Ready Capital Corp Q2 FY2020 Earnings Call

Thank you for holding. This is the conference operator. Welcome to the Ready Capital Corporation Second Quarter 2020 Earnings Conference Call. I will now hand the call over to Andrew Ahlborn, Chief Financial Officer. Please proceed.

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 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 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 have been filed with the SEC. We plan to file our second quarter 2020 10-Q this evening. In addition to Tom and myself, we are also joined by Adam Zausmer, Head of Credit, on today's call. I will now turn it over to Tom Capasse, our CEO.

Thanks, Andrew, and good morning. We appreciate you joining the call during what continues to be unprecedented and challenging times. Our thoughts remain with you and your loved ones, and I hope that you are safe and healthy. The lending business has historically been adept at remote operations; we have readily adapted to the COVID environment, managing greater work demands with equal or greater productivity. In response to the pandemic, our management team undertook a 3-phase process. Phase 1 was defense. We harvested liquidity and preserved book value via holistic asset management with aggressive loss mitigation during the second quarter. We preserved much of our book value from the first quarter as the decline was only 10%, with a current 60-day delinquency rate of 2.2% versus over 7% for our large balance commercial peers. Phase 2 is offense. Armed with over $260 million of liquidity today, we've completed a strategic review of our diverse businesses to chart the path forward. We will continue to expand our government-sponsored lending segments and plan the relaunch of our CRE acquisition and lending businesses, including the introduction of new products. Operating expenses were also reduced in line with reduced CRE loan volume and a planned greater reliance on technology. Phase 3 is implementation from the early third quarter to year-end. We will seek to restore our normalized core earnings, comprising a combination of net interest margin from redeployment of excess liquidity into the robust post-COVID CRE acquisition and lending opportunities and cash gain on sale income from our government lending businesses. In the current quarter, we achieved our Phase 2 objectives and record results by leveraging our gain on sale businesses, including 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-risked our balance sheet by increasing liquidity and decreasing mark-to-market liabilities. Our three government-sponsored lending businesses posted strong quarterly results. First, our residential mortgage banking segment, GMFS, realized a record $1.2 billion in originations, supported by a strong demand for both home purchases and refinances in an attractive rate environment. This volume, approximately $500 million larger than any other quarter in the company's history, was further supported by record margins. Second, supported by Freddie Mac reducing multifamily origination rates by 50 basis points, our Freddie Mac multifamily business also experienced record quarterly originations of $157 million, with year-to-date volumes through the second quarter representing 79% of 2019 total production. Lastly, in addition to our PPP efforts, our SBA business continued to originate new 7(a) loans. Although limited by the program requirements, which require that the businesses be both open and operational, we managed to fund $21 million of SBA 7(a) loans in the quarter. On the PPP front, our company helped over 40,000 businesses through the origination of $2.7 billion of loans. As we said on our first quarterly call, we committed to doing everything we could to provide financial support to small business owners across America during a time when they needed it most. To do this, we developed a new technology, formed various partnerships, and dedicated the majority of our internal staff to these efforts. We will continue to evaluate how Ready Capital can assist businesses in need through these difficult times and intend to participate in programs organized under the so-called CARES 2 Act. The proposed legislation includes $190 billion for second loans to existing PPP borrowers. In addition, the bill would create a new 7(a) loan program targeting COVID-damaged small businesses in low-income areas. Eligible businesses would be eligible to receive low-interest loans for a term of 20 years, supported by a 100% SBA guarantee. In our small balance commercial lending and acquisition segments, we focused on proactively engaging with our borrowers facing difficulties arising from COVID. The stronger relative fundamentals of the SBC sector entering this recession, along with our conservative underwriting, are reflected in the superior credit performance relative to our large balanced peers. As of mid-July, total 60-day plus delinquencies in the CRE portfolio were 2.2%, a slight increase from the year-end delinquencies of 1.4%. We monitor risk in the portfolio by scoring each loan in the portfolio on a scale of 1 to 5, with scores of 4 to 5 representing loans with the highest risk of principal loss. With the onset of COVID, loans in the 4 to 5 bucket have increased to 8.3% of the portfolio from 4.5% pre-COVID. Our extensive history in the management of problem loans, including resolving approximately 6,000 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, with the largest loan representing under 1% of the portfolio. We also have minimal exposure to underperforming sectors, with hospitality at 4% and retail at 15% of the CRE loan portfolio. Of note, our retail is not malls but small strips with a $1.3 million average balance. Beyond these lending and asset management initiatives, we increased liquidity and reduced mark-to-market liabilities. In the quarter, we increased cash on hand by $134 million to $257 million, while decreasing mark-to-market liabilities by 26% to $1.25 billion. This was in part due to the successful execution of a bridge equivalent loan obligation and a legacy acquired loan securitization. These securitizations raised $58 million in cash and reduced warehouse debt by $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 CRE warehouse lines that matured in the quarter through year-end. Our efforts in navigating the difficulties of the COVID pandemic have positioned the company to re-emerge from this period stronger, which leads me to our Phase 3 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 the launch of our bridge loan product, where we are seeing opportunities to price loans with increased credit enhancements to retain yields at 500 basis point premiums to pre-COVID levels. In our fixed-rate lending business, we are currently partnering with National Bank to originate securitizations, retaining the subordinated tranches. We believe this is a cost-effective way to keep our platform active and expect to retain yield in the high teens. Our current money up pipeline in our core CRE origination channels