UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to         

Commission file number 001-34569

Ellington Financial LLC

(Exact Name of Registrant as Specified in Its Charter)

Delaware	26-0489289
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

53 Forest Avenue, Old Greenwich, Connecticut 06870

(Address of Principal Executive Office) (Zip Code)

(203) 698-1200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filers” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	¨	Accelerated Filer	x
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 2, 2012
Common Shares Representing Limited Liability Company Interests, no par value	20,527,108

ELLINGTON FINANCIAL LLC

FORM 10-Q

PART I. Financial Information	2
Item 1. Consolidated Financial Statements (unaudited)	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures about Market Risk	63
Item 4. Controls and Procedures	66
PART II. OTHER INFORMATION	66
Item 1. Legal Proceedings	66
Item 1A. Risk Factors	67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 6. Exhibits	68

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY

(UNAUDITED)

	September 30, 2012		December 31, 2011
(In thousands except share amounts)	Expressed in U.S. Dollars
ASSETS
Cash and cash equivalents	$	69,223	$	62,737
Investments, financial derivatives, and repurchase agreements:
Investments at fair value (Cost – $1,133,991 and $1,234,203)		1,165,644		1,212,483
Financial derivatives – assets at fair value (Cost – $75,677 and $118,281)		59,342		102,871
Repurchase agreements (Cost – $13,780 and $15,750)		13,780		15,750
Total investments, financial derivatives, and repurchase agreements		1,238,766		1,331,104
Deposits with dealers held as collateral		25,194		34,163
Receivable for securities sold		524,533		533,708
Interest and principal receivable		6,587		6,127
Other assets		497		216
Total Assets	$	1,864,800	$	1,968,055
LIABILITIES
Investments and financial derivatives:
Investments sold short at fair value (Proceeds – $455,057 and $459,013)	$	456,824	$	462,394
Financial derivatives – liabilities at fair value (Proceeds – $18,701 and $9,636)		20,165		27,040
Total investments and financial derivatives		476,989		489,434
Reverse repurchase agreements		660,933		896,210
Due to brokers on margin accounts		34,564		79,735
Payable for securities purchased		178,453		127,517
Securitized debt (Proceeds – $1,409 and $0)		1,439		—
Accounts payable and accrued expenses		1,627		1,845
Base management fee payable		1,913		1,396
Incentive fee payable		9,491		—
Interest and dividends payable		741		1,002
Total Liabilities		1,366,150		1,597,139
SHAREHOLDERS’ EQUITY		498,650		370,916
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,864,800	$	1,968,055
ANALYSIS OF SHAREHOLDERS’ EQUITY:
Common shares, no par value, 100,000,000 shares authorized;
(20,483,696 and 16,447,651 shares issued and outstanding)	$	489,692	$	362,047
Additional paid-in capital – LTIP units		8,958		8,869
Total Shareholders’ Equity	$	498,650	$	370,916
PER SHARE INFORMATION:
Common shares	$	24.34	$	22.55

See Notes to Consolidated Financial Statements

2

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012

(UNAUDITED)

Current Principal/ Notional Value	Description	Rate		Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
North America
Long Investments (233.76%) (a) (o)
Mortgage-Backed Securities (232.83%)
Agency Securities (131.13%) (b)
Fixed Rate Agency Securities (127.00%)
Principal and Interest - Fixed Rate Agency Securities (119.50%)
$            22,536	Federal National Mortgage Association Pool		4.50%	12/41	$	24,622
20,826	Federal National Mortgage Association Pool		3.50%	9/42		22,399
18,522	Federal National Mortgage Association Pool		5.00%	10/35		20,213
18,241	Federal National Mortgage Association Pool		5.00%	8/41		20,012
18,146	Federal Home Loan Mortgage Corporation Pool		5.00%	7/41		19,894
18,327	Federal National Mortgage Association Pool		3.50%	8/42		19,735
17,926	Federal National Mortgage Association Pool		4.50%	9/41		19,585
17,637	Federal National Mortgage Association Pool		4.50%	10/41		19,270
16,201	Federal National Mortgage Association Pool		5.00%	3/41		17,900
15,981	Federal National Mortgage Association Pool		4.50%	9/41		17,361
13,603	Federal National Mortgage Association Pool		3.50%	8/42		14,648
12,393	Federal National Mortgage Association Pool		4.50%	9/41		13,463
12,340	Federal National Mortgage Association Pool		4.00%	11/41		13,343
11,663	Federal National Mortgage Association Pool		5.00%	7/41		12,868
11,524	Federal Home Loan Mortgage Corporation Pool		3.50%	8/42		12,469
10,956	Federal National Mortgage Association Pool		4.00%	1/42		11,822
10,112	Federal National Mortgage Association Pool		4.50%	4/26		10,943
9,599	Federal National Mortgage Association Pool		3.50%	9/42		10,336
9,039	Federal Home Loan Mortgage Corporation Pool		4.50%	10/41		9,837
8,591	Federal Home Loan Mortgage Corporation Pool		4.50%	2/41		9,349
8,778	Federal National Mortgage Association Pool		3.00%	8/27		9,311
8,169	Federal National Mortgage Association Pool		4.00%	7/26		8,745
7,822	Federal National Mortgage Association Pool		5.50%	10/39		8,621
7,097	Federal National Mortgage Association Pool		3.00%	9/27		7,529
6,575	Federal National Mortgage Association Pool		5.00%	6/41		7,213
6,141	Federal National Mortgage Association Pool		5.00%	3/34		6,734
5,956	Federal National Mortgage Association Pool		5.50%	5/40		6,564
5,989	Federal Home Loan Mortgage Corporation Pool		4.00%	5/42		6,509
5,864	Federal National Mortgage Association Pool		5.00%	7/41		6,396
5,698	Federal National Mortgage Association Pool		5.00%	11/39		6,215
5,615	Federal National Mortgage Association Pool		4.00%	10/41		6,092
5,502	Federal National Mortgage Association Pool		5.00%	10/41		6,029
5,550	Federal National Mortgage Association Pool (Pre-Issue)		3.50%	11/42		6,004
5,569	Federal National Mortgage Association Pool		3.50%	8/42		5,974
5,240	Federal Home Loan Mortgage Corporation Pool		3.50%	9/42		5,654
5,108	Federal National Mortgage Association Pool		4.00%	4/42		5,567
5,069	Federal National Mortgage Association Pool		5.00%	11/40		5,561
5,172	Federal National Mortgage Association Pool		4.00%	6/26		5,536
4,964	Federal National Mortgage Association Pool		4.50%	8/41		5,392
4,748	Federal National Mortgage Association Pool		3.50%	7/42		5,093
4,450	Federal National Mortgage Association Pool		5.00%	9/41		4,931
4,522	Federal Home Loan Mortgage Corporation Pool		3.50%	10/42		4,847
4,487	Federal Home Loan Mortgage Corporation Pool		4.00%	2/42		4,844
4,418	Federal National Mortgage Association Pool		3.50%	8/42		4,740
4,284	Federal Home Loan Mortgage Corporation Pool		6.00%	4/39		4,722

See Notes to Consolidated Financial Statements

3

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012 (CONTINUED)

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
	Principal and Interest - Fixed Rate Agency Securities (119.50%) (continued)
$	4,330	Federal National Mortgage Association Pool	3.50%	6/27	$	4,640
	4,087	Federal Home Loan Mortgage Corporation Pool	4.00%	11/41		4,416
	3,923	Federal National Mortgage Association Pool	4.50%	12/41		4,261
	3,946	Federal National Mortgage Association Pool	3.50%	8/42		4,234
	3,778	Federal National Mortgage Association Pool	4.50%	4/42		4,137
	3,744	Federal National Mortgage Association Pool	5.00%	6/40		4,108
	3,812	Federal National Mortgage Association Pool	3.50%	6/27		4,085
	3,672	Federal Home Loan Mortgage Corporation Pool	4.50%	9/41		3,996
	3,676	Federal National Mortgage Association Pool	4.50%	11/41		3,994
	3,691	Federal Home Loan Mortgage Corporation Pool	4.00%	1/42		3,989
	3,644	Federal National Mortgage Association Pool (Pre-Issue)	3.50%	11/42		3,964
	3,435	Federal National Mortgage Association Pool	4.00%	4/42		3,742
	3,307	Federal Home Loan Mortgage Corporation Pool	3.50%	2/42		3,561
	3,236	Federal National Mortgage Association Pool	4.50%	10/41		3,526
	3,196	Federal National Mortgage Association Pool	4.00%	8/42		3,473
	2,943	Federal National Mortgage Association Pool	4.00%	8/42		3,206
	2,995	Federal National Mortgage Association Pool	3.50%	7/27		3,205
	2,700	Government National Mortgage Association (Pre-Issue)	4.49%	9/42		3,074
	2,687	Federal National Mortgage Association Pool	4.50%	10/41		2,919
	2,640	Federal National Mortgage Association Pool	3.50%	5/42		2,832
	2,576	Federal National Mortgage Association Pool	4.00%	8/42		2,798
	2,508	Federal National Mortgage Association Pool	4.00%	9/42		2,725
	2,516	Federal Home Loan Mortgage Corporation Pool	3.50%	1/42		2,703
	2,509	Federal National Mortgage Association Pool	3.50%	8/42		2,701
	24,668	Other Federal National Mortgage Association Pools	3.50% - 6.00%	8/27 - 9/42		26,867
	7,268	Other Federal Home Loan Mortgage Corporation Pools	3.00% - 6.00%	9/27 - 9/42		7,858
						595,906
	Interest Only - Fixed Rate Agency Securities (0.74%)
	23,569	Other Federal National Mortgage Association	4.00% - 5.50%	1/36 - 10/40		2,165
	11,358	Other Federal Home Loan Mortgage Corporation	5.00% - 5.50%	6/33 - 1/39		1,214
	5,669	Other Government National Mortgage Association	5.50%	3/36		282
						3,661
	TBA - Fixed Rate Agency Securities (6.76%)
	21,550	Federal Home Loan Mortgage Corporation (30 Year)	4.00%	10/12		23,168
	10,000	Federal National Mortgage Association (30 Year)	3.00%	10/12		10,555
						33,723
	Total Fixed Rate Agency Securities (Cost $622,122)					633,290
	Floating Rate Agency Securities (4.13%)
	Principal and Interest - Floating Rate Agency Securities (4.10%)
	7,115	Federal National Mortgage Association Pool	5.10%	5/38		7,501
	5,358	Federal National Mortgage Association Pool	5.24%	12/35		5,650
	3,034	Federal National Mortgage Association Pool	5.69%	4/36		3,218
	2,712	Federal National Mortgage Association Pool	5.50%	7/37		2,912
	1,066	Other Federal National Mortgage Association Pool	5.27%	9/37		1,136
						20,417
	Interest Only - Floating Rate Agency Securities (0.03%)
	1,155	Other Federal National Mortgage Association	5.50%	8/36		166
						166
	Total Floating Rate Agency Securities (Cost $20,001)					20,583
	Total Agency Securities (Cost $642,123)					653,873

