Q4 2022 Velocity Financial Inc Earnings Call
Yeah.
Good afternoon, everyone and welcome to the velocity financial incorporated Q4 2022 conference call.
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I'd like to turn the floor over to Chris to open.
Her and head of Investor Relations. Please go ahead.
Thanks, Jamie.
Hello, everyone and thank you for joining us today.
The velocity is fourth quarter and full.
Full year 2019 results.
Joining me today are Chris Ferrara, Watson, President and Chief Executive Officer.
In March the Pan out philosophy, Chief Financial Officer.
Earlier. This afternoon, we released our fourth quarter and full year 2022 results and our press release and accompanying presentation are available on our Investor Relations website.
I'd like to remind everyone that today's call may include forward looking statements, which are uncertain.
Outside of the company's control and actual results may differ materially.
For a 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 filings with the Securities and Exchange Commission.
Please also note that the content of this conference call contains time sensitive information that is accurate only.
As of today, and we do not undertake any duty to update forward looking statements.
We may also refer to certain non-GAAP measures on this call for reconciliations of these non-GAAP measures you should refer to the earnings material on our Investor Relations website.
Finally, today's call is being recorded and will be available on the company's website later today.
With that I will now turn the call over to Chris Ferrara.
Thanks, Chris I'd like to welcome everyone to our fourth quarter earnings call.
<unk> continued headwinds from rapidly rising interest rates, we reported another profitable quarter in our most profitable year in the history of our company.
Our loan portfolio increased by 36% to a record $3 5 billion and we.
We also issued a new high Mark of six securitizations throughout the year to finance our growth.
Additionally, we grew.
Annual core net income by over 26% or just under $9 million.
We're very proud to deliver these excellent results for our shareholders, especially considering the challenges we faced.
In terms of our portfolio, our solid credit discipline continued to pay off.
We had zero charge offs in the fourth quarter, and we continued to profitably resolve delinquent assets.
With respect to market conditions, the real estate markets are slowing as the quantity of transactions are down which impacted us in the fourth quarter as we experienced fewer payoffs.
And realized less past due interest in prior quarters.
Good news is that we will recognize that income in future periods and payoffs have already picked up in Q1 exceeding the Q4 activity through February of this year.
Our real estate valuation perspective, we're seeing some over heated markets come down, but others remained strong as we continue to actively sell oreos with no problems when they're priced correctly.
In terms of originations, we tightened credit in the fourth quarter and intentionally restricted our new production as we wanted to see better conditions develop in the bond market.
Fortunately that strategy paid off as the markets improve this year and our first securitization in January some much stronger demand than our October deal.
Continue to see better execution, and the new issue mortgage market and have decided to increase production levels going forward as a result.
We expect originations to trough in Q1, this year and increase going forward as we take advantage of favorable lending conditions and I've seen several competitors leave the market entirely.
Our pipeline is healthy and growing as our customers remain loyal to our brand.
Lastly, I want to outline an important strategic decision, we made last quarter to elect fair value accounting for new originated loans.
We did this after careful consideration and analysis with the goal to better align our GAAP results with what we believe to be the actual economic value of our equity over.
Over the next several years, we will gradually transition to portfolio as new feo loans replace the current loans held at amortized cost.
We think this change is in the best interest of all shareholders and will communicate our value proposition more clearly true GAAP results.
Mark will cover more specifics later in the presentation.
Summing up I'm extremely proud of how well our team performed last year and we're in a good position to continue our growth. We appreciate the support of all shareholders and will now review our presentation materials.
If we turn to page three we've got some highlights for the full year metrics you can see GAAP net income.
Nicely loan production year over year up 33%.
Our H F I portfolio grew by over 40%.
NIM was down about 20% and charge offs down 60% on a year over year basis.
Yeah.
On slide four.
Just highlighting net income was essentially flat.
Core net income was down slightly.
Over the prior year's quarter, mainly due to NIM.
A lower NIM.
Importantly, also in the fourth quarter, we kind of had an unusual event, where our earnings were reduced by about 10 cents a share from lower volume of NPL resolutions as compared to the third quarter.
