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J. R. Herlihy

Thanks, Larry. Good morning, everyone. For the first quarter, we reported GAAP net income of $0.35 per common share on a fully mark-to-market basis and ADE of $0.39 per share.
On slide 5 of the deck, you can see the income breakdown by strategy, $0.58 per share from credit, $0.05 per share from Agency and negative $0.01 per share from Longbridge. And on slide 6, you can see the ADE breakdown by segment, $0.32 per share from the investment portfolio segment net of corporate expenses, and $0.07 per share from the Longbridge segment.
Positive performance in the credit portfolio was driven by sequentially higher net interest income, net gains from forward MSR related investments, commercial mortgage loans, closed-end second lien loans, non-QM retained tranches and ABS, and net gains on our loan originator equity investments.
Partially offsetting higher net interest income were net realized and unrealized losses on consumer loans, CLOs, non-QM loans and residential transition loans, as well as losses on residential and commercial REO. Meanwhile, thanks to our coupon and hedge positioning, our agency portfolio generated excellent returns for the quarter, even as Agency RMBS slightly underperformed benchmarks market-wide.
Turning now to Longbridge. While that segment reported a slight net loss overall due to interest rate hedges with rates sharply lower during the quarter, Longbridge had positive contributions from both servicing driven by a net gain on the HMBS MSR and from originations driven by higher origination margins for Prop Reverse and steady margins for HECM despite seasonally lower origination volumes in HECM quarter-over-quarter.
Our results for the quarter also reflected gains on the fixed receiver interest rate swaps used to hedge the fixed payments on our unsecured notes and preferred equity with interest rates lower during the quarter. These gains exceeded net losses on our unsecured notes, which included a mark-to-market loss on our unsecured notes, driven by lower interest rates, as well as a realized loss related to the par redemption of our 6.75% notes that we had carried at a slight discount to par.
Turning now to portfolio changes during the quarter. Slide 7 shows a 4% decrease for our adjusted long credit portfolio to $3.3 billion. The decline was due to the impact of securitizations completed during the quarter as well as a smaller residential transitional loan portfolio, where principal pay downs exceeded net new purchases and net sales of CLOs. Offsetting a portion of the decline were larger commercial mortgage bridge and non-QM loan portfolios both driven by net purchases.
On Slide 8, you can see that our total long Agency RMBS portfolio declined by another 14% to $256 million by design, as we continue to sell down that portfolio and rotate the capital into higher-yielding opportunities. Slide 9 illustrates that our Longbridge portfolio increased by 31% sequentially to $549 million driven by a proprietary reverse mortgage loan originations.
Please next turn to Slide 10, for a summary of our borrowings. At March 31, the total weighted-average borrowing rate on recourse borrowings decreased by 12 basis points to 6.09%. Quarter-over-quarter, the net interest margin on our credit portfolio decreased by 12 basis points, while the NIM on Agency increased by 24 basis points. Our recourse debt-to-equity ratio declined to set 1.7:1 from 1.8:1 quarter-over-quarter and including consolidated securitizations, our overall debt to equity ratio decreased slightly to 8.7:1 from 8.8:1.
During the quarter, we paid off one of the tranches of unsecured notes that we brought over from Arlington upon their maturity in March. At March 31, combined cash and unencumbered assets increased to approximately $853 million or more than 50% of our total equity. Book value per common share stood at $13.44 and total economic return for the first quarter was 9.5% annualized.
With that, I'll pass it over to Mark.

