Velocity Financial, Inc. (VEL) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon everyone and welcome to the Velocity Financial Incorporated Second Quarter 2020 Earnings Conference Call. All participants are currently in a listen-only mode. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Chris Oltmann, Chief Accounting Officer. Sir, please go ahead.

Thank you, Jamie. Hello everyone and thank you for participating in Velocity Financial second quarter 2020 earnings call. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer and Mark Szczepaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our second quarter 2020 press release and the accompanying earnings presentation, which are available on our Investor Relations' website. I'd remind everybody that today's call may include forward-looking statements, which are uncertain and outside of the company's control and actual results may differ material. For discussion of some of the risks and other factors that could affect results, please see the risk factors and other cautionary statements made in our communications with shareholders, including the risk factors disclosed in our more recent -- most recent annual and quarterly reports. Also note that the content of this conference call contains time-sensitive information that is accurate only as of today and we did not undertake any duty to update forward looking statements. We will also refer to certain non-GAAP measures on this call. For reconciliations of these non-GAAP measures, you should refer to the press release and earnings presentation on our Investor Relations' website. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris Farrar for opening remarks.

Thanks Chris. Appreciate it. Thanks everyone for joining us on the call. I hope that everyone is safe and healthy and all of your families are as well. On our last earnings call, I outlined three overriding principles that will guide us through this pandemic. And just as a refresher, one, protect our employees and our shareholders; two, help our small business owners manage through the crisis; and then three, carefully managed capital and liquidity to ensure long-term success. I'm proud to say that we've been very successful executing on all three of these goals. We are still working remotely and have done our part to protect our employees and our communities where we work and live. In terms of our shareholders, we continue to manage the business and our balance sheet to create long-term value. Secondly, we helped many borrowers bridge the worst of the shutdown by offering forbearance plans to help them manage their cash flow. Lastly, we were able to issue long-term debt for all loans previously pledged to our warehouse lines at very attractive terms, which eliminated the mark-to-market risk that we faced. We're also very proud that we continue to enjoy strong support from our securitization investors through all market cycles. Looking forward, our team is eager to resume lending and our customers are indicating strong demand for our programs, making the final preparations to accept new loan applications and execute our growth plans in the third quarter. I want to thank all our investors, employees, and industry partners for your continued support. Together, we will successfully navigate this environment and achieve our vision for the future. With that, we'll turn over to the presentation materials. As Chris mentioned, we've got the earnings deck, and I'll start on page 3 and just kind of kick us off with some of the highlights, and then turn it over to Mark to walk through some results, and then back to me to close. First topic on page 1, we had net income of $2.1 million for the quarter and core EPS of $0.17 a share. We think this reflects the results, a resilient business model in obviously extremely challenging times. Later on, Mark will walk you through the mechanics, but as a result of the pipe transaction, we declared a deemed dividend to the preferred common stock, which results in a non-cash adjustment from common equity to temporary equity, and Mark will walk you through all the details of that transaction in a bit. In terms of production and the portfolio continued to see strong resolutions of delinquent loans, we're seeing good recoveries there even in the depths of the crisis. So, we still see an active market. And we're a little bit surprised by how much activity was going on and was obviously a very strange time for everyone. Also, in terms of our forbearance plan about $331 million of loans were on some type of a forbearance plan at the end of the second quarter. And importantly to us, we've been monitoring how those folks are going to do post-forbearance, and for the month of July, little over 80% of those folks either made payments or paid their loan in full. So we were very pleased with the performance coming out of the forbearance period, and we think it was really the right thing to do and helped a lot of borrowers get through a tricky time. In terms of net interest margin, it's actually up quarter-over-quarter. We did see a reduction in the yields from our total portfolio, because of non-accrual loans, but there was an offset there from the interest savings on our long-term debt that we paid down with IPO proceeds, so those two essentially washed. In terms of financing and capital, I mentioned that we paid off our warehouse lines to really good securitizations that we put announcements on earlier. And then you folks all know about the $45 million of convertible preferred stock that was issued as well to strengthen the balance sheet. Turning to page 4. This is essentially just a bridge from core earnings to the GAAP loss per common share. Again, kind of the preferred dividend, or deemed dividend, if you will. It was the most material transaction. And I don't think anyone will be surprised by that that's essentially just a transfer as a result of the dilution. What we did do just to be real clear is mark the convertible preferred stock to its full redemption value. So that's essentially what's driving this “deemed dividend.” The other item on the slide that we mentioned is the COVID-19 reserve. We run a pretty rigorous model. That model came back. We sat down as a team and look through the results. And the new updated forecast is for a more severe economic downturn and for a longer period. I think it goes out a little over two years. So, we think we've got a very safe look at and where we're going to be in terms of CECL. But that did results in some increased reserve for the quarter. Turning to page five, just again, kind of summing up from the business perspective, before I hand it over to Mark, mentioned the two securitizations, we are in negotiations right now with some other counterparties for new warehouse financing. That will all be non mark-to-market. So, on a go forward basis, we want to take that risk out of the business. And we have very good dialogue going right now; expect to have significant facilities closed here in the third quarter. In terms of production, we spent the some of the downtime reworking our IT and some of our processes. We think, we've got a better process coming out of this crisis that will be more efficient and a little more streamlined for, not only our customers, but our internal operations folks, as well. We are retraining on some of those changes right now, and preparing to start accepting applications early September, so very excited to get back into the origination mode again. And then, lastly, on forbearances and loss mit, I did mention all those loans are performing. We stopped offering new forbearance plans at the end of June. We did issue some new forbearance plans early in the third quarter that kind of spilled over. But by and large, we're over that hump. As, on a go forward basis, anything that we do should be pretty small and relatively minor in comparison to what we've already done. So, very happy to see folks getting back on their feet and resuming their payments and, obviously, we'll see that happen here, again, in August and September. And we, sort of, the pig goes through the snake, if you will. And we should be over the hump with that process. And we're looking forward to refocusing on, not only managing those folks going forward, but making new loans. So with that, I'll hand it over to Mark to take you through the rest of the deck.

