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Ellington Financial LLC (NYSE:EFC)
Q4 2020 Earnings Call
Feb 19, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Fourth Quarter 2020 Earnings Conference Call. [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 under Part II, Item 1A of our Quarterly Report on Form 10-Q as amended, 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 as -- 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 fourth quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. 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, please turn to Slide 3, and I will now turn the call over to Larry.

Laurence Penn -- Chief Executive Officer & President

Thanks, Jay, and good morning everyone. As always thank you for your time and interest in Ellington Financial. Ellington Financial was again firing on all cylinders in the fourth quarter, as we delivered strong results in all of our diversified credit and agency strategies. As you can see on Slide 3, we generated net income of $1.44 per share, which translated into a non-annualized economic return of 8.7% for the quarter and we generated core earnings of $0.37 per share. I am pleased to report that with our strong fourth quarter results, we more than made back the losses from earlier in the year and have positive net income and a positive economic return for the full year of 2020. Given the extreme volatility of last March and April, I think that this is a remarkable accomplishment for a hybrid mortgage REIT.

And 2021 is off to a great start. Our economic return in January was more than 3% and our estimated January 31 book value per common share was $18.05, which is now within just $0.22 of where it was last February prior to the COVID related volatility. And that's before giving credit to the dollar and $0.06 of dividends on our common stock since last February.

Now getting back to the fourth quarter results. Our loan origination businesses again led the way. In the reverse mortgage space, Longbridge concluded an outstanding year, in fact a record year for both origination volume and net income. In the non-QM business, LendSure had a record quarter for origination volumes and earnings. And in October, we completed our second non-QM securitization of the year, which drove strong performance on the portfolio side of that business. Meanwhile, we had strong credit performance from our short duration loan portfolios, particularly residential transition mortgage loans, small balance commercial mortgage loans and our consumer loan portfolios. Notably for most of these investments, we either originated the loans directly ourselves or through our origination partners. In November, we securitized the pool of unsecured consumer loans purchased through one of our loan flow agreements. Finally, I'll also add that post quarter end, in fact, just earlier this week we priced yet another very successful non-QM securitization, which Mark will discuss in more detail later.

As we have highlighted before, we believe that the loan origination platforms that we are building in Ellington Financial are crucial to ensuring us a continued steady flow of high quality investments. These origination platforms also provide significant franchise value to Ellington Financial. In fact, I believe that this franchise value already represents tremendous underappreciated upside for EFC stock price, especially given the sizable premiums, which many public loan origination companies currently trade. I believe that these platforms will continue to differentiate EFC's business model moving forward.

In addition to our loan strategies performing well, our credit securities also performed very well in the quarter. Most notably CLOs, CMBS, non-Agency RMBS and European RMBS as prices continued to recover from the March sell-off. Finally our Agency portfolio delivered another quarter of excellent results, driven by tightening yield spreads, attractive dollar rolls, hedging gains and attractive financing rates. During the quarter, we were able to further extend and improve our sources of financing. In addition to the loan securitizations, I mentioned, we also extended the term of one of our loan financing facilities and also added another such loan financing facility which closed shortly after year-end.

Okay. Many may not view details about asset financing facilities as the most exciting news. But I mentioned again in part to remind everyone that in no small part, it's not just our lower leverage, but it's also our disciplined approach to managing our financings that enabled us to weather the COVID liquidity crunch last year as well as we did. Finally I'll point out that we were again able to deliver strong results this past quarter even while maintaining leverage below our historical averages. We finished the year with a recourse debt to equity ratio of 1.6:1, down from 1.7:1 last quarter, and significantly lower than the average of 2.7:1 in 2019. With this low leverage and ample cash on the balance sheet, we have plenty of dry powder to add assets and grow earnings from here and that's exactly what we plan to do.

And with that I'll pass it to JR to discuss our fourth quarter financial results in more detail.

JR Herlihy -- Chief Financial Officer

Thanks, Larry, and good morning everyone. I'll also start with Slide 3, which shows a summary of our fourth quarter results. For the quarter ended December 31, Ellington Financial reported net income of $1.44 per common share and core earnings of $0.37 per share. These results compare to net income of $1.06 per share and core earnings of $0.41 per share for the third quarter, with net income and core earnings comfortably exceeding our dividends, the Board increased our monthly dividend rate by 11% in November. Our second dividend increase since the reduction last April. For the full year 2020, we reported net income of $17.2 million or $0.39 per share.

Next please turn to Slide 6, for the attribution of earnings between our credit and agency strategies. During the fourth quarter, the credit strategy generated a total gross profit of $1.69 per share, while the Agency strategy generated a total gross profit of $1 -- excuse me, of $0.13 per share. These compared to $1.17 per share in the credit strategy and $0.17 per share in the Agency strategy in the prior quarter. Our credit investments generated excellent results for the quarter, driven by strong net interest income and significant mark-to-market gains across the portfolio. We benefited from excellent performance in all of our credit strategies as prices and liquidity continued to improve following the substantial market sell-off earlier in 2020. We also had another quarter of strong performance from our equity investments in mortgage originators. Finally with credit spreads tightening across most asset classes, our credit hedges were the only negative contributor to results during the quarter.

Our Agency strategy also had another strong quarter as Agency RMBS yield spreads tightened quite significantly. We benefited from strong net interest income, net realized and unrealized gains on our holdings of long TBAs driven by Federal Reserve purchasing activity and net realized unrealized gains on our interest rate hedges as long-term interest rates rose. A portion of this income was offset by net realized unrealized losses on our Agency RMBS investments driven largely by elevated prepayment activity.

