Ready Capital - Earnings Call - Q2 2020
August 7, 2020
Transcript
Speaker 0
Thank you for standing by. This is the conference operator. Welcome to the Ready Capital Corporation Second Quarter twenty twenty Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is I would now like to turn the conference over to Andrew Alborn, Chief Financial Officer. Please go ahead.
Speaker 1
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 twenty twenty 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 twenty twenty ten Q this evening. In addition to Tom and myself, we are also joined by Adam Gaussmer, Head of Credit on today's call. I will now turn it over to Tom Capasse, our CEO.
Speaker 2
Thanks, Andrew, and good morning. We appreciate you joining the call in what continues to be unprecedented and challenging times. Our thoughts remain with you and your loved ones and hope that you are safe and healthy. As a lending business historically 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 three phase process.
Phase one 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 sixty day delinquency rate of two point two percent versus over 7% for our large balance commercial peers. Phase two is offense. Armed with over two sixty million dollars 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 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 three is implementation from the early third quarter to year end. We will seek to restore 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 two 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 derisked 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 1,200,000,000 in originations supported by a strong demand for both home purchases and refinances in an attractive rate environment. This volume, approximately $500,000,000 larger than any other quarter in the company's history, supported by record margins. Second, spurred by Freddie Mac reducing multifamily origination rates 50 basis points, our Freddie Mac multifamily business also experienced record quarterly originations of $157,000,000 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 seven loans. Although limited by the program requirements, which require that businesses be both open and operational, we managed to fund $21,000,000 of SBA seven loans in the quarter. On the PPP front, our company helped 40,000 businesses through the origination of 2,700,000,000 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 two Act. The proposed legislation includes 190,000,000,000 for second loans to existing PPP borrowers. In addition, the bill would create a new seven loan program targeting COVID damaged small business in low income areas. Eligible businesses would be eligible to receive low interest loans with a term of twenty years supported by a 100 percent 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 is reflected in a superior credit performance relative to our large balance peers. As of mid July, total sixty 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 one to five with scores of four to five representing loans with the highest risk of principal loss. Since the onset of COVID, loans in the fourfive bucket have increased to 8.3% of the portfolio from four point five percent pre COVID. Our extensive history in the
Speaker 3
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.
Speaker 2
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 $1,300,000 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 $134,000,000 to $257,000,000 while decreasing mark to market liabilities 26% to $1,250,000,000 This was in part due to the successful execution of a bridge collateralized loan obligation and a legacy acquired loan securitization.
These securitizations raised $58,000,000 in cash and reduced warehouse debt $431,000,000 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 COVID the COVID pandemic have positioned the company to reemerge from this period stronger, which leads me to our Phase three initiatives resulting from our recent strategic review. First, we plan to restart lending in our core small balance commercial products in the third quarter, starting with launch of our bridge loan 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 the to
Speaker 0
National
Speaker 2
originate securitization with the company 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 totals $91,000,000 Second, we will leverage our experience with the PPP program to expand our SBA seven lending business. The SBA's existing seven program will be a catalyst for the recovery of small business from COVID. We will accordingly grow our large balance seven volume by through 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 seven program. Historically, only 16% of our seven production had loan balances under $350,000 versus 56% for the seven program overall. This program will rely heavily on our PPP front end technology and expedited processing through use of the SBA scoring model with incremental seven volume in excess of $100,000,000 per year. Our current seven money up pipeline exceeds $175,000,000 Third, we expect our residential mortgage banking segment to continue to experience high volume and elevated margins. Through July, production exceeded $400,000,000 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 ten year treasury.
Fourth, we plan on deploying capital into acquisition opportunities. We are tracking $3,000,000,000 of post COVID SBC loan pool offerings, of which only one fifth 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 $230,000,000 primarily consists of seasoned 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 $25,000,000 of common stock in the coming months. I'll now hand it over to Andrew to discuss the financial results.
Speaker 1
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 climate. The company's strong financial results were due to elevated production in our gain on sale businesses, our participation in the 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 $9,000,000 net markdown of our residential MSR portfolio, offset by a $5,100,000 recovery of CECL reserves on performing loans. Included in core earnings is a $4,500,000 increase in CECL reserves on non performing loans. Our residential mortgage banking business, GMFS posted excellent numbers in the quarter. Record production of $1,200,000,000 in combination with margins exceeding 300 basis points resulted in a 180% quarterly increase in net mortgage banking revenue to $44,100,000 The $12,000,000 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 $582,000,000 and we believe elevated performance will continue into Q3.