totaled $91 million. Second, we will leverage our experience with the PPP program to expand our SBA 7(a) lending business. The SBA's existing 7(a) program will be a catalyst for the recovery of small businesses from COVID. We will accordingly grow our large balance 7(a) volume through the application of technology developed for PPP, the pursuit of new affinity relationships, and the targeting of specific industry verticals. We also plan on launching a small loan SBA 7(a) program. Historically, only 16% of our 7(a) production had loan balances under $350,000, versus 56% for the 7(a) program overall. This program will rely heavily on our PPP front-end technology and expedited processing through the use of the SBA scoring model, with incremental 7(a) volume in excess of $100 million per year. Our current 7(a) 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 if primary rates and earnings rates continue to decline due to the de facto 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 of post-COVID SBC loan pool offerings, of which only 1/5 have traded due to wide bid/ask spreads. We expect transaction volume to increase in the fourth quarter and first quarter next year as the forbearance wave subsides. Our current executable pipeline of $230 million primarily consists of season performing pools with low LTVs and levered 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 a repurchase 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 are pleased to report GAAP earnings of $0.62 per share and core earnings of $0.70 per share, both quarterly records when normalizing for business combination effects. This quarter highlights the company's ability to allocate capital and resources to their best use in varying economic climates. The company's strong financial results were due to elevated production in our gain on sale businesses, our participation in PPP, and the continued performance of our core small balance commercial loan portfolio. Revenue sources were diverse in the quarter, with 39% coming from elevated net mortgage banking activities, 31% coming from stable net interest margin and servicing, 24% coming from our PPP efforts, and 6% coming from gain on sale activities. Key adjustments to core earnings included a $9 million net markdown of our residential MSR portfolio, offset by a $5.1 million recovery of CECL reserves on performing loans. Included in core earnings is a $4.5 million increase in CECL reserves on non-performing loans. Our residential mortgage banking business, GMFS, posted excellent numbers in the quarter. 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 assumptions was partially mitigated by a 42% retention rate. At quarter end, commitments to originate reached $582 million, and we believe elevated performance will continue into Q3. Our efforts in the PPP program helped tens of thousands of small businesses maintain jobs at a time when they needed it most. Since the beginning of the PPP program, we've facilitated the funding of 40,000 loans totaling $2.7 billion. Total net revenue, meaning gross fees paid by the SBA, less payments to agents and financing partners, equaled $46.6 million, $32.3 million of which was recognized in the quarter. We've accounted for the PPP under arrangements with multiple deliverables, which required us to allocate economics between the original sourcing of the PPP loans, the forgiveness process, and the ongoing servicing of the PPP loans. Under this arrangement, we deferred the recognition of $14 million of PPP revenue to future periods. Certain expenses incurred to process PPP loans totaling $5.5 million were booked in the quarter. We will continue to participate in future government initiatives related to COVID as part of our efforts in the SBA lending business. Gain on sale revenue from our Freddie Mac and SBA 7(a) lending businesses totaled $7.5 million. The quarterly increase in Freddie Mac profitability of $2.7 million was offset by a decline in SBA originations due to COVID, which reduced 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 right-size staffing levels to projected business activities. We expect these actions, absent additional hires, to result in a 15% reduction in base compensation and benefit costs going forward. Loan servicing costs increased by $4.8 million due to reserves booked on Ginnie loans defaulting or in forbearance due to COVID. Quarterly increases in operating expenses are due to the inclusion of expenses related to PPP. 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 quarter. Turning to the balance sheet now. Our main objective in the quarter was to meet all financial obligations, increase our liquidity to account for market uncertainty, provide for future investment opportunities, and 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, a 110% increase from the reported March 31 balance. Although this cash position reduced return on equity by over 100 basis points, we believe it has positioned the company to weather additional downside and pursue accretive lending and acquisition opportunities going forward. The successful completion of two securitizations, a $405 million bridge CLO and a $204 million legacy loan CMBS, had a significant impact in reducing secured borrowings to $1.25 billion and recourse leverage down to 2.1x. It is important to note that included in that balance is approximately $400 million of financing that supports our government-sponsored businesses. We do not believe these to be at risk. And absent these amounts, recourse leverage is 1.6x. Additionally, since Q1, we successfully extended two maturing CRE warehouse lines, displaying the continued support our lenders have for our lending programs. Our loan portfolio continues to perform well during these stressful times. Total 60-plus day delinquencies within the CRE portfolio, inclusive of Freddie Mac collateral, remained stable at 2.2%, a modest increase from 2019 year-end levels. Of the 8% of CRE loans in forbearance, 87% continue to pay current. Our change in CECL reserves is reflective of this performance, where we increased provisions on non-performing loans by $4.5 million, while decreasing reserves on performing loans by $5.1 million due to slight improvements in modeled assumptions from March 31. We do not include changes in reserves on performing assets in the calculation of core earnings. Book value per share declined $0.06 per share to $14.46 due to the increase in share count associated with the Q1 dividend. We expect that the implementation of our share repurchase efforts will aid in the recovery of that dilution. As we have done in previous quarters, the supplemental deck provided 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, 13, and 14. Slide 3 outlines various corporate updates. Slide 13 provides additional information on our current CECL reserves. And Slide 14, which is new, provides insight into the risk distribution in the CRE portfolio. I hope you and your loved ones continue to be well during these unprecedented times. I will now turn it over to Tom for closing remarks.

