Thank you for standing by. This is the conference operator. Welcome to the Ready Capital Corporation's First Quarter 2020 Earnings Conference Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference call over to Andrew Ahlborn, 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 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 our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our first quarter 2020 earnings release and our supplemental information. This morning we issued a press release with the presentation of our results along with our supplemental financial information presentation. These materials could be found in the Investor Relations section of the Ready Capital website and have been filed with the SEC. We plan to file our first quarter 2020 10-Q this evening. I will now turn it over to Tom Capasse, our CEO.

Thanks, Andrew, and good morning. We appreciate you joining the call in what are unprecedented and challenging times. We hope that you and your loved ones are safe and healthy. The safety of our employees remains the main focus, and since March 16th we have worked remotely across our four corporate locations in the U.S. without disruption to our operations. Our first quarter results primarily reflect a pre-COVID operating environment with the exception of certain quarter-end fair value adjustments and the implementation of CECL. Andrew will take you through quarterly results and CECL methodology later, I would like to focus my remarks on where our business is today and why Ready Capital's diversified model is positioned to weather the current economic environment and prosper during recovery. Now entering this period of volatility, the combination of a multi-faceted business strategy, a well-capitalized balance sheet due to our capital raising activities in the fourth quarter of 2019, and the highly diversified nature of our small balance loan strategy with low relative exposure to COVID-sensitive sectors like hospitality, positions the company to withstand the initial shocks of a closed economy. This is reflected in lower book value erosion of 10% relative to our large balanced commercial peers or more highly leveraged residential mortgage rates. Moreover, 88% of the decrease was due to non-cash CECL reserves and the mark-to-market decline of MSR and CMBS assets. In Phase 1 of the COVID recession, we initiated a sequential three-pronged focus on liquidity, successfully meeting all margin costs to date, book value preservation through preemptive asset management, offering forbearance to 10% of our borrowers to date, and profitability with an emphasis on our three government-sponsored businesses, which I’ll discuss below. In Phase 2, which we believe will be a prolonged economic recovery as the COVID restrictions ease, our all-weather business strategy of acquiring distressed small-balance commercial loans, along with gain on sale income from our government-sponsored lending businesses, and gradual re-emergence of SBC direct lending provide a path to profitability at higher post-COVID ROEs. In the commercial real estate lending segments, which include our stabilized fixed-rate and floating bridge loan products, originations remain minimal as we remain highly disciplined in the deployment of capital. These lending segments face two current challenges. First is the difficulty in underwriting property cash flows in the uncertain environment. Second is a dislocation in the capital markets, making securitization execution difficult. Accordingly, we shifted focus from front office production to proactive asset management and book value preservation for which we repurposed staff. The current portfolio consists of $4.2 billion of loans with pre-COVID weighted average LTV of 60%. This low loan-to-value aligns well with our 2020 forecast for SBC property price declines of 5% to 10%, which correlates to a 5% projected decline in residential home prices. As of today, 90% of the portfolio is contractually current compared to 97% at year end. We will continue to proactively work with borrowers to help them get through the challenges presented by COVID, working to find mutually beneficial solutions. In our government-sponsored lending segment, which includes SBA 7(a), Freddie Mac, small balance, multifamily, and residential mortgage banking, lending volumes are strong. These businesses require modest capital to operate and generate healthy gain on sale remnant. Our SBA lending segment continues to originate 7(a) loans to businesses that remain operational, and the secondary market remains open and will benefit from inclusion in the pending Fed's CALP program. In addition to our normal 7(a) activities, Ready Capital has been active in the Treasury's paycheck protection program or PPP, which provides for forgivable loans to small businesses in need. As one of 14 SBA approved non-bank lenders, when Congress passed the legislation in early April, we committed to do everything we could to provide financial support to small business owners across America during a time when they need it most. Many small businesses we interact with nationally were likely not accepted in round one of PPP, as traditional bank lenders generally focused on existing clients and large businesses. In signing onto the program, we did not prioritize existing customers or new customers. Our mission was and remains to help as many true small businesses as possible, such as local delis, nail salons, and local shop owners. The challenge of underwriting these smaller borrowers was significant and often dealt with changing program requirements. However, from the start, our goal was to help the smallest of the small without prejudice. In round one of PPP, Ready Capital approved approximately 40,000 applications approaching $3 billion. While there have been some challenges outside our control that