Ellington Financial Inc. Common Stock

Good morning, ladies and gentlemen. Welcome to the Ellington Financial second quarter 2026 earnings call. Today's call is being recorded and 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. If at any time your question has been answered, you may remove yourself from the queue by pressing star two. And lastly, if you should require operator assistance, please press star zero. I will now turn the call over to Mr. Ala-Deen Shilleh, Associate General Counsel and Secretary. Please go ahead, Mr. Shilleh.

Thank you. Before we begin, I'd like to remind everyone that this conference call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our annual and quarterly reports filed with the SEC. Actual results may differ materially from these statements, so they should not be considered to be predictions of future events. The company undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Financial, Mark Tecotzky, Co-Chief Investment Officer, and J.R. Herlihy, Chief Financial Officer. Our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Today's call will track that presentation, and all statements and references to figures are qualified by the important notice and endnotes in the presentation. With that, I'll hand it over to Larry.

Thanks, Ala-Deen. Good morning, everyone, and thank you for joining us today. I'll begin on slide three of the presentation. Ellington Financial delivered yet another terrific quarter, continuing the momentum we have built over the past several years. Strong performance across our diversified platform once again drove strong GAAP earnings, adjusted distributable earnings well above our dividend, and also drove a further increase in book value per share. For the quarter, we generated GAAP net income of 43 cents per share, ADE of 60 cents per share, and an annualized economic return of 13.6%. These results reflected excellent securitization execution continued outstanding results at Longbridge, solid contributions from our other loan origination partners, and continued strong credit performance across our loan portfolios. Meanwhile, the financing spreads on our credit lines continue to narrow, which is providing an additional tailwind to our results. Importantly, all these drivers reinforce one another. Strong Loan Sourcing supports capital deployment and securitization volume. Through our securitization executions, we create attractive retained investments that help build our future earnings power, we release capital for redeployment, and we replace short-term financing with more stable non-mark-to-market funding. Moreover, our securitizations benefit greatly from increasing scale, as our larger and more frequent transactions continue to expand our investor base and have improved our execution levels over time. Meanwhile, strong loan credit performance supports the yields on our retained investments and also sustains and broadens the institutional investor demand for our securitizations. Finally, the profitability and market share growth of our originator affiliates contribute directly to our earnings while also expanding the flow of loans available to our investment portfolio. We saw this dynamic play out repeatedly during the quarter. Ellington's proprietary residential loan portal, where we lock in loans for more than 40 unique sellers, is now generating more than $15 million of loan purchases per day for a pace of around $4 billion annually. This portal supplied a significant portion of the approximately $2 billion of loans we securitized during the quarter. And of course, we have Longbridge, which supplies their expanding pipeline of proprietary reverse mortgage loans for our investment and securitization. Foundational to all of this is Ellington's well-known and long-standing focus on proprietary research, data, and modeling capabilities. A full 20% of Ellington's employees are dedicated to research and technology, and recent advances in AI are further enhancing the output of that team. Ellington's research and analytics help shape the loans we originate The underwriting standards and loan programs we support, the risks we choose to retain and those we choose to offload or hedge, and the way we manage our liquidity. Some of this is clearly visible in our credit statistics, as shown on slide 14. As you can see on that slide, inception to date cumulative realized credit losses were a mere 17 basis points on approximately $20.4 billion of residential mortgage loan fundings. and just 39 basis points on more than $2.5 billion of commercial mortgage bridge loan originations. Keep in mind, these are cumulative loss amounts with the annualized ratios being far lower. This credit performance spans multiple market cycles, including COVID, the 2022 interest rate sell-off and the more recent commercial real estate downturn and reflect not only the quality of our underwriting at loan origination, but also the effectiveness of our asset management and loan workout capabilities. The same discipline is evident in our securitizations. Our EFMT non-QM shelf has continued to rank among the strongest in its cohort for both low delinquencies and controlled prepayment speeds. These drivers enhance the yields on the retained tranches we invest in while also helping reinforce the liquidity and reputation of the EFMT franchise. They also demonstrate how Ellington's competitive advantage in research and underwriting can translate into stronger credit outcomes and better investment performance. Longbridge had another standout quarter. Originations were up 38% year over year, margins remained healthy, securitization executions improved, and servicing continued to add meaningfully to the bottom line. Longbridge remains one component of EFC's much broader platform, but its performance demonstrates the value that can be created when sourcing, analytics, financing, securitization, and servicing all work together. With that, please turn to slide five, and I'll hand the call over to JR to walk through our financial results in more detail.