See Notes to Consolidated Financial Statements

4

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012 (CONTINUED)

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
	Private Label Securities (101.70%)
	Principal and Interest - Private Label Securities (101.02%)
$	824,471	Various	0.28% - 9.35%	5/19 - 2/51	$	503,745
	Total Principal and Interest - Private Label Securities (Cost $483,548)					503,745
	Principal Only - Private Label Securities (0.43%)
	5,800	Various	—	8/30		2,146
	Total Principal Only - Private Label Securities (Cost $2,189)					2,146
	Interest Only - Private Label Securities (0.25%)
	65,872	Various	0.50% - 2.00%	6/44 - 9/47		1,230
	Total Interest Only - Private Label Securities (Cost $796)					1,230
	Other Private Label Securities (0.00%)
	175,151	Various	—	6/37		—
	Total Other Private Label Securities (Cost $475)					—
	Total Private Label Securities (Cost $487,008)					507,121
	Total Mortgage-Backed Securities (Cost $1,129,131)					1,160,994
	Commercial Mortgage Loans (0.93%) (n)
	5,000	Various	6.25%	11/13		4,650
	Total Commercial Mortgage Loans (Cost $4,860)					4,650
	Total Long Investments (Cost $1,133,991)				$	1,165,644
	Repurchase Agreements (2.76%) (a) (c)
$	13,780	Bank of America Securities	0.25%	10/12	$	13,780
		Collateralized by Par Value $13,000
		U.S. Treasury Note, Coupon 1.75%,
		Maturity Date 5/16
	Total Repurchase Agreements (Cost $13,780)				$	13,780

See Notes to Consolidated Financial Statements

5

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012 (CONTINUED)

(UNAUDITED)

Current Principal/
Notional Value		Description	Rate	Maturity	Fair Value
					Expressed in U.S.
(In thousands)					Dollars
	Investments Sold Short (-91.61%) (a)
	TBA - Fixed Rate Agency Securities Sold Short (-88.88%) (d)
$	(60,700)	Federal National Mortgage Association (30 Year)	5.00%	11/12	$	(66,180	)
	(59,352)	Federal National Mortgage Association (30 Year)	3.50%	10/12		(63,650	)
	(45,200)	Federal Home Loan Mortgage Corporation (30 Year)	3.50%	10/12		(48,467	)
	(40,100)	Federal National Mortgage Association (30 Year)	4.50%	11/12		(43,388	)
	(40,400)	Federal National Mortgage Association (30 Year)	3.50%	11/12		(43,215	)
	(33,130)	Federal National Mortgage Association (30 Year)	4.50%	10/12		(35,866	)
	(17,600)	Federal National Mortgage Association (30 Year)	5.00%	10/12		(19,198	)
	(16,500)	Federal Home Loan Mortgage Corporation (30 Year)	5.00%	10/12		(17,883	)
	(16,300)	Federal National Mortgage Association (15 Year)	4.00%	10/12		(17,428	)
	(15,900)	Federal National Mortgage Association (15 Year)	3.00%	10/12		(16,856	)
	(14,600)	Federal National Mortgage Association (30 Year)	4.00%	11/12		(15,714	)
	(13,500)	Federal National Mortgage Association (30 Year)	5.50%	10/12		(14,802	)
	(12,300)	Federal National Mortgage Association (15 Year)	3.50%	10/12		(13,090	)
	(11,000)	Federal National Mortgage Association (15 Year)	4.50%	10/12		(11,863	)
	(9,918)	Federal National Mortgage Association (30 Year)	4.00%	10/12		(10,687	)
	(2,500)	Federal National Mortgage Association (30 Year)	6.00%	10/12		(2,761	)
	(1,000)	Other Federal Home Loan Mortgage Corporation (30 Year)	6.00%	10/12		(1,099	)
	(989)	Other Federal Home Loan Mortgage Corporation (15 Year)	3.00%	10/12		(1,044	)
	Total TBA - Fixed Rate Agency Securities Sold Short (Proceeds -$441,970)					(443,191	)
	U.S. Treasury Securities Sold Short (-2.73%)
	(13,000)	U.S. Treasury Note	1.75%	5/16		(13,633	)
	Total U.S. Treasury Securities Sold Short (Proceeds -$13,087)					(13,633	)
	Total Investments Sold Short (Proceeds -$455,057)				$	(456,824	)

See Notes to Consolidated Financial Statements

6

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012 (CONTINUED)

(UNAUDITED)

					Range of
	Primary Risk Exposure	Notional Value			Expiration Dates	Fair Value
						Expressed in U.S.
(In thousands)						Dollars
Financial Derivatives - Assets (11.90%) (a)
Swaps (11.90%) (e)
Long Swaps:
Credit Default Swaps on Asset-Backed Indices (Cost - $331) (f)	Credit	$	10,135		6/36 - 9/37	$	752
Interest Rate Swaps (g)	Interest Rates		12,200		8/22 - 9/22		143
Short Swaps:
Credit Default Swaps on Asset-Backed Securities (h)	Credit		(39,178	)	9/34 - 5/36		31,460
Credit Default Swaps on Asset-Backed Indices (i)	Credit		(108,412	)	8/37 - 10/52		26,361
Interest Rate Swaps (j)	Interest Rates		(43,800	)	7/22 - 10/22		369
Total Return Swaps (l)	Equity Market		(5,769	)	9/13		257
Total Swaps (Cost $75,677)							59,342
Total Financial Derivatives - Assets (Cost $75,677)						$	59,342
Financial Derivatives - Liabilities (-4.04%) (a)
Swaps (-4.02% )
Long Swaps:
Credit Default Swaps on Asset-Backed Indices:     (Proceeds - $18,089) (f)	Credit	$	46,370		8/37 - 10/52	$	(16,924	)
Interest Rate Swaps (g)	Interest Rates		10,000		10/22		(2	)
Short Swaps:
Interest Rate Swaps (j)	Interest Rates		(213,800	)	8/14 - 9/22		(2,124	)
Credit Default Swaps on Asset-Backed Indices (i)	Credit		(10,135	)	6/36 - 9/37		(752	)
Credit Default Swaps on Corporate Bond Indices (k)	Credit		(58,250	)	6/17		(276	)
Total Return Swaps (l)	Equity Market		(16,324	)	9/13		—
Total Swaps (Proceeds -$18,701)							(20,078	)
Futures (-0.02% )
Short Futures:
Eurodollar Futures (m)	Interest Rates		(84,000	)	12/12 - 9/13		(87	)
Total Futures							(87	)
Total Financial Derivatives - Liabilities (Proceeds -$18,701)						$	(20,165	)

See Notes to Consolidated Financial Statements

7

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2012 (CONCLUDED)

(UNAUDITED)

(a) See Note 2 and Note 3 in Notes to Consolidated Financial Statements.

(b) At September 30, 2012, the Company’s long investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association represented 104.58%, 25.88%, and 0.67% of shareholders’ equity, respectively.

(c) In general, securities received pursuant to repurchase agreements were delivered to counterparties in short sale transactions.

(d) At September 30, 2012, the Company’s short investments guaranteed by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation represented 75.14% and 13.74% of shareholders’ equity, respectively.

(e) The following table shows the Company’s swap assets by dealer as a percentage of shareholders’ equity:

	Percent of
	Shareholders’
Dealer/Parent Company	Equity
Affiliates of Deutsche Bank		4.83	%

(f) For long credit default swaps on asset-backed indices, the Company sold protection.

(g) For long interest rate swap contracts, a floating rate is being paid and a fixed rate is being received.

(h) For short credit default swaps on asset-backed securities, the Company purchased protection.

(i) For short credit default swaps on asset-backed indices, the Company purchased protection.

(j) For short interest rate swap contracts, a fixed rate is being paid and a floating rate is being received.

(k) For short credit default swaps on corporate bond indices, the Company purchased protection.

(l) Notional value represents number of underlying shares or par value times the closing price of the underlying security.

(m) Every $1,000,000 in notional value represents one contract.

(n) Maturity date may be extended through November 4, 2015.