have caused some delays in the distribution of funds, we have facilitated the funding of $2.1 billion through last Friday and are actively working through the remaining applications to disperse funds as quickly as possible. Ready Capital was in a unique position not only having more PPP loan applications to fund than any other financial institution in round one, but also the smallest average balance, with 50% under $25,000 and over 20% comprising sole proprietors. Now, activity in our Freddie Mac multifamily segment remains elevated above prior year's levels due to the decline in the 10-year Treasury to 70 basis points, making Freddie's SBL rates more competitive with banks' rates tied to more inelastic deposit rates. Year-to-date, we have closed approximately $200 million with a current money-up pipeline in excess of $175 million. We expect with rates down nearly 50 basis points that origination levels will continue to remain elevated. Our residential mortgage banking segment, which continues to perform well despite economic uncertainty, is benefiting from refinancing volume due to the first-quarter decline in the 10-year U.S. Treasury. The quarterly volume of $691 million in the first quarter was supported by a record $317 million in March, topped by April production of $422 million. With demand exceeding production capacity, margins have remained elevated, which is reflected in the $9 million quarterly increase in net mortgage banking income. In March, Ginnie Mae and the FHFA instructed servicers to implement mandatory six-month forbearance on existing mortgage-backed securities, for which the servicer must continue to advance various amounts of principal and interest as well as corporate expenses. To reduce the advanced burden, Ginnie Mae announced a servicer advanced facility and the GSCs curtailed advance obligations from 12 to 4 months. As of April month end, approximately 1% of our loans were in forbearance, below national averages, and we believe we have adequate liquidity to meet peak projected forbearance. As some of our long-term shareholders may know, Ready Capital's beginnings were rooted a decade ago in the acquisition of over $5 billion in distressed small balance commercial loans post the last recession. We believe that the current economic climate will lead to opportunities that leverage that skill set. These distressed loan acquisitions typically lead to higher ROEs and require minimal fixed overhead. We will continue to increase liquidity so that we are in a position to take advantage of opportunities as they arise. In addition to the continued operations of the business, management of liquidity and the reduction of mark-to-market liabilities remains important. As of May 8th, the company had total liquidity of approximately $100 million, consisting of cash and availability in undrawn committed warehouse lines. Additionally, unencumbered assets of $296 million may provide additional liquidity as we work to pledge them to existing facilities or selectively market for sale. Since the start of the COVID pandemic, the company has met all obligations related to its mark-to-market liabilities. These obligations consisted of consistent margin calls, and additional funds needed to roll short-term repurchase obligations have totaled $96 million. In addition to liquidity management, we have focused our efforts on reducing short-term liabilities, which has included selling securities when pricing levels have been favorable. Since the December 31st balance sheet, we have reduced the net settlement amount of our short-term repo by 35% to $191 million. We will continue efforts to reduce risk in the portfolio and will continue to evaluate capital raising efforts to fund growth opportunities. Finally, I would like to discuss the status of our loan portfolio and funding sources. Unlike our large balanced peers, our loan portfolio is granular with strong collateral coverage. The current $4.2 billion portfolio of help for investment consists of over 4,500 loans, with an average balance of approximately $900,000. 99% of the portfolio consists of first liens with a 60% average loan-to-value. Further exposure to COVID-sensitive sectors is relatively modest. In our SBC segment, collateralized by investor-owned properties, where we have invested 52% of shareholders' equity, retail is 21% and hospitality is 6% of our total gross loan portfolio. The average balance of our SBC retail exposure is only $1.5 million, reflective of the company's limited exposure to malls and big-box retail. In our SBA segment, where we've invested approximately 10% of shareholders' equity, total exposure to hospitality and restaurants is approximately 40%. On the funding side, 64% of the loan portfolio is funded with non-recourse securitizations, and the earliest maturity of our corporate debt is April 2021. In May, the new issue market for commercial mortgage-backed securities and CRE collateralized loan obligations is gradually reopening. As such, in addition to this channel, we are exploring ways to fund our existing warehouse lines on a non-mark-to-market basis, including delevering through asset sales. We continue to focus substantial resources on proactive asset management and have robust procedures in place for monitoring watch list assets and migration of loans between risk buckets. These efforts include processing hardship and forbearance requests, frequent communication and updates from borrowers, lender updates, reporting, and liquidity management. We currently use a risk model which categorizes loans into categories between one and five. Buckets four and five represent the riskiest assets in the portfolio, and currently comprise only 9% of total collateral, including those supporting unconsolidated mortgage-backed security positions. So with that, I'll now turn it over to Andrew.