JR? Thanks, Larry. Good morning, everyone. I'll begin on slide five with our earnings summary, then review the principal drivers of the quarter, and several disclosure enhancements we've made in our portfolio and balance sheet activity. For the second quarter, CFC reported GAAP net income of 43 cents per common share on a fully marked market basis and adjusted distributable earnings of 60 cents per share. On slide five, you can see the contribution to GAAP net income by segment, and on slide six, the corresponding contribution to ADE. Our quarterly results again demonstrated the strengths of our underlying businesses with continued excellent performance across the investment portfolio and another outstanding quarter from Longbridge. Looking ahead, we continue to see broad support for ADE reinforced by several factors, including attractive net interest margins, particularly on our portfolio of retained securitization tranches, robust credit performance, ample liquidity available for deployment, and of course, continued sizable earnings contributions from Longbridge. Turning to the investment portfolio, net interest income increased significantly quarter over quarter, reflecting attractive asset yields and a higher average portfolio size. Earnings from unconsolidated entities also remained strong, driven by solid results in our equity stakes and loan originators, and commercial mortgage bridge loans accounted for as equity method investments. Overall performance was excellent across the investment portfolio, led by our residential credit strategies, while gains on hedges more than offset net realized and unrealized losses. Credit performance across our loan businesses also remained excellent with exceptionally low life-to-date realized credit losses across both our residential and commercial mortgage loan portfolios consistent with the statistics that Larry highlighted. You'll notice several changes to our disclosures this quarter. These changes simplify certain parts of the presentation while adding detail where we believe it will be most useful to investors. First, we have incorporated Agency MBS into the broader investment portfolio disclosures throughout the presentation. In years past, Agency represented a substantially larger allocation of our capital, but we have since rotated much of that capital into credit strategies where we see stronger return opportunities and clearer competitive advantages. Given the smaller role today played by Agency MBS, We believe that the revised presentation better reflects how we evaluate and allocate capital across the portfolio. Second, we have expanded our long-range disclosures. Starting on slide nine, we now separately present HECM and proprietary reverse mortgage origination volumes, including the channel composition of each, providing greater visibility into the scale and growth of both product lines. We have also added submission volumes to this slide, Because loan fundings are preceded by loan submissions, we believe that submissions provide a useful leading indicator of future origination volume. As you can see on slide 9, second quarter submissions were up substantially, sequentially, supporting a healthy pipeline entering the second half of the year. That momentum is continuing, with July 2026 marking Longbridge's highest ever month for prop reverse mortgage originations and submissions. Finally, turning to slide 10, you can see that we are now presenting separate roll-forwards for HMBS MSRs and prop reverse mortgage MSRs, together with earnings generated by those assets. The roll-forwards separately identify overall MSR values, new production, revenue, runoff, and changes in fair value, providing greater visibility into changes in MSR value and the components of net servicing profits. We believe that this additional detail should make the Longbridge business easier for investors and analysts to understand and model. Turning to Longbridge's results, please turn back to slide eight. Longbridge delivered another outstanding quarter across both originations and servicing. It originated approximately $590 million of loans, a 38% year-over-year increase. Prop reverse represented approximately 54% of volume and reached record levels. while HECMS represented the remaining 46%. Originations at Longbridge benefited from strong volumes, healthy margins, and gains from the two proprietary reverse mortgage securitizations completed during the quarter. Those transactions represented Longbridge's strongest financing execution to date for this product as measured by overall debt spreads. Servicing also made a substantial contribution at Longbridge, reflecting both steady base servicing income and continued strong execution on sales of heckum tailpools. Consistent with Ellington's broader risk management approach, we maintain enterprise level interest rate hedges in the Longbridge segment that are designed to offset some of the pressure that higher interest rates can put on mortgage origination volumes and margins. Despite the increase in rates during the quarter, Longbridge's origination business remained highly profitable while the enterprise hedges also generated gains. That combination was unusually favorable in the second quarter. All else equal, we should generally expect origination profitability and interest rates to move inversely, so these hedges should help stabilize the segment's earnings across different interest rate environments. Turning next to portfolio activity, please turn to slide seven. Our adjusted long investment portfolio increased modestly during the quarter, as growth in residential transition loans, commercial mortgage bridge loans, and Retained RMBS more than offset the impact of continued securitization activity. In other words, asset sourcing kept pace with our robust securitization activity. Our shorter duration loan portfolios continued to generate significant principal repayments, including payoffs, providing internally generated capital for redeployment into new opportunities. Turning to financing, our focus remains on improving the durability, diversification and cost of our liability structure. As shown on slide 11, at quarter end, the weighted average borrowing rate on our recourse borrowings was 5.5%, essentially unchanged from the prior quarter, contributing to a solid overall net interest margin of 336 basis points, which was also roughly unchanged quarter over quarter. Approximately 29% of our recourse borrowings were long-term and non-market market, while 17% consisted of unsecured debt. In addition, the weighted average remaining term of our repo borrowings increased to 9.3 months, approximately double the level in mid-2025, reducing near-term refinancing risk and providing greater funding certainty. During the quarter, we extended and or improved terms on several warehouse facilities, while adding a new financing relationship covering multiple residential mortgage products. Our securitization program continued replacing shorter-term mark-to-market financing with longer-term non-recourse financing. Through the first half of 2026, we securitized approximately $4 billion unpaid principal balance compared to $4.4 billion UPV during all of 2025. We continue to be encouraged by the market's reception to our unsecured debt. Our outstanding notes have recently traded at a premium despite higher interest rates. reflecting the progress we've made strengthening our balance sheet and funding profile. We believe this positions us well to continue increasing the use of unsecured financing as well as preferred equity over time as market conditions permit. At quarter end, our recourse debt-to-equity ratio remained 1.9 to 1, while our overall debt-to-equity ratio increased modestly to 9.2 to 1, primarily reflecting additional non-recourse borrowings associated with recent securitizations. Turning now to our hedging portfolio on slide 17. We continue to manage interest rate, mortgage basis, and credit risks through a diversified set of instruments designed to protect book value while preserving our ability to capitalize on attractive opportunities. As you can see on slide 18, during the quarter we increased our credit hedges as market conditions changed and as the size and characteristics of our portfolio evolved. Turning to corporate other. Aside from recurring items, We also recognized unrealized losses in our corporate other category. As has been our long-standing practice, we carry our outstanding unsecured notes at fair value on the liability side of our balance sheet. With spreads on our debt tightening during the quarter, the increases in the prices of our outstanding debt led to the recognition of an unrealized loss. Also in this category, higher interest rates led to unrealized losses on the fixed receiver interest rate swaps we used to hedge the fixed payments on our unsecured notes and preferred equity. A quarter end book value per share increased by $0.05 to $13.61 after $0.39 per share of dividends, and our annualized compounded economic return for the quarter was 13.6%. With that, I'll turn the call over to Mark.