Thanks, Andrew. We had a productive quarter managing through this pandemic recession. Our personal business model featuring 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 the relaunch of our net interest margin-based, small balanced commercial direct lending segments will provide a ramp to normalized core earnings in subsequent quarters. Our management team sees in the crisis as an opportunity to refocus our lending businesses by applying technology to design strategies to cut loan acquisition costs while increasing volume. We believe that successful execution of these plans alongside pandemic bonds, lending, and acquisition opportunities will over time provide core earnings growth for the benefit of shareholders. With that, operator, we can open the line for questions.

Our first question comes from Stephen Laws with Raymond James.

Tom, I guess to start off maybe with the PPP gains, Page 3 talks about $18 million of earnings to be recognized in future periods. Was that all hitting 3Q? Or is this going to be more water-filled out than that?

Andrew, do you want to address that?

Sure. It's going to be dependent on two things. So a portion of the deferred revenue will be allocated to the forgiveness process, which we expect to be completed within the year, so sometime over the third and fourth quarter. The remaining amount will be allocated to any ongoing servicing costs, and that may extend into 2021, but we expect the entirety of that amount to be recognized over the next four quarters.

Great. Staying on the topic of income and margins, you mentioned the strength in residential banking margins in your prepared remarks. Are those margin levels holding through July? Do you expect them to gradually decrease, or might we see even stronger margins before they normalize? What is your outlook for the second half regarding residential mortgage loan margins?

Yes. Margins remained elevated in July. Certainly, 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 margins to continue to be elevated. Tom, do you want to give more color on our forward-looking statements on that?

Yes, definitely. Generally speaking, GMFS operates as an efficient mortgage lender focused on purchases and holds a significant market share in Louisiana, Mississippi, and Alabama, where there's less variability in prepayment rates. We anticipate that the current high margins, highlighted by the Rocket Mortgage IPO, stem from a historic mismatch between refinancing demand and the industry's production capacity due to a decline in 10-year rates. Several companies have had to adjust their staffing in response. At this stage, the unusual pricing elasticity seen is a result of this supply-demand mismatch. Therefore, we foresee a gradual return to normal margin levels, likely by the first quarter of next year, as production capacity aligns with refinancing volume, particularly as we exhaust the inventory of higher FICO borrowers, who represent the easiest opportunities. So, we expect a gradual normalization leading into the first quarter of next year.

