period
Ended
June
30,

2018

Per
Share

% of
Average
Equity

(In thousands, except per share amounts)
Credit:
Interest income and other income $ 23,053 $ 0.75 3.75 % $ 20,545 $ 0.65 3.34 % $ 43,598 $ 1.40 7.09 %
Net realized gain (loss) 105 0.01 % 4,961 0.16 0.81 % 5,066 0.16 0.82 %
Change in net unrealized gain (loss) 11,046 0.36 1.80 % 7,680 0.24 1.25 % 18,726 0.60 3.05 %
Net interest rate hedges(1) 29 % 179 0.01 0.03 % 208 0.01 0.03 %
Net credit hedges and other activities(2) 1,659 0.05 0.27 % 1,195 0.04 0.19 % 2,854 0.09 0.46 %
Interest expense(3) (7,680 ) (0.25 ) (1.25 )% (6,647 ) (0.21 ) (1.08 )% (14,327 ) (0.46 ) (2.33 )%
Other investment related expenses   (3,288 )   (0.11 ) (0.53 )%   (2,619 )   (0.08 ) (0.43 )%   (5,907 )   (0.19 ) (0.96 )%
Total Credit profit (loss)   24,924     0.80   4.05 %   25,294     0.81   4.11 %   50,218     1.61   8.16 %
Agency RMBS:
Interest income 8,345 0.27 1.36 % 6,693 0.21 1.09 % 15,038 0.48 2.45 %
Net realized gain (loss) (1,509 ) (0.05 ) (0.25 )% (1,187 ) (0.04 ) (0.19 )% (2,696 ) (0.09 ) (0.44 )%
Change in net unrealized gain (loss) (4,151 ) (0.14 ) (0.67 )% (12,591 ) (0.40 ) (2.05 )% (16,742 ) (0.54 ) (2.72 )%
Net interest rate hedges and other activities(1) 3,406 0.12 0.56 % 10,239 0.32 1.66 % 13,645 0.44 2.22 %
Interest expense   (4,439 )   (0.14 ) (0.73 )%   (3,471 )   (0.11 ) (0.56 )%   (7,910 )   (0.25 ) (1.29 )%
Total Agency RMBS profit (loss)   1,652     0.06   0.27 %   (317 )   (0.02 ) (0.05 )%   1,335     0.04   0.22 %
Total Credit and Agency RMBS profit (loss)   26,576     0.86   4.32 %   24,977     0.79   4.06 %   51,553     1.65   8.38 %
Other interest income (expense), net 497 0.02 0.09 % 399 0.01 0.06 % 896 0.03 0.15 %
Other expenses   (4,598 )   (0.15 ) (0.75 )%   (4,052 )   (0.13 ) (0.66 )%   (8,650 )   (0.28 ) (1.41 )%
Net increase in equity resulting from operations (before incentive
fee)
  22,475     0.73   3.66 %   21,324     0.67   3.46 %   43,799     1.40   7.12 %
Incentive fee   (291 )   (0.01 ) (0.05 )%         %   (291 )   (0.01 ) (0.05 )%
Net increase (decrease) in equity resulting from operations $ 22,184   $ 0.72   3.61 % $ 21,324   $ 0.67   3.46 % $ 43,508   $ 1.39   7.07 %
Less: Net increase (decrease) in equity resulting from operations
attributable to non-controlling interests
  991     285     1,276  
Net increase (decrease) in shareholders' equity resulting from
operations
(4)
$ 21,193   $ 0.69 3.53 % $ 21,039   $ 0.67 3.52 % $ 42,232   $ 1.36 7.05 %
Weighted average shares and convertible

units(5) outstanding

30,907 31,534 31,219
Average equity (includes non-controlling interests)(6) $ 612,622 $ 615,433 $ 614,610
Weighted average shares and LTIP units outstanding(7) 30,695 31,322 31,007
Average shareholders' equity (excludes non-controlling interests)(6) $ 597,870 $ 598,498 $ 598,714
 
  (1)   Includes TBAs and U.S. Treasury securities, if applicable.
(2) Includes equity and other relative value trading strategies and
related hedges.
(3) Includes interest expense on our Senior Notes.
(4) Per share information is calculated using weighted average shares
and LTIP units outstanding. Percentage of average equity is
calculated using average shareholders' equity, which excludes
non-controlling interests.
(5) Convertible units include Operating Partnership units attributable
to non-controlling interests and LTIP units.
(6) Average equity and average shareholders' equity are calculated using
month end values.
(7) Excludes Operating Partnership units attributable to non-controlling
interests.
 

