Q2 2020 Ready Capital Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the ready Capital Corporation second quarter 2020, <unk> earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal and operator by pressing star and zero.
I would now like to turn the conference over to Andrew Outboard Chief Financial Officer. Please go ahead.
Thank you operator, and good morning, and thanks to those of you on the call for joining us this morning.
Some of our comments today will be forward looking statements within the meaning of the federal Securities laws.
Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
Therefore, you should exercise caution interpreting and relying on them.
We refer you to our S. You see apologies for a more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call we will discuss our non-GAAP measures, which we believe can be useful in evaluating the companies operating performance.
These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with got.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2020 earnings release, and our supplemental information.
Yesterday evening, we issued a press release with the presentation of our results along with our supplemental financial information presentation.
These materials can be found in the Investor Relations section of the ready capital website and I've been filed with the FCC.
We plan to file our second quarter 2020 10-Q disease.
In addition to Tom and myself. We're also joined by Adams outdoor had a credit on today's call.
I'll now turn it over to Tom capacity our CEO.
Thanks, Andrew Good morning.
We appreciate you joining the call in what continues to be unprecedented and challenging times.
Thoughts remain with you and your loved ones and hope that you are help safe and healthy.
As a lending business historically adapted remote operations, we have readily adopted to the cobot environment, managing greater work demands with equal or greater productivity.
In response to the pandemic our management team undertook a three phased process.
Hey, it's one was defects.
We harvested liquidity and preserve book value of the holistic asset management with aggressive loss mitigation during the second quarter, we preserved much of our book value from the first quarter as a decline was only 10%.
With a current 60 day delinquency rate up 2.2% persist over 7% per our large balance commercial peers.
Phase two is offense armed with over 260 million of liquidity today.
We've completed the strategic review of our diverse businesses to chart. The path forward. We will continue to expand our government sponsored lending segments and plan relaunch of our scary acquisition and lending businesses, including the introduction of new products.
Operating expenses were also reduced in line with reduced series loan volume and a plan greater reliance on technology.
Phase three is implementation from the early third quarter two year end.
We'll seek to restore normalized core earnings comprising a combination of net interest margin.
Redeployment of excess liquidity into the robust post call. They see every acquisition and lending opportunities and cash gain on sale income from our government lending businesses.
In the current corridor, we achieved our phase two objectives and record results by leveraging our gain on sale businesses, including allocation allocating substantial resources to the paycheck protection program or PPP.
Additionally, we focused on the asset management of our existing small balance commercial loan portfolio and de risk our balance sheet by increasing liquidity and decreasing mark to market liabilities.
Our Threed government sponsored lending businesses posted strong quarterly results first our residential mortgage banking segment G.M. Epas realized a record 1.2 billion in origination supported by a strong demand for both home purchases and refinances in attractive rate environment.
This volume approximately 500 million larger than any other quarter and the company's history was further supported by record margins.
Second suffered by Freddie Mac, reducing multifamily origination rates 50 basis points are Freddie Mac multifamily business also experienced right record quarterly originations.
157 million with year to date volumes through the second quarter, representing 79% of 2019 total production.
Lastly, in addition to our P.P. efforts are asked the aid business continue to originate new seven I loans.
Although limited by the program requirements, which required the.
This is people open an operational.
We managed to fund 21 million of SPD 70 loans in the quarter.
On the P.P.P. front, our company helped over 40000 businesses through the origination up 2.7 billion of loans.
As we said when I first quarterly call.
We committed to doing everything we could provide financial support to small business owners across America. During a time when they needed at most to do this we developed a new technology form various partnerships and dedicated the majority of our internal staff to these efforts will continue to evaluate how ready capital can assist business isn't need through these difficult times.
And intend to participate in programs organized under under the so called cares to act.
The proposed legislation includes 190 billion for second loans to existing P.P.P. borrowers.
In addition, the bill would create a new seven a loan program targeting called the damage small business in low income areas.
Let's go businesses would be out eligible to receive low interest loans with the term of 20 years supported by 100% SBK guarantee.
In our small balance commercial lending in acquisition segments, we focused on proactively engaging with our borrowers facing difficulties arising from called it the stronger relative fundamentals of the FCC sector entering this risk recession, along with our conservative underwriting is reflected in a superior credit performance relative to where a large balance peers.
