Ellington Financial Inc. Reports Fourth Quarter 2020 Results

Rhea-AI Summary

Ellington Financial reported a stellar fourth quarter for 2020 with a net income of $63.2 million, or $1.44 per common share, contributing to a full year net income of $17.2 million, or $0.39 per share. Core earnings stood at $16.0 million, or $0.37 per share. The company's credit strategy gross income was $75.0 million, while the agency's was $6.3 million. With a 7.5% dividend yield based on the latest stock price, Ellington continues to emphasize liquidity and growth in its loan origination businesses.

Positive

• Net income of $63.2 million, or $1.44 per share for Q4 2020.
• Full year 2020 net income of $17.2 million, or $0.39 per share.
• Core earnings of $16.0 million, or $0.37 per share.
• Credit strategy gross income of $75.0 million for Q4 2020.
• Strong performance in loan origination businesses, particularly in non-QM and reverse mortgages.

Negative

• None

Ellington Financial Inc. (NYSE: EFC) (the "Company") today reported financial results for the quarter ended December 31, 2020.

Highlights

• Net income of $63.2 million, or $1.44 per common share; full year 2020 net income of $17.2 million, or $0.39 per common share.
• Core Earnings¹ of $16.0 million, or $0.37 per share.
• Book value per common share as of December 31, 2020 of $17.59, including the effects of dividends of $0.29 per common share for the quarter.
• Credit strategy gross income of $75.0 million for the quarter, or $1.69 per share.
• Agency strategy gross income of $6.3 million for the quarter, or $0.13 per share.
• Dividend yield of 7.5% based on the February 17, 2021 closing stock price of $15.92 per share, and dividend of $0.10 per common share declared on February 5, 2021.
• Debt-to-equity ratio of 2.6:1 and recourse debt-to-equity ratio of 1.6:1² as of December 31, 2020.
• Cash and cash equivalents of $111.6 million as of December 31, 2020, in addition to other unencumbered assets of $442.5 million.

Fourth Quarter 2020 Results

"Ellington Financial fired on all cylinders in the fourth quarter, with broad-based contributions across our diversified credit and Agency portfolios. EFC generated Core Earnings of $0.37 per share, and a non-annualized quarterly economic return of 8.7% for the quarter," said Laurence Penn, Chief Executive Officer and President. "The fourth quarter's strong results brought our economic return and net income positive for the full year, despite the extreme volatility encountered earlier in the year. I am extremely proud of this result, which I believe confirms yet again the importance and effectiveness of our risk and liquidity management. Notably, EFC is one of the only publicly traded hybrid mortgage REITs to post a profit in 2020.

"During the fourth quarter, our loan origination businesses again led the way. In the non-QM space, our affiliate LendSure had a record quarter for origination volume, and our affiliate Longbridge concluded an outstanding year in the reverse mortgage space. We also closed on our second non-QM securitization of the year, and we securitized a pool of our unsecured consumer loans. We had strong performance across our short-duration loan portfolios, particularly residential transition mortgage loans, consumer loans, and small-balance commercial mortgage loans. In addition, our credit securities performed very well, most notably CLOs, CMBS, non-Agency RMBS, and European RMBS, as prices continued to recover from the March selloff. Finally, our Agency portfolio delivered another quarter of excellent results.

"Moving into 2021, our focus continues to be on growing our proprietary loan origination businesses, including potentially adding more strategic equity investments and loan flow purchase agreements. We will also continue to be opportunistic in our securities strategies, and plan to continue to extend and diversify our financings. We still hold ample liquidity and employ low leverage, which means that we have plenty of dry powder to add assets and grow earnings. As always, our disciplined hedging and risk management should continue to be critical in protecting book value, as we tackle the challenges and opportunities of the year ahead."

Financial Results

The Company's total long credit portfolio³ increased by approximately 2% in the fourth quarter, to $1.434 billion from $1.405 billion. The quarter-over-quarter increase was driven by larger non-QM and residential transition loan acquisitions, which more than offset significant pay-offs on the Company's small balance commercial mortgage loan and consumer loan portfolios, as well as the completion of two loan securitizations during the quarter. In addition, the Company's total long Agency RMBS portfolio increased approximately 4% to $959.4 million as of December 31, 2020, from $919.9 million as of September 30, 2020.

The Company's debt-to-equity ratio decreased to 2.6:1 as of December 31, 2020, as compared to 2.7:1 as of September 30, 2020, primarily as a result of the completion during the quarter of a consumer loan securitization, which the Company did not consolidate, as well as an increase in the Company's total equity. The Company's recourse debt-to-equity ratio, adjusted for unsettled purchases and sales, also decreased over the course of the quarter to 1.6:1 from 1.7:1, driven by the increase in the Company's total equity. As of December 31, 2020, the Company had cash and cash equivalents of approximately $111.6 million, along with other unencumbered assets of $442.5 million.

During the fourth quarter, the Company's credit strategy generated total gross income of $75.0 million, or $1.69 per share, and its Agency strategy generated total gross income of $6.3 million, or $0.13 per share.

