Q1 2021 Ready Capital Corp Earnings Call
Ladies and gentlemen, please standby our company you can momentarily once again, ladies and gentlemen, please standby our confidence of getting momentarily. We thank you for your patience.
[music].
Greetings and welcome to the ready capital Corporation's first quarter 2021 earnings conference call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I would now like to turn the conference over to Jos Mr. Andrew Ahlborn Chief Financial Officer. Thank you you may begin.
Thank you operator, and good morning, 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 in interpreting and relying on them.
We refer you to our SEC filings 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 company's operating performance.
These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2021 earnings release and our supplemental information.
By now everyone should have access to our first quarter 2021 earnings release and the supplemental information all of it can be found in the investors section of the ready capital website.
In addition to the Tom and myself. We are also joined by items asthma or head of credit.
I will now turn it over to Chief Executive Officer, Tom capacity.
Good morning, and thank you for joining our first quarter earnings call.
Ready capital is off to a strong start in 2021.
We have accomplished much in the first quarter of the year with our small balance commercial or SBC CRE lending operations and small business administration of our S. P. A seven day lending businesses posting record originations, including high volume in round two of the Paycheck protection program or a P. P. P.
Liquidity in the quarter was bolstered significantly by closing of the Edwards merger and accretive capital markets transactions. Additionally, post COVID-19 credit metrics and our SBC portfolio continue to outperform our large brown balance brother and now the.
The start we originated a record $823 million of SBC loans first quarter volume focused on high conviction sectors, such as multifamily and industrial which make up 90% of 2021 volume of loans originated the hold on balance sheet average spreads were 431 basis points and average duration is three years.
These efforts increased our net portfolio of 13% quarter over quarter.
Additionally, originations in April totaled $202 million and our current money up pipeline is in excess of $420 million.
Our multi strategy SBC theory platform has enabled us to capitalize on post pandemic loan demand, particularly in transitional in agency multifamily transitional loan demand increased due to pandemic related rental volatility whereby sponsors have elected to take shorter term bridge loans, the prepayment flexibility to allow them to the.
Stabilize the real estate and optimize exit financing at a later time the strategy elevated bridge loan volume since the fourth quarter last year into the first four months of this year, we expect continuation of this trend along with demand from strong sponsors pivoting to opportunistic acquisitions in the sector as hard hit by.
COVID-19, such as hospitality and office the sustained demand into 2022.
In multifamily the federal housing Finance agency reduce the lending cap of the GSE and increase the affordability mandate driving more product into the private market boosting our transitional and fixed programs. Meanwhile, our Freddie.
Small balance loan agency multifamily business has benefited as a large portion of the program meet the affordability criteria, leading Freddy Mac to price more competitive rates and leverage versus banks.
Again this is reflected in record.
S B L quarterly volume and pipeline of trend we project will continue through 2021.
Beyond the Freddie SPL program of correspond the agency agreed agreements executed in the third quarter of 'twenty 'twenty will not only allow us to refinance our bridge loans, which we control with an exit fee, but also.
Allow us to access a broader set of GSE products.
Our SBA operations are also off to a strong start for the year due to pent up post COVID-19 demand from small businesses as discussed on the prior earnings call of the first quarter decline of seven day volume was expected due to the the updated SBA guidance released in February.
Although first quarter volume was down quarter over quarter to $50 million originations through a April equaled $41 million and the money up pipeline is over $235 million.
Increased production is complemented by an attractive market for SBA guaranteed net sales premiums, which have averaged 13% in 2020 one.
Now in terms of our secondary market strategy, we may sell seven eight loans at lower premiums keeping a higher servicing strip.
This would increase future servicing revenue versus current loan sale gains, particularly in markets, where the strip is undervalued.
Similar to our outlook on commercial real estate.
We believe we're at the beginning of increased growth in our SBA franchise by gaining market share in the projected $25 billion to $30 billion seven a market with a three pronged strategy.
The first is loan officer hires the.
S. P. A business has actively recruited talent in the SBA lending space and added 19, new members to the production team in the first quarter to manage the increase in demand for SBA loans.
Second as affinity programs, we've made senior level hires and are investing in technology to build out of affinity programs, providing other financial services companies with access to the seven day program.
Finally program expansion as the we've discussed on prior calls we continue to rollout our SBA small loan program with our Fintech Knight capital.