(o) The table below shows the Company’s long investment ratings from Moody’s, Standard and Poor’s, or Fitch, as well as the Company’s long investments that were unrated but affiliated with Fannie Mae, Freddie Mac, or Ginnie Mae. Ratings tend to be a lagging credit indicator; as a result, the credit quality of the Company’s long investment holdings may be lower than the credit quality implied based on the ratings listed below. In situations where an investment has a split rating, the lowest provided rating is used. The ratings descriptions include ratings qualified with a “+”, “-”, “1”, “2”, or “3”.

	Percentage of
	Shareholders’
Rating Description	Equity
Unrated but Agency-Guaranteed		131.13	%
Aaa/AAA/AAA		0.02	%
Aa/AA/AA		0.45	%
A/A/A		1.85	%
Baa/BBB/BBB		8.25	%
Ba/BB/BB or below		90.44	%
Unrated		1.62	%

See Notes to Consolidated Financial Statements

8

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate			Maturity	Fair Value
(In thousands)							Expressed in U.S. Dollars
	North America
	Long Investments (326.89%) (a) (o)
	Mortgage-Backed Securities (322.98%)
	Agency Securities (206.07%) (b)
	Fixed Rate Agency Securities (195.78%)
	Principal and Interest - Fixed Rate Agency Securities (185.76%)
$	85,000	Federal Home Loan Mortgage Corporation Pool		4.50	%	10/41	$	90,611
	25,882	Federal National Mortgage Association Pool		5.00	%	7/41		28,107
	25,456	Federal Home Loan Mortgage Corporation Pool		4.00	%	11/40		26,824
	24,164	Federal National Mortgage Association Pool		4.50	%	12/41		25,874
	20,212	Federal National Mortgage Association Pool		5.00	%	8/41		21,937
	18,867	Federal Home Loan Mortgage Corporation Pool		5.00	%	7/41		20,417
	18,434	Federal National Mortgage Association Pool		4.50	%	9/41		19,738
	18,120	Federal National Mortgage Association Pool		4.50	%	10/41		19,397
	17,391	Federal National Mortgage Association Pool		5.00	%	3/41		18,941
	17,182	Federal National Mortgage Association Pool		4.50	%	9/41		18,328
	15,465	Federal Home Loan Mortgage Corporation Pool		5.00	%	9/39		16,620
	15,243	Federal National Mortgage Association Pool		4.50	%	9/41		16,260
	14,964	Federal National Mortgage Association Pool		4.50	%	11/41		15,991
	13,451	Federal National Mortgage Association Pool		4.50	%	9/41		14,348
	13,554	Federal National Mortgage Association Pool		4.00	%	11/41		14,252
	13,033	Federal National Mortgage Association Pool		4.50	%	9/41		13,927
	13,125	Federal National Mortgage Association Pool		4.00	%	10/41		13,818
	12,593	Federal National Mortgage Association Pool		5.00	%	7/41		13,699
	11,361	Federal National Mortgage Association Pool		4.50	%	4/26		12,154
	11,095	Federal National Mortgage Association Pool		5.00	%	9/41		12,098
	10,358	Federal Home Loan Mortgage Corporation Pool		4.00	%	1/41		10,902
	9,995	Federal Home Loan Mortgage Corporation Pool		5.00	%	10/41		10,791
	9,468	Federal National Mortgage Association Pool		4.00	%	7/26		10,011
	9,176	Federal Home Loan Mortgage Corporation Pool		4.50	%	2/41		9,805
	9,149	Federal Home Loan Mortgage Corporation Pool		4.50	%	10/41		9,736
	9,152	Federal National Mortgage Association Pool		4.00	%	5/26		9,657
	9,027	Federal National Mortgage Association Pool		4.00	%	9/41		9,498
	8,468	Federal National Mortgage Association Pool		5.50	%	10/39		9,269
	8,400	Federal Home Loan Mortgage Corporation Pool		4.00	%	3/41		8,851
	8,123	Federal National Mortgage Association Pool		5.00	%	9/41		8,836
	7,437	Federal National Mortgage Association Pool		5.00	%	9/41		8,072
	7,261	Federal National Mortgage Association Pool		5.50	%	5/40		7,947
	6,955	Federal National Mortgage Association Pool		5.00	%	6/41		7,553
	6,878	Federal National Mortgage Association Pool		5.00	%	7/41		7,465

See Notes to Consolidated Financial Statements

9

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011 (CONTINUED)

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
	Principal and Interest - Fixed Rate Agency Securities (185.76% ) (continued)
	$6,852	Federal National Mortgage Association Pool	5.00%	5/41	$	7,437
	6,823	Federal National Mortgage Association Pool	5.00%	6/41		7,406
	6,759	Federal National Mortgage Association Pool	4.00%	6/26		7,147
	5,836	Federal National Mortgage Association Pool	5.00%	10/41		6,334
	5,531	Federal Home Loan Mortgage Corporation Pool	6.00%	4/39		6,095
	5,687	Federal National Mortgage Association Pool	4.00%	10/41		5,987
	5,514	Federal National Mortgage Association Pool	5.00%	11/40		5,985
	5,711	Federal National Mortgage Association Pool	3.50%	11/41		5,883
	5,549	Federal Home Loan Mortgage Corporation Pool	4.00%	5/41		5,833
	5,209	Federal National Mortgage Association Pool	4.50%	8/41		5,557
	4,888	Federal National Mortgage Association Pool	5.00%	8/41		5,330
	4,799	Federal National Mortgage Association Pool	5.00%	6/40		5,209
	4,837	Federal National Mortgage Association Pool	4.50%	4/41		5,190
	4,702	Federal National Mortgage Association Pool	5.00%	9/41		5,127
	4,398	Federal Home Loan Mortgage Corporation Pool	3.50%	10/41		4,522
	4,150	Federal National Mortgage Association Pool	5.00%	10/41		4,504
	4,230	Federal National Mortgage Association Pool	4.00%	9/41		4,454
	4,158	Federal Home Loan Mortgage Corporation Pool	4.00%	1/41		4,384
	4,100	Federal National Mortgage Association Pool	4.50%	11/41		4,374
	3,724	Federal Home Loan Mortgage Corporation Pool	4.50%	9/41		3,963
	3,751	Federal National Mortgage Association Pool	3.50%	11/41		3,859
	2,565	Federal National Mortgage Association Pool	5.00%	7/41		2,791
	2,391	Federal National Mortgage Association Pool	5.00%	11/41		2,595
	4,609	Other Federal National Mortgage Association Pools	6.00%	9/39 - 2/40		5,092
	1,197	Other Federal Home Loan Mortgage Corporation Pool	6.00%	5/40		1,319
	806	Other Government National Mortgage Association Pool	5.50%	3/41		907
						689,018
	Interest Only - Fixed Rate Agency Securities (1.38%)
	24,381	Other Federal National Mortgage Association	5.00% - 5.50%	1/36 - 10/40		2,734
	13,937	Other Federal Home Loan Mortgage Corporation	5.00% - 5.50%	6/33 - 1/39		1,772
	9,281	Other Government National Mortgage Association	5.50%	3/36		603
						5,109
	TBA - Fixed Rate Agency Securities (8.64%)
	30,500	Federal National Mortgage Association (30 Year)	4.00%	1/12		32,033
						32,033
	Total Fixed Rate Agency Securities (Cost $718,177)					726,160

See Notes to Consolidated Financial Statements

10

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011 (CONTINUED)

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
	Floating Rate Agency Securities (10.29%)
	Principal and Interest - Floating Rate Agency Securities (10.23%)
	$  9,464	Federal National Mortgage Association Pool	5.10%	5/38	$	9,969
	6,675	Federal National Mortgage Association Pool	5.28%	12/35		7,027
	6,627	Federal National Mortgage Association Pool	5.29%	2/38		6,954
	3,364	Federal Home Loan Mortgage Corporation Pool	2.71%	7/34		3,524
	3,261	Federal National Mortgage Association Pool	5.52%	7/37		3,493
	3,247	Federal National Mortgage Association Pool	5.69%	4/36		3,441
	1,906	Federal National Mortgage Association Pool	5.44%	9/37		2,023
	1,444	Other Federal National Mortgage Association Pool	5.01%	10/33		1,525
						37,956
	Interest Only - Floating Rate Agency Securities (0.06%)
	1,476	Other Federal National Mortgage Association Pool	5.50%	8/36		228
						228
	Total Floating Rate Agency Securities (Cost $37,594)					38,184
	Total Agency Securities (Cost $755,771)					764,344
	Private Label Securities (116.91%)
	Principal and Interest - Private Label Securities (114.91%)
	762,480	Various	0.35% - 9.35%	5/19 - 12/47		426,202
	Total Principal and Interest - Private Label Securities (Cost $456,170)					426,202
	Interest Only - Private Label Securities (0.48%)
	76,167	Various	0.50% - 6.91%	7/35 - 9/47		1,774
	Total Interest Only - Private Label Securities (Cost $1,471)					1,774
	Other Private Label Securities (1.52%)
	201,831	Various	—	6/37 - 9/46		5,650
	Total Other Private Label Securities (Cost $6,011)					5,650
	Total Private Label Securities (Cost $463,652)					433,626
	Total Mortgage-Backed Securities (Cost $1,219,423)					1,197,970
	Commercial Mortgage Loans (1.19%) (n)
	5,000	Various	6.25%	11/12		4,400
	Total Commercial Mortgage Loans (Cost $4,789)					4,400
	U.S. Treasury Securities (2.72%)
	10,000	U.S. Treasury Note	2.00%	11/21		10,113
	Total U.S. Treasury Securities (Cost $9,991)					10,113
	Total Long Investments (Cost $1,234,203)				$	1,212,483

