Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Financial Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If any time your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K filed on March 13, 2020, and under Part 2, Item 1A of our quarterly report on Form 10-Q, as amended for the three-month period ended March 31, 2020, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates, and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial, Mark Takashi, Co-Chief Investment Officer of EFC, and J.R. Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry.

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. Over the course of the second quarter, we saw a significant rebound across most credit-sensitive fixed income assets following that violent sell-off in March and early April. Thanks to our risk and liquidity management, EFC had avoided forced or distressed asset sales during the market turmoil, and so we avoided locking in losses at depressed prices. If you recall from our previous earnings call, we explained that when we had strategically sold agency MBS in March and early April, we focused those sales on our most generic, lower pay-up specified pools, keeping our deep value pools with higher pay-ups, in anticipation of an eventual market rebound. This selective selling in agency MBS enabled us to get through the market crisis with our credit portfolio intact and our liquidity solid. After the worst had passed, we had first resumed only very limited purchase and sales in credit. But moving into May and June, markets had stabilized enough that we fully resume new investments, both in credit and agency. With many specialty finance companies still hobbled in the aftermath of the market-wide deleveraging events of March and early April, we are seeing compelling net interest margins on new loan originations and are exploring some exciting potential strategic investments in loan originators. As of today, our agency portfolio is about back to where it was at March 31st. But more importantly, our credit portfolio is already about 5% larger today than it was on June 30th, just a little over a month ago. To summarize, all the steps we took during the deaths of the market stresses have not only enabled us to participate in the market rebound in our existing credit assets, but since then we've been able to add, and we continue to add, credit assets at highly attractive prices. As you can see on slide four, we had 85 cents per share of net income and 39 cents per share of core earnings. Since these both easily covered our 25 cents of dividends declared for the quarter, we rebuilt a nice amount of book value during the quarter, and we are demonstrating that there's ample room for us to grow our dividend. Our economic return for the quarter was 5.7%, which is around 25% annualized. Importantly, we had excellent performance from our loan businesses. In our non-QM business, we completed our fifth securitization in June with strong investor demand, and our non-QM loan production has now come roaring back. Our short duration loan portfolios, especially our residential transition loan and consumer loan portfolios, generated great ROEs this quarter. As with previous quarters, our short duration loan portfolios have continued to return principal quickly. During the second quarter, we received proceeds from principal repayments of about $70 million on our small balance commercial mortgage loan, consumer loan, and residential transition loan portfolios. which represented more than 11% of the aggregate size of those portfolios coming into the quarter. When the opportunity set for new investments is changing quickly, like it has this year for our loan businesses, short duration can be a huge benefit as we can redeploy our incoming stream of principal payments exactly in those subsectors where we see the best opportunities. Additionally, Longbridge Financial, the reverse mortgage originator in which we hold a minority stake, had one of its strongest quarters yet, driven by strong borrower demand in the current environment and higher origination margins. Because the reverse mortgage business provides liquidity to borrowers without the need for them to make monthly principal and interest payments, that business has a counter-cyclical component to it. And not surprisingly, borrower demand for the product has soared in recent months amidst the economic pain and uncertainty brought on by COVID. Finally, we also had an exceptional quarter in our agency RMBS portfolio. which Mark will discuss in more detail. On the liability side of the balance sheet, we took substantial steps during the second quarter to further improve and extend our sources of financing and leverage. The non-QM securitization deal we completed add yet another term non-mark-to-market facility to our balance sheet. We also extended the terms of several of our credit facilities and obtained term financing for numerous loan assets that were previously unfinanced. Furthermore, the market for standard repo financing of securities has now largely returned to pre-March levels. We finished the second quarter with lower leverage and more cash, even though we held it March 31st. So we continue to maintain ample dry powder to capitalize on opportunities and to withstand any future shocks. With that, I'll turn the call over to JR to go through our second quarter financial results in more detail.