Yeah.
As a mid July totaled 60 day, plus delinquencies in the C or a portfolio were 2.2% a slight increase from the yearend delinquencies of 1.4%.
We monitor risk in the portfolio by scoring each loan in the portfolio on a scale of one to five with scores a four to five representing loans with the highest risk the principal loss.
Since the onset of co that loans in the four or five bucket have increased it to 8.3% of the portfolio from 4.5% pre cobot.
Our extensive history in the management of problem loans, including resolving approximately 6000 SBC loans in the last recession gives us comfort that at this time losses will not exceed current reserve levels.
Additionally, the diversity of the portfolio is a significant mitigant.
The largest long representing under 1% of the portfolio. We also have minimal exposure underperforming sectors, but hospitality at 4% and retail at 15% of the see every loan portfolio.
No our retailers not malls, but small strips with a 1.3 million dollar average balance.
Beyond these lending in asset management initiatives, we increased liquidity and reduce mark to market liabilities.
In the quarter, we increased cash on hand by 134 million to 257 million, while decreasing mark to market liabilities, 26% to wanted a quarter billion.
This was in part due to the successful execution of a bridge a bridge collateralized loan obligation and a legacy acquired loan securitization.
D. Securitizations raised 58 million in cash and reduce warehouse that 431 million.
The market support of our securitization program was evident in senior bond execution spreads at or inside comparable offerings.
74% of our loan portfolio is now financed through non recourse means and we successfully extended both our see every warehouse lines that matured in the quarter through year end.
Our efforts in navigating the difficulties of co that the covered pandemic have positioned the company to reimburse during this period stronger.
Which leaves me to our phase three initiatives, resulting from our recent strategic review.
First we plan to restart lending in our core small balance commercial products in the third quarter, starting with launch of our bridge loan products, where we are seeing opportunities to price loans with increased credit to hand enhancements to retain yields at 500 basis points premiums to pre covered levels.
In our fixed rate lending business. We are currently partnering with the national bank to originate into securitization with the company retaining the subordinated tranches.
We believe this is a cost effective way to keep our <unk> platform active and expect unexpected retain yield in the high teens, our current money up pipeline in our core see every origination channels totals 91 million.
Second we will leverage our experience with the P.P.P. program to expand our as PA seven a lending business dsps existing seven a program will be a catalyst for the recovery of small business from co that.
We will accordingly grow our large crowds 70 volume.
But by through application of technology developed for P. T. The pursuit of new affinity relationships and the targeting specific industry verticals.
We also plan in launching a small loan SP, a seven day program.
Historically, only 16% of our seven eight production had loan balances under 350000 versus 56% for the seven eight program overall.
This program will rely heavily on our PPP front end technology and expedited processing through use of U.S.P.A., scoring model with incremental 70 volume in excess of 100 million per year.
Our current seven any money up pipeline exceeds 175 million.
Third we expect our residential mortgage banking segment to continue to experience high volume at elevated margins through July production exceeded 400 million and we expect less downside on the mortgage servicing rights Mark in the third quarter, even a primary rates and earnings rates continue to decline due to that.
The fact of floor and refinancing rates afforded by the absolute level of the 10 year Treasury.
Fourth we plan on deploying capital into acquisition opportunities.
We are tracking $3 billion opposed cobot, SPC long cool offerings of which only a one fifth of trade is due to wide bid ask spreads.
We expect transaction volume to increase in the fourth quarter and first quarter next year as the poor parents wave subsides.
Our current executable pipeline of 230 million, primarily consists of seeing performing for pools with low ltvs unlevered yields in the mid teens.
Lastly, we continue to evaluate the best use of cash in the context of providing the greatest return to our shareholders. Given the current share price. This includes a program to repurchase shares our board of Directors has approved every purchase program, which allows us to repurchase up to $25 million of common stock in the coming months.
I'll now hand, it over to Andrew to discuss the financial results.
Thank you Tom.
We're pleased to report GAAP earnings of 62 cents per share and core earnings of 70 cents per share.
Paul Quarterly records when normalizing for business combination affects.
This quarter highlights the company's ability to allocate capital and resources to their best use in varying economic climate.