Mark Tecotzky

Thanks, JR. This was a strong quarter for EFC. We covered our dividends with ADE, made substantial progress in resolving our larger delinquent commercial mortgage loans and had broad-based contributions to earnings from our diversified investment portfolio.
One highlight for the quarter was our portfolio of agency mortgage servicing rights, where we not only had substantial positive carry, but a substantial mark to market gain as well. These MSRs are backed by very low rate Fannie Freddie loans. We acquired these MSRs through the Arlington acquisition and they remain one of the few holdings of theirs that we kept in our portfolio. On prior calls, we have spoken about the mortgage lock in effect, putting a wet blanket on prepayments and creating a huge opportunity in second liens and HELOCs for us.
Another consequence of that lock in effect is that values of servicing have gone up as each month's prepayment data confirms very slow speeds on low coupon MBS. In addition, there has been a trend in the mortgage space to put an increasingly higher value on the customer relationships that come with owning servicing rights, particularly customers with high FICO's. That is part of the driver behind Rocket's recently announced acquisition of Mr. Cooper. While we don't expect this quarter's mark-to-market gain to be repeated, we do expect an ongoing meaningful contribution to our ADE from this MSR portfolio.
We also had a great quarter in our non-QM loan business. For our non-QM origination partners in which we had ownership stakes, their strong profitability in 2024 has continued into 2025. We continue to expand our footprint in non-QM and we remain an active deal sponsor. We waited at the mid-market April volatility and priced the non-QM deal last week and were rewarded with great execution.
The securitization process creates high-yielding investments for the EFC portfolio as well as giving us a growing portfolio of call options that potentially provide us access to high note rate season loans in the future.
In recent months, we have been tightening our underwriting guidelines, preferring to focus on higher FICO borrowers and loans with a more extensive underwrite. That view is heavily informed by Ellington's internal research, and as we see the market now pricing in a greater probability of a slowdown in the US economy that scenario should favor a more conservative positioning. We also had another strong quarter from non-agency RMBS both in terms of earnings contribution and portfolio growth. With the growing securitization market in non-QM, jumbo and second liens, we are finding a rich opportunity set in the market and have been deploying capital accordingly.
Last year, we identified as a growth area for us equity release products offered to high FICO agency borrowers with low fixed rate mortgages. Since then, we have been an active buyer and securitizer of second lien loans. We had strong contributions from those investments in the first quarter and have also been co-sponsoring third-party securitizations of closed-end seconds that create retained tranches for us to hold. We expect those retained tranches to provide very high yields and generate outsized ADE.
We also made substantial progress in a handful of delinquent commercial mortgage loans in our portfolio. One resolved in the first quarter, one is scheduled to resolve today, and one is in the middle of CapEx and lease up. We continue to originate commercial bridge loans and are seeing a stronger set of sponsors looking to partner with us. The relationship and expertise that our origination affiliate Sheridan are a big benefit to us here.
Similar to residential, we have become progressively more restrictive in our underwriting guidelines, but our pricing power remains strong and we continue to see a high volume of deal flow. We also had a very strong quarter in our agency portfolio, as we were well-positioned to capture both positive carry and mark-to-market gains over our hedges.
Now let's talk about April. That was one of the most volatile months we have seen in a long time. While results are still preliminary, we estimate that, it was a positive return month for EFC. The tariffs uncertainty is challenging many business models and causing a huge amount of volatility in both high yield bonds and bank loans.
Amidst the market weakness, low LTV real estate loans with high FICO borrowers in the case of residential and high-quality sponsors in the case of commercial have been a safe, high-yielding place to invest so far as they appear to be much better insulated from tariff uncertainty than many parts of the corporate market.
Now look on slide 19, you can see we continue to increase our credit hedges in Q1. Those are primarily corporate focused and they certainly did their job helping to predict book value in April. Going forward, we are closely watching credit performance across many markets sectors for signs of weakness. So if we need to -- so if need be, we can adjust our credit hedges and or pivot and rotate between sectors.
In addition, we want to keep pushing our advantage of vertical integration, both to drive value-creation in our portfolio origination companies and drive investment creation for EFC's portfolio. In addition, we are seeing the value of many of the technology initiatives we developed last year coming to bear. We are actively developing more proprietary tools to support loan origination.
Now back to Larry.

Laurence Penn

Thank you, Mark. I'm very pleased with how we started out the year. In the first quarter, we continued to grow our residential and commercial loan businesses, building on the strength of our vertically integrated platform, opportunistically accessing securitization markets and maintaining dividend coverage.
Our investment teams executed skillfully in the face of growing macro headwinds, generating solid returns and executing key tactical and strategic maneuvers, such as asset sales, securitizations and hedging adjustments. As a result, we were positioned really well coming into the second quarter.
The current high levels of volatility are recharging the opportunity set and creating compelling trading opportunities. This is an environment that we believe is well-suited to our core strengths. Our short duration loan portfolios continue to steadily return principal, enabling us to redeploy capital at higher yields. As during previous periods of market stress, our dynamic hedging strategies, diversified portfolio, broad financing base and low leverage are all helping us protect book value.
To that point, please turn to slide 19. As Mark mentioned, we have built up our credit hedges considerably since mid-2024. So we were able to amass a significant portfolio of credit hedges when spreads were much higher than they are now. Even though our assets are mortgage focused, we mostly use derivatives on corporate bonds, especially high yield corporate bonds to hedge credit risk, because of their liquidity and their robust protection in big market tail events, like what we saw during COVID.
We also opportunistically use CMBS to hedge. Those are credit default swaps on commercial mortgage backed securities. On this slide, you can see that at quarter end, our corporate credit hedges alone represented an estimated short position of over $450 million high yield corporate bonds.
For context, that figure one year prior was only about $120 million. In April, those credit hedges did their job beautifully. They generated huge profits and cash for us, when credit spreads blew out earlier in the month. And for the full month of April, even with credit spreads staging somewhat of a recovery later on, they still helped to offset valuation declines that we saw in the loan portfolio. As a result, despite the widespread market weakness in April, we estimate that, our economic return was still positive for the month.
In summary, with our strong capital base, ample liquidity, highly-diversified portfolio strategy, disciplined leverage and active hedging, I believe that, we are exceptionally well-positioned to take advantage of the recharged opportunity set that we're seeing in this period of heightened market volatility.
With that, let's open the floor to Q&A. Operator, please go ahead.

