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Ellington Financial LLC (EFC) Q3 2020 Earnings Call Transcript

By Motley Fool Transcribers – Nov 6, 2020 at 10:31PM

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EFC earnings call for the period ending September 30, 2020.

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Ellington Financial LLC (EFC -2.08%)
Q3 2020 Earnings Call
Nov 6, 2020, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Ellington Financial Third Quarter 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

It is now my pleasure to turn the call over to Jason Frank, Deputy General Counsel and Secretary. Sir, you may begin.

Jason Frank -- Deputy General Counsel and Secretary

Thank you. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K filed on March 13, 2020, and and under Part two item 1A of our quarterly report on Form 10-Q for the three month period ended March 31, 2020.

Forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I am joined on the call today by Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, Co-Chief Investment Officer of EFC; and JR Herlihy, Chief Financial Officer of EFC. As described in our earnings press release, our third quarter earnings conference call presentation is available on our website, Management's prepared remarks will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation.

With that, I will now turn the call over to Larry.

Laurence Penn -- Chief Executive Officer and President

Thanks, Jay, and good morning, everyone. As always, thank you for your time and interest in Ellington Financial. Ellington Financial had another excellent quarter as we benefited from strong performance across virtually all of our strategies. As you can slide four, we generated net income of $1.06 per share, core earnings of $0.41 per share and a non-annualized quarterly economic return of 6.7%. Earlier this week, the Board increased our monthly dividend for the second time this year, this time by 11%.

And given that our core earnings this past quarter still comfortably exceeds our new higher dividend run rate, and in light of our current earnings power, we should have ample room for additional dividend growth from here. With our investment activity back to normal levels throughout the entire third quarter, we methodically grew our credit portfolio, mostly in non-QM loans, but we still kept our overall leverage relatively low. Despite this conservative positioning, we were still able to grow core earnings and book value per share significantly this quarter.

Given the continuing uncertainty around fiscal stimulus and economic recovery, we believe that our lower leverage and high cash balances position us well to withstand any additional market shocks and enable us to capitalize on new investment opportunities, whether in the credit-sensitive sector still grappling with the pandemic or an agency RMBS, where we're in the middle of a massive prepayment wave. During the third quarter, our loan portfolios continued their resilient performance, producing another solid quarter of ROEs, while continuing to return capital quickly for redeployment, often at higher reinvestment yields, I would note.

Meanwhile, the securities portfolios in our credit strategy benefited from some nice spread tightening, and our agency portfolio had another very strong quarter and has now generated a positive return on equity on a year-to-date basis through September. But the part of our portfolio I'd like to focus most on today is the strength and growth of our loan origination businesses. Ellington Financial's results this quarter were again boosted by strong performance from our strategic investments in loan originators, most notably Longbridge Financial, which continued its excellent performance this year.

As we've discussed on past calls, because the reverse mortgage business provides liquidity to borrowers without the requirement of monthly principal and interest payments, borrower demand for the product has surged this year amid the economic turmoil brown by COVID. Meanwhile, LendSure has done an extraordinary job restarting its loan production after the market stresses temporarily interrupted new originations earlier this year.

LendSure's loan production in September and October exceeded production levels right before the pandemic related volatility. And in fact, October was a record $80 million origination volume month from LendSure. Last week, Ellington Financial entered securitization of LendSure loans, our second such securitization this year. And in fact, we achieved the tightest financing spreads yet of any post-COVID non-QM securitization.. The performance of our LendSure loans continues to be excellent, and our entire non-QM business continues to be an important driver of earnings for Ellington Financial.

Ellington Financial also has a strategic investment in the third loan originator. This one in the consumer loan space. This pipeline has is generated, and we expect it will continue to generate attractive risk-adjusted returns for us. All three of these originators weathered the COVID-19 volatility successfully and emerged in a strong position to add market share. In addition to investments in these three originators, Ellington has been active in the small balance commercial mortgage loan sector for more than a decade now, and we've developed strong and reliable sourcing channels over the years.

We benefit from several successful joint ventures in the space. And we originate many of our bridge loans and source many of our commercial mortgage NPLs directly out of Ellington Financial, using our own loan sourcing and origination teams here at Ellington. We have also well-established origination channels for residential transition loans as well as flow agreements with other loan originators in the consumer space. We believe that our array of proprietary loan pipelines is a key differentiator for Ellington Financial and they are critical for our business for at least two primary reasons.

First and foremost, our loan pipelines are designed to provide a steady flow of high-quality investments to Ellington Financial. The loans coming out of these pipelines have been a key driver of our portfolio and core earnings growth over the past few years, and we believe that they will continue to drive our growth going forward. At this time, our loan pipelines enable us to leverage Ellington's core strengths of modeling and data analytics. We apply our analytics to help shape the underwriting criteria of the loans that we and our partners originate.