The company strong financial results were due to elevated production in our gain on sale businesses.
Participation into PPP.
And the continued performance of our core small balance commercial loan portfolio.
Revenue sources, where diverse in the corner with 39% coming from elevated net mortgage banking activities.
31% coming from stable net interest margin and servicing.
24% coming from our P.P. efforts and 6% coming from gain on sale activities.
He adjustments to core earnings included a $9 million net markdown of a residential MSR portfolio.
Offset by a $5.1 million recovery of seasonal reserves on performing loans.
Included in core earnings is a four and a half million dollar increase in fee so reserves, our nonperforming loans.
Our residential mortgage banking business GFS posted excellent numbers in the corner.
Record production of 1.2 billion in combination with margins exceeding 300 basis points resulted in a 180% quarterly increase in net mortgage banking revenue to 44.1 million.
The $12 million decline in the residential MSR valuation due to a 130 basis point increase in CPR assumption was partially mitigated by 42% retention rate.
At quarter end commitments to originate reached 582 million and we believe elevated performance will continue into Q3.
Our efforts into PPP program helped tens of thousands of small businesses to maintain jobs at a time when they needed. It most since the beginning of the P.T. program, we facilitated the funding a 40000 loans totaling $2.7 billion.
Total net revenue, meaning gross fees paid by the FDA less payments to agents and financing partners equaled 46.6 million.
32.3 million of which was recognized in the corner.
You have accounted for the P.T. under arrangement with multiple deliverables, which required us to allocate economics between the original sourcing of the P to P laws.
Forgiveness process and the ongoing servicing of the P. lost.
Under this arrangement, we deferred direct connection recognition of 14 million a P.P.P. revenue to future periods.
Certain expenses incurred due process PPG loans totaling 5.5 million, we're booking the corner.
We will continue to participate in future government initiatives related to coal bed as part of our efforts and he has to be a lending business.
Gain on sale revenue from our Freddie Mac and Sta, seven eight lending business days totaled seven and a half million dollars.
The quarterly increase in Freddie Mac profitability of $2.7 million was offset by decline in Sta originations, you did call bad which reduce quarterly gain.
On loan sales to 1.5 million.
On the expense side employee compensation and benefits increased due to commissions and bonus accruals in the residential mortgage banking segment as well as certain employee payments related to PPP activities.
At the onset of the third quarter, we undertook certain actions to rightsize staffing levels to projected business activities.
We expect these actions absent additional hires to result in a 15% reduction in based compensation and benefit costs going forward.
Loan servicing costs increased $4.8 million due to reserves booked on Ginny loans in defaults are in forbearance due to cobot.
Quarterly increase in operating expenses are due to the inclusion of expenses related to <unk>.
Other key items included a $13.4 million quarterly increase in the provision for income taxes due to elevated activities at our taxable REIT subsidiaries.
Additionally, certain fees due to the investment manager were booked in the corner.
Turning to the balance sheet now our main objective in the quarter was to meet all financial obligations increased our liquidity to account for market uncertainty and should provide for future investment opportunities.
And to reduce our exposure to mark to market liabilities.
We believe our current financial position is strong and reflective of the actions we undertook to meet those objectives.
Current unencumbered cash totaled $257 million, 110% increase from reported March 31st balancing.
Oh, no just cash position reduced return on equity by over 100 basis points. We believe it has positioned the company to whether additional downside I pursue accretive lending and the acquisition opportunities going forward.
The successful completion of two Securitizations, a $405 million bridge, CLL and a $204 million legacy loan CMBS, how many significant impact in reducing secured borrowings to 1.25 billion and recourse leverage down to 2.1 tops.
It is important to note that included in that balance is approximately 400 million of finding financing that support our government sponsored businesses.
We do not believe these could be at risk and absent. These amounts recourse leverage is 1.6 times.
Additionally, since Q1, we successfully extended to maturing theory warehouse lines displaying the continued support our lenders have for lending programs.
Our loan portfolio continues to perform well during these stress times total 60, plus day delinquencies within the theory portfolio inclusive of Freddie Mac collateral remained stable at 2.2% a modest increase from 2019 year on levels.