Thank you, Tom. Beginning with earnings, our results were significantly impacted by the current COVID economic climate. GAAP losses were $0.98 per share. The quarterly loss was driven by a $35 million reserve related to the Q1 implementation of CECL, a $12 million mark-to-market decline and held for sale CMBS, and a $15 million decline in the valuation of residential mortgage servicing rights. Core earnings were $0.01 per share. Core earnings have been adjusted to exclude both the CECL reserve and the decline in residential MSR values, but includes the mark-to-market loss on CMBS and specific reserves on non-performing loan collateral. Absent these two items, core earnings would have been $0.32 per share. Beginning on January 1, 2020, we adopted CECL, the new accounting standards that require us to estimate and record a non-cash provision for future credit losses against all loans in the portfolio not otherwise subject to fair value accounting. To determine the CECL reserve, we supplemented our historical track record of zero losses with securitized loan data licensed from Trepp. Although the Trepp data is not a perfect match given the small balance focus of our business, we were able to tailor the model to be insightful into our portfolio. The CECL Reserve on the March 31st balance sheet contains two components which include the initial reserve on January 1st and the change in that reserve on March 31st. The impact of COVID-19 has caused this allowance to increase during the first quarter, reflecting the current economic environment. On January 1st, we recorded an initial reserve of $6.6 million or a $0.13 per share reduction in book value. At March 31st, our assumptions on the economic indicators changed significantly, resulting in an additional $35 million reserve or a $0.68 loss per share. To be clear, I want to make the point that this is a non-cash allowance. The portfolio subject to CECL did not incur any losses during the quarter, and we suspect that over time our CECL reserve may migrate back to levels consistent with our initial implementation on January 1st. The significant decline in the value of our available-for-sale CMBS securities was, in part, driven by the current liquidity in the market inflamed by periods of poor sell-out. Based on our analysis, we believe the underlying pattern will support values to be above these distressed marks as liquidity returns to the markets over time. In fact, we have selectively sold a handful of positions after quarter-end at average premiums of 21% to the March 31st month-end mark. The $16 million decline in the market value of our residential MSRs was driven by the historic low tenured U.S. Treasury and an increase in our CPR assumptions, which was mitigated by an industry-leading 40% retention rate. We believe that in comparison to prior rate rallies, the convexity profile of our current MSR book is superior due to the low absolute level of the 10-year U.S. Treasury and limited production and servicing capacity in the mortgage banking industry. Near-term, this limits further downside with prospects for improved valuation even with modest rate increases. Longer-term, the dislocation in the mortgage banking industry from COVID-19 and GMFS's eligibility as an MSR purchaser from all three agencies presents attractive distressed MSR acquisition opportunities. Away from CECL accounting and the MSR declines, profitability from net interest margin, gain on sale revenue, and mortgage banking activities continued to be robust. Interest income increased $5 million quarter-over-quarter, gain on sale revenue in the 7(a) and Freddie Mac businesses totaled $2.4 million, supported by strong volumes and stabilized sale premiums. Mortgage banking income reached record levels due to high demand and elevated margins. On the balance sheet, recourse leverage is 2.8 times. The quarterly increases due to draws on available borrowing bases and a reduction in stockholders equity, primarily due to non-cash CECL reserves and unrealized losses on fair value assets. The portfolio subject to mark-to-market liabilities totals $1.5 billion, including $775 million of bridge loans and $200 million of fixed-rate loans, both slated for securitization before COVID impacted the new issuance markets. Book value per share declined by $1.60 to $14.52 per share. This decline was driven by CECL, unrealized losses, and the quarterly dividend. As we have done in previous quarters, the supplemental deck provided this morning includes summary information on the company's earnings profile, various operating segments, and key financial metrics. Instead of taking you through the deck, I would like to draw your attention to Slides 3 and 5. Slide 3 outlines the various ways in which our business has been affected by COVID and the strategies we are undertaking to ensure the long-term health of the business. Slide 5 provides additional insight into the CECL reserve implemented in the quarter. Before turning it back to Tom, I would like to echo his previous comments; I hope you're all safe and sound, and my thoughts are with all who have been impacted by the COVID pandemic. Tom.

Even in these unprecedented times, Ready Capital continues to originate and deploy capital across our diverse platform. As discussed, we continue to successfully navigate Phase 1 of the COVID recession with adequate liquidity and small relative declines in book value. In subsequent quarters, we will strategically position the company for Phase 2 of the COVID recovery, where our all-weather business model providing potential net interest income through acquisition of distressed SBC assets, along with gain on sale income from our capital-light government-sponsored lending segment represents unique earnings potential. It will certainly take time for the country to emerge from this crisis, but our focus will remain on the areas of the business we can control, and we will work as a team to navigate and emerge in a position that builds on past success. We appreciate your patience and support and hope everyone remains healthy and safe. So with that operator, we'll now open it up for questions.

Thank you. The first question comes from Tim Hayes with B. Riley FBR. Please go ahead.