Thanks, Chris and good afternoon, good evening, everyone. I'd like to echo, Chris's opening comments. I hope all of you and your families are staying safe during this COVID pandemic and, like, I am looking forward to being able to go outside without masks for a change so. Before we go into the page six of the deck, I just want to kind of follow-up to what Chris was mentioning, on the $2.33 kind of adjustment or loss per common share and give the little more explanation or detail on that. GAAP accounting or U.S. GAAP posted a loss per common share. We have to keep in mind, when you see that word loss, it is not an operating loss. The company did not have an operating loss in Q2. Our net income was $2.1 million for Q2; we add that to Q1, its $4.7 million net income year-to-date. So there was no P&L hit as a result of this. It's also called a deemed dividend, because, no cash went out of the company. What happened is, in putting together the preferred stock transaction, the preferred stock transaction has embedded redemption feature. When it has an embedded redemption feature, U.S. GAAP precludes us from classifying that as permanent equity, because there's a chance, it could get put back at a future date. So it goes in a category called Mezzanine Equity or Temporary Equity, which is on our balance sheet. It's below liabilities and above common equity. So it goes into what's called Mezzanine Equity. And when it has a redemption value, you’re really required to carry their preferred stock at its full redemption value. So the full redemption value of the stock as of June 30 is $90 million. So the stock was actually on the books to say like around $41 million. Remember, we receive $45 million in proceeds. But part of those proceeds is allocated to the warrants, because we got stock – preferred stock and warrants. The warrants are in permanent common equity, because those are warrants that can only be exercised to buy common stock. They're not redeemable. So the carrying value of preferred stock was a 41 million, 42 million less the warrants that we had to increase it up to the 90 million, which is the redemption value. So that 48 million, 49 million, actually it's another deal cost. So 48 million, 49 million is a reclassification out of permanent equity in capital up into temporary equity, truly just a balance sheet re-class because our permanent equity into temporary equity. That’s why I said, didn't go through the P&L. It's not really a loss on the P&L, and that carries the preferred stock at 90. However, under GAAP when you're calculating earnings per share based on common equity – common shares of stock, any classification out of permanent equity into temporary is what's called a deemed dividend, meaning cash didn’t go out the door. But it's a deemed dividend. And when you calculate the earnings per share, you have to take the actual earnings for the quarter, which we said was 2.1 million off the income statement or earnings for the quarter. And you have to reduce it by that reclassification amount that came out of common into temporary. So you take the 2 million, less say 48 million – 49 million that got reclassified, then you're saying we've got a negative 47 million, divided by 20 million shares outstanding. There's your 233 – $2.33 of share loss. So you have to keep the loss in perspective. There was no operating loss. The company does not have a loss, as a result of the operations. It's resulting operations, it's more of kind of an accounting thing where you ask GAAP and FASB requires you to classify. So that's the pipe transaction and the $2.33, so something that -- is clear on that. Now going back to the deck on Page 6 and taking a look at our loan portfolio is the combination of the HFS and HFI. Obviously, HFI – out of the $2 billion portfolio, HFI as of June 30 was $1.8 billion. The HFS was a much smaller portion a couple hundred million. But take a look at the total portfolio, on the left-hand side, the portfolio composition you see we ended at just under $2.1 billion, compared to the end of Q1 which is a little over 2.1, so you should imagine the portfolio is fairly flat. We – remember, we had no loan originations in Q2, operations were suspended in Q2 and again because of the COVID crisis now there's very little pay downs or payments happening as well. So you could see that the portfolio stay pretty flat, decrease about 3%. And then the right-hand side just kind of shows the waterfall. On Page 7, we look at our portfolio related net interest income and our net interest margin. Our net interest income for Q2 was $18.6 million, as compared to $21.8 million for the first quarter. And our NIM, our portfolio weighted margin was 3.54%, compared to Q1, 4.18%. And again, as Chris mentioned earlier, the margin is down, primarily because of the non-performing loans going up, and the right-hand side, so we did get a pickup though that decrease in the amount of the yield, if you look at the top side, on the right hand side, the low yield -- the decrease in the yield is due to the non-performing is going up, but we also had a decrease in our average debt cost. So, we kind of mentioned debt cost has been coming down, a lot of it's due to the pro rata structures. So, if we could do more of those in the sequential pay down, we're going to be picking up on the debt cost. You see that is happening, debt cost has trended down over the last three quarters. But the yield is going down as well due to the increase in non-performing. So, the margin is down compared to Q1. On page eight, if you take a look at the biggest portfolio, we have the HFI loan portfolio. In terms of the non-accrual loans, we ended the quarter with just under 15% of non-performing non-accrual loans compared to about 8% at the end of Q1. So, as we said non-performing is up. One thing to keep in mind, we've always said our charge-off rate is very, very low compared to non-performing. A lot of it has to do with the low LTV, the 65% LTV which we've held consistently. The high borrower FICO score on average, personal guarantees, there is a lot of good reasons that the charge-off has been low historically, and you see those charge-offs continue to stay low. If you look at the right hand side, for the last three quarters, on a quarterly basis, under 50 basis points in charge-offs in any one of those quarters. So, although the non-performing has ratcheted up, charge-offs remain low. And we're kind of expecting our charge-off rate to be hopefully consistent going forward and kind of what we've had in the past based on the way our loans are structured. Going on to page nine, in terms of the CECL reserve, Chris has mentioned that we did take an increase to our loan loss reserve for Q2. The biggest part of the reserve was due to the economic forecasts. I think we mentioned at the end of Q1, we use a model and we used a CECL stress scenario at the end of Q1 to kind of model the economic forecast and we increased just that CECL piece to that -- I'm sorry the COVID piece of it by about $900,000 in Q1, and we use the COVID stress scenario again for Q2. And as you can imagine the COVID stress scenario was a little bit more adverse for Q2, because of the longer recovery period that was experienced during Q2 on COVID, the resurgence kind of the second wave of the COVID virus, businesses that were reopening now had to re-close again. So the model that we use reflected that. And so it was little bit more -- instead of a kind of an inverted V, where it hit the peak and then came down quickly, it was more of the -- the curve was more of an inverted U, where that peak kind of extended a little longer. And so we felt the need to take an additional provision for Q2 based on that model. So at the end of Q2, we're now at a loan loss reserve of $5.2 million on our full portfolio or 28 basis points, where at the end of the say last year we were at 13 basis points. So, we feel that we've sufficiently increased that reserve that it's in a good position to kind of based on where COVID is at now and based on the adverse scenario that we've run. And with that, Chris, I'll turn it over to you to go through a second quarter asset resolution activity.