Turning next to Slide 7. You can see that our total long credit portfolio increased by approximately 2% in the fourth quarter. The quarter-over-quarter increase was driven by larger non-QM and residential transition loan acquisitions, which more than offset significant pay-offs on our small balance commercial mortgage loan and consumer loan portfolios as well as the completion of two loan securitizations during the quarter. Removing the impact of the two securitizations, the long credit portfolio grew by nearly 15%.

Turning next to Slide 8. You can see that our long Agency RMBS portfolio increased by 4% quarter-over-quarter, but remained significantly smaller than it was pre-COVID. Recall that earlier in 2020 in response to the COVID related market volatility, we strategically reduced the size of our Agency portfolio in order to lower leverage and enhance our liquidity position. We continue to keep this portfolio relatively small throughout 2020 which has kept our leverage low.

Turning to Slide 9, you can see that our recourse debt to equity ratio adjusted for unsettled purchases and sales decreased during the quarter to 1.6:1 from 1.7:1 at the end of the third quarter, while our overall debt to equity ratio decreased to 2.6:1 from 2.7:1 over the same period. Our weighted average cost of funds decreased in the fourth quarter as well to 2.03% from 2.2% in the third quarter. As our older higher cost repo borrowings mature, we continue to replace them with repo borrowings priced based on current lower cost borrowing rates. At year-end, we had cash and cash equivalents of approximately $112 million along with other unencumbered assets of approximately $442 million. As Larry mentioned, we have plenty of dry powder to add assets from here.

For the fourth quarter, total G&A expenses per share were $0.15, down slightly from $0.16 in the prior quarter. Other investment related expenses increased quarter-over-quarter to $0.12 per share from $0.08, mainly due to non-QM securitization issuance costs that we incurred in the fourth quarter, but not in the third quarter. For the fourth quarter, we accrued income tax expense -- expenses of $7.9 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 December 31 was $17.59, up 6.9% from $16.45 at the end of the third quarter and after a strong start to 2021, our January 31 estimated book value per share stood at $18.05.

Now over to Mark.

Mark Tecotzky -- Co-Chief Investment Officer

Thank you, JR. Q4 was a strong quarter for EFC. Today I'll review performance for the quarter and the full year, how the portfolio evolved in the quarter and our outlook for the coming months. In the fourth quarter EFC had significant contributions from each of our three core credit strategies: residential mortgages, commercial mortgages and consumer loans. Overall, we achieved an 8.7% total return with only modest leverage, and for the entire year EFC had a positive economic return of 2%. Our simultaneously -- our simultaneous focus on both protecting against downside shocks and seizing opportunities guided our decisions every moment of what was probably the most volatile year ever for structured product assets.

One reason I mentioned that are 8.7% return in Q4 was achieved with modest leverage is because having modest leverage coming into the crisis last March was one of the primary reasons that EFC was able to weather the storm without selling credit sensitive assets at deeply distressed prices. Too much leverage in March, meant you had to sell assets at the lows and then you didn't have asset remaining to drive future performance or any cash to invest. Our performance for the year demonstrates our disciplined approach to underwriting credit risk. We have remarkably few headaches in the portfolio today. There is certainly a few individual loans where the underlying property cash flow was challenged, but by and large, we believe that our loan investments are well covered by the value of the underlying assets. And I feel highly confident that we'll continue to see favorable resolutions on these loans.

You can't really judge a company's underwriting standards until the market hits a speed bump. Before the speed bump it always looks better to have chased higher note rates, higher LTVs, lower FICOs, because everything performs the same and you'd rather have the extra yield. But given the disruption to the capital markets and to the US economy in 2020 and the substantial problems in many sectors of the credit markets, underwriting practices were really put to the test and EFC is shown across three of its areas of focus: residential, commercial and consumer.

Our strong underwriting was reflected in our performance and it allowed us to play offense in the spring when assets were really distressed and new lending opportunities were so attractive. Non-QM is a great example. Yes, we had some delinquencies. Yes, our service have worked closely with borrowers. They have a COVID related loss of income, but the challenges were manageable and we believe that our proposition as a lender was secure, because we had faith in our origination process including our underwriting and appraisal policy. Because of that confidence, our origination partner LendSure was one of the first to restart it's non-QM lending program following the crisis. And that has really paid off for EFC in two significant ways. First it immediately increased LendSure's prominence in market share and the broker community responded by rewarding LendSure with increasing volumes. And second, with less competition, we were able to buy and securitize new non-QM loans at highly attractive levels, which helped drive profits in core earnings at EFC.

So I think 2020 demonstrated the efficacy of many of our core principles. The first core principle is monitor your leverage closely. The difference between being an opportunistic buyer or a forced seller at the end of March turned on just an incremental extra turn to leverage. The extra turn to leverage that many managers reach for when spreads are tight is rarely rewarded over the long run. It can certainly work out with slightly higher core earnings for a quarter or two, with spreads and liquidity turn against you being over-levered is the enemy of long-term performance. Obviously in a risk on move like we saw this past quarter, if we had an extra turn to leverage on our credit assets our returns would have been marginally higher but balance sheets must be managed, not just for the upside case but also to be stable and asset prices are under attack like they were last March. And the type of leverage matters a lot too. The term non mark-to-market structure of several of our facilities added additional resilience and flexibility when the market sold off.