Of the 8% of CRT loans in forbearance, 87% continued to pay current.
Our change in seasonal reserves is reflective of this performance, where we increased provision our nonperforming loans 4.5 million, while decreasing reserves on performing loans 5.1 million due to slight improvements in modeling assumptions from March 31st.
We do not include changes in reserves underperforming assets in the calculation of core earnings.
Book value per share declined six cents per share to $14.46 due to the increase in share count associated with the Q1 dividends.
We expect that the implementation of our share repurchase efforts will aid in the recovery of that dilution.
As we've done in previous quarters. The supplemental deck provided include summary information on the company's earnings product profile, various operating segments and key financial metrics.
Instead of taking you through the dock I'd like to draw your attention to slide 313 and 14.
Slide three outlines various corporate updates.
Slide 13 provides additional information on our current seasonal reserves and slide 14, which is new provides insight into the risk distribution in the theory portfolio.
I hope you and your loved ones continued to be well and he is unprecedented in time.
I'll now turn it over to Tom for closing remarks.
Thanks, Andrew.
We had a productive quarter managing through this pandemic recession, our personal business models, featuring the government sponsored businesses provided earnings and liquidity to bridge the period of capital markets volatility.
Further expansion of these businesses, including cares act programs together with pending redeployment of excess liquidity harvested during the crisis into relaunch of our net interest margin based small balance commercial direct lending segments will provide a ramp to normalized core earnings in subsequent quarters.
Our management team season, the crisis as an opportunity to refocus our lending businesses by applying technology to design strategies to cut loan acquisition costs, while increasing volumes.
We believe successful execution of these plans along alongside Pandemics bond lending in acquisition opportunities will overtime provide core earnings growth for the benefit of shareholders.
With that operator, we can up in line for questions.
Thank you well now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad, you will share a tone acknowledging your request.
Our using a speakerphone please pick up your handset the far pressing any key.
To withdraw your question. Please press Star then too well, we'll talk for a moment as collars join the queue.
Our first question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Tom I guess to start off maybe with the tripled since the triple P. gains page three parties about about 18 million Oh earnings to be recognized in future periods, well that all hitting three Q or is it is gonna be.
More waterfall dolphin.
[noise], Andrew you want to address that.
Sure, it's going to be a events can be dependent on two things. So a portion of the deferred revenue will be allocated to Ah.
The forgiveness process, which we expect to be completed within the year. So sometime over the third and fourth quarter did the remaining amount will be allocated to any ongoing ongoing servicing costs and that may extend into 2021, but we expect the entirety of that.
Now to be recognized over the next four quarters.
Great. Thanks for that color Andrew and.
Yes.
You know staying on trying to.
The income and margin show resi banking margins, you talked a good bit about the strength there in prepared remarks, I mean are those margin levels holding through July.
Thanks, that's it to gradually pull back or when we get even stronger margins here before they are they normalize what are your outlook kind of second half your outlook for residential mortgage loan but margins.
[laughter].
Yeah margins remained elevated in in July I'm, certainly I'm not quite at the levels. We saw in April and may, but much higher than where they were in the first quarter.
I think we expect throughout the third quarter bargains.
To continue to be elevated I'm, Tom do you what I've.
Give more color on you know or forward looking statements. Yeah, Yeah, Yeah sure I think just more broadly I think Jim if that Jim at bats, those they're very efficient.
Purchase oriented mortgage banker.
With a dominant market share in a yeah wins in the Louisiana, Mississippi, Alabama area, where you.
Do you have a lot less convexity in terms of prepayments and what have you but just.
More broadly we expect.
The elevated margins today as evidenced by the rocket mortgage IPO are really a function of the historic <unk> imbalance of demand for refinancing given historic declined in the 10 year versus read refinancing.
It is production capacity in the industry a number of companies have had to reposition staff and what have you, but it's just it at this point the pricing elasticity, which is very typical for the industry is a function of that supply demand imbalance. So given that we expect a gradual normalization.
The.
The margins over the next let's say probably by the first quarter of next year when that the.
Production capacity equals the you obviously the refinancing volume will decline as you work through the inventory of a higher FICO borrowers that will be to low hanging fruit and so yes. So we expect a gradual normalization over.
Going into the first quarter of next year.