Portfolio

The following tables summarize our portfolio holdings as of June 30,
2018 and March 31, 2018:

Investment Portfolio

       
June 30, 2018 March 31, 2018
(In thousands) Fair Value     Cost Fair Value     Cost
Long:
Credit:
Dollar Denominated:
CLO(1) $ 210,935 $ 216,236 $ 226,403 $ 232,741
CMBS 16,927 16,890 11,666 13,015
Commercial Mortgage Loans and REO(2) 139,546 137,846 139,367 138,392
Consumer Loans and ABS Backed by Consumer Loans(1) 196,584 205,243 148,418 158,089
Corporate Debt and Equity 71,422 68,878 82,426 83,061
Debt and Equity Investment in Mortgage-Related Entities 30,823 25,314 30,215 25,314
Non-Agency RMBS 156,834 144,760 169,185 157,249
Residential Mortgage Loans and REO 294,366 292,994 241,651 239,954
Non-Dollar Denominated:
CLO 4,670 4,788 10,559 9,681
CMBS 16,309 16,468 21,500 20,336
Consumer Loans and ABS Backed by Consumer Loans 8,723 899 5,911 1,005
Corporate Debt and Equity 11,911 12,576 12,880 12,864
RMBS(3) 130,395 128,620 119,791 112,307
Agency:
Fixed-Rate Specified Pools 853,120 874,862 830,689 849,000
Floating-Rate Specified Pools 6,155 6,304 7,270 7,407
IOs 32,899 33,630 32,450 32,925
Reverse Mortgage Pools 56,371 58,104 57,825 59,107
TBAs 317,013 316,530 193,332 192,834
Government:
Dollar Denominated 70,468   70,467   2,200   2,178  
Total Long 2,625,471   2,631,409   2,343,738   2,347,459  
Repurchase Agreements
Dollar Denominated 194,230 194,229 94,060 94,059
Non-Dollar Denominated 20,181   20,117   38,478   38,671  
Total Repurchase Agreements 214,411   214,346   132,538   132,730  
Short:
Credit:
Dollar Denominated:
Corporate Debt and Equity (84,395 ) (85,280 ) (85,186 ) (86,587 )
Agency:
TBAs (618,665 ) (616,872 ) (499,620 ) (497,379 )
Government:
Dollar Denominated (159,220 ) (159,005 ) (69,156 ) (68,716 )
Non-Dollar Denominated (19,866 ) (19,668 ) (38,000 ) (35,101 )
Total Short (882,146 ) (880,825 ) (691,962 ) (687,783 )
Net Total $ 1,957,736   $ 1,964,930   $ 1,784,314   $ 1,792,406  
 
  (1)   Includes equity investment in a securitization-related vehicle.
(2) Includes equity investment in a limited liability company holding
small balance commercial mortgage loans.
(3) Includes RMBS secured by non-performing loans and REO, and an
investment in an entity holding a securitization call right.
 

Derivatives Portfolio(1)

