Q4 2023 Velocity Financial Inc Earnings Call
Good day, and welcome to philosophy financials fourth quarter conference call.
Operator: Good day, and welcome to Velocity Financial's fourth quarter conference. All participants will be in the
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Operator: Please note this event, and I'd like to turn the conference over to Chris Oltmann. Please go ahead. Thanks, Ed. Hello, everyone, and thank you for joining us today for a discussion of Velocity's fourth quarter and four-year 2023 results. Joining me today are Chris Farrar, Philosophy's president and chief executive officer, and Mark Szczepaniak, Philosophy's Chief Financial Officer, earlier this afternoon. We released our fourth quarter and full year 2022 results, and you can find the press release and accompanying presentation we will refer to during this call on our investor relations website at www.bellfinance.com. I want to remind everyone that today's call may include forward-looking statements that are uncertain and outside of the company's control, and actual results may differ materially due to discussion of 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 findings with the Securities and Exchange Commission.
Please note this event is being recorded.
I would now like to turn the conference over to Chris Oltman. Please go ahead.
Thanks, Ed.
Hello, everyone and thank you for joining us today for a discussion of philosophy fourth quarter.
For your 2023 results.
Joining me today are Chris Ferrara.
He is president and Chief Executive Officer, and Mark Japan, yet.
Philosophy as Chief Financial Officer.
Earlier this afternoon.
We released our fourth quarter and full year 2022 results and you can find the press release and accompanying presentation. We will refer to during this call on our Investor Relations website at Www Dot <unk> Dot com.
I want to remind everyone that today's call may include forward looking statements, which are uncertain and outside of the company's control and actual results may differ materially.
For a discussion of risks and other factors that could affect results.
Do you 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.
Chris Oltmann: 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 materials on our Investor Relations website. And finally, today's call is being recorded and will be available on the company's website later today. And with that, I will now turn the call over to Chris Farrar. Thanks, Chris.
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 materials on our Investor Relations website and finally today's call is being recorded and will be available on the company's website later today.
And with that I will now turn the call over to Chris sure.
Thanks, Chris.
Chris Farrar: We appreciate everyone joining our fourth quarter earnings call. First off, I'd like to congratulate my teammates as we delivered another record quarter to finish 2023 as our best year in the history of the company. Our execution was outstanding across all segments of the business.
We appreciate everyone joining our fourth quarter earnings call.
First off I'd like to congratulate my teammates as we delivered another record quarter to finish 2023 is our best year in the history of the company.
Our execution was outstanding across all segments of the business.
Chris Farrar: We consistently grew Originations and expanded our platform capabilities to deliver products that our customers need and want. Banks continue to be constrained in extending credit, which has allowed us to grow our portfolio with compelling risk-adjusted spreads. While there continues to be stress in some segments of the larger commercial real estate markets, our single-family rental and small neighborhood-serving commercial properties continue to perform well. We see healthy demand with limited supply in our niche, which continues to drive modest price appreciation for these types of assets. The most significant development impacting us in Q4 was the change in Fed policy.
We consistently grew originations and expanding our platform capabilities to deliver products that our customers need and want.
Banks continue to be constrained and extending credit, which has allowed us to grow our portfolio with compelling risk adjusted spreads.
While there continues to be stressed in some segments like the larger commercial real estate markets are single family rental and small neighborhoods, serving commercial properties continues to perform well.
Healthy demand with limited supply in our niche, which continues to drive modest price appreciation for these types of assets.
The most significant development impacting us in Q4, it was the change in fed policy.
Chris Farrar: As everyone knows, bond markets responded quickly and favorably as the Fed signaled the likely end of rate hikes. We saw an immediate improvement in the securitization market as our first deal in 2024 benefited from lower base rates and tighter spreads, where we realized more than a 100 basis point decrease in our cost of funds. We continue to see very healthy execution for new issuance and believe there is more demand than supply available to our bond investor base. In terms of credit, our portfolio is performing well, and we remain disciplined in following our credit process without sacrificing margin. As a result, we improved our margins throughout the year by increasing yields and controlling expenses, which drove a 43% increase in our annual pre-tax ROE. While delinquency remained stable in the fourth quarter, our asset management team resolved just over 70 million NPLs favorably, and they deserve credit for an outstanding job.