Great. Tom, I have another question regarding the outlook, and I apologize if I missed this. You mentioned CRE lending in your prepared remarks. Could you share what kind of volumes you anticipate for the second half? Are you just dipping your toes back in, or how quickly do you expect to ramp up CRE lending activity?

There's definitely an interesting dynamic at play. Our bridge team and transitional lending team estimate that about 65%, nearly two-thirds of lenders, have not yet resumed lending. This information comes from our larger capital providers as well as our own research. On the other hand, demand is somewhat subdued, especially in sectors heavily impacted by the pandemic, like retail and hospitality, which we are less focused on since we are more oriented towards multifamily. As a result, we are seeing reduced demand and reduced supply. Putting it all together, I believe it will be until the first quarter of next year before our lending volume returns to the levels seen in the first quarter of this year, or more comparably, the last quarter of 2019.

Our next question comes from Steve Delaney with JMP Securities.

And congratulations on your Phase 1 success, and it looks to me that you're well positioned for 2 and 3. And Tom, given that you've survived the tempest of the storm fairly well in terms of liquidity and lowering leverage. It seems to me your big decision, not that you don't have challenges in this market, but your big decision really is where to deploy your capital and liquidity. And I guess, looking first to the buyback plan, the authorization, about 5% of your market cap today. We're seeing the shares at 60% of book. And I'm curious if that level of current valuation, would you say that that meets with your return requirement on the accretion from repurchasing shares at this level?

Yes, it does.

No, I would just say, I realize you have to balance. 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 want to assume some level of buybacks here over the next quarter or two?

Yes. Please go ahead, Andrew, I'm sorry.

Yes, Steve, I think that's right. Over the next quarter or two, I think you will see repurchase activity.

Very good. Okay. And Tom, you all managed to navigate through your securitizations and maintain a healthy leverage position. We've observed eight transactions now, and I would characterize them as rescue capital, not to undermine the companies or transactions involved. I believe there are winners on both sides in most of these dealings. It seems that you do not require any defensive capital at this moment. Another question would be if you would contemplate partnering or bringing in some opportunistic capital to capitalize on market opportunities, even if it means sharing the returns with another entity, while not discussing common equity.

Yes, that's a good point. There are two responses to that question. First, we are actively engaged in several corporate debt transactions since we have some capacity in that area, likely around $100 million. We are progressing on this front because we have stabilized and our cash position is nearly one-third of our GAAP equity book value. Secondly, regarding the number of REITs that have more investment opportunities related to deployable capital, we have entered joint ventures with private funds; our external manager has approximately $8 billion available for investment, which we could leverage in the joint venture. Several other companies have adopted similar approaches in the past few years. Therefore, I believe that this avenue remains open and has historically been utilized, such as when we engaged in the Louisiana purchase of non-performing loans, which was a 50-50 split with the external manager. Currently, between our corporate debt capacity and the external manager, we possess sufficient capital to optimize the ReadyCap platform and allocate resources where we face concentration limits, while still benefiting from fee income and any potential promotions related to those investments.

Great. That's very helpful. And just one housekeeping. Andrew, when we look at the $14 million remaining PPP fees, what would be an approximate tax rate which you put on that?

25%.

Our next question comes from Timothy Hayes with B. Riley.

And my first question, just kind of staying in line with talking about being opportunistic here. Tom, you made some constructive comments on the resi lending and housing environment. And just wondering if you've considered expanding into some more resi credit focused strategies and you anticipate maybe seeing some good acquisition opportunities in the back half of the year like you expect on the small balance commercial real estate side?

Yes, we have been exploring opportunities to expand and diversify our investment and lending activities in the residential sector. We are looking into the fix and flip market, the single-family rental financing option, and builder lot loans. These areas present potential for expansion. However, we have chosen to steer clear of the non-QM space due to the significant liquidity risks associated with it, as seen with certain residentially focused REITs. We intend to pursue opportunities to grow through the GMFS platform and are particularly interested in distressed M&A opportunities in both the private and public commercial and residential REIT sectors, similar to our past experience with the Owens merger last year.

Okay. Regarding acquisitions, it seems that there hasn't been much activity with portfolios trading. I'm curious if you're noticing any tightening in bid-ask spreads. What do you believe will be the key factors that will lead to more acquisition opportunities in the latter half of the year, and where do you anticipate these opportunities might arise?