And our goal is to manufacture and control our own sources of return rather than passively accepting what the secondary markets have to offer. But there's also a second reason why I'm highlighting our proprietary loan pipelines. And that has to do specifically with our investments in loan originators we've made to help build and broaden those pipelines. There's been a tremendous flow of public capital into loan originators recently at premium valuations.

Several companies have gone public in recent months, and the mortgage originator sector is trading at a very significant premium to where the mortgage rates, including EFC are trading. But if you look at EFC stock price, I think it's clear that the market is undervaluing our investments in loan originators. And therefore, this represents significant upside for EFC stock. Over time, we believe that the market will recognize not only the synergies, but also the franchise value that these loan originators represent for Ellington Financial.

One final note on our originator investments. We fair value these investments through our income statement. So any P&L that they generate for us is reflected in our GAAP earnings. However, the appreciation on these investments is not captured in our core earnings. Therefore, if we're able to continue levering our dividend through core earnings as we've done every quarter since we started reporting core earnings, by the way, the appreciations on these loan originator investments can be a significant talent to our EPS and book value per share.

Before I turn the call over to JR, I'd also like to highlight that we are not only keeping leverage low in anticipation of plentiful investment opportunities, but we are also continuing to extend and improve our sources of financing. During the third quarter, we added another financing facility for our residential loan strategies. And just within the past two weeks, we not only closed our sixth non-QM securitization, we also priced a securitization of unsecured consumer loans.

These rated securitizations add additional term, non mark-to-market borrowings to our balance sheet, and they also have significantly lowered borrower cost relative to repo and other types of financing. It used to be that repo and other bank lines while coming with the serious disadvantages of shorter terms and mark-to-market margining generally provided lower cost financing than securitization financing.

But lately, especially in those sectors where securitizations have become commonplace, it's the securitization market that now provides lower borrowing costs, even while affording all the important advantages of long-term locked in and non mark-to-market financing terms.

With that, I'll pass it to JR to discuss our third quarter financial results in more detail.

JR Herlihy -- Chief Financial Officer

Thanks, Larry, and good morning, everyone. Staying on slide four, where you can see a summary of our third quarter results. For the quarter ended September 30, Ellington Financial reported net income of $1.06 per common share, core earnings of $0.41 per share. These results compare to net income of $0.85 per share and core earnings of $0.39 per share for the second quarter. GAAP and core earnings comfortably exceeded dividends declared during the quarter of $0.27 per share as well as our new quarterly dividend run rate of $0.30 per share.

Next, please turn to slide seven for the attribution of earnings between our credit and agency strategies. During the third quarter, the credit strategy generated a total gross profit of $1.17 per share, while the agency strategy generated a total gross profit of $0.17 per share. These compared to $0.76 per share in the credit strategy and $0.33 per share in the agency strategy in the prior quarter. Net interest income in our credit portfolio increased quarter-over-quarter driven by a larger portfolio and lower financing costs.

We also had significant net realized and unrealized gains. Each of our credit strategies contributed positively to results. Prices increased for our non-QM loans CMBS, CLO and non-agency RMBS holdings during the quarter as liquidity continued to improve in those markets. In addition, the small balance commercial mortgage loan, consumer loan and residential transition mortgage loan portfolios performed well and each experienced significant principal repayments.

During the third quarter, we received proceeds from principal repayments of about $130 million on these loan portfolios, which represented more than 22% of the aggregate size of those portfolios coming into the quarter. Finally, as Larry discussed, we also benefited from extremely strong results for the quarter from our investments in loan originators. The sole detractor from earnings from results this quarter were credit hedges driven by the strong performance of many credit sectors in the quarter.

Our agency strategy had another strong quarter of performance, driven by increased net interest income and strong performance from our prepayment-protected specified pools as mortgage rates declined further and actual and expected prepayments rose again during the quarter. Overall pay-ups on our specified pools actually declined slightly quarter-over-quarter but this decrease only occurred because our specified pool purchases during the quarter were primarily of low pay up specified pools, which skewed the average downward.

During the quarter, we also increased our holdings of long TBAs held for investment, which will be concentrated in current coupon production. These investments performed well, driven by federal reserve purchasing activity. Turning next to slide eight. You can see that the size of our long credit portfolio increased approximately 12% in the third quarter to $1.4 billion at September 30. The increase in the credit portfolio was mainly driven by non-QM loan originations as well as by purchases of CMBS and single-family rental RMBS.

You can see the growth of non-QM here in the residential loans and REO slides, but the impact of the CMBs and single-family rental RMBS purchases are harder to see on this slide because we had offsetting paydowns and sales in the same slices. Overall, the CMBS and commercial loans and REO slice shrank sequentially because we had several successful resolutions in the small balance commercial loan mortgage strategy in the third quarter.