The second core principle is when you are a lender like we are, you try to get as close as you can to the ultimate borrower. Again I think non-QM is a great example. In this business, we are originating loans to LendSure and manufacturing our product -- our end product investments directly by issuing securitizations. We like the model better than just buying those securities in the secondary market. Here is a good illustration why? We priced the non-QM securitization deal yesterday. The AAA tranche, which is 75% of the deal, priced at a yield under 0.8%, but the average note rate on the underlying loan was about 5.7%. So that gives us an enormous spread over our AAA financing costs. Of course there is a lot more to the equation here. The loans originated a premium, we take prepayment risk and credit risk and we have to absorb deal fees. So I don't want to oversimplify it, but by getting closer to the ultimate borrower, the homeowner and overseeing the entire process, I think we're able to manufacture much higher yielding and frankly much safer investments compared to just buying them after they've been originated warehouse and securitized. We gain a deeper understanding of the credit risk when we are closer to the borrower and are more involved with the initial underwriting of the credit.

The third core principle, is our belief that ownership stakes in origination businesses represent excellent alignment and are a great long-term way to grow book value. Only originators can be bumpy in the short -- can be a bumpy road in the short-term. Gain on sale margins and origination volumes can ebb and flow. And in addition to that, our investments in the originators don't directly generate core income for EFC, so they can be under-appreciated by the market at times. But over time we think they can be material drivers of our book value and our franchise value and because we own equity in the platforms their upside is theoretically not capped.

Another advantage for us is that originator earnings are sometimes inversely correlated with securities yields. So these investments can be counter cyclical to some of the other investments in our portfolio and enhance our diversification. For the quarter, we grew both our Agency and credit portfolios even while we had many loan resolutions and completed two securitizations. Core earnings -- our core earnings comfortably covered our dividend, which we raised in November. Leverage is still low and has room to increase.

Looking at the pie charts on Slide 7. The commercial strategy shrunk a little due to several successful loan resolutions. That's a portion of the portfolio that we're intending to grow substantially and we're currently seeing some attractive origination opportunities that should help us to do so. We're also expecting some of our dry powder to be deployed in commercial NPLs given the inventory of defaulted loans that's building up at banks and in CMBS deals. Consumer loans, where we have had very consistent performance throughout the year shrunk this past quarter, but that was mainly the result of the securitization we did in November. We expect growth in that portfolio. The residential mortgage loan portfolio grew from both non-QM and residential transition loans, even net of the loans we securitized. Our Agency strategy also had another very strong quarter, finishing up the year more than 8% on allocated capital. The Agency portfolio again demonstrated it's strategic value to the company in 2020. Over the years, it has not only been a source of return, but it's also been a source of liquidity in times of stress such of last March and April.

Our strong fourth quarter earnings came from a combination of core earnings as well as significant asset price appreciation, which means that the portfolio we bring into the start of the year isn't quite as high yielding as it was at the start of Q4. For example, Agency MBS, in our way of looking at things was more expensive at the end of the quarter than the start. And that's also true for many of the credit securities we own, but it's less true for many of the loans we are targeting. In some sectors, we are seeing expected yields, consistent with the second half of last year plus the potential for some better financing terms. Our focus going forward is to continue to grow our real estate and consumer-focused strategies through both loan investments and securities. We have seen some attractive investment opportunities already this month. A steepening yield curve and higher agency mortgage rates could drive incremental demand in non-prime and non-agency sectors in particular. And as always, we are also focusing on improving and expanding our financing arrangements.

Finally we are focused on supporting and providing resources to our origination businesses so they can continue to grow and expand their footprint in what has been a very fertile market for originators.

Now back to Larry.

Laurence Penn -- Chief Executive Officer & President

Thanks, Mark. Our strong fourth quarter brought our net income and economic return positive for 2020, a tremendous result for an unprecedented year. As to our core earnings and dividend, well throughout 2020 we consistently generated core earnings in excess of our dividend and our Board has already acted twice to increase our dividend. I see further upside to the dividend from here, given the earnings power of our current portfolio and given how much dry powder we have to continue to expand the portfolio, especially on the loan side. But in addition to dividend upside, I also see a lot of book value upside from here.

Please turn back to Slide 6. As you can see toward the upper right area of this slide, realized losses in our credit portfolio were around $0.33 per share in 2020. I'm extremely proud that we were able to limit our realized losses for the year in our credit portfolio to just $0.33 per share. But that's $0.33 per share we're not getting back. But look one row lower. Our unrealized losses in our credit portfolio in 2020 were $1 per share, much of it COVID related mark-to-market losses. That's a $1 per share that we can get back. And so far in 2021, we're already -- we've already made great headway getting that back, and that's our goal and expectation that we're going to get most of that back in 2021. That would represent a huge tailwind in 2021 for our earnings and our book value per share. And we're off to a great start there. With our estimated $18.05 book value per share as of the end of January, we're already very close to our pre-COVID book value per share. And that's before giving credit to $1.06 of dividends on our common stock since last February.

Meanwhile, our traditional financing costs remain attractive and the securitization markets are providing even more attractive long-term financing. We continue to focus on growing our proprietary loan origination businesses and continuing to grow origination volumes at our originator affiliates. This growth creates a virtuous cycle, driving increased earnings at the originator which we participate in through our meaningful equity investment, while also driving portfolio growth for Ellington Financial. Furthermore, we are actively on the look out to leverage our strong track record as an origination partner by adding more strategic equity investments and loan flow purchase agreements. So as to further expand, diversify and enhance our sources of investment product.