Question and Answer Session

Operator

(Operator Instructions) Crispin Love, Piper Sandler.

Crispin Love

Just drilling a little bit deeper on the volatility that you've seen in the past months setting you up for some attractive trading opportunities. So far have you been able to deploy a material amount of capital in these types of trades? And then, also where are you seeing the best opportunities in addition to the credit hedges that you've called out?

J. R. Herlihy

Hi, Crispin. It's JR. Thanks. Mark, do you want me to start off with the first half of that? Sorry to interrupt you, the first half of the question and then you can do the second half?

Mark Tecotzky

Yes, absolutely.

J. R. Herlihy

Thanks, Crispin. Crispin, I would say not material growth in April, but the portfolio has grown net relative to where we were March 31. I would put the growth in two buckets, bucket one being continuing to grow loan portfolio.
So I think non-QM, close-in seconds, proprietary reverse, kind of somewhat ordinary course, although we've seen spreads widened and recharging the opportunity set. But then in bucket two, we're able to pick up securities more opportunistically and non-agency MBS for example has grown in April in that category. So we have grown in those areas.
And Mark, I don't know if you want to talk about more specifically what you like and what you're seeing in this market?

Mark Tecotzky

Sure. Yes. So there was, by middle of April, I mean, the volatility was really extreme. And so, to put a perspective on it, we saw quality non-QM deals from good originators with AAA is priced at 190 to the curve and those same deals earlier in the year were 115 to 120 to the curve.
So 70-odd basis points widening. Now Larry mentioned, the deal we did end April, give you a sense what the recovery is. We wound up getting 160 in our AAA. So waiting out sort of the eye of the storm, definitely worked our advantage. But by mid April, when you saw these 190 prints on AAA, there were people pretty nervous. So we were able to buy some loan packages that made sense even assuming 190 execution, the top part of the capital stack.
And also, CUSIP, we mentioned I mentioned in the prepared remarks, how we're seeing a better, a richer opportunity set in non-agency CUSIPs than we had maybe a couple of years ago. And part of that is non-agency securitization market has grown in jumbos, in non-QM, in seconds. And so, we actively find opportunities in buying securities in that market. And a lot of times, there's a pretty healthy new issue concession that we can capture and monetize. So those probably have been the biggest areas.

Crispin Love

Great. I appreciate all the color there, JR, Mark. Then you also called out the resolutions in some of your commercial bridge loans recently. Can you just give a little bit more detail on what those resolutions look like? Were the loans modified? Were they sold? Just curious on those details. And then, the positive impact you would expect to see to ADE from those resolutions on a go forward basis?

J. R. Herlihy

Sure. So let me think. One was a discounted payoff. One that's scheduled to close today is an REO sale. And then, we have another that goes in active CapEx and lease up that's a longer horizon. In total, the fair value on those at quarter end were, excuse me, at year end were in the $50 million to $60 million range and we've resolved by fair value a little less than half of that.
So freeing up $20 million to $25 million to reinvest and maybe some financing on that as well. But the numbers aren't huge, but they're disproportionate in terms of not just being available to invest in high-yield assets, but also turning off negative carry on the underlying.

Laurence Penn

Yes. Just as we said, we think by the end of the second quarter, we'll just have one significant one left. That's I think in the $30 million-odd, in terms of the value of that. And that's great. So we really just are going to have some continued negative ADE drag from that, but that's a very small, obviously, percentage of our portfolio. So I think it's great to have these behind us.
And I think in retrospect, compared to what a lot of other lenders, especially lenders in the commercial space, have seen, I think we did great in terms of limiting how many problem assets we end up having and I think we're towards the end here a lot sooner than other people. So I think, yes, teams have done a great job.

J. R. Herlihy

Yes. I would just clarify. So one, an REO sale, it's pretty straightforward. Maybe discounted payoff, it was in a bankruptcy process. So it was it's a little more complicated than that, but to give you a flavor of how the resolution happened. I just want to say one more thing. That bankruptcy asset was an asset that we had inherited from Arlington. So even then, not something that was the result of our underwriting team. So I think they've done a great job.