See Notes to Consolidated Financial Statements

11

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011 (CONTINUED)

(UNAUDITED)

Current Principal/ Notional Value		Description	Rate			Maturity	Fair Value
(In thousands)							Expressed in U.S. Dollars
	Repurchase Agreements (4.24%) (a) (c)
	$  15,750	Bank of America Securities Collateralized by Par Value $15,000 U.S. Treasury Note, Coupon 1.75%, Maturity Date 5/16		0.01%		1/12	$	15,750
	Total Repurchase Agreements (Cost $15,750)						$	15,750
	Investments Sold Short (-124.66%) (a)
	TBA - Fixed Rate Agency Securities Sold Short (-120.43%) (d)
	$(147,700)	Federal National Mortgage Association (30 Year)		4.50	%	1/12	$	(157,185	)
	(114,200)	Federal National Mortgage Association (30 Year)		5.00	%	1/12		(123,376	)
	(31,000)	Federal Home Loan Mortgage Corporation (30 Year)		5.00	%	1/12		(33,316	)
	(30,400)	Federal Home Loan Mortgage Corporation (30 Year)		4.50	%	1/12		(32,217	)
	(26,000)	Government National Mortgage Association (30 Year)		5.00	%	1/12		(28,805	)
	(25,300)	Federal National Mortgage Association (15 Year)		4.00	%	1/12		(26,688	)
	(13,500)	Federal National Mortgage Association (30 Year)		5.50	%	1/12		(14,700	)
	(11,000)	Federal National Mortgage Association (15 Year)		4.50	%	1/12		(11,727	)
	(8,400)	Federal National Mortgage Association (30 Year)		3.50	%	1/12		(8,640	)
	(4,400)	Federal Home Loan Mortgage Corporation (30 Year)		3.50	%	1/12		(4,517	)
	(2,500)	Federal National Mortgage Association (30 Year)		6.00	%	1/12		(2,753	)
	(1,500)	Other Government National Mortgage Association (30 Year)		5.50	%	1/12		(1,685	)
	(1,000)	Other Federal Home Loan Mortgage Corporation (30 Year)		6.00	%	1/12		(1,098	)
	Total TBA - Fixed Rate Agency Securities Sold Short (Proceeds -$443,893)							(446,707	)
	U.S. Treasury Securities Sold Short (-4.23%)
	(15,000)	U.S. Treasury Note		1.75	%	5/16		(15,687	)
	Total U.S. Treasury Securities Sold Short (Proceeds -$15,120)							(15,687	)
	Total Investments Sold Short (Proceeds -$459,013)						$	(462,394	)

See Notes to Consolidated Financial Statements

12

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011 (CONTINUED)

(UNAUDITED)

	Primary Risk Exposure		Notional Value			Range of Expiration Dates	Fair Value
(In thousands)							Expressed in U.S. Dollars
Financial Derivatives - Assets (27.73%) (a)
Swaps (27.73%) (e)
Long Swaps:
Interest Rate Swaps (g)		Interest Rates	$	4,500		10/16	$	68
Short Swaps:
Credit Default Swaps on Asset-Backed Securities (h)		Credit		(74,787	)	9/34 - 12/36		61,498
Credit Default Swaps on Asset-Backed Indices: (i)		Credit
ABX.HE AAA 2006-2 Index				(62,842	)	5/46		35,542
Other				(19,800	)	3/49 - 10/52		4,761
Credit Default Swaps on Corporate Bond Indices (k)		Credit		(106,500	)	12/16		963
Interest Rate Swaps (j)		Interest Rates		(25,000	)	12/14		27
Total Swaps (Cost $118,281)								102,859
Futures (0.00%)
Short Futures:
Eurodollar Futures (m)		Interest Rates		(147,000	)	3/12 - 9/13		12
Total Futures								12
Total Financial Derivatives - Assets (Cost $118,281)							$	102,871
Financial Derivatives - Liabilities (-7.29%) (a)
Swaps (-7.29%)
Long Swaps:
Credit Default Swaps on Asset-Backed Indices (Proceeds - $9,636) (f)		Credit	$	22,615		6/36 - 2/51	$	(9,548	)
Short Swaps:
Interest Rate Swaps (j)		Interest Rates		(280,400	)	4/14 - 12/21		(17,218	)
Total Return Swaps (l)		Equity Market		(20,571	)	9/12 - 9/13		(274	)
Total Swaps (Proceeds -$9,636)								(27,040	)
Total Financial Derivatives - Liabilities (Proceeds -$9,636)							$	(27,040	)

See Notes to Consolidated Financial Statements

13

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2011 (CONCLUDED)

(UNAUDITED)

(a) See Note 2 and Note 3 in Notes to Consolidated Financial Statements.

(b) At December 31, 2011, the Company’s long investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association represented 142.04%, 63.62%, and 0.41% of shareholders’ equity, respectively.

(c) In general, securities received pursuant to repurchase agreements were delivered to counterparties in short sale transactions.

(d) At December 31, 2011, the Company’s short investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association represented 93.03%, 19.18%, and 8.22% of shareholders’ equity, respectively.

(e) The following table shows the Company’s swap assets by dealer as a percentage of shareholders’ equity:

Dealer/Parent Company	Percent of Shareholders’ Equity
Affiliates of Morgan Stanley		8.15	%
Affiliates of Credit Suisse		7.27	%
Affiliates of Deutsche Bank		5.65	%

(f) For long credit default swaps on asset-backed indices, the Company sold protection.

(g) For long interest rate swap contracts, a floating rate is being paid and a fixed rate is being received.

(h) For short credit default swaps on asset-backed securities, the Company purchased protection.

(i) For short credit default swaps on asset-backed indices, the Company purchased protection.

(j) For short interest rate swap contracts, a fixed rate is being paid and a floating rate is being received.

(k) For short credit default swaps on corporate bond indices, the Company purchased protection.

(l) Notional value represents number of underlying shares or par value times the closing price of the underlying security.

(m) Every $1,000,000 in notional value represents one contract.

(n) Maturity date may be extended through November 4, 2015.

(o) The table below shows the ratings on the Company’s long investments from Moody’s, Standard and Poor’s, or Fitch, as well as the Company’s long investments that were unrated but affiliated with Fannie Mae, Freddie Mac, or Ginnie Mae. Ratings tend to be a lagging credit indicator; as a result, the credit quality of the Company’s long investment holdings may be lower than the credit quality implied based on the ratings listed below. In situations where an investment has a split rating, the lowest provided rating is used. The ratings descriptions include ratings qualified with a “+,” “-,” “1,” “2” or “3.”

Rating Description	Percentage of Shareholders’ Equity
U.S. Treasury Securities		2.72	%
Unrated but Agency-Guaranteed		206.07	%
Aaa/AAA/AAA		1.25	%
Aa/AA/AA		1.88	%
A/A/A		5.44	%
Baa/BBB/BBB		3.46	%
Ba/BB/BB or below		103.36	%
Unrated		2.71	%

See Notes to Consolidated Financial Statements

14

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Three Month Period Ended September 30, 2012			Three Month Period Ended September 30, 2011			Nine Month Period Ended September 30, 2012			Nine Month Period Ended September 30, 2011
(In thousands except per share amounts)				Expressed in U.S. Dollars
INVESTMENT INCOME
Interest income	$	15,426		$	15,597		$	47,203		$	48,098
EXPENSES
Base management fee		1,913			1,418			4,901			4,347
Incentive fee		9,491			—			11,802			612
Share-based LTIP expense		31			41			89			116
Interest expense		1,936			1,627			5,760			4,773
Professional fees		328			457			933			1,369
Compensation expense		260			428			935			1,079
Insurance expense		177			176			531			533
Agency and administration fees		233			225			664			715
Custody and other fees		262			191			870			707
Directors’ fees and expenses		63			57			204			198
Total expenses		14,694			4,620			26,689			14,449
NET INVESTMENT INCOME		732			10,977			20,514			33,649
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FINANCIAL DERIVATIVES
Net realized gain (loss) on:
Investments		8,130			1,570			13,543			(1,215	)
Swaps		(3,172	)		6,779			(31,637	)		17,971
Futures		(15	)		(375	)		(32	)		(1,094	)
		4,943			7,974			(18,126	)		15,662
Change in net unrealized gain (loss) on:
Investments		26,526			(9,003	)		54,957			(22,555	)
Swaps		(2,631	)		(11,477	)		15,114			(19,020	)
Futures		(33	)		369			(99	)		890
		23,862			(20,111	)		69,972			(40,685	)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FINANCIAL DERIVATIVES		28,805			(12,137	)		51,846			(25,023	)
NET INCREASE (DECREASE) IN SHAREHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	29,537		$	(1,160	)	$	72,360		$	8,626
NET INCREASE (DECREASE) IN SHAREHOLDERS’ EQUITY RESULTING FROM OPERATIONS PER SHARE:
Basic and Diluted	$	1.59		$	(0.07	)	$	4.15		$	0.51

See Notes to Consolidated Financial Statements

15

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

	Three Month Period Ended September 30, 2012			Three Month Period Ended September 30, 2011			Nine Month Period Ended September 30, 2012			Nine Month Period Ended September 30, 2011
(In thousands)	Expressed in U.S. Dollars
CHANGE IN SHAREHOLDERS’ EQUITY RESULTING FROM OPERATIONS
Net investment income	$	732		$	10,977		$	20,514		$	33,649
Net realized gain (loss) on investments and financial derivatives		4,943			7,974			(18,126	)		15,662
Change in net unrealized gain (loss) on investments and financial derivatives		23,862			(20,111	)		69,972			(40,685	)
Net increase (decrease) in shareholders’ equity resulting from operations		29,537			(1,160	)		72,360			8,626
CHANGE IN SHAREHOLDERS’ EQUITY RESULTING FROM SHAREHOLDER TRANSACTIONS
Net proceeds from the issuance of shares(1)		88,142			—			88,142			—
Shares issued in connection with incentive fee payment		231			—			231			203
Dividends paid(2)		(14,244	)		(6,752	)		(32,766	)		(35,634	)
Shares repurchased		—			(309	)		—			(309	)
Net offering costs		(322	)		—			(322	)		—
Share-based LTIP awards		31			41			89			116
Net increase (decrease) in shareholders’ equity from shareholder transactions		73,838			(7,020	)		55,374			(35,624	)
Net increase (decrease) in shareholders’ equity		103,375			(8,180	)		127,734			(26,998	)
SHAREHOLDERS’ EQUITY, BEGINNING OF PERIOD		395,275			384,854			370,916			403,672
SHAREHOLDERS’ EQUITY, END OF PERIOD	$	498,650		$	376,674		$	498,650		$	376,674

(1) Proceeds from the issuance of shares are net of placement fees in the amount of $1,852.