The good news here is this was not a loss or not.
A write off in any way. This is just income that we are typically recognizing in prior quarters and for.
Markets.
Conditions that slowed down we didn't recognize that income, but we expect to recognize in future periods.
Also on the earnings bullet from an N P. L recovery rate of one or 2.3 as opposed to 104, so although the number of transactions slowed down and the volume of resolutions was lower we still continue to.
[noise] resolve assets over and above the contractual interest that's due.
Yeah.
In terms of the production and loan portfolio, you can see that we dramatically reduced our originations by 44% from Q3.
Sorry from fourth quarter of 'twenty one.
And that was intentionally done obviously due.
Due to the conditions as I mentioned earlier in the securitization market.
I've already mentioned that the size of the portfolio and the F. B O out election, so all moved down to financing and capital.
In terms of the financing and capital we.
We did the October securitization of about $189 million you can see there and then in January similar sized deal in it and as I said.
Bonds were very strongly.
Oversubscribed in the January transaction.
In terms of warehouse capacity and liquidity, we're in a good position, we've got plenty of liquidity in warehouse capacity to continue to grow the portfolio and accelerate our origination.
Turning to slide five.
From a net income basis, you can see we had a small adjustment there on a core basis.
Implemented an employee stock purchase plan last year and had some equity compensation expense.
Impacted that adjustment.
And on the right hand side, you can see from a book value value perspective.
We continue to.
Consistent grow book value as we retain those earnings.
Yeah.
On slide six.
We've bumped this slide up you've seen this slide before in the past and this is our attempt to kind of communicate where we think true value is in the portfolio on an economic basis as opposed to a GAAP basis.
And as I mentioned in my opening remarks. This this transition to the F. B O accounting, we think is going to more closely align with sort of the bottom two sections of this graph the fully diluted the diluted equity value as well as the embedded gain in the portfolio.
And so when we when we decided to change this method of accounting we really.
We're hoping that over the over the next few years.
Investors will start to appreciate the the true GAAP values, it's going to be recorded.
In our financial statements as we transition the portfolio.
You can see on the second sub bullet in this in this slide.
We had a pick up on.
On the on the F B O loans.
That was.
Reflected in our other operating income and then to offset by additional costs that we have to expense that mark will detail all of those numbers for you shortly.
But on page seven.
Wanted to kind of.
Identify the the the reasons why we're making this election and so I'll turn this over to Mark to walk you through.
The drivers and the decisions behind the F. P O option.
Thanks, Chris and good afternoon, everybody as Chris mentioned.
Made a strategic decision starting in Q4 October one to elect the fair value option deal accounting.
For all of our originations on a go forward basis, and you can apply that to all the originations in Q4 and strategically it's just better alignment.
Actually more economic value to the shareholders, we have been presenting the economic value embedded in our securitized loan portfolio through the economic equity slide that Chris just went through a previously but its not really reflected within the financial statements because it comes in over time as you know is net interest margin over time, so it's not.
Within our statement of equity for example.
When you carry it just amortize class so but one thing is we now start to bring in that true fair value gain of the loans in the securitized portfolio into our equity and into our financial statements immediately as opposed to dribbling over time. So that's one better alignment. It also really helps us out in terms of our GAAP to tax or tax.
Specific IRS tax purposes, we've always had some marked loans.
In our securities are at a market value sell for tax it's always been mark to market on both sides, where we've been doing the amortized costs on block. This better also aligns our kind of converge is our GAAP book and our tax basis being one the thing. So there's some street just strategic alignment there that really helped us out in terms of the impact of the fair value accounting.
Just to let you have a feel for how it's going to impact the financial statements. So all new loans that we're originating are put on the books now at fair value as we do the securitization. We did one securitization in January sold Securitizations, starting with the January one will also go on our books at fair value as opposed to the amortized.
Ross.
But keep in mind that any costs or revenues that we used to differ for those originated loans for the securitization secured securitized debt that will no longer be deferred because there's nothing to amortize them over it because they're not at amortized costs, both the direct origination cost to originate a loan.