Hey, good morning, Tom and Andrew, hope you're both doing well. My first question, Andrew, you mentioned some select asset sales so far in the second quarter. Can you maybe just size that up for us, what you've been selling at, what type of discounts to your basis, and maybe just how you've been able to deleverage in light of those asset sales so far?

Yeah. Hey, Tim, how you doing? The majority of the sales is focused in the CMBS book. There have been selective sales, meaning we are not in a position of fore-selling any parts of the balance sheet, at least today. It's been relatively small, focused on one particular series thus far. And it's totaled around $35 million in sales and as we said in the script they were sold at premiums roughly 20% above the March month-end mark but closer to our historical basis. We continue to explore other securities in the portfolio, including potential sales, and if we see pricing that we believe to be accretive to the business, we may choose to further sell down parts of both of those books.

Okay, got it. So far not too much on that front. So I guess the second part that question was just kind of a quarter-to-date update on leverage at this point. But it sounds like maybe not having moved too much since the period end?

Yeah, I mean, the 2.8 times leverage at March month-end is a little deceiving. We had material increases in our available for sale loan portfolios and GMFS and Freddie, both of those are financed at 100%. So there's that number is going to fluctuate this year; the secured borrowings numbers are going to fluctuate a lot based on how those two businesses perform. What I will say is, as we are rolling repos, haircuts are getting slightly wider that’s delevering that book. And we are going to continue to explore ways, whether it's through selective pay down here and there or taking securities off of repo or trying to convert current mark-to-market liabilities into sort of term non-recourse facilities. We are going to continue to utilize those tools to deleverage the recourse portion of our balance sheet.

Okay. That's helpful. And then moving over to just the forbearance activity you've seen. You know, it's I guess 10% of the commercial book in forbearance so far, 7% on the residential side. What measures have you taken to provide forbearance and how have you seen requests continuing to increase in May? I'm just curious if there's like an internal estimate of where you might see these forbearance rates go on either the commercial or residential side.

It's actually we have…

So, sorry, Andrew go ahead.

Yeah, so Tim we actually have Adam Zausmer on the call with us today. He runs credit for all of Ready Capital. So he is probably best positioned to answer that question. So I am going to turn it over to him.

Hey Tim, how are you? So, we continue to practically work with our clients. We help them get through these challenges. The discussions have been collaborative, and we recognize that operational cash flow disruptions, especially in the hospitality and retail properties, given the nationwide shutdown are not the fault of our clients, right? As Tom and Andrew mentioned, you are the 10% that are currently evaluating the hardship requests. We will likely execute those forbearance agreements. Most of them are three months. Our team of asset managers continues to evaluate loan by loan. So, as COVID-19 impacts operations and cash flow in general, we are just looking to ensure that the collateral is well positioned during this period of disruption. We may allow sponsors to utilize reserves for debt service payments and some other creative things. But, in general call it between 10% and 15% is what kind of potentially going to actually keep forbearances on. There's 4,500 loans in our portfolio, as you know, the majority is small balance. So, we do expect that it could increase slightly but I think, towards the end of March, early April is where we saw the biggest wave. So we're just getting through that now looking for servicers to get them executed.

Actually, I just want to add one thing, Adam to that, in our script there was a reference to forbearance on the GMFS side; it's not 1%, it was 7%, but that's consistent with - on the residential MSRs. That's consistent with the current national average, and we have adequate liquidity currently to fund those advances.

And Tom do you have an estimate of Fannie Mae put an estimate out there for where they see forbearance rates going, which I guess is kind of the high end of what Adam's comments were broadly. But just curious if you have an estimated capital need for those advances if we do kind of hit that estimate?

Sorry, estimate for GMFS as it relates to their peak projected advances?

Yes, correct.

Andrew, do you want to share your thoughts on the market in Southeast? It's likely around the 15% range. Do you have an opinion on this? Please go ahead.

Yeah, Tim it is going to be hard to put an estimate out there based on just the level of uncertainty and the number. So we are probably going to hold off on putting out an estimate at this time.

Okay, that's fine. I know it's a fluid situation, so we'll just look for updates as they come across, but that's it for me for now, I will hop back in the queue. But I appreciate you guys taking my questions and stay well.

Thanks, Tim, you too.

The next question comes from Steve Delaney with JMP Security. Please go ahead.

Good morning, Tom and Andrew. And first, thank you for your strong and patriotic support of the PPP program. The question on that is how much continuing opportunity beyond the $3 billion in reported applications do you see? And can you disclose what this fee revenue opportunity was for Ready Capital participating in that program? Thanks.