Great and Tom I guess or to ask one more question kind outlook and apologies if I missed this kind of you talked about CRB lending a good said in the prepared remarks, but you know you presume lending activity kind of health.
What kind of volumes do you think you put up in the second half. The you know just kind of putting the pullback in the water how quickly will you ramp back up the CRT lending activity.
There's definitely it's interesting it's basically as a demand supply demand a factor at work.
Right now we are our bridge team our transitional lending team estimates that about.
65 by almost two thirds of the lenders have pull are still not backing.
In in London, we hear that we termed a color from our.
You know our our larger.
Capital providers as well as doing around research so.
We expect and then on the flip side demand is somewhat subdued, particularly in areas that are.
That were ER our.
You know the most affected by the pandemic retail and hospitality, where we don't really have as much of a focus more and more multi family oriented so there's reduced demand, but reduce supply. So long lead the way of saying I think it's gonna be until the first quarter of next year before you see.
Our volume back to the levels it was in the.
First first quarter of this sheet a this year, let's say last quarter of 2019.
Right, Tom Andrew Thanks for the comments and I hope, you're both good well and enjoy your weekend.
Thanks, Nick you too.
Our next question comes from Steve Delaney with JMP Securities. Please go ahead.
Good morning, and congratulations on your phase one success and it looks to me when you're you're well positioned for us for two and three.
And Tom given given that you.
Survived the tempus to the storm fairly well in terms of liquidity and lowering leverage seems to me. Your your big decision I'm not that you don't have challenges and this market, but your big decision really is where to deploy your capital and liquidity and I guess looking first to the.
Back plan the authorization about 5% of your your market cap today, we're seeing the shares at 60% a book and I'm curious if that level the current valuation.
Would you say that that that meets with your return requirement on on the accretion from repurchasing purchasing shares at this level.
Yes, it does.
Okay, and if you're running well how fast.
Hi, good sorry, sorry, no I would say I realize you have to balance I real have you have to balance that but I think what you're saying is at this level or lower.
I think from a modeling standpoint, we might we might want to assume some level of buybacks here over the next next quarter or too.
Yeah. So there is free to that yes, what Andrew sorry.
Yeah, Steve I think that's that's right over the next quarter or too I think you will see repurchase activity.
Very good okay. Thanks, then.
Okay. Thank you Andrew and Tom you guys.
We're able to get through but between your securitizations.
And just not being over Levered and the first place, but we have seen now eight.
Transactions and I'm, just Gonna go ahead and call. It rescue capital that's not intended to be the meaning of the company you sort of their transaction. So you know I think there.
Both sides one on we're winters on most of those transactions.
It doesn't appear to me that that you guys need.
Any offensive capital, but the other.
Question is there's money out there looking to partner with people that have opportunities and would you consider I'm certainly not Tom a common equity, but would you consider partnering or taking on some opportunistic capital rather than defensive capital just to take advantage.
With with the market opportunities, even if you have to share the returns with another entity.
Yeah, I think that's a good point.
We.
You know the [noise].
So to answer that question. One is we actually are working on a number of straight up.
Corporate debt transactions, given the fact that we do have some capacity in that in that regard.
I believe you know hundred Millionish I'm. So we are moving forward on that front given the fact that weve stabilized and you know we have a cash position equal to almost a third of our GAAP book value.
<unk> equity book value.
And then on the number of reads as you pointed out that are capital it could that have more up investment opportunities in relation to deployable capital.
Have undertaken a jvs with private funds I think we had the ex our external manager has around 8 billion of opportunity capital, which we could deploy in the JV with the.
With.
With the external manager number I remember a few other companies have done that <unk> over the last three to five years. So I think that would be the.
Yeah that we would that doors is in and.
Has always been opened and we've actually historically done that for example that.
So Andrew when was the but was that for the Louisiana purchase of the nonperforming loans. For example that was a 50 50 split with the external manager. So so I think right now between the corporate debt capacity that we're working on in the external manager, we have ample capital to leverage the.
Already CCAP platform, and then allocate where we do we have concentration limits or limitations in terms of overall capital, but yet capitalize on the fee income in the any any sort of promote we would get on that investment.