While direct compensation expense commissions and all that used to be deferred and then amortized as a yield adjustment backup and margin those costs now come right into the financial statements in the income statement at the operating expense.
The fair value of the loan the loans at amortized costs used to go on the books at U P. D. Now that you would want at fair value and that fair value fair value and the U P. B will be in the other income section is unrealized gain or loss from fair value loans and the same thing on the securitized debt. We used to have we had deal costs, we still do that deal cost originated securitization.
Those deal costs now will be expense and operating expense immediately so what you're going to see is a shift to the income statement is youre going to see the gain pick up on the loans and our securitization as the fair value swings in those two financial estimates will be in the other income section, but then the cost to put those estimates on the books it used to be deferred.
And amortize as yield adjustments those costs will run through the operating expense section. So that's what's going to look different as the other income and operating expenses are going to look bigger on both sides because of the fair value in terms of the margin. We are still going to accrue interest income on the loans and interest expense on the Securitizations.
Up in margin so the fair value adjustments are putting through exclude the current period interest when she's getting accrued in margin. So you really won't see a big impact in the margin because you'll still have the accrued interest both ways in interest income interest expense, yes, anything that margin may start to widen out overtime, because under the amortized cost basis.
Besides the true interest income margin remember, we've got those deferred costs that are being amortized up in margin, which is a reduction of margin now we won't have those deferred costs on the new loans going forward. So the amount of amortization expense going up there is going to get less and less as the older amortized cost of all of US at 930 September 30th continue.
To pay down so you can probably see a widening of that margin, but it'll be less and less deferred amortized cost being put into margin because the costs are running through as the loans and bonds are coming on the books through operating expense.
Moving on there, but that's kind of how it's going to change the financial statements.
And in terms of the transition on the bottom of page seven this is how we see like over a four year period. We continue just originating the loans new loans at fair value and the existing amortized cost portfolio as of September 30 of 2022 continues to pay down and pay off over around a four year timeframe, you kind of see what's happening there the gray.
<unk> cost portfolio becomes less and less and you start to kind of converge a transition to almost a full fair value now.
Now this illustrative purpose never fair value option is an election. So we're talking about all of our originations going forward. We've also said that we'd like to grow the company Inorganically as well I mean, if we decide to acquire loans from another institution.
We'll look at that on a case by case decision, we want to take acquired wells and apply fair value or maybe they're already amortized leave and advertise so there's some things that could cause this transition look a little bit different but for the most part you can start seeing the amortize portfolio coming down and the fair value side portfolio going up into this transition.
On the next slide but could you kind of our loan production as Chris mentioned, we strategically decided to reduce and put the brakes, a little bit tighten up the credit on a low production in Q4 because of the volatility that we saw in the securitization market. We wanted to wait until the first of the year and see if that securitization market comes back.
<unk>, which again did a securitization in January the execution that security was better than the one we had done in say October of Q4 that was a very smart decision to kind of pull back on that production at the same time, though we continued rise of raising interest rates on our loans you know kind of in response to what they did and interest rates, we continue to raise them.
Our overall WAC on our Q4 production was at nine 7%, which was up 78 basis points from the prior quarter's production you can see from our fourth quarter of 'twenty. One production is up 339 basis points. So we continue to raise that whack and we'd like Chris said and even though the interest rate has gone up your average WAC has gone up we still have a very healthy.
<unk> pipeline and our portfolio and we expect to kind of grow those originations now coming out of the first quarter going forward.
On page nine our loan portfolio portfolio growth continues to grow even though ive been asked the weighted average coupon goes up we weren't as Chris mentioned, 36% just about year over year, and our portfolio growth and a $3 5 billion compared to $2 6 billion total up portfolio.
You can see how in the table below it just really shows that growth. So very strong growth still very strong appetite and demand.
Borrowing base for our product.
All while still keeping their loan to value ratio right around 67, 68% and the average loan balances again still around 400000 are sub $400000 on average per well.