I will also note that subsequent to quarter end, our two largest small balance commercial investments paid down or paid off completely, both at par. And while we have also seen originations of new SBC loans pick up, that portfolio is smaller today than it was at September 30. Importantly, as we've been receiving these paydowns, we have been able to reinvest the capital in new SBC originations at higher yields as compared to our pre-COVID originations. You can also see on this slide that the consumer loan portfolio decreased quarter-over-quarter, driven by paydowns.

A final note on the credit portfolio is that with the completion of our latest non-QM securitization last week, that portfolio has decreased relative to September 30, though we are quickly replenishing our portfolio with LendSure, reaching a record level of loan production in October, as Larry mentioned. Earlier this year, in response to the significant volatility caused by the spread of COVID-19, we strategically reduced the size of our agency portfolio in order to lower leverage and enhance our liquidity position.

On slide nine, you can see that we kept the agency portfolio relatively small this quarter, which has kept our overall leverage ratios low, which you can see on slide 10. Our debt-to-equity ratio was 2.7:1 as of both September 30 and June 30, adjusting for unsettled purchases and sales. Our recourse debt-to-equity ratio, also adjusted for unsettled purchases and sales, increased quarter-over-quarter to 1.7:1 from 1.5:1, but remains well below pre-pandemic levels. The increase in our recourse debt-to-equity ratio was driven by increased recourse borrowings related to our larger non-QM loan holdings, partially offset by reductions in certain nonrecourse borrowings.

The recent non-QM securitizations converted more than $90 million of recourse borrowings into nonrecourse term financing, which reduced our recourse debt-to-equity ratio below 1.6:1 as of October 31. Our weighted average cost of funds decreased significantly in the third quarter to 2.2% at September 30 from 2.48% at June 30. As our older higher cost repo borrowings have matured, we have replaced them with repo borrowings priced based on current lower cost borrowing rates.

At quarter end, we had cash and cash equivalents of approximately $127 million, along with other unencumbered assets of approximately $306 million, which remained elevated relative to pre-COVID periods. For the third quarter, our total G&A expenses per share were $0.16, up slightly from $0.15 in the prior quarter.

Other investment related expenses decreased quarter-over-quarter to $0.08 per share from $0.12, mainly due to non-QM securitization issuance costs that we incurred in the second quarter, but not in the third quarter. For the third quarter, we accrued income tax expense of $2.5 million, primarily due to an increase in deferred tax liabilities related to unrealized gains on investments held in a domestic TRS. Finally, our book value per common share at September 30 was $16.45, up 5% from $15.67 at the end of the second quarter.

Now over to Mark.

Mark Tecotzky -- Co-Chief Investment Officer

Thanks, JR. We had another excellent quarter with 6.7% non annualized economic return, which equates to an annualized return of almost 30% and core earnings well in excess of our dividend. I was also glad to see portfolio growth as we grew our credit holdings by 12%. We've certainly adjusted our underwriting given the persistent impact of COVID, avoiding sectors most affected like lodging and student housing, but even with that discipline, we are finding high-yielding investments.

We were one of the early movers in non-QM origination post COVID with LendSure turning its origination machine back on before many others. And that decision so far has really paid off. As Larry mentioned, LendSure's origination volumes are now exceeding pre cohort levels, which I never would have predicted back in March. The economics on the assets and on the securitization execution are materially better now too. Larry also mentioned this before, but EFC gets to double debt from the strong origination platform.

First, we drive core earnings with high coupon, high-quality non-QM loans and finance them through the securitization market. And secondly, we have a long-term benefit of a sizable equity stake in a profitable originator. Credit performance is strong across the board for us. But we're very focused on the prospects of further consumer stimulus and how that will affect our portfolio. We saw substantial benefits to consumer credit performance from both the CARES Act and broad-based mortgage forbearance both enacted earlier this year.

Now we are entering a period of time where the virus is spreading more quickly, enhanced unemployment benefits have been reduced as some mortgage borrowers are exiting six months for parents discipline and underwriting is critical for us. Despite it all, markets are functioning well, take our small balance commercial mortgage loan business, for example. In March and April, that market slowed. We actually continue getting loan resolutions, but we weren't seeing many interesting opportunities to lend against.

As the second quarter progressed, we saw even more of our loans pay off as debt was refinanced and properties were sold. But we also began seeing some lending opportunities that we did find attractive, and we took advantage of those. Now it feels like business as usual. Loans are getting paid off, and we are seeing a steady flow of new properties looking for financing. This return to normalcy is allowing us to grow our portfolio and recycle our capital. As JR mentioned, our two largest commercial positions actually paid down or paid off during October.

Excluding those two situations, I expect growth to resume in this portfolio. And in our consumer loan portfolio, where many borrowers have exited forbearance and performance has remained very good. Everybody knows that housing has had great performance since the spring. EFC was well positioned to take advantage. Our non-agency securities generated both realized and unrealized gains this quarter as did our NPL RPL portfolio. And we continue to find things we like in resi credit. Let's look at how our credit portfolio evolved this quarter on slide eight.