Great. Thanks Mark. Appreciate that. Back on 10, just a little more detail around resolutions. On the roadshow, we emphasized how resolutions were really critical to us that the main thing that we focus on, as Mark mentioned, with the higher non-accrual loans. We get lower current yields, but our anticipation is that those recoveries will just be pushed out into future quarters and we will get all of that contractual interest back, as well as some of the penalties. So, recoveries are really important for us. And I’m pleased to report again in Q2, strong recoveries in a kind of laid it out in detail here. So, it was good to see that the markets continue to perform for us, even in some very strange times and those are the gains, you know, 102% recovery for the quarter. On 11, just kind of wrapping it all up, the real estate values have held up much better than I think a lot of people feared and that's really helped us in speaking with our special servicing team. They're seeing properties being shown, borrowers paying off, borrowers refinancing, healthy markets just anecdotally had a foreclosure last week in California that we went to the courthouse steps and was paid off in full by a bidder there. And so, starting to see things on par and markets continue to perform. So we think that's good for resolutions. We've enhanced our staff in the special servicing department. We are well prepared to handle this increase delinquency, and we're on top of all of those borrowers and speaking with them and working through those assets and expect to continue to resolve assets favorably. And then lastly, in terms of profitability and growth, we think there is some good opportunities here to – to drive higher income as we start to originate again. Opportunistically, we think we can blend in this environment at lower LTVs and higher coupons. So, I think from an ROE perspective, it's probably very rich, its very attractive. And so we'll see how that goes as we start to roll things out here. But we're very optimistic that we can put a lot of capital to work it for very good return pro and we're hearing good demand from our customers. And then lastly, just key operational standpoint, again, I already mentioned, but we want the mark-to-market risk removed going forward. So less volatility and less risk in the business and we're very excited about getting that completed as well. So that wraps up our presentation of the deck. And I think we can open it up for questions now.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Don Fandetti from Wells Fargo. Please go ahead with your question.