Thank you, JR. Despite rising interest rates, geopolitical uncertainty, and tremendous volatility in energy prices and equity markets, the mortgage and structured credit markets remain constructive. We had a favorable mortgage origination environment and relatively stable credit spreads, and we were able to execute our business plans consistently this quarter. Across our businesses, we continued to responsibly grow volumes, gain market share, expand our sourcing networks, and broaden our product offerings. Put simply, we bought a lot of loans, priced a lot of deals, and in so doing created a lot of attractive investments for EFC's portfolio. We also continue to support and collaborate closely with the growing portfolio of companies in which we've made equity investments. As a group, they have had phenomenal earnings this year, and their origination volumes have helped drive our securitization machine. On the commercial mortgage side, much of our loan sourcing comes through our affiliated originator, Sheridan Capital, which continues to grow its footprint and client base. We are helping institutionalize the business by expanding its capital markets capabilities and strengthening its operational infrastructure applying many of the same principles that have served us so well with our affiliated residential mortgage originators. This is exactly the ecosystem we've been building. Our consistent demand for high quality loans supports the growth and profitability of our origination partners. Those loans then become the raw material for our securitization platform creating attractive retained investments for EFC's portfolio while providing institutional investors with high quality securities. As Larry discussed earlier, those capabilities increasingly reinforce one another. Both net income and ADE again exceeded the dividends this quarter while we continue to keep recourse borrowings low and organically created investments continue to perform well. We also continue investing in technology and automation while pushing for deeper integration across our businesses. On the residential mortgage side, with the help of the loan portal that Larry mentioned, We continue streamlining our channel connecting credit worthy borrowers seeking home financing with the vast reservoir of institutional capital looking for investment grade bonds. At LongBridge, our investments in technology, process improvements, and AI enabled workflow look like they're paying off handsomely. For example, since January 23, the number of funded loans per operations employee has more than doubled, demonstrating how these investments are improving efficiency while supporting continued growth. This past quarter, we continued our disciplined portfolio growth while maintaining high securitization volumes. With bigger portfolios inevitably comes some delinquencies. We put substantial resources into resolving residential mortgage delinquencies optimally for the company while seeking the best practical outcomes for borrowers experiencing financial difficulty. On the residential side, we are close to completing the acquisition of a loan servicer. We have redeployed substantial internal resources to help build what we believe can be a best-in-class residential special servicing platform with specialized processes for managing delinquent loans across multiple mortgage products. That acquisition should close in Q3. We believe that controlling our own special servicer will unlock significant value for us as we align incentives, share valuable data, and refine our work-out expertise over time. We have a lot to build, but whether it's managing construction projects we take over from RTL borrowers or even just non-QM loans where borrowers can no longer pay their mortgage debt, we know that special servicing is going to be important to preserving value and delivering returns through market cycles. Stepping back, We are seeing an expansion of the addressable market for our business model. More and more mortgage loans are ultimately finding their way into the private label market rather than the GSEs. We expect approximately $250 billion of new issue non-agency mortgage securizations this year. Larger new issue volumes have dramatically improved liquidity across the asset class, attracting many new investors over the past year. As liquidity continues to improve, more institutional investors enter the market which in turn supports additional issuance and better execution. That virtuous cycle has been a meaningful tailwind for our securitization platform and for the broader private label market. We see these trends as ideally suited for integrated private sector capital platforms like Ellington Financial that can source, analyze, and securitize loans efficiently. Ellington's had a front row seat throughout this evolution, having been an early mover in securitizing non-QM, Close End Second Liens, Agency Eligible Loans, and of course, Proprietary Reverse Mortgages. As these markets continue to grow, we will continue investing in the people, technology, and infrastructure needed to support them, while continually working to improve efficiency across our platform. I'd like to finish with some thoughts on the forward MSR market, where we have one large investment that we've held since our acquisition of Arlington back in 2023. The market value of that MSR has increased significantly this year, even much more than you'd expect with the rise in interest rates we've seen. One factor at play is that for banks, the market is expecting that regulators will loosen the caps on how much tier one bank capital can be in MSRs. If that happens, banks could flip from being net sellers of MSRs into being net buyers. The second factor at play is that mortgage companies with large servicing and origination arms are bidding up MSRs. Not only can those companies add mortgage servicing rights to their existing portfolio more efficiently than others, but they can also cross sell a variety of products to what would become new servicing clients. When servicing low coupons in particular, home equity loans present obvious cross selling opportunities. We all saw the feverish bidding war for two harbors that recently came to an end and it was a large mortgage company as opposed to a pure investor that won that contest. Our forward MSR is also backed by low coupon loans and while we're pleased with the appreciation we've seen on that asset, we're better sellers than buyers at these levels from an investment standpoint. Now back to Larry.

