Ellington Financial LLC (EFC)

EFC 
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Ellington Financial, LLC (EFC)

Q4 2012 Earnings Call

February 14, 2013 11:00 am ET

Executives

Sara Brown - Corporate Counsel

Larry Penn - CEO

Mark Tecotzky - Co-CIO

Lisa Mumford - CFO

Mike Vranos - Ellington Management Group's CEO and Ellington Financial's Co-CIO

Analysts

Trevor Cranston - JMP Securities

James Winchester - QVP

Steven Laws - Deutsche Bank

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2010 Financial Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference call is being recorded today, February 14.

I would now like to turn the conference over to your host, Sara Brown, Company Counsel. Please go ahead.

Sara Brown

Before we start I would like to remind everyone that certain statements made during this conference call including statements concerning future strategies, intentions and plans 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 and can be identified by words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "should," or similar expressions or by reference to strategies plans, or intentions.

As describe under item 1A or our annual report on Form 10-K, filed on March 14, 2012, and under item 1A of our quarterly report on our Form 10-Q, filed on May 9, 2012, forward-looking statements are subject to a variety of risk and uncertainties that could cause the company's actual result differ from its belief, expectations, estimate and projection. 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 statement whether as a result of new information, future events or otherwise.

I have with me today on this call Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford our Chief Financial Officer.

Laurence Penn

Thanks Sara. Once again, it is our pleasure to speak with our shareholders this morning as we release our fourth quarter and full year 2012 results. And as always we appreciate your taking the time to participate on the call today.

We will follow the same format as we have for the past several quarters. First, our CFO Lisa Mumford will run thorough our financial result. Then our Co-CIO Mark Tecotzky will discuss how the MBS market performed over the course of the quarter, how we positioned our portfolio, and what our market outlook is going-forward. Then, I will close our prepared remarks and we will take some questions.

In addition to our earnings release, yesterday evening we posted a fourth quarter earnings conference call presentation to our website www.ellingtonfinancial.com. You will find it right on our shareholders page or alternatively on the presentations page of the website. Lisa and Mark's prepared remark will track the presentation. So, it will be helpful if you have this presentation in front of you, and turn to page three to follow on. And while you are getting that in front of you I am going to turn it over to our CFO, Lisa Mumford.

Lisa Mumford

Thank you, Larry, and good morning every one. On page three of the presentation we provide our P&L attributes in table. There you can see for the quarter we earned $24.8 million or a $1.19 per share bringing our total full year P&L to $97.1 million or $5.31 per share. Our return on equity was 23.5%.

Our predominant Non-Agency Strategy, which also include the MBS and commercial mortgage loans, provided the lion's share of our P&L, actually 91% of our gross P&L in this quarter and 86% for the year. Our agency strategy also performed very well during the quarter and the year especially when you consider that it only utilizes a relatively small amount of our capital.

In our Non-Agency Strategy, our income was driven by interest income and net realized and unrealized gains. The weighted average book yields on the portfolio declined slightly to 9.7% from 10.2% but our average holding quarter-over-quarter decreased by approximately $50 million resulting in an increase in income but a decline in the per share contribution to income.

Trading gains and net valuation gains combined to add $1.28 per share for this quarter result. In our Agency Strategy, our income (inaudible) of interest and net realized gains (inaudible), our weighted average book yield was essentially flat quarter-over-quarter at 2.7% but our average agency holding increased in size by about $69 million. Valuations declines reduced our quarter result.

Within both our non-agency and agency portfolio, we continued to sell securities where we felt there was limited remaining upside potential and rotated it so where we see greater value. Our overall average consequence declined 2 basis points during the quarter to 0.99% as the composition of our average borrowing has not changed much quarter-over-quarter.

However, our leverage ration increased to 1.79 to 1 since weighted for the end of this quarter, we increased our holding of Agency RMBS which we generally finance with repo and decrease our repo non-agency holding.

Core expenses which includes other operating expenses and bates management fees and exclude incentive fees and financing cost, payment at 2.8% of average equity on an annualized basis and was in-line with our expectations.

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