Right. That's that's very helpful and I'm, just one housekeeping Andrew when we look at the 14 million remaining.
<unk>, what would be an approximate tax rate, we should put on that.
A 25 or so.
25, Okay, well. Thank you both for your comments and Ah stay safe and be well.
Great.
Our next question comes from Timothy Hayes with B. Riley. Please go ahead.
Hey, good morning, guys hope, you're doing well and my first question just kind of staying a in line with talking not being opportunistic here you know Tom you made some constructive comments on the resi lending and housing environment and just wondering if if you've considered expanding into some.
More resi credit focused strategies and you know you anticipate maybe seeing some good acquisition opportunities in the back half of your unlike you expect them to small balance commercial real estate side.
Yeah on the yeah, we definitely have been looking to expand broaden our ours our investment activities in lending activities in the I'm on the residential front you know we've looked at.
Yeah, So <unk> opportunistically, the fixed and flip market the SFR financing markets single family rental market not the property investment, but financing the those those strategies.
Build or lot loans.
Has been on our radar screen. So yes, there was definitely a ways to expand around the opportunities that we have Oh boy did the non QM space, because we view it as a high.
Very having significant liquidity risk as you know as what occurred.
With a number of the Residentially focused.
So yeah. So I think we will look to expand opportunistically leveraging off the GFS platform.
And then there are definitely some distressed M&A opportunities that we think both in the private and public space on the.
Yeah on the on the on the C reach side I'm, sorry, the commercial and residential street side that we will continue to pursue a you know along the lines. What we did a for example, with the island's merger last last year.
Okay interesting.
And I guess just on me on the acquisition right Yeah. It sounds like you expect for your you've seen some transaction.
You know you haven't really seen a lot of portfolios trade here and I'm. Just curious are you seeing bid ask spread starting to tighten a little bit and what do you think will be the main drivers and seeing a lot more acquisition opportunities in the back half in a year and where do you expect they might come from.
A lot of them are a community banks that have.
And regional banks that have taken much larger cecil reserves due to the.
But you caught the.
The pandemic, which you know a churn which was on top of him implementation granted they have regulatory forbearance, but you know so I think what what we're seeing is a lot of sales of either scratching, Dan or performing small balance portfolios, which are they view as noncore and so that that we're currently.
As of.
Last week, we had about 3 billion that we had tracking about a fifth traded and we're currently engaged on about a quarter billion.
But I think.
The right now there's a there's a significant bid ask that is.
Due to the forbearance you know in these SBC portfolios is running at about what's running at the peak at around 2015, 20% and it but you're seeing roll rates for example, on our chief credit officers on right now, but I think our our roll rates where.
Out of delinquency so out of forbearance, we're we're back to pay was where around 85%. So when that volume I think you're going to see a lot more volume in the third and fourth quarter.
Got it got it but a good color and then just you know.
Small balance commercial real estate prices as you pointed out in the past historically track closer at the Reggie market then the large bounce Jerry markets that have relationship seems to me a little bit broken in this situation like that and I know, it's going to differ by market NASA tied but just wondering how you think broadly as you see real estate prices will trend in.
And whether we see bear case scenarios, where we're really eating into your LTV.
[music].
Yeah, I think the correlation has been zero 0.8 over the last 30 to 45 years using the boxwood means data.
Versus the case shiller and I'm not sure that that's decoupling.
Significantly in this in this recession.
Housing is extremely strong due to supply shortages.
Our house forecast is now for a decline this year, two and half percent in case shiller.
For large balance the Moody's and Cree index were.
That being a.
20 ish percent decline versus 40 in the last recession and a lot of that is 80% of that is hospitality retail sectors, given that that two and a half for housing and the.
Down 20 for commercial large balance we're expecting maybe a down 10 for see a small balance. So now if you compare that Andrew our current LTV in our portfolio is what six.
Upper like cities.
Yes.
Yeah, sorry, Tom So does your question yeah. So if you. If you look if you look at that stress layer on default rates and and liquidation expenses where Ah.
Yes, I think we're in a very very strong place in terms of in principle impairment in particular in relation to our reserves I see some reserves.
Got it that's helpful. Thanks for taking my questions. This morning.
Appreciate it.
Our next question comes from Jade Rahmani with KBW. Please go ahead.