Operator

Trevor Cranston, Citizens JMP.

Trevor Cranston

Mark just mentioned the spread volatility you guys have seen in the securitization market so far in the second quarter. Does that high level of spread volatility have any material impact on your guys' near-term appetite for loan acquisitions given some level of uncertainty about ultimate securitization execution levels and can you maybe just provide some color on what loan acquisition activity has been like through the market volatility over the last several weeks? Thanks.

Mark Tecotzky

Sure. This is Mark. That's a great question, right, because we think about that all the time. We have choices in these markets to just buy securities that other people make and sometimes you have to be deal sponsor to get the ones you want, sometimes you don't or taking a longer view and doing securitizations yourself and then retaining things that, you've had more control over the underwriting and more control over the guidelines and how the deal is put together.
But if you want to do the latter, you have to go through a fairly long process, a couple of months process of ramp up, where you're acquiring loans, you're hedging the interest rate risk. We have been diligent about hedging, spread widening risk and then executing the deal in the open market. So there are pros and cons to both. When you see heightened volatility, if you don't get a corresponding widening of loans relative to securitization execution, then, it looks like that ramp up risk you might not be getting fully paid for it.
So I think our view of the world in April was that, when spreads really widened a lot, top of the capital stack, we thought that, the securities looked really cheap, a little bit cheaper than loans, and we responded by buying some securities.
Then, as you started to get a little bit more consistent pricing on deal execution, loans didn't fully tightened to reflect that, then we thought loans look attractive. I think one thing about April, which was very interesting and it was materially different than what you saw in kind of the last big stress was maybe March 2020, is that, in April, there were people that want to sell risk, but there were people that want to buy risk.
So it's not as though the origination market shut down the way it did in COVID, where you're kind of flying blind as to where securitizations would be and you had to price loans assuming just going to hold them in portfolio on repo, which is what we did.
But in April, there were as many or more buyers I think than there were sellers. So deals were getting consistently done. The way they were getting priced, they were getting priced very quickly. So there was capital on each side of the market. So I think that definitely gave us a little more confident in things.
So I think the first leg we thought securitizations had lagged, we're a little cheap, we had some securitizations. And then through the course of the month, as we saw opportunities to buy loans and you had better transparency and just tighter spreads on securitizations, then we thought loans look attractive relative to securitizations and ultimately sort of re-expressed that by pricing and securitization, I guess, last week or week before in April.

Laurence Penn

And if I could just add one more thing to that, Mark. The velocity, the frequency of our especially in non-QM securitizations has increased a lot versus where it was a couple of years ago, for example. So instead of doing one deal a quarter, we're looking at under normal circumstances do at least two deals a quarter, right? So that just cuts down the time frames.
So when we're if we're buying a loan package. We might be doing a securitization, granted not of those very loans, but of loans that we've held, we might be doing a securitization in that same week, for example, that we're buying a new loan package. And so, you're derisking one package and then putting on risk in another. And if you have this frequent volume of securitizations, that just limits kind of that gestation risk, if you will.
And at the same time, as we mentioned, we are doing something that we think not a lot of other people are doing, which is we're using credit hedges to mitigate those spread movements. And we've found that they've been extremely effective and correlated with the spreads that we've seen in the securitization markets versus how our hedges have reacted. So we think that's working well for us.

Operator

Randy Binner, B. Riley.

Randy Binner

I think we heard in the prepared remarks that you're in discussions with potential JVs with two originators. Just wondering, if you can share kind of timing on that or any size, so we might gauge the impact there?

J. R. Herlihy

Sure. Yes. Thanks, Randy. I would say that, maybe starting with size neither of these is a large investment under $5 million I think in total would be our equity investment. So but we have a stable of these types of small investments that have produced loan flow well multiples in excess of what our equity investment is.
So I think we point those two deals out in term sheet stage. I think we put it to point out that we're further diversifying our sourcing channels in the same products, not necessarily that either will be material in size, but just adding to the stable of originator investments that have been successful for us over the last couple of years.

Laurence Penn

Yes. And it's a win, win. I mean, even with the amount of money that we're providing in terms of working operating capital for them may not be a big number for us in terms of an investment. But it's very meaningful, especially for an originator that is not so long established for them to ramp up. And so, a lot of these smaller originators just getting started. They could be originating $40 million a month, something like that, pretty soon after we supply that working capital.
And so, if that's supplying us close to $0.5 billion a year alone, it's just a win, win for both parties, right? They it jump starts turbo chargers their growth, gives them they don't have to worry about an outlet for their product. They could even sell to us on a forward basis, which they do all the time.
So they can even lock-in a sale even if they haven't originated the loans yet. So there's just lots of advantages going both ways. These are great joint venture arrangements that we've put in overtime and we now have a lot of these.