Finally, I'd like to close by highlighting how Ellington Financial has performed, not only in 2020, but over market cycles. Please turn to Slide 23. This slide shows our net portfolio income on a fully mark-to-market basis for each of the 13 full years of our existence, whether it was the financial crisis of 2008, the Taper Tantrum of 2013 or the COVID crunch of 2020, Ellington Financial has generated positive net portfolio income in each of these 13 incredibly varied years. EFC is one of the only publicly traded hybrid mortgage REITs to a posted a profit in 2020. I am extremely proud of this result and of our entire history, which I believe reflect the strength of our key -- of our team and our disciplined approach to investing as well as the importance and effectiveness of our risk and liquidity management.

Before we open the floor to questions, I would like to thank the entire Ellington team for their hard work in 2020 and for all of those listening on the call today, we wish you the best for 2021. And with that, we will now open the call to questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Doug Harter of Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Thanks. As far as kind of your sourcing the loans, you mentioned, about getting as close to the return of the borrower as possible as kind of the way to add value. Can you just talk about your interest as kind of fully owning an originator versus kind of the equity ownership and kind of how that -- kind of how you think about the pros and cons of that?

Laurence Penn -- Chief Executive Officer & President

Well, it's Larry. Hey, Doug. I think there is, yes, there's a few issues. The first one is that we certainly like having our -- the principles at these companies will then show in particular, have a lot of skin in the game there, a lot of ownership. I think consolidation is a small issue, it's not a big issue. If we were to consolidate these companies onto our balance sheet then that would create some additional complexity I guess in looking at our financials. The -- in the case of Longbridge, that's more of a -- as we own less than 50% there. And we have a partner Stone Point, home point mortgage actually which just went public, which is owned an equal share as us. So I don't think at this point certainly, there is no concept of owning a majority there. And we also have other stakes that we're exploring. We have one stake that we currently have where it's also minority interest. So I think for us the important thing is, is the loan flow right. I mean we are -- we have a big mouth to feed right in terms of the REIT's needs to generate investments that clearly are -- we think better from certainly on our return on equity standpoint and also just in terms of a repeatability standpoint over time just to keep that loan flow going. So that's really super important. So I don't think -- obviously, the franchise value indirectly, through ownership of that is important, and you're seeing that already in terms of the earnings flowing through the book value of these companies which flows through the book value of our company. So that's all important, but I think it's really the loan flow is the key. And the other is sort of the icing on the cake.

Doug Harter -- Credit Suisse -- Analyst

Got it. And then I guess are any of those equity interest are they providing any cash flow through kind of dividends to the equity ownership or is kind of any of the kind of earnings being retained for growth within those businesses?

Laurence Penn -- Chief Executive Officer & President

Yes, earnings is being retained for growth.

Doug Harter -- Credit Suisse -- Analyst

Great, thank you.

Laurence Penn -- Chief Executive Officer & President

Which is -- and I'll just add, which is why as Mark said, it's not directly to core right. If they were paying dividends, regular dividends that could be core income, right, but they're not. I mean it's -- and it makes perfect sense for them. We want them to grow their platforms and the multiplier effect on that growth is going to be much better than any dividends that they would pay out.

Doug Harter -- Credit Suisse -- Analyst

Makes sense. Thank you.

Operator

Your next question comes from the line of Eric Hagen of BTIG.

Eric Hagen -- BTIG -- Analyst

Hey, good morning guys. Hope all is well. Couple of things here. First on the non-QM portfolio. Can you maybe go into some detail about how much you think LendSure can originate using your current outlook for interest rates and where you plan to source the incremental capital to support the growth of that portfolio. And then on the -- how are you guys thinking about the consumer loan portfolio, just following up on your prepared remarks. Maybe I think I heard you say, adding to it here. Any themes that you're picking up there that kind of drive your outlook for credit performance, specifically in the non-QM portfolio than other direct lending strategies? Thanks.

Laurence Penn -- Chief Executive Officer & President

Yes, let me just take the first part on LendSure which is there I think we -- on our prior call talked about how they originated $80 million, over $80 million in October. So if you annualize that that's just under $1 billion. So we are -- certainly I will just say our target, which we think is an extremely realistic target is for them to exceed $1 billion this year and certainly hopeful that they can exceed it by a wide margin. But just to manage expectations, I'd say let's expect over $1 billion. Mark, do you want to talk about commercial loans. And by the way, we can also, I mean we're not -- we don't have to exclusively purchase from LendSure of course. So we have looked at portfolios in the past and we'll continue to look at purchasing non-QM from other providers as well, potentially even through flow agreements. I mean we are -- that's something that is not out of the question.

Mark Tecotzky -- Co-Chief Investment Officer

Sure, Eric. Were you asking about credit performance going forward in non-QM or more in the commercial bridge side?

Eric Hagen -- BTIG -- Analyst

Well, I was actually asking about what you're seeing as far as kind of performance in the consumer loan portfolio and whether any trends or themes that you're picking up there have any influence on other direct lending strategies that you guys are pursuing specifically around non-QM of course.

Mark Tecotzky -- Co-Chief Investment Officer

Yes. So we've had very consistent performance in that consumer loan portfolio throughout 2020 and we think came to -- right when COVID hit that was definitely a portfolio that we were watching very closely because it certainly concerned us. I think a lot of the consumers there have benefited substantially from the various stimulus program from the government and there were forbearance programs there. They've by and large ended and borrowers have been able to perform. So we have had strong performance there. I think that portfolio more than the real estate focus portfolios where you have sort of that that low LTV sort of protection around your investment, on the consumer side you don't have that.