       
As of June 30, 2018 As of March 31, 2018
Notional    

Net
Fair
Value

Notional    

Net
Fair
Value

(In thousands) Long     Short     Net Long     Short     Net
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices $ 7,587   $ (25,047 ) $ (17,460 ) $ 5,348   $ 14,554   $ (26,971 ) $ (12,417 ) $ 5,138  
Total Mortgage-Related Derivatives 7,587   (25,047 ) (17,460 ) 5,348   14,554   (26,971 ) (12,417 ) 5,138  
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond Indices 142,955 (392,947 ) (249,992 ) (9,850 ) 174,088 (424,880 ) (250,792 ) (17,309 )
Total Return Swaps on Corporate Equities(2) 59 (8,018 ) (7,959 ) 60 (10,073 ) (10,013 ) 1
Total Return Swaps on Corporate Bond Indices(3)   (56,140 ) (56,140 ) (314 )   (18,290 ) (18,290 ) 16  
Total Corporate-Related Derivatives 143,014   (457,105 ) (314,091 ) (10,164 ) 174,148   (453,243 ) (279,095 ) (17,292 )
Interest Rate-Related Derivatives:
Interest Rate Swaps 297,656 (600,809 ) (303,153 ) 9,282 350,799 (606,304 ) (255,505 ) 8,382
U.S. Treasury Futures(4) (95,900 ) (95,900 ) 634   (95,900 ) (95,900 ) (931 )
Total Interest Rate-Related Derivatives 9,916   7,451  
Other Derivatives:
Foreign Currency Forwards(5) (25,495 ) (25,495 ) 11 (25,097 ) (25,097 ) (89 )
Foreign Currency Futures(6) (38,125 ) (38,125 ) (115 ) (35,250 ) (35,250 ) (92 )
Other(7) n/a n/a n/a (2 ) n/a n/a n/a (3 )
Total Other Derivatives (106 ) (184 )
Net Total $ 4,994   $ (4,887 )
 
  (1)   In the table above, fair value of certain derivative transactions
are shown on a net basis. The accompanying financial statements
separate derivative transactions as either assets or liabilities. As
of June 30, 2018, derivative assets and derivative liabilities were
$30.7 million and $(25.7) million, respectively, for a net fair
value of $5.0 million, as reflected in "Total Net Derivatives"
above. As of March 31, 2018, derivative assets and derivative
liabilities were $30.0 million and $(34.9) million, respectively,
for a net fair value of $(4.9) million, as reflected in "Total Net
Derivatives" above.
(2) Notional value represents number of underlying shares multiplied by
the closing price of the underlying security.
(3) Notional value represents the number of underlying index units
multiplied by the reference price.
(4) Notional value represents the total face amount of U.S. Treasury
securities underlying all contracts held. As of both June 30, 2018
and March 31, 2018 a total of 959 short U.S. Treasury futures
contracts were held.
(5) Short notional value represents U.S. Dollars to be received by us at
the maturity of the forward contract. Long notional value represents
U.S. Dollars to be paid by us at the maturity of the forward
contract.
(6) Notional value represents the total face amount of currency futures
underlying all contracts held. As of June 30, 2018 and March 31,
2018, a total of 371 and 348 short foreign currency futures
contracts were held, respectively.
(7) As of both June 30, 2018 and March 31, 2018, includes interest rate
caps and interest rate "basis" swaps whereby the Company pays one
floating rate and receives a different floating rate.
 

The mix and composition of our derivative instruments may vary from
period to period.

The following table summarizes, as of June 30, 2018, the estimated
effects on the value of our portfolio, both overall and by category, of
hypothetical, immediate, 50 basis point downward and upward parallel
shifts in interest rates.

   
Estimated Change in Value (1)
(In thousands)

50 Basis Point Decline in
Interest Rates

   

50 Basis Point Increase
in Interest Rates

Market Value    

% of Total
Equity

Market Value    

% of Total
Equity

Agency RMBS—ARM Pools $ 30 —% $ (38 ) (0.01)%
Agency RMBS—Fixed Pools and IOs 16,890 2.75% (21,674 ) (3.53)%
TBAs (8,003 ) (1.30)% 9,000 1.47%
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans 4,582 0.75% (4,642 ) (0.76)%
Interest Rate Swaps (5,776 ) (0.94)% 5,539 0.90%
U.S. Treasury Securities (2,369 ) (0.38)% 2,281 0.37%
U.S. Treasury Futures (3,230 ) (0.53)% 3,127 0.51%
Mortgage-Related Derivatives 18 —% (15 ) —%
Corporate Securities and Derivatives on Corporate Securities (235 ) (0.04)% 256 0.04%
Repurchase Agreements and Reverse Repurchase Agreements (2,697 ) (0.44)% 2,685   0.44%
$ (790 ) (0.13)% $ (3,481 ) (0.57)%
 
  (1)   Based on the market environment as of June 30, 2018. The preceding
analysis does not include sensitivities to changes in interest rates
for instruments for which we believe that the effect of a change in
interest rates is not material to the value of the overall portfolio
and/or cannot be accurately estimated. In particular, this analysis
excludes certain corporate securities and derivatives on corporate
securities, and reflects only sensitivity to U.S. interest rates.
Results are based on forward-looking models, which are inherently
imperfect, and incorporate various simplifying assumptions.
Therefore, the table above is for illustrative purposes only and
actual changes in interest rates would likely cause changes in the
actual value of our overall portfolio that would differ from those
presented above and such differences might be significant and
adverse.
 