Thanks, Mark. On last quarter's earnings call, I concluded with the observation that Ellington Financial was firing on oil cylinders. I'm happy to report that we still are with that momentum continuing into the third quarter. I firmly believe that EFC's sustained strong performance reflects the capabilities and investments we've been building over many years rather than the success of any single recent initiative. Ellington's investment in research, analytics, technology, and discipline risk management dates back to the firm's founding more than 30 years ago and has been central to EFC since its formation. Over the past decade, We've steadily expanded the ways we apply those capabilities by investing in strategic originator partnerships, building a best-in-class securitization platform, expanding our proprietary sourcing capabilities, and strengthening our funding profile. As those investments have reached greater scale, their benefits have increasingly reinforced one another across the business. We've now covered our dividend for eight consecutive quarters and counting, reflecting the increase in contribution of those long-term investments to our earnings. Looking ahead, we'll continue focusing on the things we can control, disciplined underwriting, thoughtful capital allocation, continued investment in technology and our platform, and maintaining a strong, flexible balance sheet. We also intend to be opportunistic issuers of unsecured debt and preferred equity when market conditions are favorable, further diversifying our funding sources and enhancing our financial flexibility. We are aiming for a virtuous cycle of stronger balance sheets and improved credit ratings. As we've emphasized throughout today's call, the strength of our platform is not in any single business or investment strategy. Rather, it is the way our research, relationships, technology, and capital markets capabilities reinforce one another to create an increasingly diversified and resilient earnings stream for our shareholders. Finally, A word about our adjusted distributable earnings and dividend. As strong as ADE was in the first quarter, it was even stronger in the second quarter at $0.60 per share compared to our $0.39 quarterly dividend. By out-earning the dividend, not only on an ADE basis, but on a GAAP basis as well, we've been able to build book value per share, and we think that's really important. For now, we think our $0.13 monthly dividend remains appropriate With ADE running so strong, we could see upward pressure on our dividend based on the REIT distribution requirements. For now, however, we believe that continuing to build book value per share is the best use of our excess earnings and that our current dividend remains appropriate.

With that, let's open the floor to Q&A. Operator, please go ahead. Thank you, Mr. Penn. Ladies and gentlemen, at this time, if you do have any questions or comments, please press star 1. Additionally, if you find your question has been addressed, you may remove yourself from the queue by pressing star 2. We'll go first this morning to Trevor Cranston with Citizens JMP.

Hey, thanks. Good morning. Mark mentioned the pending acquisition of a residential servicer. Can you provide any additional sort of color around that, if that would come with some MSR assets attached or subservicing contracts or just any additional color on what that would look like.

Thanks.

Mark? Why don't you take that one, Larry?

Sure. First of all, it's a small servicer. Single-digit billions of of Servicing Rights. It does have some subservicing contracts, as you mentioned, and it's diversified in the sense that it does service many different types of loans. And as we mentioned, we think it's going to close sometime in September, and it's The type of project, let's just call it, where we're going to try to build it as much in our image as we can. So it's not going to bring any appreciable size of MSRs that are going to have a noticeable impact on our balance sheet, per se, or frankly, even our earnings in the beginning. But as Mark said, we have big plans, especially to build out the special servicing aspects of the business. We think they already have some real good expertise in that area, in the special servicing area, and as Mark also mentioned in his script, that's gonna be super important to us over time to get the best possible outcomes from our delinquent loans.

I would just add one thing, Trevor, is that the motivation for this Thank you for joining us. and the available third-party special servicing capabilities have been diminished. We think there's a real need for high-touch servicing and we've seen the benefit of building things organically in collaboration with an experienced management team. So it's really, that was really the motivation for it.

Got it. Okay. That makes sense. And then on Longbridge, JR, in your commentary, you mentioned kind of the expected relationship and impact of higher rates on volumes and margins. Can you give us any sense sort of how Longbridge volume and margins are trending so far early in the third quarter with the move higher?