Page 10-Q, four asset resolution activity on our Mpls, Chris alluded to this Q4, the volume of NPL resolutions. It's just low Q4 is pretty much a market phenomenon, where securitization market kind of went away. The borrowers worked prepaying. Its just everybody kind of I guess to the Q4 holiday.
So in Q4 resolutions, where LOE you can see we resolved 25 million in total both long term and short term loans on our U P D compared to say fourth quarter of $44 million you have an idea of the lower volume.
Yes, if you took the first three quarters of 'twenty to Q1, two and three on average they were all at about $44 million, but Q4 was a 44 million resolutions were about 43 44 on average for the first three and then you get to Q4.
And is this 25 million, but the key point there, though is even on that 25 million you can see at two 3% gain meaning again over and above collecting the contractual principal and interest on those loans. So we're still making the same percentage gain on the NPL resolutions. So that's more of a temporary thing those resolutions will occur as NPL loans will here.
We expect to make that game going forward is more of a timing thing and we've already seen in January and February of this year January and February that NPL interest that we've received the default interest you're seeing for two months is already it's already more than it was all in Q4. So we are seeing that start to come back.
Q1 of this year.
Slide 11 on the net interest margin, we expect our portfolio NIM to stabilize.
Essentially the lower NPL resolutions in Q4, and the impact of 61 basis points on the net 61 basis points because of that lower total NPL resolution dollars coming in and we expect to recover that going forward in future periods, you said that <unk> already seen that start to come back now in Q1.
And the portfolio WAC has increased the portfolio last quarter over quarter increase by 25 basis points. So again, the fact that Q4 was kind of the.
The NPL resolutions were low we're seeing it come back so we're seeing the MPL dollars coming back in on top of that you've got a weighted average coupon on the portfolio that we had the past. So we do expect that NIM to stabilize on a go forward basis.
Page 12, the loan investment portfolio performance.
The second quarter of last year, we pretty much got to come back to our normal range of nonperforming and we've set our 7% to 9% is kind of our sweet spot.
Seven 9% doesn't make us nervous at odds with what he said on the overall gain on our nonperforming over 95% of an epsilon the loans.
Zhao gained position us to make money on those and you can see since June eight.
<unk> seven <unk> eight three kind of in there keep in mind, the eight 3% a slight tick up in Q4 again, we had low resolutions in Q4 tightening item, but we also put the brakes on production. So you didn't have the normal new production coming in Q4 to kind of help offset so that's.
Specced out to kind of more stabilized in the 8% to seven range on a go forward basis.
Slide 13, the cease of loan loss reserve, it's a loan loss reserve at the end of the year. It was $4 9 million as compared to five 3%.
For Q3 at the end of September .
A lot of 15 basis points. So we're running right around 15 16 basis points, we feel that's an accurate reserve rate.
H S U P b.
Keep in mind on the loan loss reserve the slight tick down. It was just you had less loans you know a smaller portfolio at the end of the year that was subject to seasonal because the fair value option loans that we put on in Q4, because the rest of their value. They are not subject to a loan loss reserve.
You've got the portfolio starting to pay down is at 930 that is subject to the reserve and you didn't add any new loan subject to reserve in Q4, which have accounts for the tick down in dollars, but we're still at the same rate 15 basis points and the <unk>.
Real positive takeaways to charge offs as Chris mentioned, there were no charge offs for Q4, and if you look at the Q1, two three and four charge offs total charge offs for the year were $520000.
On a $3 billion portfolio.
On slide 14, our funding and liquidity is still very durable we've got plenty of warehouse capacity and funding we did six securitizations in 2022 as Chris alluded to.
We have significant reserves in warehouse capacity and we ended the year with total liquidity of about $64 million and that includes cash cash equivalents as well as on finance law. So on finance collateral that we could pledge, but we had about $64 million in available liquidity, we said that our maximum capacity on the warehouse lines was 800.
$10 million at the end of the year, we had $500 million available capacity. So plenty of capacity in terms of both cash and liquidity as well as warehouse capacity to grow the business and pick up the originations as Chris mentioned coming out of Q1 into the rest of 2023.
Okay.
Chris with that I'll turn it over to you for kind of our key business drivers and outlook.
