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| The credit strategy results also reflects a net positive gain on our investments in loan originators as a mark-up, driven by a strong year for American Heritage as well as a modest mark-up on our state and LendSure exceeded a write-down on our consumer loan originator investment |
| But our view is that yields and yield spreads are still very high in many sectors and most sectors are exhibiting very strong credit performance despite these challenges |
| Flows into fixed income funds were strong and fixed annuity sales were robust |
| A steeper yield curve with lower interest rates should also benefit Longbridge as reverse mortgages offer homeowners' bigger lines of credit when rates are lower and reverse mortgage borrowers are generally very sensitive to the size of the credit line they can get |
| If and when the Fed executes its first rate cut, we think that will be a catalyst for book value gains and a tailwind for our ADE |
| Meanwhile, housing has performed well despite skyrocketing mortgage rates |
| I think it's going to be a great opportunity |
| So the return of their origination platform to profitability would be a significant boost to our ADE, since it's been a drag on our ADE for the last three quarters or so |
| We continue to benefit from positive carry on our interest rate swap hedges where we overall received a higher floating rate and pay a lower fixed rates |
| We continue to expect that the ongoing dislocation in the commercial mortgage and banking sectors will generate compelling opportunities for Ellington Financial, both to acquire distressed assets and to add market share at our originator affiliates |
| Moving forward, our larger capital base, ample liquidity and additional borrowing capacity should allow us to capitalize on the many attractive investment opportunities we are seeing |
| The credit strategy generated $0.18 per share of net income in the quarter, driven by strong net interest income and net gains on our non-agency RMBS investments |
| Looking ahead, I believe that the current market environment is a great one for us to generate attractive risk-adjusted returns |
| And then of course the third one, which again, we haven't historically done so much, but there's a very strong bid especially from insurance companies that's been in the market recently |
| Our single-family residential-related strategies of RTL, non-QM and agency MBS, non-agency RMBS and CRT, all contributed positively to Ellington Financial's returns |
| Looking forward, while we expect another quarter of slow originations in Q1, more constructive margins are improving the prospects for originations to turn profitable later this year and start contributing to EFC's overall ADE as well |
| In fact, both companies were solidly profitable in 2023 |
| I believe that our partnership with Sheridan and our own in-house expertise gives us great capabilities to maximize values and work-out situations |
| This is a great sector to leverage the breadth and depth of EFC's capabilities |
| LendSure and American Heritage both managed things very well |
| We are also seeing compelling opportunities in CMBS |
| So I think we have a good handle on what it takes to maximize value for the shareholders, and that's really what our focus is |
| And I think now that we're in it with the acquisition, that is another area where we could see very high returns on equity |
| In mid-December, we completed the merger with Arlington, which immediately added scale, taking EFC's equity base above $1.5 billion and which further strengthened our balance sheet as the merger included the assumption of Arlington's low-cost long-term unsecured debt |
| So that means they delivered gains above and beyond just the ADE they provided |
| Longbridge has actually I think done great relative to the competition |
| There was a lot going on at EFC this quarter with the completion of the Arlington merger, the monetization of some of their assets and reinvestment of that capital and lots going on in the market with a pivot and expectations for Fed cuts instead of hikes and a strong recovery in agency MBS performance |
| While we have all the hedging tools we need to manage risk and generate returns in a flat and inverted yield curve, for all these reasons, we do think a steeper yield curve in the future, which the market is pricing in, would be a net benefit to our strategies |
| Although the bargain purchase gain net of the related expenses contributed positively to net income during the quarter, overall, the common shares issued in connection with the merger were diluted to book value per share by approximately 1.1% |
| I mean, obviously, LendSure, American Heritage are doing great |
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| Finally, I'll note that results from our consumer loan strategy were negative for the fourth quarter |
| Despite the rally, there are certainly still some fundamental challenges in several parts of structured products |
| Our total economic return was a negative 35 basis points for the fourth quarter |
| You can also see on this slide that ADE contribution from Longbridge was just $0.01 per share, mostly attributable to low origination volumes |
| Performance for lower FICO borrowers has been weak |
| In terms of net income, the Longbridge segment generated a net loss of $0.04 per share for the fourth quarter as net loss in originations and a drag from interest rate hedges exceeded net gains on proprietary loans reversed MSR-related net assets and servicing income |
| Office vacancies are high, multifamily rents stagnating in some markets and overall economics for commercial real estate are challenging |
| Affordability in the housing market is still weak |
| In the fourth quarter, Longbridge originated $262 million across HECM and prop, which was a 15% decline from the previous quarter |
| And while we don't have a lot of exposure there by design, the exposure we do have was a drag on earnings |
| We also saw NIM compression in our credit portfolio, but in that case, it was caused by the shift of some delinquent loans to non-accrual status, which dragged down overall asset yields |
| It's been a tough business |
| The originations, the decline is just due to seasonal factors and obviously higher rates and slow housing |
| Although in the agency portfolio, the extent of this benefit declined quarter-over-quarter, which led to NIM compression in that part of the portfolio |
| Until we fully redeploy that incremental capital, we view ourselves as effectively trading some short-term pressure on adjusted distributable earnings for longer term earnings accretion for shareholders |
| With both credit and agency experiencing compressed NIMs quarter-over-quarter, their contributions to ADE also declines |
| In the investment portfolio, the sequentially ADE decline was driven by higher delinquencies and by the absence of an ADE boost that we had benefited from in the third quarter when we had earned back interest on a previously non-performing loan |
| With the notable exception of CMBS, which has its own unique challenges, virtually all spread products tightened in Q4, including agency MBS, investment-grade corporates, high yield bonds, CRT, non-QM, CLOs, et cetera |
| It's just the number of transactions we are seeing is down |
| And in fact, I think we put this stat in the prepared remarks, we've seen delinquencies come down by about a third between year-end and kind of today |
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