Yeah, and they've been growing the volumes of and a number of others. So, we've seen prop reverse relative to HECM over the last several quarters and this quarter we broke out them separately and you see the prop was a larger percentage than HECM. The reason I start there is we've seen that prop is relatively less sensitive to higher interest rates vis-a-vis HECM. We also have the enterprise hedge in place which all of the equal higher rates if it impacts origination volumes should offset some of that impact. guidance, if you will, on volumes and margins. We did include submissions for the first time in our presentation on slide 11, I believe. Excuse me, slide 9. And you can see that submissions in Q2, you know, for loans that are prospectively closing in Q3, $870 million in Q2 versus under $750 million in Q1. You can just see an upward trend. We showed the last six quarters. So I think that should give a good and many more. We're not giving Q3 guidance on margins. A lot of the profits in prop have also come through because of securitizations. We did two securitizations of prop loans in Q2. There's always going to be some noise in the profits from the Longbridge segment around the securitization activity and execution. But long story short, I think the submission story is looking positive going into Q3 for Longbridge.

And let me add two things to that. The first is that in terms of margins, In the HECM product, the real point of sale, if you will, is when you securitize into HMVS, and those spreads are still quite healthy, quite tight on a historical basis, so that's good. We don't see those moving, frankly. On the prop side, it's really a function of securitization in terms of when we, technically those still on balance sheet, but certainly when we feel like we've, I'll just say, generated a gain on those assets. And again, securitization spreads are still quite healthy. So gain on sale, looking good there. The other, or just in prop, again, sort of equivalent of gain on sale. The other thing I wanted to mention, when rates go up, The HECM product, the government product, has very, very defined rules in terms of what LTVs, principal limit factors, they're called, things like that, that the government will wrap effectively those loans. The FHA wraps those loans. So the prop product, of course, you have more flexibility. And what we found is that we found that when rates are low, the principal limit factors that are dictated by FHA actually are generally are often more competitive than on the prop side. But when rates rise often, and that's what we're seeing now, is the opposite is true. So we think that from a risk perspective, we think that that The government is actually imposing requirements that are probably a little too strict relative to where we think the right economics are. And so we and others in the space are able to take advantage of that and with rates higher offer products, offer loans that are more attractive, frankly, to customers. So we're actually, in some cases, seeing the product take some of that market share away from Thank you.

We'll go next now to Bose George with KBW.

Hey, guys. Good morning. This is Frankie Libetti on for Bose. Just sticking on the Longbridge topic, can you maybe discuss an outlook of more normalized earnings run rates? or contributions to ADE from Longbridge as you guys continue to gain share and scale that segment?

Sure. For the last two quarters, their contribution to ADE was $0.23 and $0.21. And the average of 2025 was $0.12. The portfolio is growing. Origination volumes are growing. The MSR portfolios are growing, and so that kind of recurring base servicing income is growing. There are a few, I'm trying to unpack the questions, there are a few different components that are important here. If you look at the roll forwards that were included in the presentation, you can see the net profits from those MSRs are six, six and a half cents per share, something like that. Meaning that everything else is 16, 17 cents per share for the quarter, originations I mentioned earlier that there's going to be noise in the segments results because of securitization. The number that we do and the execution that we did to this quarter. So securitization execution has been notably strong in the first two quarters of this year. I don't know that 16, 17 cents aside from servicing is the run rate. It's probably a little bit high. But we don't need it to be that high to hit our mid-40s ADE run rate that we had mentioned last quarter. So if it's in the low mid-teens, that's plenty to kind of carry its contribution to the overall EFC earnings stream.

Yeah, I think overall, we're comfortable now. Sure, if we do two securitizations in a quarter, Like we did just now, we'll see a higher ADE, right? That definitely helped drive the 60 cents. But even if we just do one, which I think is a modest goal at this point, we're comfortable guiding into the, let's just call it the high 40s on ADE.

Great. That's very helpful. And then switching to the investment portfolio, you continue to see strong returns there, given where... Spreads are now. Where do you see the best risk-adjusted return in credit today? And then conversely, where are you maybe least comfortable adding to? Thank you.

Mark Ira Tecotzky. Yeah. I guess what I would say is that we look at what's kind of happened not just this year but really the last year, so mid-25 to now, is that you've seen credit spreads tighten across the board. That's on investment-grade corporates, it's on high-yield bonds, it's in CRT, it's in non-QM investment-grade bonds. And you've seen the same thing happen to residential loan purchases and commercial loan purchases. So what's been supportive of our ADE is the fact that when you securitize, what really drives the economics is that difference between the spreads where you're buying the loans and the spreads where you're buying the you're selling the primarily investment grade bonds right what's that difference because that difference is really what you leverage in the retained pieces the same way sort of same way like how a CLO equity works right and so that difference has been preserved so loans are tighter than what they were a year ago but the bonds we sell are tighter than what they were a year ago We're not seeing a big change in expected yield on what we're retaining. That, to us, has been very favorable, that we're able to grow our portfolio at the same kind of yields where we were growing it a year ago, despite the fact that spreads have tightened. Where we think about pockets of weakness, and this is something we focus on all the time as we sort of parse through the monthly data we get. I think it's the same story you've seen a while ago. Lower FICO scores, right? Any model will have higher delinquencies on lower FICO scores versus higher FICO scores, but that difference has gotten a little bit more elevated in the past year. I think we also are watching closely Cash Out Refinancing. So borrowers that are choosing to cash out in this environment of relatively high interest rates, that can also be a signal. And so, you know, we have kept our consumer portfolio relatively small. That used to be a bigger part of our pie chart if you go back probably, you know, 10, 12 years. And so we've seen a little bit of weakness there from time to time over the years. and that's one of the reasons why we've reduced those holdings on a percentage basis.

