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Text: You can also access these slides on the website.
Before we begin, I'd like to review the Safe Harbor statement.
Actual outcomes and in results could differ materially from those forecasts due to the impact of many factors, beyond the control of the company.
As Mortgage Credit Markets rallied in the third quarter, Valuations on Western Asset Mortgages residential and commercial credit assets benefited meaningfully.
WMC's GAAP book value increased to 29.2% in the quarter to $4.07 per share.
GAAP net income was $59.8 million or $0.98 per share and core earnings were $6.4 million or $0.10 per share in the quarter.
Our net interest margin improved to 2.27%, which together with the underlying performance of the portfolio contributed to solid core earnings despite a significant reduction in recourse leverage from 3 times as of June 30 to 2.2 times as of September 30.
Over the last two quarters, we fortified the Company's balance sheet, improved funding terms increased liquidity and equity, and reduced recourse leverage to ensure that our shareholders could benefit from the performance of the underlying assets of our portfolio.
In light of our results this quarter including the strengthening of our balance sheet, improved liquidity and solid core earnings, the Company declared a cash dividend of $0.05 in the quarter.
The payment of an attractive dividend is an important priority for our shareholders and the resumption of the dividend was a key milestone for the company.
The recovery and asset prices across the portfolio and the redemption of our dividend contributed to an economic return on book value of 30.8% for shareholders this quarter.
We remain highly focused on our long-term objectives of generating sustainable core earnings that support an attractive dividend with relative stability in our book value.
We believe our portfolio's earnings power is likely to provide a solid underpinning for future dividends.
And while we have seen substantial recovery in asset values across our portfolio this quarter, we believe there is the potential for additional improvement, particularly in our commercial mortgage investments.
Much of this will be dependent on the path of the virus as well as the pace of recovery in economic activity.
In our view, our diversified investment strategy focused on high-quality commercial and residential borrowers is well-positioned for the uncertainties of this environment.
The third quarter of 2020 saw the equity and credit markets continued to rebound, driven by improved liquidity conditions across financial markets and the ongoing reopening of the economy, which translated into higher valuations for a number of our portfolio holdings.
The recovery of our residential portfolio combined with improvement in our commercial holdings translated into a significant improvement in our GAAP book value.
As the market and our portfolio have improved, so has our liquidity position, which contributed to our decision to reinstate our dividend for the third quarter.
Over the course of the quarter, we saw continued improvement in the credit performance from both our residential and commercial holdings.
Our non-QM residential loan portfolio is performing well and experienced a decline in the percentage of loans that were part of a forbearance plan dropping to 10% at September 30, from 16% at the end of the second quarter.
We see this as a strong indication that borrowers with meaningful equity in their homes will prioritize their mortgage payment in order to remain current on that obligation.
We believe that this trend will continue given the positive data coming out of the U.S. housing sector including robust purchase and refinance demand and ongoing home price appreciation in many major markets across the country.
Our commercial loan and non-agency CMBS portfolios are performing in line with expectations even though those expectations have shifted as a result of the pandemic.
The commercial whole loan portfolio carries an approximate 65% original LTV and all but one of the loans remains current.
As we mentioned last quarter, the delinquent loan has a principal balance of $30 million which is secured by a hotel.
We are currently exploring various workout strategies and believe that there is a reasonable likelihood that the majority of the principal and missed interest payments will be recovered.
Although, there is no guarantee that will be the case.
Our large low non-Agency CMBS portfolio has an original LTV of 60% and despite exposures to some retail and hotel assets over 82% of the loans by principal balance remain current compared with 70% at June 30.
We are in forbearance and modification discussions with the delinquent borrowers in this portfolio.
In fact, we have been active with many of our commercial real estate borrowers, monitoring their situations and working with them to help preserve the value of the underlying properties in order to protect our collateral and increase the probability of an eventual recovery in asset values.
That being said, we believe that our focus on high quality properties with well-capitalized sponsors capable of withstanding short-term disruptions should enable our commercial real estate portfolio to emerge from the crisis without significant overall impairment.
We have spent a significant amount of time and effort over the last two quarters to improve the terms of our financing arrangements and the company's risk profile.
These ongoing efforts continued in the third quarter as we amended our existing residential home loan facility to convert it to a limited mark to market facility with more attractive terms.
With respect to our outlook going forward.
While the US economy rebounded during the quarter most economic measures remain well below where they started the year.
We believe that the recovery will continue to be dependent on the future trajectory of COVID 19, the availability of improved therapeutics and vaccines and continued fiscal and monetary support.
We also expect that the Federal Reserve will follow through on its commitment to keep interest rates at or near zero for an extended period of time.
We continue to believe mortgages secured by real estate assets with meaningful equity in the properties and higher quality credit will continue to perform well over the long term.
While many sectors of the mortgage market currently offer historically attractive valuations, our primary focus remains on maintaining sufficient liquidity, protecting the value of our assets and positioning the portfolio for continued future appreciation.
So I'm only going to focus on the items that warrants' some additional explanation.
During the quarter we continue to focus on optimizing our portfolio financing, increasing liquidity and improving shareholder's equity.
In July, we retired $5 million of our convertible senior notes at a 25% discount to par value.
In exchange for the issuance of $1.4 million shares of our common stock.
We were once again active in improving the financing of our assets during the third quarter.
We amended our existing residential home loan facility in October to converted to a limited mark to market facility with more attractive term.
Among other terms the amended facility has a 12-month term and bears interest at one month LIBOR plus 2.75%.
We reported core earnings of $6.4 million or $0.10 per share for the third quarter.
Our core earnings came in higher than the $4.3 million generated in the second quarter, primarily driven by a higher net interest margin and a full quarter's benefit of the lower financing costs associated with last quarter's Arroyo securitization, which allowed us to reduce the income drag experience under the original Residential hold on facility.
Economic book value for the quarter increased 2.2% to $4.11 per share.
As mentioned last quarter, we believe that this non-GAAP financial metric provides investors with a useful supplemental measure to evaluate our financial position.
It reflects our actual financial interest in all of our investments and eliminates the accounting mismatch that arises from our Arroyo securitizations where we fair value the loans, but not the debt.
This quarter the difference between our GAAP book value and our economic book value narrowed only $0.04 due to the sharp rebound in asset values, mainly in the residential whole loan portfolio, which reduce this accounting mismatch.
In summary, we believe these steps solidify our capital structure, increase our liquidity and will enable us to participate meaningfully in the economic recovery.
Our Recourse leverage was 2.2 times at September 30, significantly lower than the 9.5 times level at the end of March and 5.4 times at the beginning of the year.
Our net interest margin remains healthy and with a significant portion of our assets now finance with attractive longer-term financing.
We believe that we are well positioned for another quarter of positive financial results in the fourth quarter.

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q3 core earnings per share $0.10.
q3 gaap earnings per share $0.98.
resumed our quarterly dividend, declaring a $0.05 per share cash dividend.

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