Yes. Chris, on the non-accruals, certainly being up this quarter, it sounds like you expect those not really to materialize into larger charge-offs. Can you just talk a little bit about how you think those will get worked out versus your historical? I mean, clearly, the residential housing market is holding up really well, and so I didn't know, if there would be more sales, more refinancing. How do you see that being worked out?

Yeah. Sure. Hi, Don. Good to hear from you. Yeah, I think -- looking at it, we think it will resolve pretty similarly to how it has in the past for sure in the investor one – the portfolio, you're right very robust markets. And I would expect, we'll historically see that, sort of 50-50 divide between refinances and folks selling their properties. And I think, our view is that we've tried to help as many folks as we can get through that, and it will take some time to work off, it doesn't – it doesn't come off overnight, so it's going to take three, four quarters to get to work through that. But each month goes by, you tend to work that backlog off, I guess, so we'd be stable, but declining.

So Mark, do you have any thoughts on NIM outlook in the near-term, I am not sure, not accruals have peaked at this point?

Yes, our focus in a way where we'll take a look at our forecast as well done. By the way, hi. Nice to hear you, again. We're thinking that well, right now there is 16% – 15%, 16% level is probably kind of where we're going to peak out and we're going to start to see it actually decline and taking a look like you know one metric on one slide, it's like 14.6% and over overall our entire portfolio was like around 15.9% is in the queue, if you've taken the HFS and HFI loan, it’s like 15.9% at Q2. We looked at the end of July, it's more or like around 15.1%. So you're already start to see some decline and we think that's going to gradually start to decline that would be our forecast.