Great. Thank you Mark.
Just kind of wrapping up.
Where we're headed and how we see things in terms of the market. There's certainly a lot of crosscurrents going on.
Definitely seeing a softening in the real estate markets in terms of price and volume.
However, it has been modest so far and we've been able to as I said execute.
Our army is comfortably in and we see markets generally holding up fairly well.
In terms of credit.
Again same story quite a lot of cross currents. There we have tightened our credit box recently, and Fortunately with our business model and the portfolio earnings we can.
Modulate volumes as we see fit.
Managed risk appropriately.
On the capital front.
We expect to do a securitization next quarter.
And we're.
We're getting we're continuing to see good trends, there and expect that that will go well.
Looking for other opportunities to continue to grow our capital base.
Accretively in it in a way that will be helpful to all shareholders.
Lastly on the earnings front as Mark expressed we do think yields will improve going forward and.
So while our volumes as we start to step on the gas pedal here.
And lastly, we are still open and looking for strategic opportunities and haven't found anything that's compelling yet, but if we do we will certainly execute on that.
So.
That wraps up our presentation and I think we should open it up for any questions.
Yeah.
Ladies and gentlemen, we will begin the question and answer session.
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And our first question today comes from Stephen Laws from Raymond James. Please go ahead with your question.
Hi, good afternoon, Chris and Mark.
Yeah.
Mark sorry, Chris let's start maybe with the you know you talked about volumes ramping those back up you've mentioned in the prepared remarks that Q1 will be the trough.
Where do you see those ramping back up to on a monthly or quarterly basis.
By the second half of the year, where do you see those leveling out yeah, Hi, Stephen Good good question, I think where we're projecting somewhere.
Somewhere in the I would say that.
Two to 250 million.
[noise] range would probably be what we expect on a quarterly basis I think for the year.
I think it will be in excess of 900 million. So.
It will.
Q1 will be the low point, but it will start to grow from there.
Great. Thanks for that Chris Martin I wanted to touch base on the <unk>.
The NPL resolutions.
Year to date mentioned.
More versus Q4 is that more in volume or more than the margin on the recovery or is it more referring to both.
Hey, Steve how are you doing.
The thing is it.
In terms of for the first two months of this year, we've seen more actual game coming through than we did in all of Q4. So that's the actual resolution gain dollars.
Great. Thanks for that clarification, what are the big Charles clearer on that Oh, the WAC you know big increase on your four key production.
97, I believe you know here we are in mid March can you talk about where that is today to increase that further since year end or is it kind of settled in at that level.
Yeah. So we we've continued to follow the the bond market and our benchmarks and current production.
Right now, we're just a tad under 11%. So yeah. We've we've raised the coupons significantly to follow with the market and we feel like we're.
At the right level for from a from a margin and a NIM perspective to where we would execute on on a securitization.
Great and last one if you don't mind.
I know, our Npls ticked up a touch.
I need to normalize that though I think due to pulling back a little in Q4 that probably takes out about 150 or $200 million of performing loans. The denominator. So maybe.
Maybe the number over reflects the uptick there, but I noticed in the back of the supplement your 60 to 90 day I think went from about $120 million to $185 million can you just touch on maybe what you're seeing in inside the portfolio.
Year to date from a credit migration.
Migration standpoint, just given the backdrop and maybe some additional color there would be fantastic and I. Appreciate your comments. This afternoon, yes sure absolutely yeah definitely saw the uptick there.
I mean, I think it's our read is that clearly you know.
Some borrowers are feeling stress in and seeing the impacts of what the fed is done and that shows up in delinquency.
There does tend to be a lot of noise in that 30 day buckets. So we don't really.
Sweat that one too much people bounce around quite a bit there, but when you start getting into 16 90, that's when youre definitely going to.
I have to get involved and we've seen the number of nonperforming loans that are special asset team works on.
Increase in the fourth quarter. So clearly you know borrowers are feeling feeling the pressure.
<unk> of what the fed is done.
As we've always said, if we did our job right and got them value right.
Not concerned.
We'll be fine.