While most of the net gross was in non-QM, there was a lot of activity in every sector. In our commercial mortgage strategy, which spans loans, investment-grade bonds and B pieces, we had loans pay off, we had -- we originated new loans, we bought and sold CMBS securities, and we acquired a new B piece investment so we're definitely busy. The consumer loan strategy returned capital essentially because loans paid down at a faster pace than we purchased new loans.

One somewhat nonintuitive side effect of the CARES Act was that many consumers found themselves with more cash than normal given enhanced unemployment benefit, and they used that extra cash to pay down debt. So pay downs have been coming in quickly in our loan portfolio. Another point to make is that our mortgage originations are up. I'm not sure if that's to result of fewer competitors, superior pricing or both, but our market share seems higher. It's hard to measure scientifically, but I'm pretty sure it's true.

Larry mentioned our recent securitizations, how they avoid the mark-to-market with inherent in repo, how even their cost relative to term repo historically very wide right now. One additional advantage that our securitizations provide is that they allow us to potentially acquire loans at below market levels in the future by exercising deal calls. We did this with our non-term deal just closed, where about half of the securitized pool represented loans to be had just reacquired at well below current market prices by calling a non securitization we have done in 2018.

Everybody loves to hate commercial real estate now, and there's going to be no shortage of headaches there, but capital is flowing in that market. The new issue CMBS market is open, and we had a lot of resolutions in our portfolio. I wouldn't have guessed that would be the case six months ago. So given the credit expertise of our commercial mortgage team and the great proprietary analytic tools we have, we're finding lots of opportunities to invest in high-yielding assets with both high credit enhancement levels and limited exposure to COVID affected sectors.

Our Agency MBS portfolio had another strong quarter. Our long agency portfolio continued to be concentrated prepayment-protected specified pools, and these assets performed well relative to their hedges, which drove results in our agency strategy. We also maintained our long position coupon TBAs. And by doing so, benefited from the strong dollar rolls driven by the Fed's purchasing activity. We are in the middle of a significant refinancing wave and origination volumes are at record highs.

We just got the October prepayment report from the GSEs and prepayment speeds continue to increase to multiyear record levels despite what some market participants were hoping. We believe that we are well equipped to outperform with our prepayment modeling, asset selection and dynamic interest rate hedging. Thinking about the rest of the year in 2021, we want to continue to use the securitization market to term out financing and lower our borrowing costs whenever possible.

Larry mentioned, we already priced a consumer loan securitization that will close in the fourth quarter. Front and center in our minds right now is once we know who the next president will be, what will that mean for additional stimulus? What will that mean for housing policy? And how will that impact GSE reform. Given our diversity of strategies and research-driven approach, we're excited about properly positioning EFC to take advantage of the new opportunities that will inevitably be created. We believe that our flow arrangements and origination partnerships give us a big advantage in sourcing high credit quality, low LTV loans for our portfolio.

Now back to Larry.

Laurence Penn -- Chief Executive Officer and President

Thanks, Mark. I'm very pleased with our performance in the third quarter and year-to-date. Ellington Financial fired on all cylinders in the third quarter. And as you can see on slide 23, we've now recovered all but just $15 million or almost 90% of our portfolio losses from the first quarter, but this is not the time to be complacent. The ongoing economic uncertainty and credit and the refinancing wave that's fully under way in Agency RMBS, underscore the importance of risk management and liquidity management to protect earnings and book value, areas where Ellington Financial has shined.

As you can see on slide 13, EFC is unmatched among its peer group and the stability of its economic returns. We have achieved the stability through our diversified portfolio, prudent leverage levels, stable sources of financing, disciplined interest rate hedging and opportunistic credit hedging. These principles continue to be critical in protecting book value and being in position to capitalize on new opportunities. And as always, management remains strongly aligned with our shareholders with a significant co-investment in EFC.

As we look to 2021 and beyond, our primary business objective is to continue to grow, broaden and refine our loan origination capabilities. So we can continue to manufacture and control our own sources of return to an even greater degree. I believe that these businesses are a key catalyst for the growth of our book value and stock price as well as for the continued stability of our earnings. Before we open the floor to questions, I would like to thank the entire Ellington team for their hard work over the past few months despite the difficult circumstances. And for all of those listening on the call today, we hope that you and your families stay healthy and safe.

And with that, we'll now open the call to your questions. Operator, please go ahead.

Questions and Answers:


[Operator Instructions] Your first question comes from Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Looking at the securitization from the end of October, one thing that I noticed is the loan coupon was still up around 6.2%, which seems like it's pretty stable from where things were pre COVID. But so I mean, obviously, that means the spreads versus agency loans is significantly higher than where it was. I was curious if you could talk about -- if you think that type of loan coupon is sustainable? And more generally, if you can comment on how other loan characteristics have sort of evolved since March on new loans you guys are purchasing?