Okay. And then just lastly, as you start to originate again, how are you going to pay for those I mean obviously, you'll get a good advance rates on the bank loans, but do you have enough cash, I mean do you expect pay downs? How material could the new originations be?

Yeah, good question. We're going to start slow coming out of the gate, we're not going to race back to where we were. So yes, we have enough capital and cash to do that. We kind of want to test the waters and see where demand levels are and as we resume, we'll figure that out, but we expect to have positive cash flow from our retained interests, coming in as well, so as we go forward, should have capital to grow the originations. And then we're also in talks, as I mentioned with some of our investment banks and warehouse providers to provide financing there as well. So the combination of those should give us plenty of room for growth capital.

Got it. Thank you.

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

Hi, good afternoon. Chris, Mark, I hope you are both well. Good to hear from you. Yeah, I guess first, I noticed in the deck on Page 5, it talks about reevaluating product guidelines and offerings. Chris, can you maybe talk about that a little bit, is that due to the performance you're seeing in certain geographies or product types in your portfolio? Is it something specific with an outlook of COVID impact? Can you give us a little color around the changes being made there maybe what you liked that more post COVID and what products you maybe no longer going to offer?

Sure. Yes, we're going to – we've been evaluating with the team, looking at just our performance and then where we see opportunities. We definitely see more delinquency at lower FICO scores. So, initially going out we're probably going to raise our minimum FICO score, that'll be a key area. And then we've looked across the portfolio, property types don't see much there. But on a go forward basis, we're certainly going to be careful lending to property to make sure that the tenants are paying, or what's going on with those businesses there. So, there will be -- that will have a little bit of I would say, COVID feel to it, where we just want to make sure we understand what's really happening at the asset and walking into a mess. And then, I think, that overlays with the geography question as well same type of thing just, if there's any specific thing going on in a municipality or something like that that we need to be aware of and adjust for. So, I think broadly speaking, we're going to go initially out of the gate with our traditional 30-year product. That's kind of our core bread and butter. We won't offer that short-term bridge loan right out of the gate, but probably add that in as time progresses. So fortunately we have the earnings coming off the portfolio, which sustains us, so we're going to just kind of dip our toe back into the water if you will and just see it go.

Great. Chris, higher level when thinking about the business here, move to non-mark to market financing for the new originations and certainly expect that to be higher costs to get that characteristic of those facilities. Securitization markets and what it costs to finance their and then just heightened risk today, so how do you take all those things in and think about pricing on new loans in order to meet your ROE targets, and maybe how do those -- how does that compare to maybe where you are with rates six or 12 months ago?

Yeah, good question. So the way that we look at it is the lower non-mark to market aggregation facilities really don't have that big of an impact on ROE. Yes, we have more of a haircut, but we also have lower interest expense during the aggregation period, so it's not a huge factor and we think that just the peace of mind and structural benefits of those facilities, far outweigh any marginal cost, the more important driver for true ROE, or IRR on any loan that we make is really where we execute in the securitization market. We think we can aggregate fairly quickly in securitized and those economics are much more favorable. So, we think we can price product and securitize it with ROEs north of 20% at the margin on new stuff. And so we work backwards from there from the securitization exit I guess to determine pricing in ROE. And the execution that we saw just in Q2 was very strong and the markets bounced back very quickly, and so I think, we're being conservative about what those returns will look like. But I think if securitization markets are where they are today will have very healthy ROEs.

Great. That's helpful. Thanks very much for that. Have a good afternoon.

Thanks. You too. Good talking to you.

Our next question comes from Steve DeLaney from JMP Securities. Please go ahead with your question.

Thanks. Good afternoon everyone and thank you for the detailed deck and your clarifications on a couple of complicated things this quarter. As far as the increase in non-accruals, certainly 98 basis points, so we were high certainly over the high above -- well above the consensus because of not factoring in -- not applying enough windage to that I guess I would say. But would you say that -- I mean it is the increase in the non-accrual loans to 15. Should we assume like there is really no material impact for floating rate loans in your held for investment portfolio, is that a good assumption, Chris?