Our efforts in the PPP program helped tens of thousands of small businesses to maintain jobs at a time when they needed it most. Since the beginning of the PPP program, we facilitated the funding of 40,000 loans totaling $2,700,000,000 Total net revenue, meaning gross fees paid by the SBA less payments to agents and financing partners equaled $46,600,000 $32,300,000 of which was recognized in the quarter. We've accounted for the PPP under arrangement 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 $14,000,000 of PPP revenue to future periods. Certain expenses incurred to process PPP loans totaling $5,500,000 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 seven lending businesses totaled $7,500,000 The quarterly increase in Freddie Mac profitability of $2,700,000 was offset by a decline in SBA originations due to COVID, which reduced quarterly gain on loan sales to $1,500,000 On the expense side, employee compensation and benefits increased due to commissions and bonus accruals in the residential mortgage banking segment as well as certain employee payments related to PPP activities. At the onset of the third quarter, we undertook certain actions to rightsize staffing levels to projected business activities. We expect these actions, absent additional hires, to result in a 15% reduction in base compensation and benefit costs going forward. Loan servicing costs increased 4,800,000 due to reserves booked on Ginnie loans in default or in forbearance due to COVID.
Quarterly increase in operating expenses are due to the inclusion of expenses related to PPP. Other key items included a $13,400,000 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 and to provide for future investment opportunities and to reduce our exposure to mark to market liabilities.
We believe our current financial position is strong and reflective of the actions we undertook to meet those objectives. Current unencumbered cash totaled $257,000,000 a 110 percent increase from reported March 31 balances. 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 four zero five million dollars bridge CLO and a $2.00 $4,000,000 legacy loan CMBS had a significant impact in reducing secured borrowings to $1,250,000,000 and recourse leverage down to 2.1 times. It is important to note that included in that balance is approximately $400,000,000 of financing that support our government sponsored businesses.
We do not believe these to be at risk. And absent these amounts, recourse leverage is 1.6 times. 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 stressed times. Total sixty plus day delinquencies within the CRE portfolio, inclusive of Freddie Mac collateral, remained stable at 2.2%, a modest increase from twenty nineteen year end levels.
Of the eight percent 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 nonperforming loans $4,500,000 while decreasing reserves on performing loans $5,100,000 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 $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 three, thirteen and fourteen. Slide three 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 in these unprecedented times. I will now turn it over to Tom for closing remarks.
Speaker 2
Thanks, Andrew. We had a productive quarter managing through this pandemic recession. Our versatile 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 relaunch of our net interest margin based small balance commercial direct lending segments will provide a ramp to normalized core earnings in subsequent quarters. Our management team 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 successful execution of these plans alongside pandemics fund 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.
Speaker 0
Thank you. We will now begin the question and answer session. Our first question comes from Stephen Laws with Raymond James. Please go ahead.
Speaker 4
Hi, good morning. Tom, I guess to start off maybe with the PPP gains, Page three talks about $18,000,000 of earnings to be recognized in future periods. Will that all hit in 3Q or is it going to be more water called out than that?
Speaker 2
Andrew, you want to address that?
Speaker 1
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.
Speaker 4
Great. Thanks for that color, Andrew. And I guess staying on kind of the income and margins, resi banking margins, you talked a good bit about the strength there in prepared remarks. I mean, are those margin levels holding through July? Are we do you expect that to gradually pull back?
Or will we get even stronger margins here before they normalize? What are your outlook kind of second half of your outlook for residential mortgage loans margins?
Speaker 1
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
Speaker 4
more forward looking statements? Yes,
Speaker 2
sure. I think just more broadly, I think GMFS, those they are very efficient purchase oriented mortgage banker with a dominant market share in the Louisiana, Mississippi, Alabama area where you have a lot less convexity in terms of prepayments and what have you. But just more broadly, we expect the elevated margins today as evidenced by the Rocket Mortgage IPO are really a function of a historic imbalance of a demand for refinancing given the historic decline in the ten year versus refinancing versus production capacity in the industry. A number of companies have had to reposition staff and what have you, but it's just at this point, the pricing elasticity, which is very atypical for the industry is a function of that supply demand imbalance. So given that, we expect a gradual normalization of the margins over the next, let's say, probably by the first quarter of next year when that the production capacity equals the obviously the refinancing volume will decline as you work through the inventory of higher FICO borrowers that will be the low hanging fruit.