So it's, I think it's a little bit tethered more to the economy than those other portfolios. I mean, right now, just it seems as though the economy is starting to pick up and we're certainly making no predictions, but hopeful about the vaccines ability to open up the economy. So it's just one of those things where every month we review it. We watch it very closely. We're not immune to changes in performance is a function of changes in the health of the US economy. But we've been investing in that space for a long time now and we have sort of seen how it performs over cycles. That sort of linkage to the real economy more so in the real estate strategy is one of the reasons why that portfolio is also shorter duration rates with typically shorter loans and so that allows you, if you take an economic downturn to change your underwriting guidelines relatively quickly, relative to how long the assets stay on the books.

JR Herlihy -- Chief Financial Officer

Right. And if I could just jump in for one minute, one additional point, Eric, on your question regarding origination volumes at LendSure. Larry mentioned that LendSure originated $80 million plus in October. November, was a little lower but December hit a new record at $95 million. So even a higher run rate. I just wanted to add that additional update.

Eric Hagen -- BTIG -- Analyst

All right. That's great, thanks. That's helpful color. Thanks guys.

JR Herlihy -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Bose George of KBW.

Bose George -- KBW -- Analyst

Hey guys, good morning. Can you elaborate on where you're seeing some of the best returns you mentioned like commercial NPLs and also just what are your returns on the retained interest in securitizations from the LendSure loans? And then just on Longbridge do you retain anything or is that all just sold through this second program?

Laurence Penn -- Chief Executive Officer & President

Well, I'll start. Hey Bose. So a reverse order. So with Longbridge, no, we don't purchase any -- we haven't purchased anything directly from Longbridge. I think that one thing that we've talked about, but not done is that as Longbridge grows, it may make sense one day for them to sell extra servicing rights and that's certainly a very interesting a niche asset class servicing rights on reverse mortgages and that's something that we have definitely looked at before. Most of Longbridge's tangible book value is in-servicing rights. So that would be a possibility, but, and even though we do acquire hack them ourselves and hack some derivatives like [Indecipherable] things like that we're not -- Longbridge is not our source for that they just sell their production to dealers. So that's the Longbridge question.

And sorry the other two questions were?

Bose George -- KBW -- Analyst

Returns on your retained interests from LendSure loans?

Laurence Penn -- Chief Executive Officer & President

Yes, I don't think we -- we don't disclose that. Because it's, I mean there is -- first of all, there is an arbitrage as you're probably aware, right, which is that when you securitize their expenses or do securitization, but the value of what you take back is which according to risk retention rules, you have to actually -- you're compelled to actually keep that over time. So it's not liquid that retained asset, but I -- it's very high. I mean it's well into the double-digits I'll just say, but it really depends on where you mark the asset and I guess that it's a retained interest. So it's a little bit high. But certainly where we think is the range of fair values, as I said, it's well into the double-digits. So -- but that's not something that I think we specifically disclose.

Bose George -- KBW -- Analyst

So, OK, that's helpful, thanks. And then actually, just curious about your thoughts on asset prices both on agencies and credit and would you think spreads on things could continue to tighten or how do you sort of see that?

Laurence Penn -- Chief Executive Officer & President

Mark?

Mark Tecotzky -- Co-Chief Investment Officer

I don't know. That's always hard to predict. And I'd say much more of our focus is on looking at the assets that we can buy either loan as to security form, thinking about what -- how different exogenous factors contains your cash flow. And then thinking about what levered total return they generate for the shareholders with our financing arrangements. I would just say that the pace at which new issue deals are being gobbled up while still very strong, still very strong demand for new issue, it's not quite as ravenous as what it was during, I'd say, fourth quarter and end of the third quarter of 2020. So a lot of money has been put to work. I mean spreads are relatively tight now, but they could go tighter. But I just think the biggest part of the move is certainly behind us. If I had to guess, but I would say that that's hard to predict and what more of our focus is just understanding the risks, both on the credit side and on the prepayment side. Prepayment risk is substantial now in the Agency market non-QM. Just understanding the risk on the assets. Thinking about what their expected returns are over a range of outcomes, we have a new presidential administration and then thinking how that drives earnings when we apply, what we consider the appropriate of leverage and viewing it -- viewing the opportunity set through that lens, I think there is a lot of opportunities, we're going to have to put more capital to work.

Bose George -- KBW -- Analyst

Okay. Now that makes sense.

Laurence Penn -- Chief Executive Officer & President

If I could...

Bose George -- KBW -- Analyst

Sorry, go ahead.

Laurence Penn -- Chief Executive Officer & President

If I could just -- yes, I just want to add a couple of things to that. So, the first is that like it -- so for example, let's look at securities. Agencies had a great run in the fourth quarter, right? And now they're looking, I would say a little on the tight side not relative to other areas in fixed income, but relative to where they've been. So that's because we are active traders and we want to rotate, we want to go into the best areas where the opportunities are. So first of all, we can increase our TBA short positions and then we have a trade and we've talked about a lot that we really like for the last few years, which is long specified pools and short TVAs, again of the right flavor in each case, right. So an opportunity when spreads are tighter where we can still make money.

But we want -- there is no question that we think the most consistent return on equity opportunities that we're seeing right now are in the loan spaces. Small balance commercial is a great example. We can -- we have a certain amount of flow there. I think we're seeing actually much greater flow recently. So I'm really optimistic about increasing that portfolio here and the remainder of the first quarter and the second quarter of this year, but you can't just turn the faucet higher and immediately see higher flow right. It takes time for that to come in, but if you look at the dry powder we have, we're definitely reserving space for that flow which we think is really going to set up core earnings for the second half of the year.