(2) For the three month periods ending September 30, 2012 and 2011, dividends totaling $0.70 and $0.40, respectively, per common share and LTIP unit outstanding were declared and paid. For the nine month periods ending September 30, 2012 and 2011, dividends totaling $ 1.80 and $2.11, respectively, per common share and LTIP unit outstanding were declared and paid.

See Notes to Consolidated Financial Statements

16

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Month Period Ended September 30, 2012			Nine Month Period Ended September 30, 2011
(In thousands)	Expressed in U.S. Dollars
INCREASE IN CASH AND CASH EQUIVALENTS:
NET INCREASE IN SHAREHOLDERS’ EQUITY RESULTING FROM OPERATIONS	$	72,360		$	8,626
Cash flows provided by (used in) operating activities:
Reconciliation of the net increase in shareholders’ equity resulting from operations to net cash provided by (used in) operating activities:
Change in net unrealized (gain) loss on investments and financial derivatives		(69,972	)		40,685
Net realized (gain) loss on investments and financial derivatives		18,126			(15,662	)
Amortization of premiums and accretion of discounts (net)		(8,904	)		(7,857	)
Purchase of investments		(1,763,718	)		(2,695,989	)
Proceeds from disposition of investments		1,802,659			2,582,023
Proceeds from principal payments of investments		103,733			75,595
Proceeds from investments sold short		576,851			980,116
Repurchase of investments sold short		(600,777	)		(1,226,418	)
Payments made to open financial derivatives		(78,043	)		(119,933	)
Proceeds received to close financial derivatives		111,235			224,232
Proceeds received to open financial derivatives		40,248			25,878
Payments made to close financial derivatives		(53,439	)		(27,540	)
Shares issued in connection with incentive fee payment		231			203
Share-based LTIP expense		89			116
(Increase) decrease in assets:
Decrease in repurchase agreements		1,970			7,649
(Increase) decrease in receivable for securities sold		9,175			(91,287	)
(Increase) decrease in deposits with dealers held as collateral		8,969			(16,275	)
Increase in interest and principal receivable		(460	)		(1,689	)
Increase in other assets		(229	)		(157	)
Increase (decrease) in liabilities:
Decrease in due to brokers on margin accounts		(45,171	)		(74,345	)
Increase in payable for securities purchased		50,936			269,450
Decrease in accounts payable and accrued expenses		(313	)		(204	)
Increase (decrease) in incentive fee payable		9,491			(1,422	)
Increase (decrease) in interest and dividends payable		(261	)		88
Increase (decrease) in base management fee payable		517			(107	)
Net cash provided by (used in) operating activities		185,303			(64,224	)
Cash flows provided by (used in) financing activities:
Net proceeds from the issuance of shares(1)		88,142			—
Shares repurchased		—			(309	)
Offering costs paid		(280	)		(469	)
Dividends paid		(32,766	)		(35,634	)
Proceeds from issuance of securitized debt		1,522			—
Principal payments on securitized debt		(158	)		—
Reverse repurchase agreements, net of repayments		(235,277	)		106,456
Net cash provided by (used in) financing activities		(178,817	)		70,044
NET INCREASE IN CASH AND CASH EQUIVALENTS		6,486			5,820
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		62,737			35,791
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	69,223		$	41,611
Supplemental disclosure of cash flow information:
Interest paid	$	6,009		$	4,714
Shares issued in connection with incentive fee payment (non-cash)	$	231		$	203
Share-based LTIP awards (non-cash)	$	89		$	116
Aggregate TBA trade activity (buys + sells) (non-cash)	$	11,882,119		$	16,291,487

(1) Proceeds from the issuance of shares are net of placement fees in the amount of $1,852.

See Notes to Consolidated Financial Statements

17

ELLINGTON FINANCIAL LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(UNAUDITED)

1. Organization and Investment Objective

Ellington Financial LLC was formed as a Delaware limited liability company on July 9, 2007 and commenced operations on August 17, 2007. EF Securities LLC, a wholly owned consolidated subsidiary of Ellington Financial LLC, was formed as a Delaware limited liability company on October 12, 2007 and commenced operations on November 30, 2007. EF Mortgage LLC, a wholly owned consolidated subsidiary of Ellington Financial LLC, was formed as a Delaware limited liability company on June 3, 2008 and commenced operations on July 8, 2008. EF CMO LLC, a wholly owned consolidated subsidiary of EF Mortgage LLC, was formed as a Delaware limited liability company on June 3, 2008 and commenced operations on July 8, 2008. EF Special Transactions LLC, a wholly owned consolidated subsidiary of EF CMO LLC, was formed as a Delaware limited liability company on December 14, 2011 and commenced operations on January 31, 2012. Ellington Financial LLC, EF Securities LLC, EF Mortgage LLC, EF CMO LLC and EF Special Transactions LLC are hereafter collectively referred to as the “Company.” All inter-company accounts are eliminated in consolidation. The Company intends to be treated as a partnership for U.S. federal income tax purposes.

The Company is a specialty finance company that acquires and manages mortgage-related assets, including residential mortgage-backed securities, or “RMBS,” backed by prime jumbo, Alt-A, manufactured housing and subprime residential mortgage loans, RMBS for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored enterprise, mortgage-related derivatives, commercial mortgage-backed securities, or “CMBS,” commercial mortgage loans and other commercial real estate debt, as well as corporate debt and equity securities and derivatives. The Company may also opportunistically acquire and manage other types of mortgage-related and financial asset classes, such as residential whole mortgage loans, asset-backed securities, or “ABS,” backed by consumer and commercial assets and non-mortgage-related derivatives.

Ellington Financial Management LLC (“EFM” or the “Manager”) is a registered investment advisor and a registered commodity pool operator that serves as the Manager to the Company pursuant to the terms of the Third Amended and Restated Management Agreement effective August 2, 2011 (the “Management Agreement”). EFM is an affiliate of Ellington Management Group, L.L.C., an investment management firm that is registered as both an investment advisor and a commodity pool operator. In accordance with the terms of the Management Agreement, the Manager implements the investment strategy and manages the business and operations on a day-to-day basis for the Company and performs certain services for the Company, subject to oversight by the Board of Directors.

2. Significant Accounting Policies

(A) Basis of Presentation: The Company’s unaudited interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America for investment companies, ASC 946, Financial Services—Investment Companies (“ASC 946”), for interim financial information. ASC 946 requires, among other things, that investments be reported at fair value in the financial statements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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(B) Valuation: The Company applies ASC 820-10, Fair Value Measurement and Disclosures (“ASC 820-10”), to its holdings of financial instruments. ASC 820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

• Level 1—inputs to the valuation methodology are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets,

• Level 2—inputs to the valuation methodology other than quoted prices included in Level 1 are observable for the asset or liability, either directly or indirectly, and

• Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.

(C) Securities Transactions and Investment Income: Securities transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost. Interest income, which includes accretion of discounts and amortization of premiums on mortgage-backed securities, or “MBS,” commercial mortgage loans, U.S. Treasury securities and securitized debt, is recognized over the life of the investment using the effective interest method. For purposes of determining the effective interest rate, management estimates the future expected cash flows of its investment holdings based on assumptions including, but not limited to, assumptions for future prepayment rates, default rates and loss severities (each of which may in turn incorporate various macro-economic assumptions, such as future housing prices). These assumptions are re-evaluated not less than quarterly and require the use of a significant amount of judgment. Principal write-offs are generally treated as realized losses.

(D) Cash and Cash Equivalents: Cash and cash equivalents include amounts held in an interest bearing overnight account and money market funds. As of September 30, 2012 and December 31, 2011, all cash was held in an interest bearing account at the Bank of New York Mellon Corporation.

(E) Financial Derivatives: The Company enters into various types of financial derivatives. The two major types utilized are swaps and futures.

Swaps: The Company may enter into various types of swaps, including interest rate swaps, credit default swaps and total return swaps. The primary risk associated with the Company’s interest rate swap activity is interest rate risk. The primary risk associated with the Company’s total return swap activity has been equity market risk. The primary risk associated with the Company’s credit default swaps is credit risk.

The Company is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. To help mitigate interest rate risk, the Company enters into interest rate swaps. Interest rate swaps are contractual agreements whereby one party pays a floating rate of interest on a notional principal amount and receives a fixed rate on the same notional principal, or vice versa, for a fixed period of time. Interest rate swaps change in value with movements in interest rates.