Yes. That is. That is. Just to remember, I would say a very, very large majority of the loans are fixed and so is the underlying debt, so there should be no interest rate factor at all, it's all related to non-accrual.

Great. Okay. And that was a meaningful chunk of course in the quarter.

Yes.

There's -- accounting has its rules and then economics at the end of the day, economics rules, the non-accrual interest, okay that we -- you were not able to recognize in the second quarter. As you go through your resolution workout process. And we look at you had 102% recovery in the second quarter. I believe I'm right in assuming that you're not just talking about principle, but you're talking about all interests that you would be due including possibly some penalty interest, is that correct?

That's correct.

The 102% is actually saying we got all of our back contractual principal and interest, and on top of that principal and interest, made a 2% gain also across that either prepayment or default interest or whatever.

Great, yeah. So not just one or two a principle, but you're entitled everything you're entitled to under the deed of trust. Okay, that's very helpful because when you look at the quarter, and you look at the trend and NIM and then spread, it's meaningful, but it's also important to know that this isn't due to just a levered carry trade or something this is something that it's temporarily credit related, but you have a track record of eventually recognizing, that income down the road, or at least we'll look at it as you certainly have the potential to recognize that assuming COVID doesn't get worse than we think. But thanks and thanks for that clarification.

And that's why, definitely that one slide to your point, the left hand sides for non-accrual on the right hand side, for charge-offs and to your point that's the left hand side gap accounting and the right hand side the economics. And the non-performing is high because at 90 days past due we put it on non-accrual, that's the gap kind of industry standard. But if you look at the actual losses that were taking economically, that's the right hand side charge-off and you can see it's been historically very low and it was low for Q2 as well.

Yeah. Okay. Great. Thanks. And then on the $214 million loans held for sale at June 30, I know you did a securitization in July and that had kind of mixed collateral in there, I think. Are those -- are the HFS loans still around or did any of those get pushed into the securitization, where do we stand on those at this point?

So, everything got securitized Stevens, and so all of the HFS loans will move into HFI for Q3 so it'll all just be held as HFI.

Great. Okay, very good. So, that's -- we won't have that category, going forward. Okay, great. And then my last--

Right. And just a -- little color there. I'd say I don't have the exact number, but a very large portion, probably 75% or so, were kind of the short-term loans.

That's what I'm --

So they're in that securitization, but I think our expectation is they'll pay off much faster than our other core long-term product.

Got it. Okay.

Yes, the securitization was about, what, $276 million and about $215 million that was the short-term so --

Yes. I notice the ticker had MC and I assume that that’s stand for mix collateral or something that’s --

That's exactly.

Exactly right, exactly right.

That was my guess. Alrighty. And then lastly, and Mark, this maybe best handled offline, but, with respect to the accounting or the book value impact of the preferred, and your book value being at $10.26. We had actually taken into account the dilution on the preferred if-converted, and had taken $12.47 and March 31 down to $9.30. So the $10.26 is not a shock, but is there -- I don't think there's a simple answer to this. But if, let's say, the holders of that Series A Pref decided next week that they were just going to convert to common. Then my question is how much -- in my analysis had assumed $45 million, was going to go in and then 11.7 million shares would be issued. Of your $90 million that you're now showing in -- as equity and I know that's got that implied dividend build in. Is there a number you have in mind that, like, if we forgot about the dividend because they like to convert. Is there a number within that that would go into common equity on an if-converted basis that you can share?

Yes, let me -- well, right now, the way the financials show and you'll see in the Q tomorrow. You got $90 million in temporary equity and $49 -- roughly like $48.9 million, $49 million was a deemed dividend and it came out of common equity up into temporary. But to your point, if tomorrow all those preferred shareholders converted to common that entire $90 million would go back down into the common stock.

So we just took a $2-plus hit to book value to account for the future dividends, theoretically account for the dividend stream going forward for some period of time.

We took a hit. We took hit to common. Be really careful, not to total equity book value, no, to common book, because --

That's why I hit the common exactly.

