Ellington Financial Inc. (EFC) Q2 2026 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Ellington Financial Second Quarter 2026 Earnings Call. Today's call is being recorded. [Operator Instructions] I will now turn the call over to Mr. Alaael-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 end notes in the presentation. With that, I'll hand it over to Larry.

Thanks, Alaael-Deen. Good morning, everyone, and thank you for joining us today. I'll begin on Slide 3 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 $0.43 per share, ADE of $0.60 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 at 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 helps 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 remain 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 5, and I'll hand the call over to J.R. to walk through our financial results in more detail. JR?

Thanks, Larry. Good morning, everyone. I'll begin on Slide 5 with our earnings summary, then review the principal drivers of the quarter, several disclosure enhancements we've made in our portfolio, and balance sheet activity. For the second quarter, EFC reported GAAP net income of $0.43 per common share on a fully marked-to-market basis and adjusted distributable earnings of $0.60 per share. On Slide 5, you can see the contribution to GAAP net income by segment, and on Slide 6, 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 remain 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 Longbridge disclosures. Starting on Slide 9, 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. 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 8. 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 2 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 HECM tail pools. 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 7. 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 continue 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-mark-to-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 UPB 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 1.9x to 1x, while our overall debt-to-equity ratio increased modestly to 9.2x to 1x, 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 recognize 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. At quarter end, book value per share increased by $0.05 to $13.61 after $0.39 per share in 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, J.R. Despite rising interest rates, geopolitical uncertainty, and tremendous volatility in energy prices and equity markets, the mortgage and structured credit markets remained 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 continue 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 creditworthy 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 come 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 workout 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 securitizations 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 has had a front row seat throughout this evolution, having been an early mover in securitizing non-QM, closed-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 1 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 all cylinders. I am 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 disciplined 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 8 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 earning stream for our shareholders. And 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. And with that, let's open the floor to Q&A. Operator, please go ahead.

[Operator Instructions] We'll go first this morning to Trevor Cranston with Citizens JMP.

On the -- 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 sub-servicing contracts or just any additional color on what that would look like?

Mark?

Why don't you take that one, Larry?

Sure. Yes. So, well, first of all, it's a small servicer, single-digit billions of servicing rights. It does have some sub-servicing contracts, as you mentioned. But -- 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 going to be super important to us over time to get the best possible outcomes from our delinquent loans.

Yes, I would just add one thing, Trevor, is that the motivation for this wasn't servicing acquisition. It's a recognition that over the past several years, we used to have a lot of servicing at Rushmore. Rushmore was bought by Mr. Cooper. Now Mr. Cooper is bought by Rocket. We used to have servicing some other platforms that have been absorbed. So it's just a recognition that as our footprint in the market grows 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, J.R., 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 new hiring mix?

Yes. And they've been growing the volumes of 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 has -- is relatively less sensitive to higher interest rates vis-a-vis HECM. We also have the enterprise hedge in place, which all else equal, higher rates, if it impacts origination volumes, should offset some of that impact. To your question about kind of forward-looking 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 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 over the last 6 quarters. So, I think that should give a good idea of what Q3 may look like. Of course, not all submissions lean to originations, and there's going to be some fallout in those numbers, but I think it bodes well for volumes. In terms of margins, we're not giving Q3 guidance, if you will, on margins. I think a lot of the profits and props have also come through because of securitizations, and we did 2 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 2 things to that. The first is that in terms of margins, right, in the HECM product, the real sort of point of sale, if you will, right is when you securitize into HMBS 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 call things like that, that the government will wrap effectively those loans. The FHA wraps those loans. So the proprietary product, of course, there's -- that's -- 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 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 the government product.

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

This is Frank Labetti on for Bose. Just sticking on the Longbridge topic, can you maybe discuss an outlook, more normalized earnings run rate or contribution to ADE from Longbridge as you guys continue to gain share and scale that segment?

Sure. For the last 2 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 $0.06, $0.065 per share, something like that, meaning that everything else is $0.16, $0.17 per share for the quarter, originations, securitizations, less G&A. I mentioned earlier that there's going to be noise in the segment's results because of securitizations, the number that we do and the execution that we did, 2 this quarter. So the securitization execution has been notably strong in the first 2 quarters of this year. I don't know that $0.17 -- $0.16, $0.17 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.

Yes, I think overall, we're comfortable now. Sure, if we do 2 securitizations in a quarter, like we did just now, we'll see a higher ADE, right? That definitely helped drive the $0.60. 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?

Yes. 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. So we're not seeing a big change in expected yield on what we're retaining. So 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? They all -- 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 we have kept our consumer portfolio relatively small. That used to be a bigger part of our pie chart, if you go back probably, 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.

Yes. So just to add -- sorry.

No, no. Come on in, Larry.

Yes, I was just going to say the other sector there 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 it's been -- 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 $50 million, $100 million plus loans, but in the sub-$50 million, sub-$25 million area. We're hopeful that we could see some supply there at attractive levels.

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

Can you just talk about how you're thinking -- just given what you just mentioned about kind of the still attractiveness of returns, how you would think about maintaining short duration versus potentially adding some duration to potentially lock in those returns for longer? 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, 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 spreads. 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 ones are short duration, and I think they'll 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 -- 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've mentioned -- 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.