Loans under $350000 approve the of credit score system.
Our goal of continuing to grow market share of the leading non bank SBA lender and expect our second quarter volume to likely exceed $100 million.
Knight capital combined with our SBA license has enabled us to be active participants.
In round two of P. P P over the last four months.
Through April 30th we have originated over one 8 billion of PPP loans in round two.
The focus has been on helping smaller businesses with 55000 loans originated at an average loan size of <unk>.
$33000.
As of May 3rd the P. P. T authority had reached its approved limit with ret ready capital achieving its target goals, our business will benefit on a go forward basis from the front end origination technology, we have built for P. P. P accelerating SBA production efficiency and capabilities going forward.
The turning to our residential mortgage business originations remained elevated in the first quarter at $1 2 billion as expected cyclical of margin compression resulted in the quarter declining 100 basis points to 150 basis points due to rising rates and additional competition.
Over the next few quarters, we expect origination volume to decline approximately 25% from our quarterly run rate over the last few quarters.
With margins holding near pre COVID-19 levels.
Notably, we expect our volume and margin metrics to compare favorably to the industry due to a higher focus on purchase channels, which are benefiting from ramp in housing demand.
In the current cyclical rates environment, our strategy of retaining mortgage servicing rights as the production had boosted results as we recover at 15 million of MSR value and expect continued appreciation, which will result in book value per share increases going forward.
Beyond the day to day operations, we successfully closed the <unk> merger and welcome the end of our shareholders. The transaction added $338 million in common and preferred equity, bringing the market cap of of the company to over $1 billion and was completed as of dilution level of 25% lower than previously communicated.
<unk> also successfully executed some of our post close of objectives, including Liquidating. One 8 billion of agency MBS Securities generating $200 million of current liquidity the remaining $200 million of non agency MBS assets will be liquidated in conjunction with our go forward acquisition and origination pipeline.
Want to thank the <unk> management team for helping to close the transaction and transition the operations seamlessly.
Our small balance commercial portfolio continues to be differentiated and stable source of revenue for the company the <unk>.
Portfolio. Currently consists of 4500 loans totaling $4 7 billion.
Credit performance remained stable with the 60 day plus delinquencies in our portfolio.
Holding at two 3% I would like to highlight that we have yet to experience a realized loss in our new origination new originations book since the inception of the company.
In terms of stability and outlook for our dividend, we continue to grow core earnings where the combination of net interest margin from capital redeployment in our core S. B C. CRE segment and gain on sale revenue from our government sponsored businesses.
Be clear our dividend for the first quarter was 40 cents.
And the separate distributions of <unk> 30 from 10 cents of function of the merger mechanics in the end where at the acquisition.
Over the last 12 months, our core earnings have covered 140% of our annualized quarterly dividend of 40 cents.
Future dividend tail winds from the deployment of <unk> capital in F. B C C. Our investments along with increases in SBA production and deferred P. P. P revenue will be included in determining the company's normalized forward dividend rate.
With that I'll turn it over to Andrew to discuss financial results.
Thank you Tom and good morning, everyone.
GAAP earnings and distributable earnings per share were <unk> 49 cents and 41 cents respectively.
With distributable earnings of $24 7 million and a 10.9% distributable return on equity we have surpassed our 10% target for the fourth consecutive quarter.
Our earnings profile is reflective of efforts to grow our loan servicing portfolio from COVID-19 lows.
Continued performance from our gain on sale operations and the trend towards normalization in our residential mortgage banking operations.
Interest income in the quarter grew $8 6 million due to a 13% increase in our loan portfolio as well as the accretion of fees related to recent PPP originations.
Interest expense rose in the quarter as the road results of short term borrowings to fund our P. P. P originations increased warehouse balances due to our securitization cycle and slightly higher leverage due to the and worth acquisition.
$5 4 million of the increase in interest expense in the quarter should be considered nonrecurring and is related to short term borrowings incurred to fund P. P. P production.
Adding to our stable earnings profile was $4 $2 million growth in servicing revenue, which is reflective of the quarter over quarter growth in our servicing asset.
Net realized gains from the SBA and Freddie Mac gain on sale operations were off 500000 due to lower volumes in the SBA seven day operations.
As Tom mentioned you used the clients were anticipated due to updated SBA guidance received in February which slowed the first quarter pipeline.