The Company enters into credit default swaps. A credit default swap is a contract under which one party agrees to compensate another party for the financial loss associated with the occurrence of a “credit event” in relation to a “reference amount” or notional value of a credit obligation (usually a bond, loan or a basket of bonds or loans). The definition of a credit event often varies from contract to contract. A credit event may occur (i) when the underlying reference asset(s) fails to make scheduled principal or interest payments to its holders, (ii) with respect to credit default swaps referencing mortgage/asset-backed securities and indices, when the underlying reference obligation is downgraded below a certain rating level or (iii) with respect to credit default swaps referencing corporate entities and indices, upon the bankruptcy of the underlying reference obligor. The Company typically writes (sells) protection to take a “long” position or purchases (buys) protection to take a “short” position with respect to underlying reference assets or to hedge exposure to other investment holdings.

The Company enters into total return swaps in order to take a “long” or “short” position with respect to an underlying referenced asset. The Company is subject to market price volatility of the underlying referenced asset. A total return swap involves commitments to pay interest in exchange for a market-linked return based on a notional value. To the extent that the total return of the security, group of securities or index underlying the transaction exceeds or falls short of the offsetting interest obligation, the Company will receive a payment from or make a payment to the counterparty.

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Swaps change in value with movements in interest rates or total return of the referenced securities. During the term of swap contracts, changes in value are recognized as unrealized gains or losses. When the contracts are terminated, the Company will realize a gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Company’s basis in the contract, if any. Periodic payments or receipts required by swap agreements are recorded as unrealized gains or losses when accrued and realized gains or losses when received or paid. Upfront payments paid/received by the Company to open swap contracts are recorded as an asset and/or liability on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity and are recorded as a realized gain or loss on the termination date. The Company may be required to deliver or receive cash or securities as collateral upon entering into swap transactions.

The Company’s swap contracts are generally governed by International Swaps and Derivatives Association, or “ISDA,” trading agreements, which are separately negotiated agreements with dealer counterparties. Changes in the relative value of the swap transactions may require the Company or the counterparty to post or receive additional collateral. Typically, a collateral payment or receipt is triggered based on the net change in the value of all contracts governed by a particular ISDA trading agreement. Collateral received from counterparties is included in Due to brokers on margin accounts on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. Collateral paid to counterparties is included in Deposits with dealers held as collateral on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. Entering into swap contracts involves market risk in excess of amounts recorded on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity.

Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. The Company enters into Eurodollar futures contracts to hedge its interest rate risk. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received periodically, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company’s basis in the contract.

Derivative instruments disclosed on the Consolidated Condensed Schedule of Investments include: credit default swaps on asset-backed securities, credit default swaps on asset-backed indices, credit default swaps on corporate bond indices, interest rate swaps, total return swaps and Eurodollar futures contracts.

Swap assets are included in Financial derivatives—assets at fair value on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. Swap liabilities are included in Financial derivatives—liabilities at fair value on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. In addition, swap contracts are summarized by type on the Consolidated Condensed Schedule of Investments. Unrealized appreciation on futures contracts is included in Financial derivatives—assets at fair value on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. Unrealized depreciation on futures contracts is included in Financial derivatives—liabilities at fair value on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. For interest rate swaps, total return swaps, credit default swaps and futures, notional values reflected on the Consolidated Condensed Schedule of Investments represent approximately 110%, 100%, 90% and 69%, respectively, of average monthly notional values of each such category outstanding during the nine month period ended September 30, 2012. For total return swaps, interest rate swaps, credit default swaps and futures, notional values reflected on the Consolidated Condensed Schedule of Investments represent approximately 354%, 111%, 92% and 65%, respectively, of average monthly notional values of each such category outstanding during the year ended December 31, 2011. The Company uses average monthly notional values outstanding to indicate the volume of activity with respect to these instruments.

(F) Investments Sold Short: When the Company sells securities short, it typically satisfies its security delivery settlement obligation by obtaining the security sold from the same or a different counterparty via repurchase agreement. The Company generally is required to deliver cash or securities as collateral to the repurchase agreement counterparty. The amount by which the market value of the obligation falls short of or exceeds the proceeds from the short sale is treated as an unrealized gain or loss, respectively. A realized gain or loss will be recognized upon the termination of a short sale if the market price is less or greater than the proceeds originally received.

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(G) Reverse Repurchase Agreements and Repurchase Agreements: The Company enters into reverse repurchase agreements with third-party broker-dealers whereby it sells securities under agreements to be repurchased at an agreed-upon price and date. Interest on the value of repurchase and reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. The Company accounts for reverse repurchase agreements as collateralized borrowings. When the Company enters into a reverse repurchase agreement, the lender establishes and maintains an account containing cash and securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. The Company enters into repurchase agreement transactions with third-party broker-dealers whereby it purchases securities under agreements to resell at an agreed-upon price and date. In general, securities received pursuant to repurchase agreements are delivered to counterparties of short sale transactions. Assets held pursuant to repurchase agreements are reflected as assets on the Consolidated Statement of Assets, Liabilities and Shareholders’ Equity. Repurchase and reverse repurchase agreements that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet Offsetting. There are no repurchase and reverse repurchase agreements netted in the consolidated financial statements.

Reverse repurchase agreements are carried at their contractual amounts, which the Company believes is the best estimate of fair value. At September 30, 2012, the Company’s open reverse repurchase agreements had remaining terms that averaged 68 days and ranged from 2 to 180 days and had interest rates that averaged 1.07% and ranged from 0.31% to 2.80%. At September 30, 2012, approximately 64% of open reverse repurchase agreements were with three counterparties. At December 31, 2011, the Company’s open reverse repurchase agreements had remaining terms that averaged 33 days and ranged from 3 to 180 days and had interest rates that averaged 0.82% and ranged from 0.08% to 2.56%. At December 31, 2011, approximately 73% of open reverse repurchase agreements were with four counterparties.

The Company follows the provisions of ASC 860-20, Sales of Financial Assets, which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. As of September 30, 2012 the Company had no seller financed holdings.

(H) Securitized Debt: The Company entered into a resecuritization transaction in January 2012, which is accounted for as a collateralized borrowing. The asset contributed to the securitization was not derecognized but rather, the liability issued by the securitization was recorded to reflect the term financing of the re-securitized asset. Under ASC 820-10, the Company has elected to carry securitized debt at fair value. The asset subject to the resecuritization had a fair value of $2.4 million as of September 30, 2012 which is included on the Consolidated Condensed Schedule of Investments under Principal and Interest – Private Label Securities.

(I) Purchased Options: The Company may enter into options primarily to help mitigate overall market risk. When the Company purchases an option, an amount equal to the premium paid is recorded as an asset and is subsequently marked-to-market. Premiums paid for purchasing options that expire unexercised are recognized on the expiration date as realized losses. If an option is exercised, the premium paid is subtracted from the proceeds of the sale or added to the cost of the purchase to determine whether the Company has realized a gain or loss on the related investment transaction. When the Company enters into a closing transaction, the Company will realize a gain or loss depending upon whether the amount from the closing transaction is greater or less than the premiums paid. The Company had no purchased options outstanding as of September 30, 2012 and December 31, 2011.

(J) When-Issued/Delayed Delivery Securities: The Company may purchase or sell securities on a when-issued or delayed delivery basis. Securities purchased or sold on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price or yield, and no income accrues to the purchaser prior to settlement. Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price or yield at the time of settlement may be lower or higher than the agreed-upon price or yield, in which case a realized loss may be incurred.

The Company transacts in the forward settling To Be Announced MBS (“TBA”) market. The Company typically does not take delivery of TBAs, but rather settles with its trading counterparties on a net basis. The market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale

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price. As part of its TBA activities, the Company may “roll” its TBA positions, whereby the Company may sell (buy) securities for delivery (receipt) in an earlier month and simultaneously contract to repurchase (sell) similar, but not identical, securities at an agreed-upon price on a fixed date in a later month (with the later-month price typically lower than the earlier-month price). The Company accounts for its TBA transactions (including those related to TBA rolls) as purchases and sales. As of September 30, 2012, total assets included $33.7 million of TBAs as well as $441.8 million of receivable for securities sold relating to unsettled TBA sales. As of December 31, 2011, total assets included $32.0 million of TBAs as well as $443.7 million of receivable for securities sold relating to unsettled TBA sales.

As of September 30, 2012, total liabilities included $443.2 million of TBAs sold short as well as $33.7 million of payable for securities purchased relating to unsettled TBA purchases. As of December 31, 2011, total liabilities included $446.7 million of TBAs sold short as well as $32.5 million of payable for securities purchased relating to unsettled TBA purchases. On a net basis, as of September 30, 2012, the Company held a net short position in TBAs of $409.5 million while at December 31, 2011, the Company held a net short position in TBAs of $414.7 million.

(K) Offering Costs/Placement Fees: Offering costs and placement fees are charged against shareholders’ equity.

(L) LTIP Units: Long term incentive plan units (“LTIP units”) have been issued to the Company’s dedicated personnel and independent directors as well as the Manager. Costs associated with LTIP units issued to dedicated personnel and independent directors are amortized over the vesting period in accordance with ASC 718-10, Compensation—Stock Compensation. Costs associated with LTIP units issued to the Manager are amortized over the vesting period in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The vesting period for units issued to dedicated personnel and independent directors under the Ellington Incentive Plan for Individuals (the “Individual LTIP”) is typically one year. The vesting period for units issued to the Manager under the Ellington Incentive Plan for Entities (the “Manager LTIP”) occurred over a three year period that ended in August 2010. The cost of the Manager LTIP units fluctuated with the price per share until the vesting date, whereas the cost of the Individual LTIP units is based on the price per share at the initial grant date.