Borrowed Funds and Liquidity

Reverse Repos and Other Secured Borrowings

Borrowings By Collateral Type

The following table summarizes our aggregate secured borrowings,
including reverse repos and other secured borrowings, for the
three-month period ended June 30, 2018 and March 31, 2018.

               

As of
June 30, 2018

 

For the Quarter Ended
June 30, 2018

As of
March 31, 2018

For the Quarter Ended
March 31, 2018

Collateral for Secured Borrowing

Outstanding
Borrowings

Average
Borrowings

   

Average
Cost of
Funds

Outstanding
Borrowings

Average
Borrowings

   

Average
Cost of
Funds

(In thousands)
Credit(1) $ 702,523 $ 638,668 3.89 % $ 630,644 $ 578,727 3.59 %
Agency RMBS 891,082   891,285   2.00 % 859,780   840,274   1.68 %
Subtotal(1) 1,593,605   1,529,953   2.79 % 1,490,424   1,419,001   2.46 %
Corporate Credit Relative Value Trading Strategy 21,992 23,309 2.20 % 23,971 14,279 1.88 %
U.S. Treasury Securities 2,639   8,561   1.85 % 2,203   4,694   1.45 %
Total $ 1,618,236   $ 1,561,823   2.78 % $ 1,516,598   $ 1,437,974   2.45 %
 
  (1)   Excludes U.S. Treasury Securities and investments in our corporate
credit relative value trading strategy.
 

LIBOR rose again during the second quarter, which increased the cost of
funds for our Credit portfolio, our Agency RMBS portfolio, and overall.
The overall cost of funds on our aggregate secured borrowings increased
from 2.45% to 2.78% quarter over quarter. Consistent with recent
quarters, the share of our overall borrowings represented by our
higher-cost Credit-related secured borrowings continues to grow. As
shown in the table above, the secured borrowings in our corporate credit
relative value trading strategy have much lower costs of funds than most
of our other Credit-related secured borrowings, because this strategy
tends to involve more liquid assets, financed for shorter terms, as
compared to our other credit strategies. In light of this large
difference in borrowing costs, as well as the more short-term nature and
varying overall size of our positions in this strategy, we have broken
out in the above table the secured borrowings in that strategy from our
other Credit-related secured borrowings. Our average cost of funds on
our total Credit portfolio, including our corporate credit relative
value trading strategy, was 3.83% and 3.55% for the three-month periods
ended June 30, 2018 and March 31, 2018, respectively.

Reverse Repurchase Agreements By Remaining Maturity (1)

       
(In thousands) As of June 30, 2018 As of March 31, 2018
Remaining Maturity (2)

Outstanding
Borrowings

   

% of
Borrowings

Outstanding
Borrowings
    % of
Borrowings
30 Days or Less $ 288,859 20.3 % $ 318,439 23.9 %
31-60 Days 550,717 38.7 % 468,382 35.2 %
61-90 Days 378,875 26.6 % 419,421 31.5 %
91-120 Days % 3,563 0.3 %
121-150 Days 2,284 0.2 % 1,953 0.2 %
151-180 Days 12,241 0.9 % 11,008 0.8 %
181-360 Days 121,971 8.6 % 35,162 2.6 %
> 360 Days 66,559   4.7 % 73,015   5.5 %
$ 1,421,506   100.0 % $ 1,330,943   100.0 %
 
  (1)   Reverse repos involving underlying investments that we had sold
prior to the applicable period end for settlement following the
applicable period end, are shown using their original maturity dates
even though such reverse repos may be expected to be terminated
early upon settlement of the sale of the underlying investment. Not
included are any reverse repos that we may have entered into prior
to the applicable period end for which delivery of the borrowed
funds is not scheduled until after the applicable period end.
(2) Remaining maturity for a reverse repo is based on the contractual
maturity date in effect as of the applicable period end. Some
reverse repos have floating interest rates, which may reset before
maturity.
 