We expect the quarterly run rate interest VA business to be higher in a 90 per cent guarantees from the end of Q3 is expected to increase gain on sale revenue.
The reduction of interest of the EE business was partially offset by increased Freddie Mac production, where gain on sales revenue increased 76 per cent.
As indicated in her last earnings call mortgage banking income was down $7 million due to the normalization of margins in the back half of the first quarter.
Margin declines were offset by elevated volume, which remained at record levels as well as the recovery in the value of the servicing asset which increased by $21 7 million.
Although not included in distributable earnings we expect go forward valuation increases in the MSR to be a significant source of book value appreciation in the upcoming quarters.
Well being pleased with our distributable earnings there were several onetime items included in the quarter debt should be highlighted.
The largest is how income related to our P. P. P originations was recognized.
In the quarter, we earned $73 3 million of net fees related around two P. P. P originations of which $67 8 million was deferred and will be recognized in future periods.
Total net income related to P. P P for the quarter equaled $3 6 million the.
The first quarter recognition of both deferred fee income from prior quarters of $6 7 million and the recognition of $6 9 million of interest income from routing production was offset by $10 million of expenses incurred due to round two production.
Additionally, since the ended the first quarter, we have originated $700 million of P. P. P loans and expect total P. P. P efforts in 2021 to produce pretax net income in excess of $100 million.
This income in addition to the 65 basis points carry on the portfolio will be accreted through interest income.
The quarterly change in our balance sheet was driven by a few key items, including the completion of the and worth merger.
Growth in the portfolio due to increased origination activities and improvements to our capitalization.
Our loan portfolio grew 13% to its highest historical level due to 823 million in originations net of $276 million in principal payments and maturities.
The weighted average coupon in the portfolio remained at five 4% and with rising rates, we expect margins to increase in our floating rate portfolio, which represents 66% of of the total.
In addition to asset growth, we had several key transactions on the liability side, which reduced our overall cost of funds 14 percentage of 300 basis points.
The first was the completion of our fifth CRE CLO, the 768 million dollar deal lower debt costs of 138 basis points and increased the advance rates from 70% to 80%.
Next we executed the $200 million baby bonds at five and three quarters to both redeemer existing 6.5% baby bonds and invest in our core strategies.
And last we closed $113 million non mark to market warehouse facility to support our loan acquisition operations.
These efforts to both increase the scale of the balance sheet to support growth in our operations and to pursue lower cost and more conservative financing will be accretive to earnings going forward.
I will now turn it over to Tom for closing remarks.
Thanks, Andrew we continue to believe that our differentiated platform diversified across markets and across investments provides stability of earnings and the alpha from our embedded operating companies.
Well now open up the line for questions.
At this time, we will be conducting a question and answer session. If you would like to ask the question. Please press star one on the telephone keypad a confirmation so in the Carolinas in the question queue. You May press starts with people that you move your question from the queue from participants using speaker equipment. It maybe that sort of pickup your handset before pressing the sarky one of them. Please.
The poll for questions.
Our first question comes from the line of Tim Hayes with BTG. Please proceed with your question.
Hey, good morning, guys. Congrats on another very strong quarter. It sounds like things are all trending in the right direction for you.
Just as it relates to the P. P P earnings.
Andrew It might be helpful. If you can just give us a little context of you know.
The schedule of recognizing dose the should we be you know as any of.
Kind of like of straight line.
Recognition over a certain time period is it going to be lumpy and then as it relates to the carry on the loans on balance sheet.
I think that was about like of 65 basis point gross spread you know is that how is the I guess, we'll have to net out some costs, but if you can just talk to the economics of that and how long do you think those loans will stay on balance sheet that would be helpful.
Yeah, I think the majority of it is gonna be accreted over four to six quarters. If you look at.
Sort of the velocity of forgiveness from round one production.
That should correlate into that sort of four to six one of the timeline.
And the recognition of the carry which you know which is the 65 basis points will be highly dependent upon how the portfolio of moves.
No.
The earnings profile won't be straight lines, and I think it will be a little choppy over the next four to six quarters, but that's the expectation of around one third of.
The overwhelming majority of this income will be recognized.
Ah Okay.
Got it and then last quarter you guys talked about I mean, you've been targeting of 10% ROE for for I think ever since becoming a public company, maybe even before that but you know last quarter. You mentioned that your ROE target was a little bit higher than that I don't think you put it in exact number around it but can you just give us an idea of.