(M) Dividends: Dividends payable are recorded in the consolidated financial statements on the ex-dividend date. Dividends are declared and paid on a quarterly basis in arrears.

(N) Shares Repurchased: Common shares that are repurchased by the Company subsequent to issuance decrease total number of shares outstanding and issued.

(O) Earnings Per Share (“EPS”): Basic EPS is computed using the two class method by dividing net increase (decrease) in shareholders’ equity resulting from operations after adjusting for the impact of long term incentive plan units deemed to be participating securities, by the weighted average number of common shares outstanding calculated excluding long term incentive plan units. Because the Company’s long term incentive plan units are deemed to be participating securities and the Company has no other equity securities outstanding, basic and diluted EPS are the same. See Note 8 for EPS computations.

(P) Income Taxes: The Company intends to be treated as a partnership for U.S. federal income tax purposes. In general, partnerships are not subject to entity-level tax on their income, but the income of a partnership is taxable to its owners on a flow-through basis.

The Company follows the provisions of ASC 740-10, Income Taxes (“ASC 740-10”), which requires management to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals, based on the technical merits of the position. The Company did not have any additions to its unrecognized tax benefits resulting from tax positions related either to the current period or to 2011, 2010, 2009 or 2008 (its open tax years), and no reductions resulting from tax positions of prior years or due to settlements, and thus had no unrecognized tax benefits since inception. The Company does not expect any change in unrecognized tax benefits within the next fiscal year. There were no amounts accrued for tax penalties or interest as of or during the periods presented in these consolidated financial statements.

The Company may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations. Should the relevant tax regulators successfully challenge any such positions, the Company might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements. Also, management’s conclusions regarding

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ASC 740-10 may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance from the Financial Accounting Standards Board (“FASB”), and ongoing analyses of tax laws, regulations and interpretations thereof.

(Q) Subsequent Events: The Company applies the provisions of ASC 855-10, Subsequent Events, in the preparation of its consolidated financial statements. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.

(R) Recent Accounting Pronouncements: On April 29, 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”). This modifies the criteria for determining when repurchase agreements and other similar transactions would be accounted for as financings (secured borrowings/lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). ASU 2011-03 is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU 2011-03 did not have a material impact on the Company’s consolidated financial statements.

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”) (“ASU 2011-04”). The amendments are of two types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurement. The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements relate to (i) measuring the fair value of the financial instruments that are managed within a portfolio; (ii) application of premium and discount in a fair value measurement; and (iii) additional disclosures about fair value measurements. The update is effective for interim and annual periods beginning after December 15, 2011. As a result of the adoption of this update, the Company has added disclosure to Note 3 about the significant unobservable inputs underlying its Level 3 assets and liabilities.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). This amends ASU 210-20, Balance Sheet Offsetting, to require new disclosures about balance sheet offsetting for derivative and financial instruments which are offset on the Statement of Assets, Liabilities and Shareholders’ Equity. The update requires disclosure of gross asset and liability amounts for financial instruments shown net on the Statement of Assets, Liabilities and Shareholders’ Equity. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and is to be applied retrospectively. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

3. Valuation

The following is a description of the valuation methodologies used for the Company’s financial instruments.

Level 1 valuation methodologies include the observation of quoted prices (unadjusted) for identical assets or liabilities in active markets, often received from widely recognized data providers.

Level 2 valuation methodologies include the observation of (i) quoted prices for similar assets or liabilities in active markets, (ii) inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves) in active markets and (iii) quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 valuation methodologies include (i) the use of proprietary models that require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment and default rate assumptions and (ii) the solicitation of valuations from third parties (typically, broker-dealers). Third-party valuation providers often utilize proprietary models that are highly subjective and also require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, prepayment and default rate assumptions. The Manager utilizes such information to assign a good faith valuation (the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the valuation date) to such financial instruments. The Manager has been able to obtain third-party valuations on the vast majority of the Company’s financial instruments and expects to continue to solicit third-party valuations on substantially all of the Company’s financial instruments in the future to the extent practical.

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The Manager uses its judgment based on its own models, the assessments of its portfolio managers, and third-party valuations it obtains, to determine and assign fair values to the Company’s Level 3 financial instruments. Because of the inherent uncertainty of valuation, estimated values may differ significantly from the values that would have been used had a ready market for the financial instruments existed and the differences could be material to the consolidated financial statements.

The table below reflects the value of the Company’s Level 1, Level 2 and Level 3 financial instruments at September 30, 2012:

(In thousands)
Description	Level 1			Level 2			Level 3			Total
Assets:
Cash and cash equivalents	$	69,223		$	—		$	—		$	69,223
Investments at fair value-
Agency residential mortgage-backed securities	$	—		$	650,046		$	3,827		$	653,873
Private label residential mortgage-backed securities		—			—			457,925			457,925
Private label commercial mortgage-backed securities		—			—			49,196			49,196
Commercial mortgage loans		—			—			4,650			4,650
Total investments at fair value		—			650,046			515,598			1,165,644
Financial derivatives-assets at fair value-
Credit default swaps on asset-backed securities		—			—			31,460			31,460
Credit default swaps on asset-backed indices		—			27,113			—			27,113
Total return swaps		—			257			—			257
Interest rate swaps		—			512			—			512
Total financial derivatives-assets at fair value		—			27,882			31,460			59,342
Repurchase agreements		—			13,780			—			13,780
Total investments, financial derivatives-assets at fair value and repurchase agreements	$	—		$	691,708		$	547,058		$	1,238,766
Liabilities:
Investments sold short at fair value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—		$	(456,824	)	$	—		$	(456,824	)
Financial derivatives-liabilities at fair value-
Credit default swaps on corporate indices		—			(276	)		—			(276	)
Credit default swaps on asset-backed indices		—			(17,676	)		—			(17,676	)
Interest rate swaps		—			(2,126	)		—			(2,126	)
Unrealized depreciation on futures contracts		(87	)		—			—			(87	)
Total financial derivatives-liabilities at fair value		(87	)		(20,078	)		—			(20,165	)
Securitized debt		—			—			(1,439	)		(1,439	)
Total investments sold short, financial derivatives-liabilities at fair value and securitized debt	$	(87	)	$	(476,902	)	$	(1,439	)	$	(478,428	)

Investments under the Agency residential mortgage-backed securities Level 3 category are investments in Agency interest only RMBS securities. There were no transfers of financial instruments between Level 1, Level 2 or Level 3 during the nine month period ended September 30, 2012.

The Company’s reverse repurchase agreements are carried at cost, which approximates fair value. These liabilities are classified as Level 2 liabilities based on the adequacy of the collateral and their short term nature.

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The following table identifies the significant unobservable inputs that affect the valuation of the Company’s Level 3 assets and liabilities as of September 30, 2012:

	Fair Value as  of September 30, 2012		Valuation Technique	Unobservable Input	Range						Weighted Average
Description					Min			Max
	(In thousands)
Private label residential mortgage-backed securities (1)	$	456,486	Discounted Cash Flows	Yield		2.5	%		56.3	%		9.4	%
				Projected Collateral Prepayments		0.6	%		47.0	%		17.7	%
				Projected Collateral Losses		3.7	%		87.5	%		35.0	%
				Projected Collateral Recoveries		0.0	%		39.5	%		19.7	%
				Projected Collateral Scheduled Amortization		3.5	%		90.3	%		27.6	%
												100.0	%
Credit default swaps on asset-backed securities		31,460	Net Discounted Cash Flows	Projected Collateral Prepayments		5.6	%		37.1	%		15.2	%
				Projected Collateral Losses		25.0	%		62.8	%		43.1	%
				Projected Collateral Recoveries		10.0	%		39.3	%		18.9	%
				Projected Collateral Scheduled Amortization		8.0	%		37.1	%		22.8	%
												100.0	%
Private label commercial mortgage-backed securities and Commercial mortgage loans		53,846	Discounted Cash Flows	Yield		0.8	%		13.2	%		7.9	%
				Projected Collateral Losses		0.0	%		40.1	%		1.8	%
				Projected Collateral Recoveries		0.0	%		23.6	%		2.3	%
				Projected Collateral Scheduled Amortization		60.0	%		100.0	%		95.9	%
												100.0	%
Agency interest only residential mortgage-backed securities		3,827	Option Adjusted Spread (“OAS”)	LIBOR OAS (2)		526			1,662			1,055
				Projected Collateral Prepayments		84.0	%		96.2	%		89.3	%
				Projected Collateral Scheduled Amortization		3.8	%		16.0	%		10.7	%
												100.0	%

(1) Includes securitized debt with a fair value of $1.4 million as of September 30, 2012.

(2) Shown in basis points.

Collateral prepayments, losses, recoveries and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral’s current principal balance. Averages are weighted based on the fair value of the related instrument. In the case of credit default swaps on asset-backed securities, averages are weighted based on each instrument’s bond equivalent value. Bond equivalent value represents the investment amount of a corresponding position in the reference obligation, calculated as the difference between the outstanding principal balance of the underlying reference obligation and the fair value, inclusive of accrued interest, of the derivative contract. The Company uses a LIBOR Option Adjusted Spread (“OAS”) valuation methodology to value its Agency interest only RMBS assets. In the LIBOR OAS methodology, cash flows are projected using Ellington’s models over multiple interest rate scenarios, and these projected cash flows are then discounted using the LIBOR rates implied by each interest rate scenario. The LIBOR OAS of an asset is then computed as the unique constant yield spread that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset. LIBOR OAS is therefore model-dependent. Generally speaking, LIBOR OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embedded in the asset.