Andrew, I can comment on the program more broadly and then maybe you could talk about the second part of Steve's question. As it relates to the PPP program, it has evolved very significantly based on feedback from small businesses and what have you. And so, round one went as you've ever known, went very quickly. Round two, I think Andrew has around 40% left and it's been much slower. And a lot of that has to do with the concern that you may have seen in the broader press about the methodology for the forgiveness application of forgiveness, which we are still waiting, which were pending guidance from the SBA. So I think that's significantly slowed down the volume in round two in large part because of the conundrum of a small business that may have to retain staff today, but is not sure if they could reopen tomorrow. So anyways, Andrew, I just make that broad observation in terms of the program; maybe you can just come on in terms of the costs involved in this program.

Yeah, good morning, Steve. So, what I will tell you is in the program there, the gross fees that are prescribed in the program data are going to get shared amongst a variety of partners. Those include agents who referred loans and will include financing costs, which include both the cost of the carry as well as some split of the upfront economics on the fee, as well as split on the fee in the event we have sold loans. So it's hard for me to pin down the exact number just given that the population is moving and the methods in which we've chosen to fund these loans is diverse, but what I can say for you is I think the gross fees will be materially cut down to the net economics that ultimately result on the Ready Capital future income statement.

I understand, you made the right choice and I hope it wasn't solely for profit. You did the right thing and I hope you at least break even or earn a small return for your efforts, and we appreciate it. Please go ahead, Andrew. I'm sorry.

No, I just want to clarify that I do expect Ready Capital will generate revenue from this program. I don’t want to give the impression that it has been a break-even effort. Based on some of the information we've shared, it's clear that gross fees on that group of loans exceed $100 million, and I expect that this amount will be significantly reduced when we finalize the numbers. However, I want to emphasize that it's not a break-even situation for us.

Thank you for the clarification. You mentioned having $190 million in short-term repo, which I assume is the figure from March 31. I have two questions regarding that. Could you provide an updated figure for short-term repo? Additionally, could you explain the nature of the collateral associated with that repo? Thank you.

Yes, so the majority of the securities we have in repo include retained bonds from our fixed-rate program, Freddie Mac's securities from our SBL program, and some selective bonds we've acquired over the years. The $191 million is a net settlement amount today. So the gross loan amount net whatever margin we paid since the last call. As I said earlier, we have selectively paid down or sold certain securities which has also further reduced that number. What I'll say is that number has decreased through April just due to haircuts widening when those securities roll. And so, the net number probably is around $175 million today just based on the delevering in April from the natural rolls.

Thank you both for your comments.

Thanks, Steve.

The next question comes from Jade Rahmani with KBW. Please go ahead.

Thank you very much. I appreciate your time and hope you're all doing well. I would like to ask, at a high level, do you expect Ready Capital to be profitable for the year, possibly excluding the non-cash charges from the first quarter?

Yes. So, Jade, obviously the non-cash charges in the first quarter were significant. You know, absent those, we do suspect, and it's clearly very uncertain, and a lot of it will depend on how the economic recovery unfolds, but given strong gain on sale business activity, given PPP economics, and given our projections on where we think sort of portfolio defaults will go, we do believe that Ready Capital will be profitable in 2020.

Okay. And the $100 million in fee earnings that you referenced, was that with respect to SBA originations, and that would be a gross revenue number; can you give any sense for what the net profit contribution might be?

Yes. So to be clear, the $100 million I reference is specifically related to the PPP. So within the PPP program, the gross fees on those originations range from 5% to 1%, depending on loan size. 5% being paid for loans that are under $350. Now based on Tom's comments earlier, the majority of our portfolio falls in that bucket. So the gross fee earned is going to be about 5% on the balance of PPP loans originated. Now, there are prescribed agent fees in the program that come right off the top if that loan was referred into Ready Capital, and then there are various ways in which that fee after the agency is paid is being allocated amongst all the partners who are contributing within our population to get those funds in the hands of the small business. So, that's how that number is going to come down off of that $100 million number I referenced. It's hard for me to pin down at this time what that net number is going to be, so I am going to hold off on commenting there. But I suspect it's going to be in the range of, let's call it, 35% to 50% of that number.

The $100 million, is that a fee revenue number, is that an originated balance under the PPP program?

That is a fee revenue number.

Okay, so potentially earnings from that program in the second quarter can be 35% of the $100 million?

That's correct.

Okay, thanks for that. Can you go through a range of perhaps cash sources and uses for the balance of the year and if you expect the company to be cash flow positive?