The weighted average remaining term on our reverse repos as of June 30,
2018 decreased slightly to 104 days from 108 days as of March 31, 2018.

Our borrowings outstanding under reverse repos were with a total of 24
counterparties as of June 30, 2018. As of June 30, 2018, we held liquid
assets in the form of cash and cash equivalents in the amount of $22.1
million.

Long-Term Debt

As of June 30, 2018, our outstanding borrowings included $86.0 million
in aggregate principal amount of unsecured Senior Notes, bearing
interest at a rate of 5.25% per annum and maturing on September 1, 2022.
Inclusive of debt issuance costs, our effective cost of funds on the
notes is 5.55%.

Total Borrowed Funds

The following table details our borrowings outstanding and
debt-to-equity ratios as of June 30, 2018 and March 31, 2018.

   
As of
June 30, 2018     March 31, 2018
($ in thousands)
Recourse(1) Borrowings:
Reverse Repurchase Agreements $ 1,421,506 $ 1,330,943
Other Secured Borrowings

 

10,990

 

9,330

Senior Notes, at par

 

86,000

 

86,000

Total Recourse Borrowings

$

1,518,496

$

1,426,273

Debt-to-Equity Ratio Based on Total Recourse Borrowings

 

2.48:1

 

2.34:1

Debt-to-Equity Ratio Based on Total Recourse Borrowings Excluding
U.S. Treasury Securities

 

2.47:1

 

2.33:1

Non-Recourse(1) Borrowings:
Other Secured Borrowings

$

84,640

$

62,550

Other Secured Borrowings, at fair value(2)

 

101,100

 

113,775

Total Recourse and Non-Recourse Borrowings

$

1,704,236

$

1,602,598

Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse
Borrowings

 

2.78:1

 

2.63:1

Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse
Borrowings Excluding U.S. Treasury Securities

 

2.77:1

 

2.62:1

 
  (1)   All of our non-recourse borrowings are secured by collateral. In the
event of default under a non-recourse borrowing, the lender has a
claim against the collateral but not any of our other assets. In the
event of default under a recourse borrowing, the lender's claim is
not limited to the collateral (if any).
(2) Relates to our non-QM loan securitization, where we have elected the
fair value option on the related debt.
 

The increase in our reverse repo borrowings on our Credit and Agency
portfolios and in our other secured borrowings, partially offset by a
decrease in our other secured borrowings at fair value, led to an
increase in our debt-to-equity ratio as of June 30, 2018 as compared to
the prior period, driven primarily by the growth in our Credit
portfolio. Our debt-to-equity ratio may fluctuate period over period
based on portfolio management decisions, market conditions, capital
markets activities, and the timing of security purchase and sale
transactions.

Other

Our expense ratio, which we define as our annualized base management fee
and other operating expenses, but excluding interest expense, other
investment related expenses, and incentive fees, as a percentage of
average equity, increased to 3.0% for the quarter ended June 30, 2018,
from 2.7% for the prior quarter. The increase in our annualized expense
ratio resulted primarily from an increase in professional fees,
compensation expense, and other operating expenses for the quarter. We
incurred an incentive fee expense of $0.3 million for the quarter ended
June 30, 2018. No incentive fee expense was incurred for the quarter
ended March 31, 2018.

Dividends

On August 1, 2018, our Board of Directors declared a dividend of $0.41
per share for the second quarter of 2018, payable on September 17, 2018
to shareholders of record on August 31, 2018. The declaration and amount
of future dividends remain in the discretion of the Board of Directors.
Our dividends are paid on a quarterly basis, in arrears.

Share Repurchase Program

On June 13, 2018, our Board of Directors approved the adoption of a
share repurchase program under which we are authorized to repurchase up
to 1.55 million common shares. The program, which is open-ended in
duration, allows us to make repurchases from time to time on the open
market or in negotiated transactions, including under 10b5-1 plans.
Repurchases are at our discretion, subject to applicable law, share
availability, price and our financial performance, among other
considerations. This program superseded the program that was previously
adopted on February 6, 2018, which also authorized us to repurchase up
to 1.55 million of common shares.