Of the ROE, you think you're able to achieve in and whether the target is inclusive of kind of the the PPP economics that youll be recognizing over the next year and a half or you know if you have something in mind. Once you kind of get on the other end of that and no longer have that tailwind to earnings.
Yes, I think Andrew please step in but I think what we're looking at a kind of a core.
Roy from our CRE, the more capital intensive business, our SPC acquisition and origination business high singles.
And then another.
200 ish basis points of gain on sale of income from the.
From the.
The government sponsored operating cut back.
Secondary market companies, we have the the residential mortgage banking of the S. P. A and in the Freddie Mac sort of androgen receptor you you would add to that.
And I think that's right right.
You know when I when we look at all of our outlook. Our goal is to really grow our SBA seven day.
Capabilities.
The business requires very very little equity and so as we increase production there those returns.
Our highly accretive on an ROE basis so.
We're focused on putting investing in that platform as Tom mentioned, we hired of.
Several of front end people this year and I think we'll continue to invest in the technology in.
Front end customer experience to make that a lot of success.
Okay. So it sounds like kind of you still.
Still that maybe 10 per cent to 11% range is what you should we should be targeting end of.
Post the P. P P world.
Correct.
Okay.
And then you know very strong SBC originations this quarter a record for you guys. How much of that was attributable to kind of expanding the products debt versus you know just.
Your your normal.
Run out of running the mill of SBC loans that you've been originating since inception.
Well a lot of it is.
It is kind of dissipating a bit of a number of secular shifts in the commercial real estate market relate obviously related to COVID-19. So what.
What we did was we pivot.
Pivoted to target.
In particular of multifamily and industrial sponsor of strong sponsors that otherwise would have.
Opted for a stabilized loan.
And instead, we were able to successfully.
All of them on the benefits of the bridge.
Such that.
It gives them time to to increase.
Occupancy rates debt declined during COVID-19 and the and then exit in 2022 with a much better stabilized low and had higher LTV and the lower lower cost. So that was part of that was and we designed the product around that kind of of a stabilizer fringe of light.
I'm sorry, the debt bridge light if you will so I was kind of a combination of our team our targeting the demand from COVID-19 in and tweaking existing product lines to capture that business.
Okay got it I mean does that weigh on you know I know that.
Maybe I don't know how many of your originations this quarter were that origination light product but.
Was that is that collateralized by the CRE CLO or are you still able to get the same ROE on that type of product I imagine, it's a little bit of the tighter spread there versus some of the other stuff you're doing so just wondering how the the ROE is there compared to the other SPC launch.
Oh, well the of multifamily generally is a little bit tighter maybe 150 to 100 on an ROE of <unk> adjusted basis.
But the lower loss volatility.
But I would say on the on a blended basis.
And Andrew Correct me, if I'm wrong, but you know the.
The secondary market execution that we've been looking at and have executed this quarter.
We're still pricing of loans about 150 basis points higher Roe.
And that program than where we were pre COVID-19.
And at the yeah.
I would say compares favorably to the larger balance reads, where theres definitely been much more margin compression versus what we've seen in our lower middle market space.
That's helpful well, thanks for taking my questions. This morning I appreciate the color.
Thanks, Tim.
Sure.
Our next question comes along the Steve Delaney with JMP Securities. Please proceed with your question.
Thanks, Hey, good morning, Tom and Andrew and and listen congrats on the quarter, but also the am worth deal you know not of large not a huge transaction, but it really was in my mind was of brilliant capital play on your part so thank you for helping.
To help in the roll up the industry and strengthen your company in the process.
So [laughter].
You know the the.
The thing about your company debt.
I find interesting is that we've been we've been watching the large originators just get wiped out this week on the higher rates.
A petition so its rocket one depot to everybody and you know you've got the same issues of G. M. F. S. Despite the purchase focus but the beauty of the diversification of your platform you were not a.
That's a pure play if you will on resi mortgage by any by any means so yesterday, we saw a mortgage REIT of resi credit mortgage REIT buyer of specialty originator.
I'm just curious if there any products out there.
Credit products lend themselves to securitization, which is your forte and anything that you're not in today that you might find of interest in whether adding another bolt on platform is something that we might see over the next year or two to broaden your product line. Even further thank you.
Yes, I mean as you.