Yes, so certainly we've made the decision over the last six weeks to really curtail any lending or investing opportunities that require the use of capital. So we have not originated bridge or fixed loans during this period of time, and we suspect that we will continue to be highly selective in when we choose to do so over the next few months until we have more certainty in the economy. Now our other business segments are those gain on sale businesses. They don't require any capital. 7(a) is cash neutral, Freddie cash neutral, GMFS is cash neutral. And so our active lending activities are not requiring use of the balance sheet. Continued uses of cash will include fixed operating expenses, including our employees, rent, things like that which we will continue to adjust and right size to the business activities. And then management of our mark-to-market liabilities; on the sources side, it's going to continue to be revenue generated from the active lending segments, as well as just the normal P&I from the company. Additionally, in the event we see the right opportunities to do so, we will evaluate selling certain parts of our portfolio to generate liquidity.

Okay, thanks for that. In terms of margin call risk, could you give a number with respect to the value of loan balances subject to the margin calls? And secondly, if there's also any cash management triggers within the CLOs that you've issued?

Yeah, so right now we have around $1.5 billion of loans on warehouse. That's the number of exposure there in the loan portfolio. What I'll say is our lenders have been very constructive in our conversations and continue to be supportive of their involvement in the SBC space. Maybe I'll turn it over to Adam to talk a little bit about how we're managing those relationships and then your question on the CLO.

Hello, Jade, I hope you are doing well. Regarding our warehouse lenders, we believe that transparency is essential. We have been conducting thorough assessments of each asset and maintaining open communication with our partners. We have had productive discussions and received valuable feedback concerning client updates and our asset valuation insights. We will continue to provide whatever is necessary to support our warehouse partners during this challenging period. As for your question about the CLO, these loans involve significant structuring and include cash flow for interest reserves. Depending on the circumstances faced by asset managers, there may be scenarios where a cash flow sweep occurs, and we would use those funds for debt service to ensure monthly payments are met.

Hello.

Yeah, hey Jade. So there are no cash triggers in our deal.

Okay, thank you for that. Just lastly on the dividend. I'm not sure if you could comment high level expectations or just policy leanings and if you could specifically say whether you believe the management and board's preference should be toward suspending the dividend for conservatism sake or to pay dividends through stock, pay stock dividends. Personally, I think suspending the dividend would be preferable to stock dividend. But I wanted to hear what you are thinking.

Andrew, could you please address Jade's question about the dividend since this was a significant topic for the Board?

Yeah, so Jade, in terms of a dividend amount, I think a lot of that is going to be dependent on the performance of the business, right sizing the dividend to taxable income as well as core performance is probably the path going forward. What I can say is we do not plan on issuing stock dividends going forward. Now, I can't predict every event in the future, so that may change, but it is not our intention, nor do we plan on issuing stock dividends in subsequent quarters. With that being said, given our desire to maintain liquidity and even increase liquidity, I think we'll re-evaluate or the Board will re-evaluate the dividend amount as we get closer to quarter end to see how the business has performed and to reset expectations of how the business will perform in the future. So although you can't put a number on it today, what I can tell you is that I do not anticipate stock dividends being part of it.

Thank you very much for taking the questions.

The next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Following up on the one PPP question, as far as funding that you've seen, are these loans that were round one overflow, or how much of the funding was actually new applications post round one?

Yes. So thanks for the question. Our round two activities have been more muted than our round one efforts. So although that that is subject to change, given that the velocity of round two fund has been much, much slower than round one. At this time, the amount of round two applications we have taken in is much, much lower than our round one activity.

Great, and then I think that in the prepared remarks you said $3 billion approved and $2.1 billion funded, which I assume is getting us to that roughly $105 million at 5% on the gross revenue contribution. Should we expect the remaining $95 million or an incremental $45 million of potential gross revenue to fund this quarter, how much of the remaining $900 million approved you expect to fund?

Yeah, we expect to fund a large percentage of that. There will be some fallout from the population, but we suspect we will fund the majority of that population over the upcoming days.

Great, and then lastly, I think on that topic that I have, so we know the fees you're entitled to at least at the gross level, when do you actually receive those fees and they hit your balance sheet as cash?

Yeah, it's probably going to be 45 to 60 days out. There are some forms that need to be filed with the SBA. There's other arrangements we've made with our counterparty in this transaction that affects the timing of that, but I think 45 to 60 days is the estimate.

And just to clarify, they don't receive their share of the fees until you do, correct? You don't need to advance or fund any of that?

Great, okay, fantastic, shifting to let me hit on advances real quick. Do you have a breakdown of your advance obligations across the GSCs and any non-agency or maybe a better preferred way would be, how much of your interest and principal advances are on the schedule versus actual basis? So, I don't think we put out a… Go ahead, Tom.