Material changes in any of the inputs above in isolation could result in a significant change to reported fair value measurements. Additionally, fair value measurements are impacted by the interrelationships of these inputs. For example, a higher expectation of collateral prepayments will generally result in a lower expectation of collateral losses. Conversely, higher losses will generally result in lower prepayments. Because the Company’s credit default swaps on asset-backed security holdings represent credit default swap contracts whereby the Company has purchased credit protection, such default swaps on asset-backed securities generally have the directionally opposite sensitivity to prepayments, losses and recoveries as compared to the Company’s long securities holdings. Prepayments do not represent a significant input for the Company’s commercial mortgage-backed securities and commercial mortgage loans. Losses and recoveries do not represent a significant input for the Company’s Agency RMBS interest only securities, given the guarantee of the issuing government agency or government-sponsored enterprise.

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The table below reflects the value of the Company’s Level 1, Level 2 and Level 3 financial instruments at December 31, 2011:

(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets:
Cash and cash equivalents	$	62,737	$	—		$	—	$	62,737
Investments at fair value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	769,120		$	5,337	$	774,457
Private label residential mortgage-backed securities		—		—			417,533		417,533
Private label commercial mortgage-backed securities		—		—			16,093		16,093
Commercial mortgage loans		—		—			4,400		4,400
Total investments at fair value		—		769,120			443,363		1,212,483
Financial derivatives-assets at fair value-
Credit default swaps on corporate indices		—		963			—		963
Credit default swaps on asset-backed securities		—		—			61,498		61,498
Credit default swaps on asset-backed indices		—		40,303			—		40,303
Interest rate swaps		—		95			—		95
Unrealized appreciation on futures contracts		12		—			—		12
Total financial derivatives-assets at fair value		12		41,361			61,498		102,871
Repurchase agreements		—		15,750			—		15,750
Total investments, financial derivatives-assets at fair value and repurchase agreements	$	12	$	826,231		$	504,861	$	1,331,104
Liabilities:
Investments sold short at fair value-
U.S. Treasury and Agency residential mortgage-backed securities	$	—	$	(462,394	)	$	—	$	(462,394	)
Financial derivatives-liabilities at fair value-
Credit default swaps on asset-backed indices		—		(9,548	)		—		(9,548	)
Total return swaps		—		(274	)		—		(274	)
Interest rate swaps		—		(17,218	)		—		(17,218	)
Total financial derivatives-liabilities at fair value		—		(27,040	)		—		(27,040	)
Total investments sold short and financial derivatives-liabilities at fair value	$	—	$	(489,434	)	$	—	$	(489,434	)

Investments under the U.S. Treasury and Agency residential mortgage-backed securities Level 3 category are investments in Agency interest only RMBS securities. There were no transfers of financial instruments between Level 1, Level 2 or Level 3 during the year ended December 31, 2011.

The Company’s reverse repurchase agreements are carried at cost, which approximates fair value. These liabilities are classified as Level 2 liabilities based on the adequacy of the collateral and their short term nature.

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The tables below include a roll-forward of the Company’s financial instruments for the three and nine month periods ended September 30, 2012 and 2011 (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended September 30, 2012

(In thousands)	Beginning Balance as of June 30, 2012			Accreted Discounts / (Amortized Premiums)			Realized Gain/ (Loss)		Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers In and/or Out of Level 3		Ending Balance as of September 30, 2012
Assets:
Investments at fair value-
U.S. Treasury and Agency residential mortgage-backed securities	$	4,667		$	(534	)	$	111	$	(314	)	$	1,057	$	(1,160	)	$	—	$	3,827
Private label residential mortgage-backed securities		385,059			6,182			5,440		24,013			92,412		(55,181	)		—		457,925
Private label commercial mortgage-backed securities		28,405			271			2,905		(293	)		57,195		(39,287	)		—		49,196
Commercial mortgage loans		4,650			21			—		(21	)		—		—			—		4,650
Total investments at fair value		422,781			5,940			8,456		23,385			150,664		(95,628	)		—		515,598
Financial derivatives- assets at fair value -
Credit default swaps on asset-backed securities		38,759			—			3,963		(3,823	)		105		(7,544	)		—		31,460
Total financial derivatives- assets at fair value		38,759			—			3,963		(3,823	)		105		(7,544	)		—		31,460
Total investments and financial derivatives-assets at fair value	$	461,540		$	5,940		$	12,419	$	19,562		$	150,769	$	(103,172	)	$	—	$	547,058
Liabilities:
Securitized debt	$	(1,415	)	$	(15	)	$	—	$	(51	)	$	42	$	—		$	—	$	(1,439	)
Total securitized debt	$	(1,415	)	$	(15	)	$	—	$	(51	)	$	42	$	—		$	—	$	(1,439	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2012, as well as Level 3 financial instruments disposed of by the Company during the three month period ended September 30, 2012. For Level 3 financial instruments held by the Company at September 30, 2012, change in net unrealized gain (loss) of $23.3 million, $(3.8) million, and $(0.05) million, for the three month period ended September 30, 2012 relate to investments, financial derivative-assets, and securitized debt, respectively.

27

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended September 30, 2011

(In thousands)	Beginning Balance as of June 30, 2011		Accreted Discounts / (Amortized Premiums)			Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out  of Level 3		Ending Balance as of  September 30, 2011
Assets:
Investments at fair value-
Agency residential mortgage-backed securities	$	5,227	$	(423	)	$	—		$	(2,169	)	$	2,826	$	—		$	—	$	5,461
Private label residential mortgage-backed securities		357,894		4,389			3,107			(12,994	)		106,262		(62,394	)		—		396,264
Private label commercial mortgage-backed securities		10,942		147			(38	)		(1,707	)		6,918		(1,383	)		—		14,879
Commercial mortgage loans		4,650		31			—			(306	)		—		—			—		4,375
Total investments at fair value		378,713		4,144			3,069			(17,176	)		116,006		(63,777	)		—		420,979
Financial derivatives- assets at fair value -
Credit default swaps on asset-backed securities		69,829		—			3,088			(248	)		122		(12,885	)		—		59,906
Total financial derivatives- assets at fair value		69,829		—			3,088			(248	)		122		(12,885	)		—		59,906
Total investments and financial derivatives- assets at fair value	$	448,542	$	4,144		$	6,157		$	(17,424	)	$	116,128	$	(76,662	)	$	—	$	480,885

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2011, as well as Level 3 financial instruments disposed of by the Company during the three month period ended September 30, 2011. For Level 3 financial instruments held by the Company at September 30, 2011, change in net unrealized gain (loss) of $(15.9) million and $2.3 million for the three month period ended September 30, 2011 relate to investments and financial derivative-assets, respectively.

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Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Nine Month Period Ended September 30, 2012

(In thousands)	Beginning Balance as of December 31, 2011		Accreted Discounts / (Amortized Premiums)			Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers In and/or Out of Level 3		Ending Balance as  of September 30, 2012
Assets:
Investments at fair value-
U.S. Treasury and Agency residential mortgage-backed securities	$	5,337	$	(1,711	)	$	111		$	(679	)	$	1,929	$	(1,160	)	$	—	$	3,827
Private label residential mortgage-backed securities		417,533		15,471			12,489			49,149			251,030		(287,747	)		—		457,925
Private label commercial mortgage-backed securities		16,093		527			3,213			990			79,911		(51,538	)		—		49,196
Commercial mortgage loans		4,400		71			—			179			—		—			—		4,650
Total investments at fair value		443,363		14,358			15,813			49,639			332,870		(340,445	)		—		515,598
Financial derivatives- assets at fair value -
Credit default swaps on asset- backed securities		61,498		—			(1,514	)		4,285			330		(33,139	)		—		31,460
Total financial derivatives- assets at fair value		61,498		—			(1,514	)		4,285			330		(33,139	)		—		31,460
Total investments and financial derivatives-assets at fair value	$	504,861	$	14,358		$	14,299		$	53,924		$	333,200	$	(373,584	)	$	—	$	547,058
Liabilities:
Securitized debt	$	—	$	(44	)	$	—		$	(30	)	$	157	$	(1,522	)	$	—	$	(1,439	)
Total Securitized debt	$	—	$	(44	)	$	—		$	(30	)	$	157	$	(1,522	)	$	—	$	(1,439	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2012, as well as Level 3 financial instruments disposed of by the Company during the nine month period ended September 30, 2012. For Level 3 financial instruments held by the Company at September 30, 2012, change in net unrealized gain (loss) of $33.7 million, $(8.1) million, and $(0.03) million, for the nine month period ended September 30, 2012 relate to investments, financial derivative-assets, and securitized debt, respectively.

29

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Nine Month Period Ended September 30, 2011

(In thousands)	Beginning Balance as of December 31, 2010		Accreted Discounts / (Amortized Premiums)			Realized Gain/ (Loss)		Change in Net Unrealized Gain/(Loss)			Purchases		Sales			Transfers In and/or Out of Level 3		Ending Balance as of September 30, 2011
Assets:
Investments at fair value-
Agency residential mortgage-backed securities	$	—	$	(843	)	$	97	$	(2,320	)	$	9,682	$	(1,155	)	$	—	$	5,461
Private label residential mortgage-backed securities		338,839		11,710			17,664		(35,632	)		292,521		(228,838	)		—		396,264
Private label commercial mortgage-backed securities		1,850		378			859		(3,185	)		23,669		(8,692	)		—		14,879
Commercial mortgage loans		—		92			—		(392	)		4,675		—			—		4,375
Total investments at fair value		340,689		11,337			18,620		(41,529	)