Yeah, I was just going to say the other sector where you actually are seeing not just weakness, and we mentioned this earlier in the call, but also you're actually starting to see some supply is in the commercial mortgage space and there's a lot of non-performing loans out there. and people in one sense have been waiting for years for some of that to come out. Well, we are actually finally seeing some supply there. I can't say that we've made a big move into that yet, but there's not going to be a lot of buyers, we think, especially in the places where we tend to play, which are a lot of the smaller loans, not the $1,500 million plus loans, but in the sub Sub 50, sub 25 million dollar area. We're hopeful that we could see some supply there at attractive levels.

Great, thank you.

We'll go next now to Doug Harder with BTIG.

Thanks and good morning. Can you just talk about, you know, how you're thinking of, you know, just given what you just mentioned about kind of the still attractiveness of returns, you know, how you would think about maintaining short duration versus potentially adding some duration to potentially lock in those returns for longer? You know, has there been any change in your philosophy or how you're thinking about that?

Hey Doug, it's Mark. So one thing I would say is that when we do the securitizations, you know, we're almost always keeping the ability to call the deals. We have the call rights, right? So that represents sort of a longer term investment and it's sort of like a nice forward investment that can be very profitable if you have a combination of lower interest rates and relatively well-behaved credit spread. So I think on the RTL, residential transition loans, they're short duration and that's because that's the nature of the risk we wanna take, right? So properties where The renovation is relatively straightforward. It's not really complicated. It shouldn't take a long period of time. And so those loans are short duration, and I think they're likely to stay that way because that's the risk we like. But your point about seeing attractive spreads on retained securitizations, keeping those call options, it does really lengthen out the risk. It doesn't really change the cash flow of the retained pieces, but it gives us one way of participating in tighter market spreads and lower yields in the future by virtue of having these call options, which I think can have. We didn't talk about it on this call, but I think we mentioned maybe on the previous call. We think those can be tremendously valuable in many different future paths.

And if I could add two more things. So the first is that, look, in reverse mortgages, right, those are long duration assets. So that's a unique situation where, you know, we have really good market share in a growing market with, you know, a small number of competitors and very attractive returns. So but there we certainly are, we think, locking in spreads for long periods of time. as Mark mentioned, right? That's a 30-year mortgage. So again, we're taking a duration there. But it's really important to our business model that we have just high cash flowing assets, including principal as an important component of our portfolio. And as Mark mentioned, whether it's RTL or frankly in commercial as well, We're dealing with, by definition, RTL, transitional properties, and same thing in terms of what we focus on in commercial. In those situations, we really strongly prefer having a shorter duration so we have more visibility, not just in terms of what our LTV is when we acquire the asset, but also if we have to resolve the asset. I think it's really important to our business model, the way we manage our liquidity. Frankly, I think you see it in terms of where our debt trades and people want us as a counterparty. That's just really important because it really helps us in terms of managing our liquidity and that's an essential part of risk management overall. So I think you'll continue to see us have a portfolio that is You know, largely short duration assets, especially in those sectors that I mentioned, but with things like reverse mortgages and others that are longer duration.

That makes sense. Appreciate it. And then in your prepared remarks, you talked about the benefits of the investments in the operating companies. As you look at the benefits to the returns, how much of that comes through kind of your stake of the ownership versus comes through in kind of the returns of the investment portfolio of the assets you retain?

Well, Mark, I'll let you sort of address the asset side. In terms of the stakes, I mean, Longbridge is fully consolidated, and obviously that's broken out. So you can see there, we've talked about how that's been a really nice boost to earnings in ADE, especially based upon their increasing volumes and margins is what's going on in the prop space. In terms of the others, Lensure has had excellent earnings recently. Ultimately, J.R., it looks like you've got it right there in terms of the actual numbers.

Right. I first want to emphasize that the total investment amount on our balance sheet is more than $5 billion. is $100 million for all of the stakes. Longbridge is consolidated, so it doesn't have goodwill. But all the other stakes, $97 million. Lensure is about a little over half of that. They contribute to gap earnings because we mark to market the positions, which are typically reflecting what earnings are happening on the underlying originator level. And then we also capture an ADE, and many more. We also have a lot of earnings contributions from the larger originators that are regularly distributing cash. So, Lenger, for example, has made distributions to its owners multiples above our original cost basis in the investment and continues to do so on somewhat of a quarterly basis, these distributions. Not every, but the last several quarters it's happened. Quantifying it, the contribution to ADE, the $0.60, something like a nickel, a little bit less than a nickel, is from the originators, so a little bit less than 10%. And that's been, I'd say, pretty steady over the last few quarters. It's certainly adding an element to ADE and further diversification. But the rest of the investment portfolio, the $0.23 came from Longbridge, $0.37 came from everything else, including overhead. The majority of those earnings come from the loans that we buy through the affiliates that we then securitize and we hold residual tranches. Most of that is net interest income, right? And many, not all, but many of the loans that we have on balance sheet are sourced by the LendShores, American Heritage, the Sheridans, our affiliates. So the vast majority of the earnings contribution comes from the loans that we buy through these agreements, but But these guys are, you know, hitting above their weight. They're making a real impact on a very modest, you know, $100 million out of $5 plus billion. It's kind of 2% of the portfolio, certainly contributing more than 2% of our earnings.