Everyone knows a bond markets responded quickly and favorably the fed signaled the likely end of rate hikes.
We saw an immediate improvement in the securitization market as our first deal in 'twenty 'twenty four benefited benefited from lower base rates and tighter spreads where we realized more than a 100 basis point decrease in our cost of funds.
We continue to see very healthy execution for new issuance and believe there is more demand than supply available to our bond investor base.
In terms of credit.
Our portfolio is performing well and we remain disciplined in following our credit process without sacrificing margin.
As a result, we improved our margins throughout the year by increasing yields and controlling expenses, which.
Which drove a 43% increase in our annual pretax Roe.
While delinquency remained stable in the fourth quarter, our asset management team resolved just over $70 million of Npls favorably and they do deserve credit for an outstanding job.
Chris Farrar: Looking forward, we have great momentum heading into 2024, and we're focused on our 5 by 25 objectives to grow the portfolio to at least $5 billion by 2025. Our entire team is committed to delivering value to our customers and shareholders. And we're excited to continue building upon our. With that, I'll turn over to our presentation materials. We'll start with page three. Obviously, a great quarter with core net income up 77% from the prior year and a great performance in terms of NIM as well.
Looking forward, we have great momentum heading into 'twenty 'twenty four and we're focused on our five by 'twenty five objective to grow the portfolio to at least $5 billion by 2025.
Our entire team is committed to delivering value to our customers and shareholders.
And we're excited to continue building upon our success.
With that I'll turn it over to our presentation materials and start with page three.
Obviously, a great quarter core net income up 77% from the prior year.
Great performance in terms of NIM as well and we've proved in the in the fourth quarter up 18 basis points sequentially.
Chris Farrar: We proved in the fourth quarter up 18 basis points sequentially, maintaining our strong production growth. I mentioned pre-tax ROE, and you can see in the fourth quarter we had a very healthy increase versus the prior quarter. Turning to production in the portfolio, $350 million of new UPB, exceptional growth there as we continue to execute on our plan and do a great job of maintaining the coupon. In terms of the total portfolio, we're now over $4 billion, and, as I mentioned, headed to $5. From a non-performing loan perspective, as I mentioned, those assets remain stable, and we continue to recognize positive gains of a little over $102 million in the fourth quarter. In terms of financing and capital, we mentioned the securitization market continues to be very strong, closed the deal in the fourth quarter, and won in early January. He also probably saw our press release that we issued $75 million of new growth capital to continue expanding the portfolio and putting on new assets in an accretive way. Turning to page 4, walking through book value and adjusted book value.
Maintaining our strong production growth.
I mentioned pre tax ROE and you can see in the fourth quarter, we had a very healthy increase versus the prior quarter.
Turning to production in the portfolio $350 million.
Of New U P b.
Exceptional growth there as we continue to execute on our plan and did a great job of maintaining the coupon.
Oh in terms of the total portfolio, we're now over 4 billion and as I mentioned headed to two five.
From nonperforming loan perspective, as I mentioned those those assets remained stable and we continue to recognize positive gains a little over 102.
In the fourth quarter.
In terms of financing and capital.
We mentioned the securitization market continues to be very strong closed the deal in the fourth quarter and one in early January.
He also probably saw a press release that we that we shoot $75 million of new growth capital to continue expanding the portfolio and putting on new assets in an accretive way.
Turning to page four I'm walking through.
Book value and adjusted book value.
Chris Farrar: We highlight on the left some of the core adjustments that we made. There's sort of a one-time tax liability that offset some of our GAAP earnings and brought the core results down a touch for the quarter, but again, very strong results that we're very proud of. You can see the book value and growth in the upper right.
The.
Highlight on the left some of the core adjustments that we made.
There's a sort of a one time tax liability.
All set some of our GAAP earnings and brought the core results down a touch for the quarter.
But again very strong results that we're very proud of you can see the book value.
Growth in the upper right.
Chris Farrar: In the section of this slide, we show the bar chart growing to book value of $13.49 a share. We added two new columns on this slide from our previous presentation and want to kind of walk folks through what this represents and why we put this here. The green bar that says adjustment, $3.32 per share, represents the fair value mark on all of our assets and liabilities that are carried at cost if we were allowed under GAF to mark all of those assets to fair value. You'll see in our financial statement footnotes. This is the math that gets us to fair value. Comparable sets and peers that we get compared to carry their assets at fair value.