We're always looking given our track record of acquisitions, we're always looking for accretive add bolt ons. You know I think just look at the impact that Knight capital the small scared of business lagged out of them.
The Florida fired in third quarter, they the crush it without a overlay of technology on.
Our SBA business for PPP in that that's kind of as you know that investment will then be levered into.
The more technology affinity based of expansion of the SBA business. So in the similar in the in the commercial side. We're looking I'd say of two silos, one is bolt ons for the.
Our residential business run by of Newsgroup the who.
That would you know round out the agency component of it yes every day.
I'm looking at things like syndicate of tax credits.
Okay. That's competitive initiatives. That's one thing we're looking at and then the other and you know we're also looking at a the other aspect of our business, you know where where true SPC with small balance commercial which is the half million two of $5 million, we're looking at potentially going downstream to the micro which has a heavy weighting towards.
Single family of commercial providing.
Providing credit to U S. F. R of for example, and and so that's within the commercial space and then on the AR from more broader than that I would say the other two things. We're looking at is continued expansion in Europe.
Is it market.
Recoveries, because remember we had a flow of arrangement with the bridge lender in Ireland, which we are going to push for of reinstating.
And other products, we're looking at manufactured housing.
As well.
Which is what we call the broad swath of of resi Marshall build a lot loves as another example, so yes, we are definitely looking with the ex with the strong liquidity position, we have with Ann where it's not just the capital that we have currently but the additional ability to lever the.
From an unsecured standpoint recourse debt on the incremental equity, we're definitely looking to redeploy into those to two silos.
Great bench of.
Yeah. So that's the well it sounds like it sounds like you've got a you've got a full wide screen out there of where the opportunities are so thanks for that color Tom.
Sure.
Okay.
Yeah.
Our next question comes from the line of Jade Rahmani with VW. Please proceed with your question.
Thank you very much was wondering on the dividend.
If it's reasonable to expect.
The full quarter of 40 cent dividend to be declared.
Yes.
Yes.
So Jade I think the the board.
You know as Tom mentioned earlier is looking at the income from.
The P. P P to be distributed as part of our sort of normalized dividend run rate over the the time that income is accretive.
So you know I do.
Based on the based on that and the outlook in the rest of the business I would say you know 40 cents is most likely the floor.
For the sort of go forward dividend over the next few quarters and then depending on how much of that P. P. P revenue is sort of reinvested back into the business notes of <unk>.
<unk> ourselves.
And the good places for the future and that'll drive you know moving off of that 40% I think 40 centers as before.
At least from here. Thanks.
And one a commercial mortgage REIT.
It is also managed by the company that manages bdcs.
Declared a regular dividend and a supplemental dividend.
Is there a distributor of distributable earnings of running ahead of.
Oh.
Of the current dividend, but given the.
Tensile spread compression I don't think they wanted to change the run rate dividend. So they introduced that distinguishing characteristic is that something you might consider.
But I think the M&A.
Yeah go ahead, sorry, I was going to say in that case, that's really more that's the single strategy see read and again, we're seeing definite margin compression in the in the larger more upscale from US you know that kind of like 25 million plus British loans.
And that's due to an influx of private debt funds that had gotten wiped out you know.
During the first quarter of last year of that coming back.
So I think that's more tactical to keep the dividend to not have a situation where you have a increase in the dividend that you have to distribute and then reduce it because of the margin more.
The normalized core earnings that's lower due to the margin compression. So we're not in that situation as Andrew said, we're in a situation where we have.
Ah the earnings over the four to eight quarters from P. P. P and we see of normalization and an increase in our other businesses in particular of the SBA and the continue.
The continued deployment of the <unk> capital in the SPC business. So that that's that's my view of of that.
Debt situation and how it does not apply to us.
Thanks.
On credit I know I noticed you said that the 60 day delinquency bucket or 60 day, plus delinquencies were constant at two 3% could you give the percentage of loans in the CRE book on nonaccrual and how that compared with last quarter and any color on the percentage of loans that are in.
Forbearance.
So Andrew Adam.
Yeah, Hey, Hey, Hey, this is Adam on the revenue side, yes, so loans on loans on forbearance, it's only one 5% of our total CRE portfolio.
I think just from a performance perspective of the loans that had been the forbearance about the E 85% plus remains current.
And then the loans on accrual, it's the lessons or 0.5% zone of course.