Appreciate it. Thank you.

Thank you. We'll go next now to Marissa Lobo with UBS.

Thanks. On non-QM, issuance has been very robust. Can you speak to where EFC is differentiating from peers on their origination focus and how securitization execution has been trending on spread?

Sure. Hey, Marissa. It's Mark. I would say, you know, Larry kind of talked about it in his remarks about our relative performance in regards to prepayment speeds and in regards to credit performance. We have always I've been very focused on prepayment risk because when you sponsor one of these deals and you're a risk retainer and you're keeping the bottom part of it, a lot of your investments, a significant part of your investment is really in IO, right? So we have always focused on loans where we think are going to have the best S-curves, so not prepay super fast when rates drop. And some of that we get as a function of explicit prepayment penalties. some that you just get from aggregation of particular loan attributes. So that's one part of the space we've liked. We've liked purchase money loans, so higher FICO, better quality borrowers that are buying a home because we have seen a little bit of softness in home prices and we do see where and where purchasers are willing to buy homes. They're typically getting some kind of concession versus the listing price, which we like. And in terms of performance of non-QM bonds in general, I think they've had where spreads are. We think about it from a modeling standpoint when we bid loans and we think about What's the right correlation? What's the right spread between IG corporates and investigate non-QM bonds? What's the right spread between agency MBS and non-QM bonds? And I would say, thinking in that framework, we think non-QM bonds are fairly priced, maybe a little bit on the cheap side. One thing we mentioned in the prepared remarks is that as the whole mortgage 2.0 space has grown to be We estimate it'll be $250 billion this year. So you're thinking about $5 billion in new issue size a week. There's transparency. There's liquidity. There's a lot of data points for investors. There's a chance to put a significant amount of capital to work. Those features are sort of a virtuous cycle and attracting more buyers. So if I look at the deals we did, we started doing them in 2017. I kind of look at who was in the order book 2017 versus 2019 versus 2021, 2024, 2026. It keeps growing, right? You keep seeing new entrants into the space, new pools of capital that are finding these bonds attractive relative to corporates, relative to other ABS, relative to agency MBS. And, you know, I do think that will continue. They still offer a lot of spread. and some of the structural features in the deals that got put in place post-COVID, you know, give some extension protections to the bonds. So, yeah, I think that where they are, they're still relatively attractive priced and what kind of confirms that to us is seeing, you know, continue sophisticated investors enter the space as they're able to now, you know, put substantial money to work and they're finding it and other A.B.S.

And if I could just add one thing, you know, our portal that we talked about, right, so we're buying, as I mentioned, you know, over 15 million a day. So as you can imagine, in the portal, we have, you know, think of them like loan level price adjustments, right, based upon the parameters of the loans that people are submitting into the portal. We're going to penalize or benefit you know the prices that we're willing to pay for those loans and that's all funneled through Ellington Research I mean it could involve geography you know maybe we are penalizing you know super jumbo loans more than others so you know you're going to see a difference now obviously we're buying a lot of loans but ultimately you will see a difference in the what we end up buying in that portal just based upon Thanks for that, Collar.

And just on hedging, you mentioned you increased credit hedges as market conditions changed. Can you speak to how you're thinking about hedge construction more broadly under Chair Warsh's framework and on the credit side, how you're thinking about TBA shorts and CDX sizing from here?

Those are great questions. So we use the hedges on the credit side in two fundamental ways. One is, as we are getting close to... bring a deal to market. Sometimes we will try to lock in our investment grade execution by buying protection on some of the investment grade credit indices because we've done a lot of work on sort of the historical relationship between IG indices and non-QM spreads and we see a tight correlation there so it's a way for us to Lock and Execution and try to protect us from any kind of spread widening that could occur during the three or four days you're typically marketing a deal. So that's kind of one sort of tactical way we use hedges to preserve, to protect deal execution. Now the other way is more trying to protect the portfolio if you had an economic shock. So if you had substantially weaker employment or You know, the economy started to go into recession. So then we have a variety of hedges there, you know, some of the commercial side, you know, they could be in high yield indices, sometimes it could be in an ETF that are designed to cushion us from book value volatility that were to come about from a, you know, a substantially weakening in the economy. Now, on the interest rate side, you talked about, you know, you have Kevin Warsh as opposed to Jay Powell and their styles in terms of how they view the benefits of communication, you know, probably, you know, the polar opposites, right? That is less of a factor for us in our hedging framework because we always try to really accurately and closely Ring Fence, the interest rate risk of our investments. And so you should think about the dividend and the ADE we're generating as really like spreads to SOFR. And we try as best as we can with the hedging instruments available to us to insulate the portfolio from changes in interest rate risk. Now, I will say that said, this style from Warsh, we do expect it. You can lead to more interest rate volatility as sort of the market might react a little bit more aggressively to numbers because they don't really aren't anchored by a Fed guiding them where they plan on their plan for hikes or for cuts. But so far, I guess two meetings into Warsh, it's been very manageable for us.