Section of this slide we show the Bar chart growing to book value of $13 49, a share.
We added two new columns on this slide from from our previous presentation and want to kind of walk folks through what this represents and why we put this here.
The Green bar that says it adjustment and $3.32 per share is.
Ah represents the fair value Mark on our all of our assets and liabilities that are carried at cost.
If we were allowed under GAAP to Mark all of those assets to fair value you'll.
You'll see in our financial statement footnotes. This is the math that gets us to <unk>.
Fair value in many of our.
Comparable sets and peers that we get compared to carry their assets at fair value.
Chris Farrar: As you know, we made the election in Q4 of last year to move to fair value accounting. We wanted to show everyone that. We believe that the true value that we've created is actually much higher than the gap book value. So this far right column of $16.81 is a reflection of that potential gain. If we were, under GAAP, allowed to mark everything to fair value, we'd come up with an adjusted book value of $16.81 a share. This is where the company is heading in the next four to five years. We expect almost the entire portfolio to be held at fair value. So we thought it would be helpful to walk folks through kind of how we get from where today's book value is to where we think fair value fits and where we expect it to go in the future. With that, I'll turn the presentation over to Mark to take over on slide five. Thanks, Chris. Hi everyone.
You folks know we made the election in Q4 of last year to move to fair value accounting. So we.
We wanted to show.
Everyone that.
We believe that's true.
That we've created is actually much higher than the GAAP book value.
And so there's far right column of $16.81.
Is it a reflection of you know that and potential gain if we were under GAAP allowed to mark everything to fair value, we'd come up with an adjusted book value of $16.81 a share so.
This is where the company is heading in the next four to five years.
We expect almost the entire portfolio to be held at fair value.
We thought it'd be helpful to walk folks through kind of how we get from where today's book value is.
Where we think fair value sits and where.
We expect it to go in the future.
With that I'll turn the presentation over to mark to take over on slide five.
Thanks, Chris Hi, everyone.
Mark Szczepaniak: Our fourth quarter capped a very successful 2023 that further advanced Velocity's strategic growth initiative. On page 5, our low production ended the year strong, as Chris mentioned. Our Q4 production was a little bit over $352 million in UPB. That was a 21% increase from the $290 million in Q3, and almost a 27% increase in production year over year.
Our fourth quarter capped a very successful 2023 further advanced philosophies strategic growth initiative.
On page five our loan production ended the year strong as Chris mentioned, our Q4 production was a little bit over $352 million in U P. B that was a 21% increase from the $290 million in Q3, and almost 27% increase in production year over year.
Mark Szczepaniak: Our strong production growth during 2023 was achieved with a weighted average coupon for new originations for all four quarters during the year remaining constant at 11%. The growth and originations in the second half of 23 were also at higher credit levels, with the way they averaged LTV for the last six months of the year at 65%. The strong 2023 production growth at the higher weighted average coupons demonstrates the continued borrower demand that we've had for our product. As a result of this strong growth in production, page 6 shows a similar growth in our overall loan portfolio. The total loan portfolio at the end of the year was almost $4.1 billion.
Our strong production growth during 2023 was achieved with a weighted average coupon for new originations for all four quarters during the year remaining constant at 11%.
The growth in originations in the second half of 'twenty. Three was also in higher credit levels with the weighted average LTV for the last six months of the year at 65%.
The strong 2023 production growth at the higher weighted average coupons demonstrates the continued borrower demand for our products.
As a result of the strong growth in production page six shows a similar growth in our overall loan portfolio total loan portfolio at the end of the year was almost $4 1 billion as Chris mentioned is the first time in history that our loan portfolio itself has been in the $4 billion threshold, that's a 5% increase from Q3 and 16%.
Mark Szczepaniak: As Chris mentioned, this is the first time in our history that our loan portfolio itself has been at a $4 billion threshold. That's a 5% increase from Q3 and a 16% increase in the loan portfolio year over year. The weighted average coupon on our total portfolio as of December 31st was 8.88%, a 25 basis points increase from Q3 and a 93 basis points increase year over year. And the portfolio loan-to-value ratio actually declined slightly to 67.8% as of December 31st, compared to 68 at both Q3 and the end of year 2022.