<unk>.
Thanks very much.
Sure.
Our next question comes from Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
Very nice quarter I wanted to.
Covered a number of things and I appreciate the comments.
On the <unk> side.
Certainly.
We were able to liquidate a lot of the agency securities.
I do think they had a sing S of par type of portfolio.
Down in South Florida.
Maybe some other assets can you talk about.
The non agency things that came with an or of sorry, the non MBS that came with <unk> as well as your intention there on whether those assets are going to be sold or something youre looking to opportunistically growth.
But Andrew can comment on the disposition of I, just I would say that debt portfolio is targeted for broader liquidation because of the.
You know excess demand we have in our core SPC and the army is available there but.
The the the liquidity for those Rajeev credit assets given the strength of the housing market is very strong in terms of the potential of beds, but Andrew what's the current.
Our target for liquidation in the strategy there.
Yeah, I mean since quarter end, we've brought down the balance sheet quite a bit and what remains is.
Roughly 200 million of the non agency RBS from Who's the 100 million dollar loan portfolio that you.
<unk> to.
As well as some Oreo that were in the process of liquidating that's around $25 million.
So I think the plan is on the Oreo to move out of that in.
In short order and then on the the rest of the RMB as and the loan book to liquidate those in conjunction with redeployment I'm sorry. It was the fact that happened some time.
Over the next two to three quarters as we sort of reinvest not only the liquidity we already generated on top of just sort of natural liquidity.
But the liquidity that will come off of those remaining assets.
So I think it's an orderly liquidation through the end of the year.
But that is sort of as liquidation of that not something early with that too.
Okay.
Steve touched on this a little bit around you get about this but can you can you talk to the April volumes there of how those of trended given the increase in mortgage rates and what youre seeing on the market margin front, just given the the news in that sector yesterday.
Yeah, so originations in April.
Remained above 300 million so.
No we haven't seen a drastic change in our monthly run rates.
But as Tom mentioned earlier, no margins really are hanging in sort of around pre COVID-19 levels.
Yes.
Great Lastly.
Looking at page eight in your presentation, you know it looks like the 60 plus day delinquency has declined quite a bit on the SBA segment.
And I think the Q1 number of probably doesn't have a lot of COVID-19 I'm not sure how impact of that was in.
And that was my question, if you could give us an idea of where that's trending what's driving that improvement in the.
Performance of those loans in that segment.
Yeah sure Hey, this is out of this as items asthma. So the second one of the cares Act payments.
Starting in February of 2021.
So I see a loans originated prior to the pandemic qualified for three months of payments and then hotels and restaurants qualified brought that.
Eight months of water manner of automatic payments up to the Max 9000 of them on that's the majority of the.
The SBA has really just keeping those loans current.
And then additionally.
There is also some deferments in there as well.
Alright, I appreciate the comments there thanks for taking my questions. This morning.
Okay.
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.
Hey, Tom on your two.
To follow up on an earlier question on the affinity program is the.
Sort of a strategic direction in terms of you're trying to become more of like one of the like lending club or something where hum.
You're going down market to smaller loans and using technology like for apps and so forth to your advantage.
Yeah, but it's in the context of the SBA, we continue to kind of measured way do the smaller unsecured.
The lending, but its really not a material percentage of our total gross portfolio really what what what that's being applied to is the what we call. The SBA small loan program, where the SBA allows you to use of credit score.
And accept more accelerated underwriting versus the larger loans and that's the.
That's kind of the $1 50 to 500000.
All of targeted loan where it's typically not used for real estate of she's more for equipment.
And so based on all of that so that that's that's how we're going to take our <unk>.
Front end technology and apply that to to that that program.
So that that's a that's actually a private company called Smart does that does that they do actually the the micro loans below 150.
But it's a little bit of of applying that same lower customer acquisition cost and and quicker underwriting decisioning to yes to what you are referring to on the unsecured side right.
The new package, the loans and interest securitize them like what others.
Go right into the SBA.
The seven day pools, so our pool of as opposed to being more had less diversified because of their real estate I think Andrew our average balance there has been running what 850 900000.
And the SBA seven day space.
This would have let's say the third of.
Of the pool being smaller loans with better diversification and more stable prepays, which might justify incremental premium increase and the secondary market.
And not to put too fine of a point on it but it's the sort of in pilot.