Many of the affected institutions are community and regional banks that have increased their CECL reserves significantly due to the pandemic, in addition to the implementation phase. While they benefit from regulatory forbearance, we are noticing many of these banks selling either underperforming or small balance portfolios that they consider non-core. As of last week, we tracked about $3 billion in these sales, with roughly 20% of that traded, and we are currently engaged in approximately $250 million worth. There is still a substantial bid-ask spread due to the forbearance situation. The small balance commercial portfolio is operating at around 15% to 20%. However, our roll rates indicate that around 85% of customers have moved out of forbearance and resumed their payments. As this volume decreases, we anticipate a surge in transaction activity in the third and fourth quarters.

Got it. Got it. That's good color. And then just small balance commercial real estate prices, as you pointed out in the past, have historically tracked closer to the resi market than the large balance CRE market. But that relationship be a little bit broken in a situation like this. And I know it's going to differ by market, mass, and type. But just wondering how you think broadly SEC real estate prices will trend and whether we see bear case scenarios where we're really eating into your LTVs?

Yes. I think the correlation has been 0.8% over the last 30 - 25 years using the Boston mean data versus the Case-Shiller. And I'm not sure that that decoupling significantly in this recession. Housing is extremely strong due to supply shortages. Our house forecast is now for a decline this year of 2.5% in Case-Shiller. For large balance, the Moody's increase index we're expecting a 20-ish percent decline versus 40% in the last recession, and a lot of that is 80% of that is hospitality and retail sectors. Given that 2.5% for housing and down 20% for commercial large balance, we're expecting maybe a down 10% for small balance. So now if you compare that, Andrew, our current LTV in our portfolio is, what, late 60s?

Yes.

Yes, to answer your question, we are in a very strong position regarding principal impairment, especially when considering our CECL reserves, particularly when looking at the stress layer on default rates and liquidation expenses.

Our next question comes from Jade Rahmani with KBW.

One of the major commercial real estate brokers is anticipating a sizable uptick in loan portfolio sales after Labor Day. Their pipeline totals around $3.5 billion, including strategic advisory assignments. I was wondering if those loans, if the average balance was more in line with overall commercial real estate loans, say around $20 million. Is that something that ReadyCap would look to participate in?

I would say we stick to our knitting. We have the trading levels of these SBC loans on a levered basis, be it securitization exit or term financing from banks, is probably a 300 to 500 basis point yield premium. And we have ample opportunities there. So I would say we wouldn't get out of our fairway and strategy drift into large balance. We have ample acquisition opportunities in our core SBC market.

Okay. And when we think about earnings in the quarter of $0.7 core earnings, that included an estimated roughly $0.43 from the PPP program. And you've said that there's a $18.2 million of remaining PPP fees. So I assume the $14 million that you mentioned is the after-tax amount. If we assume 2/3 of that took place in the third quarter, you would end up with earnings of around $0.40. Are there any adjustments for that that we should be thinking about as we project out the next 1 to 2 quarters?

Jade, the one thing I'd point out is when you look at the PPP economics in the current quarter, there are certain other items that were heavily influenced by the PPP, such as the booking of incentive fees; obviously, the calculation of taxes was much higher. And so when you whittle down the true impact of the PPP, it becomes a little smaller in the current quarter. On a go-forward basis, obviously, the $14 million, which is a pretax number, Jade. We'll obviously elevate earnings depending on the timing of the recognition, which will be dependent upon how quickly these loans are forgiven or paid off. With increased residential mortgage banking activity in the third quarter, I suspect that revenue will be high once again. And then, depending on how large of a participation we undertake in whatever new PPP programs are rolled out, it could lead to some volatile results over the next two quarters. So I think the combination of those three things could add some volatility on the upside to earnings.

Okay. When you mentioned the current quarter, I assume you are talking about the second quarter, and regarding the $0.43 estimate for the PPP impact in the second quarter, it seems like that estimate might be uncertain.

Yes. I think the effects of PPP on the EPS are a little lower than the $0.43. When you take the totality of the cumulative effects across taxes, incentive fees, and things like that.

Okay. If the PPP earnings were to completely go away, the impact would fade, and there wouldn't be any new programs to replace that. Are you still targeting the past dividend of $0.40 annualized, which represented double-digit ROE? Is that still the target range, or based on the G&A alignments and the technology execution, could we see higher ROEs than that?