Yes. And if I could add 2 more things. So the first is that, look, in reverse mortgages, those are long-duration assets. So that's a unique situation where we have really good market share in a growing market with 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 -- non-QM, 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, well by definition, RTL, transitional properties and same thing in terms of what we focus on in commercial. And so 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. So 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 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 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 operator -- 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, I mean, LendSure has had excellent earnings recently. I mean, it's -- ultimately, J.R., it looks like you've got it right there in terms of the actual numbers.

Right. So I first want to emphasize that the total investment amount on our balance sheet is more than $5 billion. It's $100 million for all the stakes. Longbridge is consolidated, so it doesn't have goodwill. But all the other stakes, $97 million. LendSure is about a little over half of that. They contribute to GAAP earnings because we mark-to-market the positions, which are typically reflecting what earnings are happening on the underlying originator level. And then the -- we also capture an ADE earnings contributions from the larger originators that are regularly distributing cash. So LendSure, for example, has made distributions to its owners multiples above our original cost basis in the investment and so -- and continues to do so on somewhat of a quarterly basis, these distributions, not every, but the last several quarters it's happened. And quantifying it, the contribution to ADE, the $0.60, something like $0.05, a little bit less than $0.05 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 kind of further diversification. But the rest of -- so 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 LendSures, American Heritages, the Sheridans, our affiliates. So, the vast majority of the earnings contribution comes from the loans that we buy through these agreements, but these guys are hitting above their weight. They're making a real impact on a very modest $100 million out of $5-plus billion. So, kind of 2% of the portfolio is certainly contributing more than 2% of our earnings.

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

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. 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 been very focused on prepayment risk because when you are a sponsor on one of these deals and you're a risk retainer and you're keeping the bottom part of it, a lot of your investment, 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 prepaid super fast when rates drop. And some of that we get as a function of explicit prepayment penalties. Some of it 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, higher FICO, better quality borrowers that are buying a market because -- buying a home because we have seen a little bit of softness in home prices, and we do see 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 investment-grade 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 -- they're fairly priced, maybe a little bit on the cheap side. We -- one thing we mentioned in the prepared remarks is that as the whole mortgage 2.0 space has grown to be -- we estimate it will be $250 billion this year. So you're thinking about $5 billion in new issue size a week, right? 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, right? So if I look at the deals we did, we started doing them 2017, I kind of look at like who was in the order book 2017 versus 2019 versus 2021, 2024, 2026, it keeps growing, right? You keep seeing new entrants in the space, new pools of capital that are finding these bonds attractive relative to corporates, relative to other ABS, relative to Agency MBS and 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 give some extension protections to the bonds. So yes, I think that where they are, they're still relatively attractive priced. And what kind of confirms that to us is seeing continued sophisticated investors enter the space as they're able to now put substantial money to work and they're finding it attractive relative to corporates and other ABS.

And if I could just add one thing, our portal that we talked about, right? So we're buying, as I mentioned, over $15 million a day. So as you can imagine, in the portal, we have -- 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 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. Maybe we are penalizing super jumbo loans more than others. So you're going to see a difference. 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 us having those price adjustments for different attributes. And we're -- we think it's working because you can see it in the prepayment and credit performance of the loans.

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 2 fundamental ways. One is, as we are getting close to bringing 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 in execution and try to protect us from any kind of spread widening that could occur during the 3 or 4 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 the economy started to go into recession. So then we have a variety of hedges there, some on the commercial side. 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 substantially weakening in the economy. Now on the interest rate side you talked about, you have Kevin Warsh as opposed to Jay Powell and their styles in terms of how they view the benefits of communication, probably the other 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 kind of 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 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 2 meetings into Warsh, it's been very manageable for us.

And if you look at Slide 16 of the presentation, right, that's where we show 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, the row that contains non-Agency RMBS, right, especially non-QM, things like that are going to be somewhat negatively convex. But overall you can see that we do a really good job being quite immunized from whether rates were up or down, lose a little money in sort of an instantaneous shock, but really not very much. I mean a minor, a very small change there you can see at the bottom of the page.

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

This is Ben Graham in for Crispin Love. 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 and if that decision was a function of that outlook?

Yes, thanks for the question. This is J.R. Yes, 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, it's -- 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 out of agency and we've also built up from a REIT test perspective, we used to need a big portfolios 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. So, the evolution has been more toward credit and we haven't needed agency to pass REIT tests either or 40 Act tests. And so now it's part of the investment -- I mean, it's always been part of the investment portfolio, but given its size and modest contribution to the overall earnings, we think it's more appropriately considered as one of several of the diversified strategies within the investment portfolio. So that's how we've kind of -- we're bulking up Longbridge 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.

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

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?

Sure, yes, absolutely part of the playbook. It's been 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, 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, J.R. mentioned that right now, the REIT tests are something that are -- we can pass quite easily on the, let's say, the income and assets 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 we're not really doing much of at all in Ellington 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. We don't 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 7s. That's obviously a great use of that capital.

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 Second Quarter 2026 Earnings Conference Call. You may disconnect your line at this time and have a wonderful day. Goodbye, everyone.