Mark Tecotzky -- Co-Chief Investment Officer

Do you want me to take that, Larry?

Laurence Penn -- Chief Executive Officer and President


Mark Tecotzky -- Co-Chief Investment Officer

Sure. So that's a great question, Trevor. I think note rates are certainly going to come down, right? So that securitization we did the one that just priced was interesting because we mentioned in the script about half the loans came from a 2018 deal that we called half the loans were loans originated post COVID, right? So we were one of the first originators to start buying loans again right after March. And we started originating them before any post cope securitizations were priced.

So we had a fair bit of pricing power. The loans in that securitization that were post-COVID loans, as you mentioned, had a note rate of about 620. What's so interesting to me is the loans we called in the 2018 deal had an rate almost exactly the same, it was right at 620. But if you look at those two securitizations, and I alluded to this in the text, prepared comments, the note rate on the AAA bond in this recent deal was about 1.2%. The note rate from that 2018 deal on the AAA bond was about 4%. So you were able to keep the same note rate but have hundreds of basis points lower debt cost.

So I think that note rate being 620, even on the post-COVID originations. That had to do with that when we were originating those loans, there were not a lot of right? The space isn't as competitive as it was pre COVID, but it's certainly more competitive than what it was, say, in May, right? So I think note rates will come down. But given the securitization execution, they can come down a lot.

Now in terms of the other attributes, LTV, credit score, they're not materially different than what they were pre COVID. So I think those attributes will stay the same. I think the note rates absolutely are coming down, but they have room to come down given the securitization execution.

Laurence Penn -- Chief Executive Officer and President

If I could add one more thing, Mark, to that, which is that now LendSure is pretty focused on non-QM, obviously, and it may actually broaden its product suite in the near future. But for now, it's been very focused on non-QM. Some of its competitors are -- have basically shifted their focus back more to agencies, given where rates are there. And so that's created a tailwind for LendSure and that really, on a day-to-day basis, it's not competing as much with some of the other originators as it was before. So that's also helping pricing power as well.

So I think that's been a phenomenon that's going to continue for a little while yet. So it's just a good -- really good space for us to be in right now. As Mark said, the note rates are going to come down. Rates are extremely low, obviously, versus where they were. Last year, for example. But I think we're still looking at really attractive net interest margins as we continue to purchase that product even if the trend is going to be slightly lower now rates.

Trevor Cranston -- JMP Securities -- Analyst

Okay. Got it. That's very helpful. And then you guys also mentioned the SBC loan originations picking up. Can you provide some more color in terms of what sectors you're seeing the most activity in? And if there's any one in particular that you guys are avoiding in new originations?

Laurence Penn -- Chief Executive Officer and President

Mark, I think we can probably both handle that. Just supplement, as you see fit. We're seeing a lot more activity now, as we mentioned, in the third quarter, that business really went back to normalcy. We can pick and choose our spots. I think that there's no question that in some of the more distressed sectors as we get past COVID and forbearance start to go away. And some of these sectors are obviously going to be challenged on a more permanent basis. We're going to see nonperforming loans. Our nonperforming loan and bridge loan business, I think, is going to pick up because of that.

As you see turnover of those properties. But for now, we have seen really more multifamily than we saw pre COVID. It was the multifamily sector was really overheated. And obviously, it's still trading better than the other sectors. But just given what's happened to so much of specialty lenders. And when you're talking about bridge loans, you're really talking about a specialty lending business.

Given that there's still recovery really from COVID, you -- I think that we're going to see -- continue to see some increased originations there versus what we were seeing before. But long term, we're actually quite looking forward to all the different sectors of the market. It's like they say, there's no bad bonds, there's only bad prices, right? So we'll -- we've tended to to stay -- we're very LTV focused, first liens only, as you can see, as you can see in many of our past disclosures.

We focus on first liens, where we focus on LTV. So we're not going to compromise our standards there, but we are definitely going to be open in terms of seeing more distressed properties in all the different sectors. Mark, do you want to add anything?

Mark Tecotzky -- Co-Chief Investment Officer

I would just say that because we've been open for business in that market really all throughout COVID that in the beginning, you could sort of be choosier, right? And we chose mostly multifamilies. I think over time as the market heels and other people enter the space, it will get to be tougher.

But for now, given that we have no predictive power is better than anyone else on the path of the virus, timing of vaccine, anything like that. The prudent thing for us is to go into sectors that are least impacted by COVID and sectors that are more impacted by COVID. If you look at those properties, then you just underwrite them to sort of very onerous scenarios.