During the three-month period ended June 30, 2018, we repurchased
242,161 common shares at an average price per share of $14.98 and a
total cost of $3.6 million. From the inception of the current repurchase
program through August 3, 2018, we have not repurchased any common
shares.

At-the-Market Program

We have entered into equity distribution agreements for an
"at-the-market" offering program whereby we are able to sell common
shares from time to time in the open market or in negotiated
transactions. Under the program, which is open-ended in duration, we can
sell common shares with a value of up to $150 million. As of June 30,
2018 we have not yet issued any common shares under the offering program.

About Ellington Financial LLC

Ellington Financial LLC is a specialty finance company that invests in a
diverse array of financial assets, including residential and commercial
mortgage-backed securities, residential and commercial mortgage loans,
consumer loans and asset-backed securities backed by consumer loans,
collateralized loan obligations, corporate equity and debt securities
(including distressed debt), non-mortgage and mortgage-related
derivatives, equity investments in mortgage-related entities, and other
strategic investments. Ellington Financial LLC 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 Tuesday,
August 7, 2018, to discuss our financial results for the quarter ended
June 30, 2018. To participate in the event by telephone, please dial
(877) 241-1233 at least 10 minutes prior to the start time and reference
the conference passcode 6598699. International callers should dial (810)
740-4657 and reference the same passcode. 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 its website at www.ellingtonfinancial.com
under "For Our Shareholders—Presentations."

A dial-in replay of the conference call will be available on Tuesday,
August 7, 2018, at approximately 2 p.m. Eastern Time through Tuesday,
August 21, 2018 at approximately 11:59 p.m. Eastern Time. To access this
replay, please dial (800) 585-8367 and enter the passcode 6598699.
International callers should dial (404) 537-3406 and enter the same
passcode. 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. 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. Examples of forward-looking statements
in this press release include without limitation management's beliefs
regarding the current economic and investment environment and our
ability to implement our investment and hedging strategies, performance
of our investment and hedging strategies, our exposure to prepayment
risk in our Agency portfolio, estimated effects on the fair value of our
holdings of a hypothetical change in interest rates, statements
regarding the drivers of our returns, our expected ongoing annualized
expense ratio, and statements regarding our intended dividend policy
including the amount to be recommended by management, and our share
repurchase program. Our results can fluctuate from month to month and
from quarter to quarter depending on a variety of factors, some of which
are beyond our control and/or are difficult to predict, including,
without limitation, changes in interest rates and the market value of
our securities, 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 maintain our
exclusion from registration under the Investment Company Act of 1940 and
other changes in market conditions and economic trends. Furthermore,
forward-looking statements are subject to risks and uncertainties,
including, among other things, those described under Item 1A of the our
Annual Report on Form 10-K filed on March 15, 2018 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 or implied 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.

       

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 
Three-Month Period Ended

Six-Month
Period Ended

(In thousands, except per share amounts) June 30, 2018     March 31, 2018 June 30, 2018
Investment income
Interest income $ 31,941 $ 28,092 $ 60,033
Other income   1,094     716     1,811  
Total investment income   33,035     28,808     61,844  
Expenses
Base management fee to affiliate (Net of fee rebates of $252, $275,
and $527, respectively)
2,021 1,978 4,000
Incentive fee 291 291
Interest expense 13,383 11,562 24,946
Other investment related expenses:
Servicing and other 3,771 2,952 6,723
Other operating expenses   2,578     2,074     4,650  
Total expenses   22,044     18,566     40,610  
Net investment income   10,991     10,242     21,234  
Net realized gain (loss) on:
Investments (388 ) 12,584 12,196
Financial derivatives, excluding currency hedges (3,632 ) 902 (2,730 )
Financial derivatives—currency hedges 3,787 (2,204 ) 1,584
Foreign currency transactions   (1,110 )   1,769     658  
  (1,343 )   13,051     11,708  
Change in net unrealized gain (loss) on:
Investments 7,457 (6,851 ) 605
Other secured borrowings 414 784 1,198
Financial derivatives, excluding currency hedges 6,553 3,197 9,749
Financial derivatives—currency hedges 76 800 877
Foreign currency translation   (1,964 )   101     (1,863 )
  12,536     (1,969 )   10,566  
Net realized and change in net unrealized gain (loss) on
investments, financial derivatives, and other secured borrowings
  11,193     11,082     22,274  
Net increase in equity resulting from operations   22,184     21,324     43,508  
Less: Increase in equity resulting from operations attributable to
non-controlling interests
  991     285     1,276  
Net increase in shareholders' equity resulting from operations $ 21,193   $ 21,039   $ 42,232  
Net increase in shareholders' equity resulting from operations
per share:
Basic and diluted $ 0.69 $ 0.67 $ 1.36
Weighted average shares and LTIP units outstanding 30,695 31,322 31,007
Weighted average shares and convertible units outstanding 30,907 31,534 31,219
 