We haven't released any specific quantitative analysis regarding Fannie, Freddie, or Ginnie. However, for Ginnie, you must advance 80% of principal and interest, and there is a facility available for that. As for Fannie and Freddie, they have reduced the advance obligation on principal and interest from 12 months to 4 months. If we consider a scenario where it doubles from the current 7, GMFS has access to current warehouse lines and the Ginnie Mae facility if needed. Therefore, we are confident about the sufficiency of liquidity for peak advance situations. Andrew, could you add to that?

No, nothing for me, Tom.

Okay, great. And lastly, I just wanted to touch on the financing facilities, appreciate the disclosure on page 16 of your supplement. A number of maturity is here, in 3 to 12 months, I believe. Do these have extensions, your option or can you talk about how those discussions on renewing those facilities are going, or given the changes in the business, are there different facilities that you need to put in place to support, to strengthen the business lines you're seeing today and some of these other facilities may be no longer necessary, so any comments around additional color on page 16 would be great?

It really varies from facility to facility. Some facilities are essential to our options, while others are not. I can say that our discussions with our current lenders have been very positive and supportive. We still believe that they are invested in the business and the long-term value of the assets. So far, we haven't received any indications that ongoing discussions wouldn't yield favorable outcomes. Additionally, our objective in the long run is to find ways to transition from recourse to non-recourse, especially in light of the current insurance market situation, which we hope will improve soon. We are actively looking into what that transition might entail. That's the current situation.

Great, and one last question, on the residential mortgage origination business, maybe it’s at the higher level, how much of those approvals are automated or even not fully automated, how much recent developments going to impact the processing timeline and how that pipeline is approved when you consider things like potential employment gaps or taking unemployment under one of these government programs or some other help that maybe would have been an instant approval type refi pre-COVID is now something that's going to get kicked out in need of a one-off approval. Any comments around the impacts of that on processing those loan applications going forward?

No Tom.

In terms of processing time across the industry, we received guidance in the last two weeks from the GSCs on how to handle the self-verification of employment due to the noticeable rise in unemployment. Additionally, the forbearance accrual is now deferred and not a payment shock at the end of the six-month period. As for the first question, application times, which used to be around two weeks, have now doubled. This will extend timelines and lead to a very slight reduction in production amounts. However, it's remarkable to note that the profitability on the production side is significantly higher due to demand outstripping the mortgage banking industry's production capacity. As a result, profit margins on new production have increased from two to five times depending on the specific month, week, and type of product.

That's great color. Thanks very much for that. Appreciate your time this morning.

As well, thanks.

Next question comes from Crispin Love with Piper Sandler. Please go ahead.

Good morning, guys. Hope you're doing well and staying safe. So, one question on loan acquisition, so you guys seem to be pretty bullish on loan acquisition opportunities. Do you think those opportunities will be 2020 events or are likely more pronounced in 2021 as kind of the market moves through what we're going through right now? And then also, are there any specific areas in loan acquisitions where you expect to see the most opportunities?

To answer your question, it's really more of a different situation compared to the last financial crisis, which was heavily influenced by banks facing significant issues. This time, the capital markets and non-bank lending have suffered a big blow in the SBC market. I believe opportunities will likely arise from late third quarter through the first quarter of 2021, and we will see three main channels. First, banks will be impacted, especially in sectors like hospitality, leading to the emergence of pools for sale at discounted rates. The second channel is non-bank lenders focused on transitional loans, where we tracked over 200 lenders at peak, and a significant portion of those fall within our typical loan size, indicating numerous potential sales in that area at a discount. The third channel involves SBA lenders; we anticipate that this recession will result in some consolidation among lenders that were aggressive in their underwriting practices. We are more conservative regarding expected losses compared to others in the market. Thus, we also see possibilities in the secondary market for SBA portfolios. We expect these three channels to become apparent starting in late Q3 and continue into Q4 and Q1 of 2021.

Okay, thanks. And then on the accounting treatment of that PPP loans, will all the net fees show up in net interest income or will they actually show up in the non-interest income side of the income statement? And then also, how long do you expect the loans to be on the balance sheet, the PPP loans?

Hi, Crispin, I think the majority of the economics will probably flow through the other bucket of the income statement; and we do not suspect to carry much of production on the balance sheet at all. So a very small portion will retain on the balance sheet; the majority of it will now be sold off balance sheet.

Okay, great. And then can you just talk a little bit about the kind of the health of the small businesses in your portfolio; do you have any data on kind of how many have closed temporarily for right now or how many are kind of starting to reopen? And then also, if any of that small business have actually closed permanently?

Adam, you want to.