And so far, we haven't -- there hasn't been a lot of activity for us in the more COVID affected sectors when you underwrite them to real draconian scenarios, but that can change. But yes, we like the multispace. It's been good for us. Spreads are healthy there. We tend to think that going into -- once we turn the calendar is '21, unless unless things change from here. We expect a lot of these sectors to be a little bit more competitive. But the margins right now are really good now. So we are focused on putting more money to work.


Our next question is from Doug Harter of Credit Suisse.

Josh -- Credit Suisse -- Analyst

This is Josh [Phonetic] on for Doug. Just thinking about the incremental deployment of capital. Given the attractiveness that we're seeing in the TBA market currently, how are you thinking about the equity allocation to the agency segment in the context of the overall -- how it fits in the overall portfolio.

Mark Tecotzky -- Co-Chief Investment Officer

EFC has benefited from long positions in TBAs with the superior roles but also short positions the TBAs with the negative roles, which is one of the ways that we've hedged for years, some of our higher coupon specified pools. I think ROEs are healthy now in the Agency market. But it's not enough to know what the Fed is doing right now. It's enough to know what they're going to do.

So if you look at what happened to different TBA coupons in the third quarter, there was one that really lagged. It was 30-year Fannie 3s. And the reason it lagged went from being a coupon that the Fed was buying to a Fed -- to a coupon that the Fed used to buy, right? And when they did that, it's roll collapsed and it's price collected. So it's not a bullet proof strategy and that the Fed -- what's on the Fed shopping list, it changed.

It changed incrementally, but it changes, right? And if you are on the wrong side of that and if you're caught holding a significant position in a TBA, where the price has gone up a lot because it's had a healthy role, all of a sudden, if the Fed stops buying in that balloon deflates, you're going to see the prices reverse. So we like it now for a portion of the portfolio. It's been successful for us. But I view it as one of several tools we have to generate returns.

And obviously, it was -- it drove healthy earnings for us and a lot of companies this quarter, but it's like anything else in these markets. I don't see it as riskless, right? And so having a good role is one thing, but you also have to look at is the price of that TBA coupon, does it make sense is it going to stay where it is if the role weakens.

Josh -- Credit Suisse -- Analyst

Great. That makes sense. And then Larry, you mentioned in your comments and in the press release about ample room for dividend growth going forward. Just curious how you're thinking about -- when you think about the earnings power of the company, how you're thinking about appropriate dividend levels versus retaining those earnings and growing book value? Or any general thoughts you have around that?

Laurence Penn -- Chief Executive Officer and President

Yes. That's a great question. One of the differentiators that we have is -- we've made this 475 F tax election. And one of the many advantage that has for us is that this year, because of our first quarter losses had actually reduced the -- any pressure on our dividend in terms of upward pressure. You had companies that were really losing money economically and yet still potentially having pressure to dividend out based upon how they were going to compute their taxable income.

And we absolutely do not have that. It's just one of the many advantages. So so what that means is that we have a lot of flexibility right now around our dividend. We did take a book value hit in the first quarter. And as I mentioned, from a portfolio P&L perspective, we've made about 90% of that back. We certainly hope to be in a positive position at December 31. But we think that there's just a balance right now between a dividend that is appealing to investors, that's consistent with the dividend yields in the space and building book value back.

And given our economic returns the last two quarters, you can see that we're really building book value back nicely. And I think that's really important. So I think we'll continue to be a balance. We were at $0.41, right, our core earnings which is obviously in the $0.13 to $0.14 range per month. Our dividend, we just raised to $0.10, right? So we've got plenty of room to grow there, another $0.03 or $0.04. We were at $0.15, basically, run rate, even a little higher than that at points, pre COVID, per month in terms of our core earnings.

So given the opportunities that we're seeing now, once we're fully deployed, which we're clearly not, you can look at our leverage, you can look at our cash balances, I think that we have plenty of room to grow our dividend. And those will be very interesting discussions with the Board in terms of the timing of any increases. And -- but I certainly see lots of room for growth there. But in the meantime, I think we're -- my prediction is we're going to be judicious about it. In terms of keeping that -- having steady increases, hopefully, as opposed to just going right away to where our current earnings are. We do want to continue to build build book value.


Your next question is from Crispin Love of Piper Sandler.

Crispin Love -- Piper Sandler -- Analyst

First, can you talk a little bit about the credit quality that you've been seeing in your portfolio and kind of the sectors that kind of you're more bullish or negative on from a credit perspective? In recent earnings calls, you have commented that kind of there will be losses and some pain in the portfolio. So I'm just curious about how performance has been relative to your initial expectations from March and July to currently.

Laurence Penn -- Chief Executive Officer and President

Mark, do you want to take that?

Mark Tecotzky -- Co-Chief Investment Officer

Crispin, so I sort of think about in sectors, right? Any of the housing-related sectors, be it non-QM, NPL RPL, the residential transition loans, non-Agency securities, performance has been really good. But I would just caveat that, and I tried to do that and introduce the balance in the prepared remarks that forbearance was a big deal for homeowners that have suffered a loss of income as a result of COVID.