[noise]. Thank you very much one of the major commercial real estate brokers is anticipating a sizeable uptick and loan portfolio sales after labor day their pipeline totals around three and a half billion, including strategic advisory.
Assignments I was wondering if.
Ah if those loans if they average balance was more in line with overall commercial real estate loans say around 20 million is that something that ready cap would look to participate.
I would say, we stick to our knitting, we we have.
The the trading levels of these SBC loans.
Levered basis via securitization exit where term financing from banks is or is probably a three to 500 basis point, you'll premium and we have you know we event, we have ample opportunities there. So I would say we wouldn't.
Get out of our fairway and and and you.
Strategy drift into large bounce <unk>, we have ample opportunities to opportunities in our core SBC market.
Okay I'm going to me think about earnings in the quarter of 70 cents core earnings that included an estimated roughly 43 cents from the PDP probes and and you said a that there's a <unk> point 2 million remaining PPP feed so I assume that 14 million that you mentioned in the after tax.
Amount.
If we assume two thirds of that took place in the third quarter, you would end up with earnings around 40 cents is there any adjustments for that that we should be thinking about as we jumped out or the next one to two quarters.
Yeah, No one thing I'll point out is when you look at the PPP economics in the current quarter, there's certain other items that were heavily influenced by.
The PBP such as the you know the booking of incentive fee is obviously the calculation of taxes was much higher and so when you you Whittle down the true impact of the PV p. It it becomes a little smaller in the current quarter.
You know on a go forward basis.
You know, obviously, the 14 million, which is a pre tax number jade well, we'll obviously elevate earnings depending on that the timing of the recognition, which will be dependent upon you know how quickly. These laws are forgiven or.
Payoff.
With increased residential mortgage banking activity in the third quarter I suspect that revenue will be high once again and then.
Absent and then depending on.
How how large of a participation we undertake in whatever you know new PTP programs are rolled out it could lead to some volatiles results over the next two quarters.
So I think the combination of those three things could add some volatility on the upside on the earnings.
Okay, and when you said current quarter, where you're referring to the second quarter when you say that.
At 43 cents estimates that I provided for the PPP impact in the second quarter. It sounds like that's too.
Estimate.
Yeah, I think the affects of PBP on that you guys are a little lower than the 42 cents [noise] [noise].
When you take the totality of the cumulative effects across no taxes incentive fees and things like that.
Okay, and if the PDP earnings were to completely.
The impact for dissipates and there werent other new programs to replace that are you still targeting.
I mean, the past dividends Creek of it was that 40 cents.
You know annualize that represents double digit our away is that still kind of the target range or based on the DNA. A alignments you mentioned the technology a executions that we can be saying hi are always a best.
Yeah, I think the goal in the short term is to get the company back up to a stabilized earnings at that.
40 cents level, and then two to grow from there.
Okay.
In terms of how you're thinking about the credit or season seasoning of the book since you know elevated levels of unemployment.
If we ever to see a a second wave in the fall is that something that adds in his prepared for in terms of the yeah.
Balancing offense and defense and also a follow a related question is do you see any in recent weeks pulled back.
Some deterioration and economic performance in any of the markets you're operating it.
Hey, Jay this is I'll, let his adams outdoor Adams.
Hey, Dave Adams outdoor how how are Ya, yes, I mean still still significant uncertainty in the market. You know, we do remain optimistic that the credit profile of our diverse and granular portfolio, Tom mentioned, 60% LTV. Additionally, we have a 11% weighted average debt yield so.
You know significant cash will cushion.
These loans strong liquid geography is that were lending in Hum also mentioned limited hospitality in large retail properties as collateral.
And then also just generally solid loan structure telephone sponsors business plans, we think that's gonna help keep our portfolio on on solid ground.
You know there's July was the first more on where Forbearances expired on you know we mentioned that 87% have remained current.
Additionally, only 4.5% of our portfolio is under a forbearance today.
We expected that that number to be much higher so and that's that's just kind of speaks to the you know the strength of our of our sponsors and you know the commitment to these properties. Additionally, just in terms of added added protection here.
The securitization structures that we have very unique and designed to give us full control of the loans. So that we can optimal but.