And a paradoxical way those delinquencies actually ended up being quite profitable for us unless we screw it unless they screwed up the value so.
I would say.
We're watching it.
But we're not we're not concerned or seeing anything that is flashing red at this point.
Right, well certainly shown that recovery NPL resolution. So I appreciate the time. Thank you. Thank.
Thank you.
Our next question comes from Steve Delaney from JMP Securities. Please go ahead with your question.
Hello, everyone I guess just to start I'd like to applaud Your F. C. O decision I think are probably a lot of the people on the call know that both Redwood Trust and MSA use the fair value method on their securitized portfolio and I really do think it will help you get across your make your books.
Value of new economic value, you know definitely more transparent. So congratulations I think that's that's good progress and it'll be well received.
Back to the sure thing we're back to the current quarter for cube, So got a little fuzzy understood. Okay core was only down two sense and I understand the resolutions that was 10 cents what got fuzzy in my brain was.
What was the key factor.
The factors that were.
Offsetting the lower resolution income of you know.
But net net you know you you picked up eight cents somewhere and I know you've got some higher coupons, but could you mark could you kind of comment on that and help help connect the dots for me.
Well sure I think I think one thing that you're seeing that kind of helps offset the lower resolutions and earrings per share and just wholesale dollars pre tax dollars.
Yeah, the FPL election.
For Q4 rates on the fair value election, Hasnt said instead of moving in that embedded value of our loan portfolio slowly overtime to margin youre, bringing that value in on day, one when you're funding the loan. So we probably brought in Oh somewhere in the neighborhood.
Maybe five to say $6 million on a pretax basis in the quarter based on the say $270 million with U P b that.
Funded and applied <unk> in Q4.
Got it okay, Yeah, just kinda blanked on that despite my complement on the F. B O option I didnt apply it to <unk>.
So.
The market today.
You your we've got your wax and everything in the in the fourth quarter originations, Chris could you just comment on like your loan products today.
Well, one I think I know what your focus are you what what products are you specifically focusing on and what kind of coupon and fees are you are you able to achieve in todays market on the loan side sure.
Yeah. So I would say you know throughout the year it was definitely an adjustment.
<unk> had to react to ever increasing rates. So there's kind of a give and take there back in force people, we'd start to see borrowers.
So there's there's there's definitely some adjustment period going on there but.
We're still focused in the core areas of where we've always been we see good demand in the investor one to four.
We see good demand in.
In the in the short term loans, where we do like some fixed and flourish in the.
Lending in fix and flip so it's strong there we've been very very tough on office space. We don't we're not we're not bullish on office space. It also were very tough there but.
Other than that change I would say.
We're seeing good demand on all those types of products and we're anywhere from the.
On the low side kind of 10% to 11, 5% depending on the property type.
And that's on the coupon right and yes, that's the coupons fees or plus right on that that's right.
Okay great.
Okay, well. Thank you for the color I would say this they want office because.
Stephen laws.
Anybody else on the call. That's all we live with today, you're talking to people about bad office loans, but I just want to make the point I think dental offices and medical offices are really still good. So you're good yes may come down a lot.
I think that's a fair point and then we also I would add to that that the neighborhood serving office can be very good so that which is typically what we do we're not doing class a downtown horse.
So a lot of that.
Business, sorry community, serving kind of small office stuff has been holding up well too sure thing.
Great the comments yeah. Thank you Steve.
Once again, if he would like to ask a question. Please press star and then one to withdraw your question you May Press Star two.
Our next question comes from Erin <unk> from Citi. Please go ahead with your question.
Thanks.
I was wondering if you could talk about what the cost of the January securitization was I'm not sure.
It didn't quite see that in the deck are procuring it.
Sure Hi, Eric.
That was that was in the very low 7%.
Coupon.
That's correct.
Got it.
And then maybe you could help walk through an example.
Maybe of the F B O our accounting.
Counting if you if you were to Saturday originated a 100000 dollar loan I know you typically do closer to 400, but just for my simplistic [laughter], you're using 100 Vesey Yeah sure Yeah sure just to just the way I think about it as you know we do a $100000 alone.