And so yes, so we expect a gradual normalization over going into the first quarter of next year.
Speaker 4
Great. And Tom, I guess to ask one more question kind of outlook and apologies if I missed this. I know you talked about CRE lending a good bit in the prepared remarks, but you've resumed lending activity. Kind of how what kind of volumes do you think you'll put up in the second half? Just kind of putting the toe back in the water?
Or how quickly will you ramp back up the CRE lending activity?
Speaker 2
There's definitely it's interesting. It's basically there's a demand supply demand factor at work. Right now, we are bridge team, our transitional lending team estimates that about 65 almost two thirds of the lenders have pulled are still not back in lending. We hear that in terms of color from our larger capital providers as well as doing our own research. So we expect and then on the flip side, demand is somewhat subdued in particularly of areas that
Speaker 1
are
Speaker 2
most affected by pandemic retail and hospitality where we don't really have as much of a focus. We're more multifamily oriented. So there's reduced demand but reduced supply. So long winded way of saying, I think it's going to be until the first quarter of next year before you see our volume back to the levels it was in the first quarter of this year, let's say, 2019.
Speaker 4
Great. Tom, Andrew, thanks for the comments and hope you're both doing well and enjoy your weekend.
Speaker 2
Thanks. Thank you. Our
Speaker 0
next question comes from Steve Gilenya with JMP Securities. Please go ahead.
Speaker 5
Good morning and congratulations on your Phase one success. And it looks to me that you're well positioned for two and three. And Tom, that you've survived the tempest of the storm fairly well in terms of liquidity and lowering leverage, 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, the current valuation, would you say that that meets with your return requirement on the accretion from repurchasing shares at this level?
Speaker 2
Yes, it does. I'm I'm wondering if you want to sorry, go ahead. Sorry to No,
Speaker 5
I was just saying I realized you have to balance that. But I think what you're saying is at this level or lower, I think from a modeling standpoint, might want to assume some level of buybacks here over the next quarter or two.
Speaker 1
I think that's right. Over the next quarter or two, I think you will see repurchase activity.
Speaker 5
Very good. Okay. And Tom, you guys were able to get through between your securitizations and just not being over levered in the first place. But we have seen now eight transactions. And I'm just going to go ahead and call it rescue capital.
That's not intended to be the meaning of the company's or the transactions. I think they're both sides won on or winners on most of those transactions. It doesn't appear to me that you guys need any defensive capital. But the other question is, there's money out there looking to partner with people that have opportunities. And would you consider, certainly not talking about common equity, but would you consider partnering or taking on some opportunistic capital rather than defensive capital just to take advantage with the market opportunities, even if you have to share the returns with another entity?
Speaker 2
Yes, I think that's a good point. You know, the there's two We answers to that question. One is we actually are working on a number of straight up corporate debt transactions given the fact that we do have some capacity in regard, probably, you know, dollars 100,000,000 ish. So we are moving forward in that front given the fact that we've stabilized and we have a cash position equal to almost a third of our GAAP book value equity book value. And then on the number of REITs, as you pointed out, that are capital that have more opportunistic opportunities in relation to deployable capital, have undertaken JVs with private funds.
I think we our external manager has around $8,000,000,000 of opportunity capital, which we could deploy in a JV with the external manager. A number of a few other companies have done that over the last three to five years. So I think that would be the yes, that would that door is and has always been open. We've actually historically done that. For example, that Andrew, was that fourth the Louisiana purchase of the nonperforming loans, for example, that was a fiftyfifty split with the external manager.
So I think right now between the corporate debt capacity that we're working on and the external manager, we have ample capital to leverage the ReadyCap platform and then allocate where we have concentration limits or limitations in terms of overall capital, but yet capitalized on the fee income and the you know any sort of promote we would get on that investment.
Speaker 5
Right, that's very helpful. And just one housekeeping. Andrew, when we look at the $14,000,000 remaining PPP fees, what would be an approximate tax rate we should put on that?
Speaker 1
25%.
Speaker 5
25%. Okay. Well, thank you both for your comments and stay safe and be well. Our
Speaker 0
next question comes from Timothy Hayes with B. Riley. Please go ahead.
Speaker 3
Hey, good morning guys. Hope you're doing well. 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 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?