You know were authorized to work directly with sponsors and we've actually Jesus prepayment penalties as needed.
You guys complete control of the loans and then also just you know the servicing agreements that we have provide you know really good servicing experience for customers. We have you know staff that that liaises with these with these borrowings under the surface area. So we can you suites optimal resolution identified but red flags easily.
Okay. Thanks, very much for taking the questions.
Sure they should.
Thank you.
Our next question comes from Crispin Love with Piper Sandler. Please go ahead.
Oh. Thank you. Thanks for taking my questions first how much of that PPP volume did you sell during the quarter and how margin was on the balance sheet as at June Thirtyth Fad is on it now.
Yeah. So he sold the overwhelming majority of production.
Only around 105 million remains on the balance sheet.
It is the or the buyers there is that mostly banks.
Yes.
Okay and then.
Just one on one the report repurchase program well, how do you think you need to increase the programs here.
Even even though you're having repurchased any shares with <unk> current authorization and I guess is there anything that was keeping you from repurchasing shares on the prior authorization, which I think what first initiated about a couple of years ago.
Yes.
Yeah, the board of director Directors.
Given the current share price decided that more flexibility in terms of an increased allocation was appropriate in this environment.
I'd say.
Going to the original program, which is about two years old we weren't quite trading.
Just had levels we are today.
And then the reasoning behind why that wasn't utilized over the last.
A couple of months.
Purely the company's focus really was on getting to a financial position that was a significantly more conservative than we were at the first quarter just in terms of cash and exposure to mark to market liabilities. So we feel we're now in a position where we have.
We have sufficient cash to not only.
You know whether any on certain downside, but also to start deploying that cash in means that provides the best returns for our shareholders.
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All right, but that that makes sense and then just one last one on palm I think he said that the percent of loans in the form fives list bucket.
Currently we are around 8% what did you say it was pretty coated.
Oh I don't have a number Adam do you have hey.
Yeah, Hey, Hey, Jay Yeah, It was for 4%.
Represents right okay. Thank you.
Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Good I'm, excluding the effects of PCP on earnings is it fair to say that core or are we was closer to around 10%.
Annualized yes, that's correct.
Okay, Great and then on the seasonal reserves, given Tom's comments that with the expiration of.
The forbearance, we could see higher losses are those already reserved for or do you have to reserve for those in the quarter is a forbearance expires.
Yeah, I know our seasonal reserve as reflect of.
Occasions of losses, it actually in terms of.
You know, how Cecil breaks down our specific.
No reserves on on loans that we've identified a significantly lower than the total Cecil reserve we have booked so we do believe it's all captured in the current reserve number.
And then the direction of leverage I mean, you're at that.
The range of historically, where you are given all the risks in the world Rethinking about leverage going forward.
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Yeah, I think we'll continue to try and maintain you know leverage ratios around where they're at today when we look at our recourse leverage ratio.
So it's sort of breaks down into three buckets. The first bucket yeah. As we mentioned is really to support our government sponsored businesses that accounts for about half a turn the other.
Parts in that recourse leverage our our corporate debt offerings, which we will most likely keep around the same size may increase a little bit to take advantage of go forward opportunities.
And then the remaining about just supporting our core commercial real estate lending an acquisition segment will try to maintain at these levels.
At least for the the short term.
Great finally on Tom mentioned in his comments you know you might be rolling out new commercial real estate type of strategies can because.
Given indication with this might be.
Yeah couple of couple of things one is.
We're looking at expanding our correspondent relationships with other let's say smaller lenders that have under utilized the agency.
Licenses for example, Fannie Mae small balance or HUD.
Multifamily.
You know senior housing what have you.
That's one area that the president of the Oh.
Commercial but our commercial businesses is looking into that we're looking at other areas. For example, like commercial paper program to assess clean energy, which is taking on a new life in the a pause pandemic world. Yeah. For example, New York State just passed legislation, so that couples very well with our small balance a transitional lending business as a form of cause they equity.
So that's another area that another example of so those are two examples where we're looking to expand in the commercial or commercial space.
Great. That's it for me could show thanks.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to management for any closing remark.
It's just like to thank everybody for the time today and we'll be looking forward to our next quarterly earnings call next quarter. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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