Let's say, we put it on the books for three points. So we lead the mark of.
$3 million gain.
Sorry, its a $3000 gain in your example of a you know.
Not on realized gain than.
And then we'd also booked some additional income that we collect.
From the origination process.
No.
Can give you a breakout of those costs and how much that is but there's some money there.
And then when you think on the expense side.
Instead of deferring some of our overhead and cost to originate that loan that was required under the under the GAAP method.
We'll go ahead and expense that whole dollar amount and so that's.
Beth.
I think I think probably.
I can't give you the numbers on the on the $100000 loan, but mark could take you through with probably if it's helpful. You know what happened in the fourth quarter.
And show you those numbers, but I can tell you on it.
On a net basis.
For 270.
Odd million dollars.
We booked about $6 million worth of.
Income.
On a pre tax basis, yes, yeah pretax right pretax.
And in terms of the just.
To mark the loans at a premium and including the gain upfront.
How do you come across or how do you come up with with with that 3%.
Your example.
Will that fluctuate over time, depending on market conditions, and then the existing book that would be.
We can get fair value would you then be marketing that.
Down over.
No.
Or up I suppose if rates are conditions changed but what are the biggest dynamics that impact.
The fair value marks on the existing.
Yeah, absolutely so.
Our capital markets team has a discounted cash flow model that we use to <unk>.
Project, what we think.
Willing buyer would pay for those assets.
And so that that's how we.
Starting with our baseline.
And then come up with what we think you know that the fair value of that asset is over time absolutely.
Those assets will move up or down dependency.
Depending on discount rate as interest rates.
Prepay speeds all of those kinds of things, but it's important to point out also that.
We will mark the corresponding debt associated with those assets as well so.
We believe there'll be limited volatility.
As we go forward because we think there's going to be you know movement on both the asset and the liability side that should go in the same direction based on that.
And then lastly is.
There's an extra level of comfort, we actually sold a $20 million worth of loans in the first quarter.
Two two.
Prove ourselves out and to make sure that we were right and they sold right around that 103 price. So.
We think we have a good.
Market clearing transaction is it.
Extra confirmation.
May not may not do that every quarter on a go forward basis, but.
We're pretty dialed into the capital markets and where things are.
Execute and we will be careful to.
To Mark those assets.
You know, what we think are fairly conservatively.
The interesting part obviously is as that.
That's obviously just an estimate of what what some buyer would pay for those assets, that's not where we're going to necessarily sell them.
Over time, we think we'll probably end up recognizing more income than that.
103 level for sure but.
That will come in over time through the through the NIM as opposed to them.
Completely through fair value marks.
Okay and then just last one for me is when you when you have loans that go.
Go into nonperforming.
Would you then mark those lower by some certain level and since you've had the nice benefit of.
Resident resolving non performing loans did it did.
100% or above 100%.
What's.
There are periods, where.
You know.
The house prices go down commercial properties go down then you start having resolutions below 100% does that force you to kind of remark the entire portfolio or or or specifically I guess the npls on your book.
Yeah. So.
On the Npls.
Definitely we will mark those down as they as they go more delinquent because the standard under GAAP as well.
Willing buyer pay so.
Yes short answer is we will we will mark those down.
Sure.
Thanks.
Yeah.
Aaron This is Martin as I say and on the NPL loans will still have the same policy, where when a loan goes nonperforming.
We will start to look at the value of the underlying collateral. So theres a difference when you're valuing you won which is a financial instrument with future cash flows and your value real property retro Theres a difference. So we're still going to take a look at the value of the underlying collateral when it goes nonperforming. So the model will say here's the value of a loan and are performing well at once.
Those nonperforming will look to the underlying value of that collateral as Chris mentioned that their underlying EBIT that collateral is less then yes that that loan would get marked down.
Okay.
I will like we have to follow up with you guys to figure out my model, but I. Appreciate the answers. Thank you you bet.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to the management team for any closing remarks.
Thanks, everybody for joining the call and we look forward to getting back together soon and I appreciate everybody taking the time to hear our story take care.
Thank you everybody.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.