Yes. So with the net -- that $12.46 whereas the $10.26 is the common equity. So we took a hit to common equity, because you're basically reserving up in temporary equity on the chance that it is at some time put back to the company at the full redemption value. It's like a reserve. Once they’ll covert to common stock, there is no put, right? They can't put the common stock back.

That's right.

That deemed dividend and all goes back into common stock.

Okay. Very good. So, that $2 loss in book value, if you will, at some point is -- it's theoretically recoverable into common equity.

Yeah.

Okay. That's great. So the same question I had about the non-accrual interest. We get that back on resolution, and this deemed dividend, we potentially get that back as well in different value. So, so I'm good with -- I'm good with both of those things.

Yeah. That's what I’m trying to be very clear on this call. This is why I've had to be clear on the call as well for you to say, the gap term is, loss per common share of stock, and I have to put it that way, because it's a gap...

I understand.

But it’s just a loss. There was no operating loss in the company, nothing went through P&L; no cash went out the door. It's a reserve. It’s a reserve in case something should happen, redemption in the future. But to your point, if the conversion happens, that all goes away, everything comes back into permanently.

Great. Thank you both for your comments.

Sure.

Very helpful.

Sure. Thank you.

[Operator Instructions] Our next question comes from Arren Cyganovich from Citi. Please go ahead with your question.

Thanks. In terms of the non-accrual that you're seeing and maybe you've already mentioned this, but is – are you seeing any kind of difference in terms of your investor one to four versus the other kind of small ticket theory?

Hi, Arren, It's Chris. Yeah. We saw a slight outperformance on the one to four versus the small commercial, but not massive and not something that I would call materially different. It's pretty consistent to the weightings in the portfolio.

Okay. And I don't know, if you have much feel for this, but in terms of the customer base on the – on the small ticket theory. Do you have a feel for how many of those customers were able to access PPP loans? Whether or not folks are planning to shut doors or keep going? There's been a lot of discussion about the impact of small businesses from the pandemic.

Yeah. Unfortunately, I don't – we don't have any data that we can share with you. We do everything kind of at the loan asset level, and don't aggregate that up all the way to see trends in speaking with our – our asset managers and the head of our special servicing team. We're seeing everything across the board. We're seeing folks that say, my tenants are put out her literally shut in. And we're seeing people say, while everybody's paying and I'm fine. So, it's kind of too widespread to report any common theme that I could give you there any real data.

Okay. Are you seeing any change in credit trends in through July and into August?

Yeah. So through July, as Mark mentioned, we saw delinquency basically stabilize where it was ticked down slightly. The probably -- well, interesting thing to note obviously will be how the rest of these forbearance plans performed so that the 19%, who didn't pay, are going to roll through those delinquency buckets now. And we'll see how they do, if they miss that first payment and make it up on the second month or if they just go straight into foreclosure, we'll have to see how that shakes out. But so far, we've seen it stabilize and we're planning for it to be that way for the next few quarters and with a slight downtrend as we – as we work through these assets just based on past experience. It takes time to work them off.

Okay. And then just lastly on, you had mentioned dipping your toe in the water in terms of originations, should we expect the portfolio to continue to decline as your originating new loans or do you think you'll actually be able to grow the portfolio modestly?

Yeah. We think, we'll be able to grow – time will tell obviously, as we get back out there and see – see where we are. But I think our expectation is by Q4. We'll be back to a point where we'll see the – the portfolio start to expand. And then going forward into 2021, definitely see, real acceleration there.

Okay. Great. Thanks so much.

Thank you.

And ladies and gentlemen at this time, it’s showing no additional questions. I’d like to turn the floor back over to management for any closing remarks.

Nothing else for me. Thank you all for joining the call. And we appreciate you taking the time. Anything Mark you wanted to cover?

No. Again, just thank you, very good questions and hope tight transaction is a little bit out there. It's a little bit out there for us too, but hopefully we explained it properly for everybody. So thank you for your time.

Ladies and gentlemen, with that, we’ll conclude today's conference call. We thank you for joining. You may now disconnect your lines.