And if you look at slide 16 of the presentation, that's where we show – and a number of other people. We're going to be looking at what we think our interest rate sensitivity is. And you can see on that slide that the way we manage the portfolio, and we always have, is not to try to lean one way or another in terms of what the Fed might do or what interest rates might do, but to be, look, we're always going to be a little negatively convex, especially because if you look at slide 16, you know, the row that contains non-agency RMBS, right, especially non-QM, Thank you for all the answers. You're welcome.

Thank you. We'll go next now to Crispin Love of Piper Sandler.

Hi, this is Ben Graham for Crispin Love. Thanks so much for taking my question. In the release and presentation, you didn't break out the agency contribution to earnings and instead included it within the broader investment portfolio segment. I'm just wondering if this is just driven by the size of agency. I might have missed this, but would you expect agency to decrease further in the coming quarters if that decision was a function of that outlook? Thank you.

Yeah, thanks for the question. This is JR. Yeah, you nailed the main reason, its size. The agency portfolio, you see it's now on an invested basis sub 200 million. On a capital basis, we haven't broken it out separately, but 1%. Going back several years, those numbers were $2 billion plus and 22% when agency was a much more meaningful part of the portfolio. And the evolution of Ellington Financial with more originator stakes and securitizations and owning loans on balance sheet and kind of the virtuous cycle that the vertical integration we've been developing, that's all in credit. That's where we see better return opportunities and we see a clearer competitive advantage for EFC. So over time, we've rotated. We've also built up, from a retest perspective, we used to need a big portfolio of agency because we had non-REIT assets in bigger size. We mentioned the consumer is a lot smaller than it used to be. Our corporate investment portfolios are much smaller. The evolution has been more toward credit, and we haven't needed agency to pass retests either. Or 40-act tests. Or 40-act tests. And so now it's part of the investment portfolio. I mean, it's always been part of the investment portfolio, but given its size and kind of modest contribution to the overall earnings, we think it's more appropriately considered as one of, you know, several of the diversified strategies within the investment portfolio. So that's how we've kind of, we're bulking up Marbridge presentation, but at the same time pulling back on the agency because I think all the detail is not as relevant to investors at this point.

Awesome. Thank you so much for the color there. That's all I had, so I'll step back, but thank you so much for taking my question. Great.

Thank you. Thank you. We'll go next now to Timothy D'Agostino at B Riley Securities.

Hi. Good morning. Thanks for taking the question. I appreciate the commentary on the pending acquisition. I guess thinking past that and maybe into 2027, is Additional M&A and potential investments into loan originators, is that part of the playbook? And if so, is there any areas you would look to address or any color about how you think about additional M&A or investments in originators? Thank you.

Sure. Yeah, absolutely part of the playbook. It's been a great... A great part of our playbook, frankly, for the last, gosh, 12 years, I would say. So, yes, we mentioned the servicer. We also are looking at another, I would say, non-QM focus, but also doing other products as well on the resi side opportunity. We are being shown opportunities on the commercial mortgage side. we mentioned I think on our prepared remarks that we have a stake in Sheridan and they've been a great source of not only have they been profitable but I would say even more importantly they've been a great source of loan product for us there and as I mentioned you know we think in the commercial mortgage space we're going to see a lot more stressed and distressed assets coming out so in all those areas absolutely and I would say You know, JR mentioned that right now, you know, the retests are something that are, you know, we can pass quite easily on the, let's say, the income and asset side. So, given that, we could also increase our focus more. Mark mentioned the consumer side. You've also got things on the asset-based finance side as well. that were not really doing much of it all in financial and we're seeing opportunities there. So, I mean, I would say the whole gamut and it's absolutely an important part of our playbook. I will say that it's been our MO to invest in smaller originators and help them grow. And that includes supporting them not just through operating capital but also through guaranteeing Warehouse Lines, and things like that. So we have a lot to offer, especially some of these smaller origination companies, and I absolutely would love to see us continue to broaden our array of investments there.

And then just as a quick follow-up, how do you think about funding those potential M&A or further investments?

We just fund those with cash on hand. who explicitly borrow against them. Of course, that's another great use of our unsecured notes and preferred equity, right? Where, as J.R. mentioned, these guys are punching way above their weight in terms of return on equity. So if they're earning 20% plus return on equity and we're funding them at high single digits or in the case of preferred equity or Well, we mentioned that our unsecured notes are trading in the low sevens. That's obviously a great use of that capital. Okay, great.

Thank you so much for taking the questions this morning.

You're welcome. Thank you. Thank you. And gentlemen, that was our final question for today. So we'd like to thank you all for participating in the Ellington Financial Inc. Second quarter 2026 earnings conference call. You may disconnect your line at this time and have a wonderful day. Goodbye, everyone.