Non-QM, I mean that's a very predictable flow right that we have. We talked about that. So we're certainly keeping space up there. And last year we did two securitizations and obviously we probably could have done another, but for COVID, but this year we're certainly looking to do three securitizations at a minimum. So we see a lot of good plan in the consumer loan portfolio we talked about as well. We've got good flow arrangements there and we surely would hope to see our normal flows there as well. So residential transition loans has been a small part of our portfolio, but ramping up there. So we really want to keep dry powder for as we see that flow coming in. And that's really where the best opportunities are. The securities markets are tight now, there's no question about it. So you've seen these lower yields quarter-over-quarter, but that's OK. As Mark said, there's just no reason to be adding on another turn of leverage in securities that might be on the tight side of the cycle when we've got that flow coming in on what we think is just a very reliable and much higher return on equity, frankly.

Bose George -- KBW -- Analyst

Okay. Yes, that definitely makes sense. Just one more question. Just given the importance of mortgage banking, does it make sense to either include that in your -- the way you sort of present core earnings or create like a new core plus category or something like that because feel like now the core and consensus is, if you like, not all that meaningful?

Laurence Penn -- Chief Executive Officer & President

Well, perhaps, I mean, that's something that I guess we could explore. We think of core as being something that is more interest dividend recurring like. So that's not something that we've thought about in terms of the -- our indirect ownership of the earnings of these affiliates as something that we can include in core. But I mean I guess we could take a closer look, but we don't have any plans to do that. I mean, our hope is that the market will recognize that we -- that the earnings growth that we project and that we see is something that is steady and is something that they can see as recurring even if it's not in the form of interest or dividends.

Bose George -- KBW -- Analyst

Yes. That makes sense. So great. Well, thanks very much.

Operator

Your next question comes from the line of Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. I was curious I think Mark mentioned in the prepared comments, the pricing of the AAA on the non-QM securitization you guys just did. My recollection is that there was decent amount lower than where the last deal you guys priced in the fourth quarter was. So I was wondering if you could just elaborate a little bit on kind of how execution of deals have evolved over the course of the last few months? Thanks.

Mark Tecotzky -- Co-Chief Investment Officer

Sure. Hi, Trevor. Yes, spreads are tighter, but sort of the velocity of tightening has slowed down. So it was really, really violent tightening move, sort of second half of 2020, and I would characterize this year spreads have sort of like grinding tighter, but at a much slower pace. So in terms of the overall liability cost on securitizations, we consider that very attractive and certainly attractive relative to repo. But it's a competitive market. So that better deal execution is also leading to sort of higher loan prices. And we think it will ultimately lead to lower note rates of the consumers. So we were able to capture a portion of it, but the market sort of moves a little bit to sort of typically have some level of efficiency to it.

Trevor Cranston -- JMP Securities -- Analyst

Got it, OK. That helps. And then on the transition loans, couple of quarters...

Laurence Penn -- Chief Executive Officer & President

Let me just add one thing. It looks like that the -- that just for reference, the deal that we priced last October, priced at swaps plus 90 right. And here, you've got the coupon below 80 basis points. So...

Trevor Cranston -- JMP Securities -- Analyst

Right. Okay. So on the transition loans. A couple of things.

Laurence Penn -- Chief Executive Officer & President

The AAA.

Trevor Cranston -- JMP Securities -- Analyst

Tight. Yes. I got it. So on the transition loans, a couple of things. One can you give us what the actual balance of the transition loans in the portfolio was at December 31? And then second, since you mentioned that that's growing asset, can you remind us what kind of financing you have in place for those and what the sort of overall financing strategy is for the transition loans in particular?

JR Herlihy -- Chief Financial Officer

Sure. So the -- to the first part, the balance, so we include the transition loan in non-QM in the same bucket in our presentation. The portion of transition loan, the residential transition loans was a little over $70 million, $70 million at year-end.

Trevor Cranston -- JMP Securities -- Analyst

Okay. And could you talk about the financing you guys are using for those?

Laurence Penn -- Chief Executive Officer & President

We're using lines that we have from banks from and they are often JR, do you want to elaborate on that a little bit, I mean these are -- these facilities that we have, I don't think we want to quote specific spreads, but it's similar to where we financed non-QM, yes?

JR Herlihy -- Chief Financial Officer

Yes, that's exactly right. And we don't talk about specific spreads on the line. But yes, it's similar in terms of structure advance and spread and even counterparty in some cases to how we're financing non-QM. And so the unlevered yields on RTLs have held up pretty well. I mean they're coming in with everything else, but they are still and firmly in the mid-upper single-digits of the spread to financing is still quite attractive on the deals that we are doing. I mean it is a small part of the portfolio. So we've probably kept it smaller and held the line on yield and underwriting. So that's helped our NIM and that strategy as well, but it's been very accretive for certainly for core earnings and for earnings and the turnover has been very good in terms of, we've been getting pay-offs even through COVID we were getting pay-offs at par. So that's been a very good performing strategy for us.

Trevor Cranston -- JMP Securities -- Analyst

Okay. That helps. And then, one other thing on the non-QM side. You guys mentioned the benefits of LendSure being one of the earliest to kind of get back into the non-QM market after March. And you also mentioned the possibility at some point of adding potentially another flow seller. Have you guys seen many of the other lenders who were doing non-QM pre-March come back to the market already or is that something you more so expect to continue to evolve as sort of the Agency repo business starts to burn out a little bit over the course of this year?