Speaker 2
Yes. On the yes, we definitely have been looking to expand, broaden our investment activities and lending activities in the on the residential front. We've looked at some of the opportunistically the fix and flip market, the SFR financing market, single family rental market, not the property investment but financing the those strategies. Builder lot loans has been on our radar screen. So, yeah, there's definitely ways to expand around the opportunity set.
We have avoided the non QM space because we view it as a high, you know, very having significant liquidity risk as what occurred with a number of the residentially focused REITs. So yes, so I think we will look to expand opportunistically leveraging off the GMFS platform. And then there are definitely some distressed M and A opportunities that we think both in the private and public space on the commercial and residential REIT side that we will continue to pursue along the lines of what we did, for example, with the Owens merger last year.
Speaker 3
Okay, interesting. And I guess just on the acquisition front, it sounds like you expect you've seen some you haven't really seen a lot of portfolios trade here. And I'm just curious, are you seeing bid ask spreads starting to tighten a little bit? And what do you think will be the main drivers of seeing a lot more acquisition opportunities in the back half of the year? And where do you expect they might come from?
Speaker 2
A lot of them are community banks that have and regional banks that have taken much larger CECL reserves due to the, what do call it, pandemic which is on top of implementation. Granted they have regulatory forbearance, but you know, so I think what we're seeing is a lot of sales of either scratching down or performing small balance portfolios which they view as non core. And so that we're currently as of last week, had about $3,000,000,000 that we had tracked about a fifth traded and we're currently engaged on about $0.02 $5,000,000,000 But I think the right now there's a significant bid ask that is due to the forbearance. You know, in these SBC portfolios, it's running at about was running at peak at around 2015%, 20%. And it's but you're seeing roll rates, for example, our Chief Credit Officer is on right now, I think our roll rates were out of delinquency sorry, out of forbearance, we're back to paying was we're around 85%.
When that volume comes down, I think you're going to see a lot more volume in the third and fourth quarter.
Speaker 3
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 resi market than the large balance CRE market. That relationship seems to be a little bit broken in a situation like this.
And I know it's going to differ by market and asset 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?
Speaker 2
Yes. I think the correlation has been 0.8 over the last thirty to twenty five years using the Boxwood main data versus the Case Shiller. I'm not sure that that's 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 and Creek 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 retail sectors. Given that 2.5% for housing and the 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 six upper low Yes. So to answer your question, yes, so if you look at that stress layer on default rates and liquidation expenses, we're yes, I think we're in a very strong place in terms of principal impairment, in particular in relation to our reserves,
Speaker 6
CECL reserves.
Speaker 3
Got it. That's helpful. Thanks for taking my questions this morning.
Speaker 2
Appreciate it.
Speaker 0
Our next question comes from Jade Rahmani with KBW. Please go ahead.
Speaker 3
Thank you very much. One of the major commercial real estate brokers is anticipating a sizable uptick in loan portfolio sales after Labor Day. Their pipeline totals around 3,500,000,000 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 20,000,000 Is that something that ReadyCap would look to participate on?
Speaker 2
I would say we stick to our knitting. We have the trading levels of these FTC loans on a levered basis via securitization exit or term financing from banks is probably a three 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.
Speaker 3
Okay. And when we think about earnings in the quarter of $0.70 core earnings, that included an estimated roughly $0.43 from the PDP program. And you said that there's 18,200,000 of remaining PPP fees. So I assume the $14,000,000 that you mentioned is the after tax amount. If we assumed two thirds of that took place in the third quarter, you would end up with earnings of around $0.40 Are there any adjustments to that that we should be thinking about as we project out the next one to two quarters?
Speaker 1
Jade, the one thing I'll 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 $14,000,000 which is a pretax number Jade, will obviously elevate earnings depending on the timing of the recognition, which will be dependent upon how quickly these loans are forgiven or payoff. With increased residential mortgage banking activity in the third quarter, I suspect that revenue will be high once again.
And then absent and then depending on how 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.
Speaker 3
Okay. And when you said current quarter, were you referring to the second quarter when you say that $0.43 estimate that I provided for the PPP impact in the second quarter, it sounds like that's too much an estimate.
Speaker 1
Yes. I think the effects of PPP on the EPS are a little lower than the $0.42 you take in the totality of the cumulative effects across taxes, incentive fees and things like that.
Speaker 3
Okay. And if the PPP earnings were to completely the impact would dissipate and there weren't other new programs to replace that, are you still targeting I mean the past dividend pre COVID was that $0.40 annualized that would represent double digit ROE. Is that still kind of the target range or based on the G and A alignments you mentioned, the technology executions that we could be seeing higher ROEs than that.