I understand the small as the sort of a pilot program to rollout for.
Other sectors, let's say real estate and things like that or its just really just the niche type of application.
It is obviously a niche within the context of the SBA program or the regulatory program, but that being said we are looking.
Our Chief operating Officer, Gary Taylor.
His team are looking at without them actually it runs credit to roll this out to the commercial space as well.
And is this kind of a.
Operating expense as much in terms of the rest of the 'twenty.
2021.
No because there's not the aside from hiring of maybe a handful of specialists underwriters.
Per maybe have millions of $1 million total incremental expense.
The revenue would far outweigh the the incremental expense.
Expense just given the profit margins in the SBA business.
Okay. That's it for me thank you.
Interest Howard our next question comes from the line of Matthew Howlett, what's the.
Please proceed with your question.
Oh, Hey, guys. Thanks for taking my question just.
Can you give a little more color on the decision to retain more of the servicing strip from the SBA premium of what to expect sort of go.
For it and what are you seeing in the market.
Well I'll, let Andrew comment, but from my perspective, it's we always said at some point of where we're going to undertake at the SBA business achieved greater volumes and we have strong coverage of <unk> from our capital intensive SPC business that we would look to extend the duration of our <unk>.
Cash flow stream in the SBA business bye.
Instead of selling I'd say at a $13 premium per 100 bps strip, maybe sort of par for a 200 basis points strip and the other thing strategy. Though we also look at is in certain markets. The Io strip is valued at you know sort of in terms of recapture of yours to recapture at at it's mispriced if there.
Excess concerns on prepayments that we don't agree with and that's another way to capture from our from of.
Overall valuation perspective to capture them.
In the in the in the business kind of Andrew if you would add to that but.
No that's sort of thing.
Great I appreciate that and then just on the Friday small balance the outlook I mean, they're obviously doing one of the affordability mission driven stuff.
Give some production guidance on that or outlook on how to think about that in terms of the rest of the year.
Yeah, maybe because out of managers that from a credit per se.
What are your views in terms of the Friday.
Look.
Yeah sure.
Obviously demand for affordable housing the United States remains extremely strong.
Theres certainly a lot of rate movement on the Freddie side.
Mission driven.
Targets to hit on on their front, so I mean.
Where we're continuing to ramp up.
The expectation is going to far exceed the 2020 production numbers I think something north of $600 million in total SPL excuse me SPL origination. It is it is the target.
Do you have of target on in terms of the league tables, where are you where you could go I mean, just some of your just thinking of really just getting going on this business.
Yeah sure from the bad debt.
Yeah from the from the seller servicer standpoint, where certainly top top five.
Between I think where you know.
Probably closer to four four today.
Got it and the overtime our goal would be top three that's the kind of.
The internet of term bucket.
Alright, that's all I had thanks a lot.
Okay.
And our final question comes from the line of Christian low with Piper Sandler. Please proceed with your question.
Thanks, Good morning.
So the the preferred tender during the quarter, which was of course related to the <unk> merger.
Do you have any interest to tender of the other preferreds that you assumed with the merger.
Yeah. So the the series B and D or both redeemable now I think when I look at.
Through the the dividend there they they seem expensive compared to the rest of the capital sack and certainly compared to what.
Where we've seen other deals executed the market recently, so I just.
The us to you know to look into the refined those out sometime in the upcoming weeks and months.
Okay. Thanks, that's helpful. And then Andrew I, just wanted to clarify something that I thought I heard in the prepared remarks will future P. P. P fees, all being interest income rather than noninterest income as you've mentioned in past quarters or is it just the 65.
Bps spread that should be an interest income.
So given the weird accounting for these is low and the entire red.
Revenue stream will flow through of interest income.
Oh.
Okay. Thank you and that's different than how it was in the first round correct.
Yeah, the first round production or the the income generated in the first of all was treated as a true up of service contracts of the the fees were down in other income.
Okay. Thank you.
And with debt we reached the end of the bar question and answer session and I would like to turn the call back over to Mr. Casey for any closing remarks.
We're pleased with the strong quarter on the tailwind as we face going forward and look forward to next quarter's earnings call and please reach out to management with any additional questions.
This concludes today's teleconference. You may now disconnect your lines at the Sun. Thank you for your participation and have a wonderful day.
Yeah.
Yeah.
Mhm.
Yeah.
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Okay.
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