And the CARES Act was a big deal for every consumer that had a loss of income from COVID and that the enhanced unemployment benefits that was $600 in excess of the state unemployment benefits, that was a big deal. And those payments replaced a lot of the income nationally that was lost. Benefits are reduced now. We need to see sort of what happens with this election and what stimulus will look like going forward.

So while performance has been very good when we think about underwriting discipline, it's always -- you're always sort of it's a pendulum between underwriting discipline in volume and what your competitors are doing, and you have to sort of think in all those dimensions, right? And so right now, we have been able to -- what's been nice about this market, has been able to get significant origination volumes with keeping very strict underwriting discipline.

And I don't think given the uncertainty about future stimulus and what happens with the path of the virus, I don't think we should let that up by any means right now. So on the residential side, performance has been great. But we understand part of the drivers that's made it great. Some of those things, it's a little -- it's less clear how they evolve going forward. On the commercial side, performance has been good, really good. That was the sector I thought we'd have headaches. I think we're going to have some but fewer than what I thought before.

And I've been really -- it's been surprising sort of the rate at which loans have been paying off, right, that there is a lot of activity in commercial real estate. And one thing that is a big benefit to commercial real estate, and I think sometimes it gets lost, is how important it is that there is active securitization markets, right? When I think back of 2008, it was years before you saw a non-Agency commercial real estate deal get priced after the financial crisis years, right? With COVID, it was probably -- is probably get done in June, I'm guessing.

So what that does is, it means that people that want to buy real estate are offered financing at very low rates with sort of appropriate leverage and it allows capital to flow so I don't think we're out of the woods by any means. And you can see we've augmented disclosure on the commercial real estate portfolio, page 12 of the earnings slide, but performance has been really strong. On the consumer loan portfolio, it's been extremely strong. And that sort of is an interesting case because that's a case where the forbearance terms in generally, we're shorter tenured than what they are in a 30-year mortgage.

So in that portfolio, a lot of the borrowers that opted for forbearance have emerged from forbearance agreements. And are paying on their loans. So that's sort of a little bit of a test case, and we're not going to be at that point on the residential side for another few months, you're seeing more data on how borrowers do when they come -- emerge the forbearance. But credit has been good, but I don't think we should necessarily extrapolate that because stimulus was a big part of it.

Laurence Penn -- Chief Executive Officer and President

I'd love to add to that, Mark. So our disclosure, I mean, I really think that we're all about no surprises. And I think you -- I'm being frank and honest, I think you saw that back in March and April, I mean I have to say there were a lot of other companies who were basically saying everything was fine, and it wasn't. And I think if you look at our disclosures on expected credit losses, which is really what your question was about, Crispin, you'll see where we assess those at the end of each quarter.

And I think you'll find, if you look, for example, and we're going to have our Q coming out in a few days, you'll -- look, you can see, if you dig into the notes, you're able to see where we see expected credit losses on various sectors of the portfolio. You'll see a lot of stability there. Our predictions are really, really good. And this not only relates to expected credit losses, it also relates to where we have stuff marked. We fair value, obviously, through the income statement. And we need to make assessments of that expected credit losses, and those are going to go right to our net income, right, we elect. We have that fair value election.

So you're going to see a stability there because I think our assessments are just really, really good and honest. And they're not -- if you look at what we disclosed on June 30, you look at where -- on September 30 disclosures after those come out in a few days, you'll see. It's really not bad at all. And as Mark mentioned, are anything consumer related, whether it's our residential mortgage portfolio or our consumer loan portfolio, the performance has been fantastic.

And we used the word resilient on the call earlier, it really, really has been. We do expect to have some credit losses on CMBS, right, on some CMBS that we had coming into COVID. And -- but again, you'll see stability there in terms of our estimate there. And in the commercial loan portfolio, because we're so focused on first lien and so focused on LTV. I really think that portfolio is going to come out with just a few scratches, nothing major.

And again, you see that in the expected credit losses that we estimate. We're going to have some hits in our corporate portfolio. And again, you saw that in our June 30, you'll see it in our third quarter Q. But again, they're contained and when you look at it in the context of things, we've already taken the hit. And I think from here, if anything, things could be a little bit better. That's kind of the -- our philosophy in terms of our disclosures. JR, do you want to add something?

JR Herlihy -- Chief Financial Officer

Yes. I would just add to that, Mark had mentioned forbearances, and I would update on how deferments forbearances have been in our portfolio in Q3. I mean, last quarter, we discussed how forbearances and deferments had increased in the months following co boot outbreak delinquencies increased, and these have both declined considerably in the third quarter. You could see it most clearly in the non-QM portfolio where just by the numbers, forbearance, loans of forbearance was close to 9% at 6/30, and that's not close to 1% at 9/30.