Yes, around 25% to 50% of businesses are currently closed. However, restaurants that offer curbside pickup and delivery have reopened, and most hotels are still operating. We believe that the paycheck protection program will support these businesses, and the SBA is assisting with loss mitigation by covering principal, interest, and fees for six months. Additionally, Ready Capital will be able to provide three months of deferment without needing SBA approval. We haven't encountered businesses that have permanently closed, but there's a lot of uncertainty. Businesses are gradually reopening as states begin to implement these measures. It's important to observe how the government programs will unfold, and we anticipate that they will provide significant assistance to our clients.

Adam, one question, what were the two specific programs the SBA is rolling out? One is the economic injury disaster loans, which they implement themselves and we also refer our borrowers to, what was the second one, the P&I deferrals?

Yeah, well, one was the economic injury disaster loans, obviously the PPP and then just a regular way deferments program. So, as an SBA lender where to offer the seamless deferment.

Okay, thanks for that helpful color.

The next question comes from Christopher Nolan, Ladenburg Thalmann. Please go ahead.

Hey guys. The loan loss ratio, are you guys targeting a loan loss reserve ratio?

No, so certainly we're not targeting anything specific. We will continue to one, evaluate lone loans on a specific basis. So Adam and his team are going through the portfolio on a continuous basis to identify sort of problem or watch list modes that warrant specific reserves. And then in addition to that, we will continue to use the Trepp data and some of the assumptions around the more macroeconomic climate to drive sort of the general CECL reserve. So although we're not, we're not targeting a specific number, I do suspect that as things move around, and as we get more certainty on the portfolio, whether it be on the downside or the upside, the reserve number will change. Now, based on the current performance of the loans that have been included in the CECL reserve as of March 31st, as the economy reopens, I suspect that that reserve will revert back to a lower number. But it's hard to tell just given the uncertainty in the general climate right now.

Okay, so the reserve. Yes go ahead please.

Yes or no, I was just going to stress that it would take a significant decline in collateral values to see losses on the portfolio. Just given that the weighted average loan to value on our collateral was 60%. But obviously, certainly still assessing each case by case, and, the initial assessment that we did not for Q1 obviously there's going to be some follow up to that as we get updates from our clients. But again, we feel that the states portfolio is well protected, especially at these low mortgage ratios, you know, the structure that we have on this.

I guess a follow-up question in terms of how well the loans are covered, if everything is closed, including courts and so forth. How do you guys intend to recover anything if there's no judicial process working at the moment?

Yeah, Adam, please.

Yeah, I think we are still several months away. The majority of hardship requests that are coming up have been reached out to. The majority of it was three-month co-variances. So, what we will be looking at three months, these loans will remain current, the ones that are having some of these issues. But as business closures, we have significant amount of non-essential tenants and retail centers; the hospitality assets, we have limited exposure to hospitality. Obviously, those assets have absolutely low occupancy right now. As the market starts to rebound, things open up. And we believe that in three months, call it early July 1st through to August is when, to the extent that sponsors are unable to make a payment post the forbearance period, that’s when workouts could start, although we expect a limited amount given that we've got a lot of confidence in any business plan. So, in terms, of course, opening, again, I think that's something that we've got to assess in three months from now. But, currently from 60-plus delinquency standpoint, the portfolio, which still right around 1%. So, there's not many workouts in our portfolio right now where we have go run up against that. The limited issues that we've had in our portfolio have been a handful of foreclosures, that we've had to circle loan acquisitions for instance; court that we've spoken to feel that the process continues. We have receivers in place. So, the world hasn't stopped completely from I believe standpoint. But, again, just to highlight, I think that's really something that we are going to be dealing with in three months.

Great, final question is what's your recourse leverage target or threshold, I should say in terms of ratio?

Yes, so historically we've targeted two times. As I said earlier, this quarter was a little bit of an anomaly given material increases on gain on sale production, corresponding with a significant reduction in stockholders equity. So over time our goal continues to target that 2.0 times ratio. And the increases this quarter as the marks in the securities and the MSR and CECL revert to more normal levels will in part drive that ratio further down.

Okay, so we should expect the recourse leverage ratio to drift downward rather than upward?

Yeah, it's our intent to always manage the business to that 2.0 times. So we're actually taking steps to try and reduce that number, and surely given that we have a large inventory of newly originated bridge and fixed-rate product, that was pretty far along in the securitization process; should the new issuance markets open up, roughly $1.1 billion of assets on warehouse will immediately be converted into non-recourse debt.

Great, okay. That's it for me, guys. Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Thomas Capasse, CEO for any closing remarks.

Thank you for everybody's support during this challenging time, and we look forward to next quarter's earnings call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.