Mark Tecotzky -- Co-Chief Investment Officer

This is Mark. I would say, I think most lenders have come back. I think we were definitely a first mover in restarting our lending operation. But I think since then a lot of the other lenders that we saw out in the marketplace pre-COVID, I think most of them are back originating.

Trevor Cranston -- JMP Securities -- Analyst

Okay, appreciate the comments. Thank you, guys.

Operator

Your next question comes from the line of Crispin Love of Piper Sandler.

Crispin Love -- Piper Sandler -- Analyst

Thank you. With LendSure or any of the other originators, are you worried at all about a pullback in originations in 2021 following the record that we saw in 2020 and its potential impact on loan flow in 2021? I heard your comment a little bit earlier about the potential for a $1 billion in originations from LendSure, but is there any reason to think that might be too aggressive considering the 2020 strength might not repeat or I guess just ask another way, what gives you the confidence of that we could see continuing at the October or the December levels that you mentioned?

Laurence Penn -- Chief Executive Officer & President

Well, this is Larry. Hey, Crispin. I think it's not as opposed to agencies where I think you've got real questions about repeatability especially as rates creep up. This is not nearly as rate driven as what's going on Agency. So we're actually not worried about that. That's I would say that's not a concern. It's a market that is still very under tapped right. In fact, we get a lot of -- LendSure gets a lot of leads you can call it or loans from brokers, right. And if anything, it's harder to get brokers attention when they are so much refi opportunity in conforming. So when that -- as rates start to creep up, if you see it getting tougher for brokers to do just refis which is obviously very easy and profitable business right now. If anything, I think you might see a greater focus from the brokers on non-QM. So we're not worried about that at all.

Crispin Love -- Piper Sandler -- Analyst

Okay, thanks. And Mark, you mentioned that you had a few headaches in the portfolio today. Can you compare that to the last few quarters and what has changed recently and performed better than what you might have otherwise expected. And then also if there are any other areas of the portfolio that you want to point out that are stressed currently?

Mark Tecotzky -- Co-Chief Investment Officer

We review in a fairly regular basis any loans to do in a state of delinquency and I guess what I said is more anecdotal, but those meetings, those review meetings have gotten a little bit shorter over time. So, just when we look at the loans, say on the commercial side, where a borrower has struggled, we look at the valuation of the properties and we look at contact with the borrower and what their plans are. We are confident that in most cases our loans are well secured. So it wasn't so much sector specific whereas like the problems there are well known right lodging, retail, student housing, it was more just a comment that when we review the loans in the portfolio.

Just it's not -- though we are seeing things, we're really concerned the valuation is below with the loan amount is and JR mentioned it. The pace of resolutions we've got has picked up and so I think that's another sort of barometer of sort of the health of these markets and how capital is flowing. There is a lot of people interested in real estate right now. And so it's also evidenced by the fact that the securitization markets opened up so quickly after March relative to what happened after the financial crisis. And I think the Fed activity helped a lot, but having active securities markets open really is -- it's a lubricant for transactions. And I think that's been a beneficial to not only our portfolio, but a lot of portfolios.

Laurence Penn -- Chief Executive Officer & President

Yes. So when obviously -- you're not going to have no headaches, right, coming out of COVID and some of the headaches that you have, are as simple as well you can't get into court to start a foreclosure on a small balance commercial loan, for example. So that's a headache, but it's not something that ultimately is if you've underwritten the property right, you have the right loan to value, that's going to impact your resolution. If you could turn to Page 11 in the deck, you can see how diversified by type we are and how, when it comes to seniority, everything is first lien. And if you think about where the headaches are that are out there, it's people that have taken second liens or third liens.

People have had too much concentration in malls or hotels or things like that. Our -- do we have some hotel properties? Yes. But for example, our biggest one, we had I think it was 20% pay down on that loan. Just, I think it was, I don't remember exactly when, but I think it was in basically in the middle of last year. So, which tells you a lot right that the borrowers, that we were able to get that loan paid down to that extent. And the LTV still looks extremely solid there. So we're -- that that loan is market par and we feel very confident about it, for example. So, yes, so there's a little headaches here and there, a lot of around timing, there are going to be somewhere maybe there is a small shortfall, but nothing -- really nothing material in the context of everything going on.

So I think we're really looking back, we're really proud that the theory behind our underwriting actually turned into reality in terms of, we did have good appraisals. We did have good diversification. We did have good legal documents in place all of that stuff that you're concerned about. So -- and in the other portfolios as well like in unsecured consumer, right. Again, good -- the performance there, we have the theory of all of our underwriting and all the data science that we put into play, but -- and then there is a reality. So I think we just feel very good about continuing to apply the same standards that we applied not to reach for yield when it's an appropriate. And I think we're -- so I think we're feeling really good about our lack of headaches, frankly.

JR Herlihy -- Chief Financial Officer

Right. And...

Crispin Love -- Piper Sandler -- Analyst

Thank you for all that color.

JR Herlihy -- Chief Financial Officer

Yes, I just wanted to -- this is JR. I just wanted to clarify one of the answers I gave a minute ago about the financing on RTLs. So it's true that there are similar structures and with similar many of the same counterparties. The economics are not quite the same. So the spreads are little wider and advances are little lower on RTLs versus non-QM, which is probably what everyone would expect given the liquidity and kind of securitizations happening in non-QM that are -- where we have securitizations. It's the other product, but not quite as expensive, so just wanted to add that clarification.

Operator

Your next question comes from the line of Brock Vandervliet of UBS.