And even of that 1%, almost 40-plus percent are current despite being in forbearance, and delinquencies are down sequentially in non-QM. But is that just non-QM, I mean, in small amounts, commercial, which Larry was just speaking to, deferments are about cut in half from where they were at 6/30. In consumer, deferments are down as well.

And the amount of loans that are in the ferment yet are still current, are up from 6/30. And then finally, in residential transition loans, we haven't had any loan subject forbearance or deferment or modification. So that's been our kind of experience in Q3 versus Q2 in terms of forbearance and deferrals.

Laurence Penn -- Chief Executive Officer and President

Yes. Just by the way, I just want to add one thing, too. On the call, we mentioned a couple of loans. I think I think it was JR mentioned that we had a couple of loans pay off significant loans in our portfolio, pay off or pay down at par, right? And I'll just say without getting to too many details, one of them was a hotel loan. And because we underwrote it to such -- to not too high of an LTV. And again, our appraisals, we don't just take any old appraisal.

We look at multiple appraisals, and we reconcile them to what we and are, in this case, origination partners are thinking. Because of that conservative underwriting, that loan was paid from down from what we had originally underwritten to a 70 LTV down to a 50 LTV. And it just, again, shows, and that was a hotel loan. So I really think that because of the care that we take and the laser focus we have on LTV, when we make these loans. And the faithfulness of the appraisal process, I really think we're in good shape there.

Crispin Love -- Piper Sandler -- Analyst

Larry, you commented earlier about Ellington's origination capabilities being undervalued by the market. Can you explain that with your investments in the loan originators, and that was helpful. But thinking of the valuations of the kind of a new mortgage or generic IPOs and perspective IPOs at those elevated valuations, some of which of those are being pitched as fintechs.

How do you think ESD fits in there in the broader market? You have some of the legacy public originators trading at three, four, five times earnings. And then you have the newer companies coming to market at much steeper valuations. So I guess the question is kind of one which valuations are right and how can EFC unlock the value of its origination channels and investments?

Laurence Penn -- Chief Executive Officer and President

Right. Well, look, we're -- as I said, in some cases, like Longbridge, it's not as much at this point of a pipeline for us of loan flow, right? We do buy we do buy Ginnie Mae Hecms. And I think having that investment in Longbridge definitely has an incremental benefit in terms of how we manage that portfolio. There's no question about it. But for now, that really is an investment gives us exposure to reverse mortgage servicing, which is a -- which is a unique asset class, obviously, and that we really like.

But -- so I think in terms of where those different originators are valued right now in the market, I think that there's obviously a blip right now in terms of profitability this year. So I think projecting that forward over multiple years is certainly not appropriate. So I think some of them are overvalued. But just in general, where should an originator be value, right? It's going to be -- you've got a book value, you've got a tangible book value that has a value and then you've got a franchise value that's going to be a multiple of earnings power.

And I think if you look at where our investments are valued now, I know we don't give a huge amount of transparency there, but there's no question that there's tremendous upside there. LendSure, as I said, just had a record month. So if we project continued growth there, there's no question that where we have those valued and where we have that investment value that there's tremendous upside there. Longbridge as well some of the reverse mortgage companies is widely known, have gone by the wayside over the past couple of years. It was a tough market.

Now it's not a tough market. Now it's a great market, and Longbridge is getting market share there. At some point, it could become a flow provider for us, for example, in getting direct exposure to servicing instead of indirect exposure. But for now, we're going to continue to do what we can to help those companies grow, and we're going to -- also those companies are going to help us, as I mentioned, Longbridge in terms of our portfolio management of reverse mortgage bonds. And in terms of wins are obviously the flow they give us in non-QM.

We want to expand LendSure's product suite, as I mentioned. So I think that's something that's on the horizon. And that could be explosive long-term in terms of going into other markets. The principles there have a lot of expertise in residential transition loans. So that's a natural place to go. Agency origination as well. I mean, all these things are possible. And then we didn't -- we haven't even talked about our investments that we either have or that we might make in the future in other spaces like the consumer loan space.

So I just think that we are in a unique position given that to vertically integrate, right? And we're a great partner, I think, for some of these companies. And obviously, they're a great partner for us. So -- but we've got $57 million in the balance sheet. You can see that. It's in the deck. It will be in our Q in terms of what our fair value is of our investments in those originators now. And OK, so that's maybe only, call it, 7% of our equity or something like that. But total equity, that number could grow over time, subject to, obviously, the reds, but we have plenty of room there.


[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Jason Frank -- Deputy General Counsel and Secretary

Laurence Penn -- Chief Executive Officer and President

JR Herlihy -- Chief Financial Officer

Mark Tecotzky -- Co-Chief Investment Officer

Trevor Cranston -- JMP Securities -- Analyst

Josh -- Credit Suisse -- Analyst

Crispin Love -- Piper Sandler -- Analyst

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