The Company's credit portfolio generated excellent results for the quarter, driven by strong net interest income⁴ and significant mark-to-market gains across the portfolio. The Company benefited from strong performance in all of its credit strategies, as prices and liquidity continued to improve following the substantial market selloff earlier in the year. The Company also had notable strong performance from its equity investments in mortgage originators. Finally, with credit spreads tightening across most asset classes, credit hedges were the sole detractor of results during the quarter.

The Company's Agency strategy delivered another quarter of strong performance, as Agency RMBS yield spreads tightened significantly. The primary drivers of these results were strong net interest income on the Company's Agency RMBS investments, net realized and unrealized gains on its long TBA holdings, driven by Federal Reserve purchasing activity, and net realized and unrealized gains on interest rate hedges as long-term interest rates rose. A portion of this income was offset by net realized and unrealized losses on the Company's Agency RMBS investments, driven largely by elevated prepayment activity. Average pay-ups on the Company's specified pools declined to 2.05% as of December 31, 2020, from 2.25% as of September 30, 2020, primarily because its new purchases during the quarter consisted mainly of lower-pay-up pools. Pay-ups are price premiums for specified pools relative to their TBA counterparts.

During the fourth quarter the Company continued to hedge interest rate risk, primarily through the use of interest rate swaps, and to a lesser extent through the use of short positions in TBAs, U.S. Treasury securities, and futures. In addition, the Company continued to hold a portfolio of long TBAs for investment during the quarter.

¹ Core Earnings is a non-GAAP financial measure. See "Reconciliation of Net Income (Loss) to Core Earnings" below for an explanation regarding the calculation of Core Earnings.
² Excludes repo borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, the Company's debt-to-equity ratio based on total recourse borrowings was 1.6:1 as of December 31, 2020.
³ Includes REO at the lower of cost or fair value. Excludes hedges and other derivative positions, as well as tranches of the Company's consolidated non-QM securitization trusts that were sold to third parties, but that are consolidated for U.S. GAAP reporting purposes. Including such tranches, the Company's total long credit portfolio was $2.173 billion and $2.095 billion, as of December 31, 2020 and September 30, 2020, respectively.
⁴ Excludes any interest income and interest expense items from Interest rate hedges, net and Credit hedges and other activities, net.

The following table summarizes the Company's investment portfolio⁽¹⁾ holdings as of December 31, 2020 and September 30, 2020:

		Fair Value
(In thousands)		December 31, 2020				September 30, 2020
Long:
Credit:
Dollar Denominated:
CLO(2)		$	181,229			$	165,954
CMBS		117,652				105,015
Commercial Mortgage Loans and REO(3)(4)		269,287				304,698
Consumer Loans and ABS backed by Consumer Loans(2)		112,077				200,857
Corporate Debt and Equity and Corporate Loans		12,606				10,257
Equity Investments in Loan Origination Entities		79,536				57,009
Non-Agency RMBS		154,492				166,787
Residential Mortgage Loans and REO(3)		1,188,731				1,033,481
Non-Dollar Denominated:
CLO(2)		6,108				2,693
Consumer Loans and ABS backed by Consumer Loans		306				333
Corporate Debt and Equity		28				27
RMBS(5)		51,388				47,663
Agency:
Fixed-Rate Specified Pools		807,704				756,580
Floating-Rate Specified Pools		6,454				7,046
IOs		47,656				51,705
Reverse Mortgage Pools		97,629				104,524
Total Long		$	3,132,883			$	3,014,629
Short:
Credit:
Dollar Denominated:
Corporate Debt and Equity		$	(218)			$	(461)
Government Debt:
Dollar Denominated		—				(14,310)
Non-Dollar Denominated		(38,424)				(36,722)
Total Short		$	(38,642)			$	(51,493)

(1)		This information does not include financial derivatives.
(2)		Includes equity investments in securitization-related vehicles.
(3)		In accordance with U.S. GAAP, REO is not considered a financial instrument and as a result is included at the lower of cost or fair value.
(4)		Includes equity investments in unconsolidated entities holding small balance commercial mortgage loans and REO.
(5)		Includes an equity investment in an unconsolidated entity holding European RMBS.

The following table summarizes the Company's operating results for the three-month periods ended December 31, 2020 and September 30, 2020 and the year ended December 31, 2020:

		Three-Month Period Ended December 31, 2020				Per Share				Three-Month Period Ended September 30, 2020				Per Share				Year Ended December 31, 2020				Per Share
(In thousands, except per share amounts)
Credit:
Interest income and other income(1)		$	34,089			$	0.77			$	37,764			$	0.85			$	150,266			$	3.41
Realized gain (loss), net		(3,984)

FAQ

What were Ellington Financial's Q4 2020 earnings per share?

Ellington Financial reported earnings per share of $1.44 for Q4 2020.

What is the net income for Ellington Financial in 2020?

Ellington Financial reported a net income of $17.2 million for the full year 2020.

How much was the dividend declared by Ellington Financial in February 2021?

Ellington Financial declared a dividend of $0.10 per common share on February 5, 2021.

What was the book value per share of Ellington Financial as of December 31, 2020?

The book value per common share of Ellington Financial was $17.59 as of December 31, 2020.

What was Ellington Financial's dividend yield based on February 2021 stock price?

The dividend yield for Ellington Financial was 7.5% based on the stock price of $15.92 on February 17, 2021.