An Eye on Financial Results: Ellington Financial LLC (NYSE: EFC)

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On Tuesday, Ellington Financial LLC (NYSE: EFC) oscillated between $15.70 and $15.79 before concluding trading period lower -0.25% at $15.70. The stock recorded total trading quantity of 16,937 shares as compared to its average volume of 70,853 shares. The share price fluctuated between $14.12 to $16.43 during the 52-week trading period. The firm has a total market worth of $70.85k and $476.682M shares remain outstanding.

Ellington Financial LLC (EFC) stated financial results for the quarter ended March 31, 2018.

First Quarter 2018 Results

Market Overview

In March, the Federal Reserve raised the target range for the federal funds rate by 0.25%, to 1.50%–1.75%, its sixth rate increase since December 1, 2015.

In January, and then again in April, the Federal Reserve increased 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 $8B per month in January, and to $12B per month in April.

Despite steepening over the first two months of the year, the yield curve finished the quarter flatter than where it started, for the fifth consecutive quarter. The 2-year U.S. Treasury yield rose 38 basis points to end the quarter at 2.27%, while the 10-year U.S. Treasury yield increased 33 basis points to 2.74%; the spread between the 2-year and 10-year tightened to just 47 basis points, as contrast to 52 basis points at year-end.

One-month LIBOR increased 32 basis points to end the first quarter at 1.88%, while three-month LIBOR increased 62 basis points to 2.31%. Both of these levels were the highest in over nine years.

Mortgage rates increased in the first quarter, with the Freddie Mac survey 30-year mortgage rate rising 45 basis points to end the quarter at 4.44%.

Overall Agency RMBS prepayment rates continued to be muted during the quarter. The Mortgage Bankers Association’s Refinance Index, which measures refinancing application volumes, was unchanged quarter over quarter.

Credit Summary


As of March 31, 2018, our total long Credit portfolio (not including corporate relative value trading positions, hedges, and other derivatives) was $1.146B, which was a raise of about 12% from $1.025B as of December 31, 2017. During the quarter, the Credit strategy generated total gross income of $25.3M, or $0.81 per share.


The growth of our Credit portfolio primarily came from net purchases in the following strategies: residential mortgage loans and REO, European non-conforming RMBS, and consumer loans and ABS. In addition, we increased our holdings of certain more liquid, lower-risk assets, such as U.S. non-Agency RMBS and CLO note investments. We believe that these investments can be sold easily as we continue to add higher-yielding assets, and in the meantime they provide the prospects for solid net income. Portfolios that declined in size during the quarter included European CLOs and U.S. CMBS.


Also during the quarter, we added financing facilities for certain of our consumer loan and European non-performing loan strategies, and take partd in a second Ellington-sponsored CLO that closed in January. We are optimistic that market conditions will support additional securitizations across our non-QM and leveraged loan strategies later this year. Of note with respect to our CLO securitization strategy, the United States Court of Appeals for the District of Columbia Circuit ruled in February that U.S. risk retention rules do not apply to managers of open-market CLOs. If not successfully challenged, we believe that this ruling will increase the liquidity of certain of our CLO investments.


Our Credit portfolio performed very well during the quarter and continued to be the primary driver of our earnings. During the first quarter, our Credit strategy generated gross investment income of $11.3M, net realized gain of $5.0M, and change in net unrealized gain of $7.7M. We benefited from strong performance from several of our loan-related strategies, including consumer loans, small balance commercial mortgage loans, and European and U.S. non-performing loans, together with investments in mortgage originators. Among our securities strategies, our CMBS, non-Agency and European non-conforming RMBS, and U.S. CLO strategies also contributed strong results.


In the first quarter, our credit hedges had no material impact on our results. The interest rate hedges in our Credit strategy, which presently consist primarily of interest rate swaps, contributed a modest gain for the quarter. We had net losses on our foreign currency hedges for the quarter, but these were over offset by net gains on foreign currency-related transactions and translation.


In our corporate credit relative value strategy as of March 31, 2018, the market value of our long corporate bonds was $74.2M, the aggregate market value of our short corporate bonds was $(46.4)M, and the aggregate notional amount of our credit default swaps where we were long protection and short protection was $122.8M and $(162.4)M, respectively. This strategy contributed modestly to results in the first quarter. As of December 31, 2017 in this strategy, the market value of our long corporate bonds was $51.2M, the aggregate market value of our short corporate bonds was $(54.3)M, and the aggregate notional amount of our credit default swaps where we were long protection and short protection was $142.5M and $(140.3)M, respectively.


Agency Summary


As of March 31, 2018, our long Agency RMBS portfolio increased about 6.5% to $928.2M, from $871.8M as of December 31, 2017. During the first quarter, our Agency strategy generated a modest loss of $(0.3)M, or $(0.02) per share. Agency RMBS prices dropped during the quarter, which led to realized and unrealized losses on our portfolio of $(13.8)M. However, these losses were mostly offset by the net interest income from the Agency portfolio of $3.2M and gains on our interest rate hedges and other activities of $10.2M.

While the widening in Agency RMBS yield spreads was the main cause of the modest loss in our Agency strategy for the quarter, results for the strategy 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 important component of our interest rate hedging strategy.

Average pay-ups on our specified pools reduced to 0.61% as of March 31, 2018, from 0.74% as of December 31, 2017. Pay-ups are price premiums for specified pools relative to their TBA counterparts. As of March 31, 2018, the weighted average coupon on our fixed-rate specified pools was 4.0%.

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 $10.2M from our interest rate hedges and other activities, as interest rates increased. In our hedging portfolio, the relative proportion (based on 10-year equivalents2) of short positions in TBAs and of U.S. Treasury futures contracts increased quarter over quarter relative to interest rate swaps.

Portfolio turnover for our Agency strategy was about 8% for the quarter, and we had net realized losses of $(1.2)M, not including interest rate hedges.

2″10-year equivalents” for a group of positions represent the amount of 10-year U.S. Treasury securities that would experience a similar change in market value under a standard parallel move in interest rates.

The average true range of Ellington Financial LLC’s (EFC) is recorded at 0.14 and the relative strength index of the stock stands 49.13. The stock price is going above to its 52 week low with 11.19% and lagging behind from its 52 week high with -4.42%. Analyst recommendation for this stock stands at 2.30. A look on the firm performance, its monthly performance is -1.26% and a quarterly performance of 5.44%. The stock price is trading upbeat from its 200 days moving average with 3.21% and down from 50 days moving average with -0.03%.


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