Yes. I think the goal in the short term is to get the company back up to stabilized earnings at that $0.40 level and then to grow from there.

Okay. In terms of how you're thinking about the credit seasoning of the book, elevated levels of unemployment. If we were to see a second wave in the fall. Is that something that ReadyCap is prepared for in terms of balancing offense and defense? And also a related question is, did you see any in recent weeks, pull back some deterioration in economic performance in any of the markets you're operating in?

Yes, there is still considerable uncertainty in the market, but we remain hopeful about the credit profile of our diverse and granular portfolio. We have a 60% loan-to-value ratio and an 11% weighted average debt yield, which provides a significant cash flow cushion on these loans. We are lending in strong, liquid areas and have limited exposure to hospitality and large retail properties as collateral. Our loan structures are generally solid and designed to align with the business plans of our sponsors, which we believe will help maintain our portfolio's stability. In July, forbearances expired for the first time, and we reported that 87% of borrowers remain current, with only 4.5% of our portfolio currently under forbearance, a number we thought would be much higher. This reflects the strength of our sponsors and their commitment to these properties. Moreover, our securitization structures are unique and allow us full control over the loans, enabling us to pursue optimal resolutions. We are authorized to collaborate directly with sponsors and adjust strategies, including waiving prepayment penalties if necessary. Our servicing agreements ensure a high-quality experience for our customers, and we have staff dedicated to liaising with borrowers and servicers to identify potential issues and facilitate effective resolutions.

Our next question comes from Crispin Love with Piper Sandler.

First, how much of the PPP volume did you sell during the quarter? And how much was on the balance sheet as of June 30 that is on it now?

Yes. So we sold the overwhelming majority of production. Only around $105 million remains on the balance sheet.

Are the buyers mostly banks?

Yes.

Okay. And then just one on the repurchase program. Why do you think you needed to increase the programs here even though you haven't repurchased any shares with the current authorization? And I guess, is there anything that was keeping you from repurchasing any shares on the prior authorization which I think was first initiated about a couple of years ago?

Yes. The Board of 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 2 years old, we weren't quite trading at the discount level we are today. And then the reasoning behind why that wasn't utilized over the last couple of months was purely that the company's focus really was on getting to a financial position that was 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 sufficient cash to not only weather any uncertain downside but also to start deploying that cash in means that provide the best returns for our shareholders, which includes share repurchasing.

That makes sense. And then just one last one. Tom, I think you said that the percent of loans in the 4 and 5 risk bucket is currently around 8%. What did you say it was pre-COVID?

I don't have a number, Adam, do you have that?

Yes, Jade, yes, it was 4%.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

I'm excluding the effects of PPP on earnings, is it fair to say that core ROE was closer to around 10% annualized?

Yes, that's correct.

Okay. Great. And then on the CECL 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 the forbearance expires?

Yes. No, our CECL reserve is reflective of current expectations of losses. It actually, in terms of how CECL breaks down, our specific reserves on loans that we've identified, are significantly lower than the total CECL reserve we have booked. So we do believe it's all captured in the current reserve number.

Great. And then the direction of leverage, I mean, you're in the range of historically where you are, given all the risks in the world, where are you thinking about leverage going forward?

Yes. I think we'll continue to try and maintain leverage ratios around where they're at today. When we look at our recourse leverage ratio, it sort of breaks down into 3 buckets. The first bucket, as we mentioned, is really to support our government-sponsored businesses. So that accounts for about half a turn. The other parts in that recourse leverage are corporate debt offerings, which we will most likely keep around the same size. It may increase a little bit to take advantage of go-forward opportunities. And the remaining amount is supporting our core commercial real estate lending and acquisition segment; we'll try to maintain at these levels, at least for the short term.

Great. Finally, Tom mentioned in his comments, you might be rolling out new commercial real estate type of strategies. Can you guys give an indication what this might be?

Yes, we are exploring ways to broaden our correspondent relationships with smaller lenders that have unused agency licenses like Fannie Mae for small balance loans or HUD for multifamily and senior housing. Our president of commercial business is actively looking into this area. Additionally, we are considering initiatives such as the commercial PACE program, aimed at promoting clean energy, which has been gaining traction in the post-pandemic landscape, especially with recent legislation passed in New York state. This aligns well with our small balance transitional lending business, serving as a partial equity solution. These are two examples of how we aim to expand in the commercial sector.

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

I'd 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.