Brock Vandervliet -- UBS` -- Analyst

Hey guys, I think most of its been covered by this point, but wanted to just circle up on the agency portfolio and how have you repositioned your hedges in the quarter. I saw the basic disclosure in the back on the hedge positioning, but didn't get a sense in the time series, how that might have changed?

Mark Tecotzky -- Co-Chief Investment Officer

I don't think there was -- I'd want to look back and answer with more precession, so we can follow-up. But Q4, was a quarter of pretty low rate volatility on the agency side, and we didn't have, big changes in that portfolio. So in terms of positioning on the yield curve, there wasn't any significant changes.

Laurence Penn -- Chief Executive Officer & President

Yes, the other thing I would add is that, we liked the mortgage basis coming into the third quarter. We liked the mortgage basis coming into the fourth quarter and those were good calls and so when you look at our TBA shorts, which as I mentioned before, we can really dial those up and down, depending upon what we think of the mortgage basis, the agency mortgage basis. Those were fairly consistent, between -- in the third quarter and the fourth quarter.

Now we mentioned that spreads are tighter, so I don't want to talk about what's going on in the first quarter of 2021, but don't be surprised if things look a little different when -- as of March 31. But we were pretty consistently constructive on the mortgage basis and we were right and that caused us to keep that hedging portfolio pretty similar in terms of its construction. That's in contrast to many, many periods in the past, we got as high as I think maybe even 50% or more TBA shorts versus our longs. So being closer to zero frankly, tells you what we felt about the mortgage basis at the time.

Brock Vandervliet -- UBS` -- Analyst

Got it, got it. Okay. And just kind of a modeling housekeeping note, the tax rate bounced up this quarter, I think with the revs in the TRS. Is that likely to continue or no?

Laurence Penn -- Chief Executive Officer & President

When you say tax rate, yes, do you mean the actual rate or do you mean just our deferred taxes that you see flow through the income statement?

Brock Vandervliet -- UBS` -- Analyst

Sorry, I guess I mean the latter.

Laurence Penn -- Chief Executive Officer & President

Yes, because the rate, I mean there's talk obviously of copper rates going up, which could affect that. But the rate has remained constant that we apply. But it's really a function of how much income we're generating in the TRS, and the income doesn't have to be taxable income, it can also be unrealized gains as well. JR, you want to elaborate on that a little bit?

JR Herlihy -- Chief Financial Officer

Yes, exactly. So the income tax provision increased this quarter because of activity in the domestic TRS and that includes one of our stakes in the mortgage originator. As Larry mentioned, as it increases even on unrealized gain would trigger the increase of a deferred tax provision. So that's one of the drivers as well. It's just taxable income that we have generating in that blocker from activity that occurs within our domestic TRS. So it's not that the rate has changed, but that just more income is driven to higher income tax provision.

Laurence Penn -- Chief Executive Officer & President

Right, and we of course limit our activities in the TRS, right, to things that we have to put in the TRS and we're going to --knowing that those are going to be taxable, as you can imagine, by and large those are very high ROE strategies right. We're not going to put a strategy that is a low ROE strategy in a taxable TRS right. So we've got some very high ROE strategies in there. Certainly our investments in mortgage originators is one that we think is extremely high growth rate in terms of those investments. And you know so when -- if at some point in the future, we do -- our TRS actually pays the REIT parent dividends, then those should be qualified dividends which would be a lower tax rate as well. It's sort of another benefit for our investors as well.

Brock Vandervliet -- UBS` -- Analyst

Got it. Okay thanks for the color.

Operator

Your next question comes from the line of Derek Hewett of Bank of America.

Derek Hewett -- Bank of America -- Analyst

Good afternoon, everyone. Most of my questions were already addressed, but could you provide some additional color in terms of what caused the book value increase in January? Was it that further credit spread tightening based on that dollar of unrealized losses referenced on, I think it was Slide 6, whether its maybe stronger evaluations from the equity investments, in the loan originators given positive trends, maybe from the agency portfolio or were there other factors involved?

Laurence Penn -- Chief Executive Officer & President

Yes, I'm going to -- Mark and JR feel free to elaborate. It was not the originator investments. It was mostly spread tightening as certainly with the lion's share. Mark or JR you want to add to that. And we by the way, spread tightening which we take advantage, both in unrealized, but also realized, right. I mean we are definitely -- when we are seeing securities now that we think are potentially maxed out on or close to it, where the risk reward for us starts to shift, then we are actively selling. When we think that's appropriate. So yes, a combination of realized and unrealized driven by spread tightening. Any color you want to add to that JR or Mark?

JR Herlihy -- Chief Financial Officer

Yes, I'll just add one thing. So the following -- because there was a progression of asset recovery kind of following March and April of last year. And so agencies seem to come back quickly and then different credit assets kind of fell and followed in order and we've talked about certain sectors are recovered faster than others, maybe non-agency and non-QM, whereas CLOs and CMBS may have lagged and those last couple of strategies have really caught up as the year progressed and where some of the drivers of earnings in Q4 that we talked about. I would say year-to-date 2021, we've seen spread tightening in those sectors continue.

Derek Hewett -- Bank of America -- Analyst

Okay. Thank you. That's all from me.

JR Herlihy -- Chief Financial Officer

Thanks.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Jason Frank -- Deputy General Counsel and Secretary

Laurence Penn -- Chief Executive Officer & President

JR Herlihy -- Chief Financial Officer

Mark Tecotzky -- Co-Chief Investment Officer

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- BTIG -- Analyst

Bose George -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Crispin Love -- Piper Sandler -- Analyst

Brock Vandervliet -- UBS` -- Analyst

Derek Hewett -- Bank of America -- Analyst

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