   

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES, AND EQUITY

(UNAUDITED)

 
As of
(In thousands, except share amounts)

June 30,
2018

    March 31,
2018
    December 31,
2017(1)
ASSETS
Cash and cash equivalents $ 22,071 $ 25,715 $ 47,233
Restricted cash 425 425 425
Investments, financial derivatives, and repurchase agreements:
Investments, at fair value (Cost–$2,631,409, $2,347,459, and
$2,071,754)
2,625,471 2,343,738 2,071,707
Financial derivatives–assets, at fair value (Net cost–$24,510,
$25,391, and $31,474)
30,669 30,038 28,165
Repurchase agreements (Cost–$214,346, $132,730, and $155,109)   214,411   132,538   155,949
Total Investments, financial derivatives, and repurchase agreements 2,870,551 2,506,314 2,255,821
Due from brokers 84,196 95,549 140,404
Receivable for securities sold and financial derivatives 637,965 522,126 476,000
Interest and principal receivable 32,469 32,488 29,688
Other assets   24,399   13,729   43,770
Total assets $ 3,672,076 $ 3,196,346 $ 2,993,341
LIABILITIES
Investments and financial derivatives:
Investments sold short, at fair value (Proceeds–$880,825, $687,783,
and $640,202)
$ 882,146 $ 691,962 $ 642,240
Financial derivatives–liabilities, at fair value (Net
proceeds–$18,294, $22,202, and $27,463)
  25,675   34,925   36,273
Total investments and financial derivatives 907,821 726,887 678,513
Reverse repurchase agreements 1,421,506 1,330,943 1,209,315
Due to brokers 3,250 21,054 1,721
Payable for securities purchased and financial derivatives 431,024 225,519 202,703
Other secured borrowings (Proceeds–$95,630, $71,880, and $57,909) 95,630 71,880 57,909
Other secured borrowings, at fair value (Proceeds–$102,298,
$114,559, and $125,105)
101,100 113,775 125,105
Senior notes, net 84,902 84,837 84,771
Accounts payable and accrued expenses 4,105 3,876 3,885
Base management fee payable to affiliate 2,021 1,978 2,113
Incentive fee payable 291
Interest and dividends payable 6,791 5,168 5,904
Other liabilities   360   479   441
Total liabilities   3,058,801   2,586,396   2,372,380
EQUITY   613,275   609,950   620,961
TOTAL LIABILITIES AND EQUITY $ 3,672,076 $ 3,196,346 $ 2,993,341
ANALYSIS OF EQUITY:
Common shares, no par value, 100,000,000 shares authorized;
(30,149,880, 30,392,041, and 31,335,938, shares issued and
outstanding)
$ 589,000 $ 584,005 $ 589,722
Additional paid-in capital–LTIP units   10,567   10,469   10,377
Total Shareholders' Equity   599,567   594,474   600,099
Non-controlling interests   13,708   15,476   20,862
Total Equity $ 613,275 $ 609,950 $ 620,961
PER SHARE INFORMATION:
Common shares, no par value $ 19.89 $ 19.56 $ 19.15
DILUTED PER SHARE INFORMATION:
Common shares and convertible units, no par value (2) $ 19.57 $ 19.25 $ 18.85
 
  (1)   Derived from audited financial statements as of December 31, 2017.
(2) Based on total equity excluding non-controlling interests not
represented by instruments convertible into common shares.

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