J. R. Herlihy

Yes. And I'd say timing wise next quarter or two is the expectation.

Randy Binner

Got it. Okay. Thank you for that. But they're small, but agree on your comments. And then, I just one more if I could. Just something that Mark said stood out to me and that kind of the increased value on consumer relationships and how Rocket Coupe is example of that. I guess the question I have is that just a reflection of this lock-in effect where the mortgage rates are higher now than they were before, or is this more of a permanent shift in your view?

Laurence Penn

A lot of cross selling options. Yes, go ahead, Mark.

Mark Tecotzky

I think it's something bigger than that because you had Rocket Coupe, but before that you had Rocket Redfin, right? So it's this notion that, let's think about home buying as a process and there's services rendered and there's fees paid along the way.
So first you have a real estate agent, then you find a home, then you buy a home. With that, there's real estate commission. There's, title insurance. There's mortgage insurance. Then you get a loan. Then you're in that loan for three years, maybe rates drop, and then you refinance the loan. Then, your family needs change, maybe you sell that house and get another house.
So I think there is a notion growing among the really scale players that, if I establish a relationship with a customer now and I maintain that relationship over that customer's life, there might be four or five loans. There might be three houses. There's a lot of fees and commissions and things paid along the way, not to mention the cross sell of second liens or consumer loans. And so, it's not that different than what you see in other parts of the economy, where the scale players have gained market share. You certainly see it in the National Builders.
So if you start thinking about the world that way, then who are the clients that you think you want to have the strongest relationships with? It's going to be clients that have a history of paying their bills as reflected in their FICO score. It's clients that have demonstrated an ability to save, as demonstrated by showing up with 20%, 25% down payment to buy a home.
And so, I think there's that is sort of what's going on. I mean, if you look at like -- it's not that different from American Express buying resi. Okay, you're going to have you're going to make restaurant reservations and maybe you're going to make hotel plans. You're going to put everything on your American Express card. So that way of thinking is in the mortgage space now.

Randy Binner

That's really interesting. I appreciate the comments.

Operator

Bose George, KBW.

Hi, guys. This is actually [Frank Betty] on for Bose. Just to start, last quarter you mentioned $0.09 earnings for the Longbridge segment for like long for run rate. Is that still achievable, given current trends?

J. R. Herlihy

Yes. We think it is. They were $0.07 of ADE in Q1, which as a percentage of their capital usage covers $0.39, but we did we have said kind of consistently $0.09 is the longer-term run rate as we see it. Their volumes were down seasonally. So they originated $420 million combined tech and prop in Q4 down to $340 million in Q1, I think largely seasonally driven.
So margins held up and they were still profitable within originations and servicing, you're setting aside the interest rate hedge. So with April selling season and April, excuse me, spring selling season and April looking good from a proper reverse submission perspective as Larry mentioned in his prepared remarks. I think we haven't changed the outlook for those reasons.

Laurence Penn

Also it's going to be a little lumpy based upon securitization activity at Longbridge. So we did not do a deal in the first quarter, but I think, we expect to do one shortly. So every time when we do the deals, that's when they ring the cash register in terms of the AD on origination profits, so on prop. So with that prop reverse deal securitization deal expected to come soon, and you didn't have one in the first quarter, I think that explains a lot of it as well.

Great. Thank you. And then you noted some sales of CLOs during the quarter. Can you just talk about current performance and dynamics in that market? Thanks.

J. R. Herlihy

Yes. I would say, CLOs for EFC have been a small part of the portfolio. It's ebbed-and-flowed kind of opportunistically across the last several years frankly. So it's more of a complementary business to the core businesses, loan businesses than a core business on its own.
So a lot of the so the negative performance for CLOs came from spread widening, particularly in CLO equity, which is not necessarily reflective of underlying credit issues or impairments, but more reflective of wider credit spreads market wide.
So I would just highlight that for EFC, the invested amount of CLOs is a pretty small amount. I mean, in our earnings release you could see that we own CLOs of $28 million at March 31 down from $61 million at year end, but that compares to a total adjusted loan credit portfolio of $3.3 billion or 1% less, exactly.

Operator

Thank you. And that was our final question today. We thank you for participating in the Ellington Financial first-quarter 2025 earnings conference call. You may disconnect your line at this time and have a wonderful day.