Speaker 1
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.
Speaker 3
Okay. In terms of how you're thinking about the credit seasoning of the book, levels of unemployment, if we were to see a second wave in the fall, is that something that Amgen is prepared for in terms of the balancing offense and defense? And also a follow-up a related question is, did you see any in recent weeks pull back from deterioration in economic performance in any of the markets you're operating in?
Speaker 1
Jay. This is Yes. Adam
Speaker 2
Go ahead, Adam.
Speaker 6
Hey, Jay. This is Adam Salmon. How are you? Yes. So I mean, significant uncertainty in the market.
We do remain optimistic that the credit profile of our diverse and granular portfolio. Tom mentioned 60% LTV. Additionally, we have 11% weighted average debt yield, so significant cash flow cushion on these loans, strong liquid geographies that we're lending in. Tom also mentioned limited hospitality and large retail properties as collateral. And then also just generally solid loan structure tailored to sponsors business plans.
We think that's going to help keep our portfolio on solid ground. There's July was the first month where forbearances expired. We mentioned that 87% have remained current. Additionally, only 4.5% of our portfolio is under a forbearance today. We expected that number to be much higher.
So again, that just kind of speaks to the strength of sponsors and the commitment to these properties. Additionally, just in terms of added protection here, the securitization structures that we have, very unique and designed to give us full control of the loans so that we can reach optimal We're authorized to work directly with sponsors and waive extra fees and prepayment penalties as needed to get complete control of the loans. And then also just the servicing agreements that we have provide really good servicing experience for customers. We have staff that liaises with these borrowers and the servicers, so we can reach optimal resolution and identify a red flag.
Speaker 3
Okay. Thanks very much for taking the questions.
Speaker 2
Sure. Appreciate it. Thank you.
Speaker 0
Our next question comes from Crispin Love with Piper Sandler. Please go ahead.
Speaker 7
Thank you. Thanks for taking my questions. 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 and is on it now?
Speaker 1
Yes. So we sold the overwhelming majority of production. Only around $105,000,000 remains on the balance sheet.
Speaker 7
And is all the buyers there, is that mostly banks?
Speaker 2
Yes.
Speaker 7
Okay. And then just one on the repurchase program. Why do you think you needed to increase the program 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?
Speaker 1
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 two years old, we weren't quite trading at discount levels we are today. And 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 Okay. Share
Speaker 7
Thanks. Makes sense. And then just one last one. Tom, I think you said that the percent of wins in the 45% risk bucket is currently around 8%. What
Speaker 3
did
Speaker 7
you say it was pre COVID?
Speaker 2
I don't have that number. Adam, do you
Speaker 1
have Yes. That
Speaker 6
Hey, Jay. Yes, was 4%.
Speaker 2
4%.
Speaker 7
Thank you.
Speaker 0
Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Speaker 8
Hey guys. Excluding the effects of PPP on earnings, is it fair to say that core ROE was closer to around 10%
Speaker 4
annualized?
Speaker 2
Yes, that's correct.
Speaker 8
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 as the forbearance expires?
Speaker 1
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 significantly lower than the total CECL reserve we have booked. So we do believe it's all captured in the current reserve number.
Speaker 8
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?
Speaker 1
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 three 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 our corporate debt offerings, which we will most likely keep around the same size may increase a little bit to take advantage of go forward opportunities. And then the remaining amount supporting our core commercial real estate lending and acquisition segment, we'll try to maintain at these levels, at least for the short term.
Speaker 8
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?
Speaker 2
Yes, a couple things. One is we're looking at expanding our correspondent relationships with other, let's say, lenders that have underutilized agency licenses, for example, Fannie Mae Small Balance or HUD multifamily, senior housing, what have you. That's one area that the President of the commercial our commercial business is looking into. And we're looking at other areas, for example, like commercial PACE program to assess clean energy, is taking on a new life in the post pandemic world. For example, New York State just passed legislation.
So that couples very well with our small balance transitional lending business as a form of quasi equity. So that's another area that another example of those are two examples where we're looking to expand in the commercial space.
Speaker 8
Great. That's it for me. Good show. Thanks.
Speaker 2
Thank you.
Speaker 0
This concludes the question and answer session. I would like to turn the conference back over to management for any closing remarks.
Speaker 2
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.
Speaker 0
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.