Rent increase in the loan portfolio year over year.
The weighted average coupon on our port full portfolio as of December 31 was 8.88% a 25 basis points increase from Q3, and a 93 basis points year over year in the portfolio loan to value ratio actually declined slightly to 67, 8% as of December 31, as compared to 68.
Yeah, both Q3 and end of year 2022, and again that was predicated based on again the last six months of 2023 coming into a 65% hydro credit spread L. T V.
Mark Szczepaniak: And again, that was predicated based on the last six months of 2023 coming in with a 65% tighter credit spread LTV. On page 7, our Q4 NIM increased by 18 basis points from Q3 and 68 basis points year-over-year as our portfolio yield increased quarter-over-quarter by 32 basis points and year-over-year by 119 basis points, while our cost of funds only increased by 12 basis points quarter-over-quarter The strong growth in Originations coupled with the widening NIM is reflected in our 2023 earnings. On page 8, our non-performing loan rate at the end of the year decreased to 9.7% compared to 10.1% at the end of Q3.
On page seven our Q4 NIM increased by 18 basis points from Q3 of 68 basis points year over year as our portfolio yield increased quarter over quarter by 32 basis points and year over year by 119 basis points, while our cost of funds only increased by 12 basis points.
Quarter over quarter, and 52 basis points year over year.
The strong growth in originations coupled with the widening NIM is reflected in our 2023 earnings.
On page eight our nonperforming loan rate at the end of the year decreased to nine 7% compared to $10. One at the end of Q3.
Mark Szczepaniak: Once again, the ongoing strong collection efforts by our special servicing department resulted in continued resolutions of our NPL loans at very favorable gains. If you look at page 9, it highlights the continued success of our NPL resolution effort. In Q4, we resolved almost $71 million UPB of NPL loans and REOs for a net gain of $1.5 million, or 2.2%.
Once again, the ongoing strong collection efforts by our special survey servicing Department results and continued resolutions of our NPL loans at very favorable gains.
If you look at page nine.
Highlights the continued success of our NPL resolution efforts in.
In Q4, we resolved almost $71 million <unk> of NPL loans scenarios for a net gain of one and a half million dollars or two 2%.
Mark Szczepaniak: In 2023, in total, we resolved a little over $225 million UPB of NPL loans and REOs for a gain for the year of $5.5 million, or 2.5%. Page 10 presents our CECL Loan Loss Reserve and our Net Loan Charge-Off and REO activity. On the left-hand side, the CECL Reserve at the end of the year was $4.8 million, or 17 basis points of our outstanding non-fair value loans health investment portfolio. Our CESA reserve has been consistent at 15 to 17 dips over the last five quarters. Remember, the CESA loan loss reserve does not include any loans being carried at fair value as they are not subject to the CESA reserve.
2023 in total we resolved a little over $225 million <unk> and NPL loans scenarios for a gain for the year of $5 $5 million or two 5%.
Page 10 presents our CSO loan loss reserve and our net loan charge offs and Oreo activity on the left hand side. The see some reserves at the end of the year was $4 8 million or 17 basis points of our outstanding non fair value loans held for investment portfolio or.
Our <unk> reserve has been consistent at 15 to 17 bps over like the last five quarters.
The CSO loan loss reserve does not include any loans getting carried at fair value that they are not subject to the CS reserve.
Mark Szczepaniak: The table to the right on page 10 is a new presentation that shows our net gain or loss from loan charge-offs and REO activities during the year. Management believes this presentation provides an enhanced view of our loan resolution valuation activities from the time a loan is charged off and converted to REO through the REO sales process. U.S. GAAP requires separate accounting and separate presentation in the financial statements for loans and REOs because they're considered different types of instruments.
The table to the right on page 10, the new presentation that shows our net gain loss from loan charge offs and our activities during the year.
Management feels this presentation provides an enhanced view of our loan resolution valuation activities from the time alone is charged off and convert into Oreo through the Oreo sales process.
U S GAAP requires separate accounting and separate presentation in the financial statements for loans and Oreo because we consider different type of instruments, but operationally management views, the Oreo foreclosure and a related sale of valuation activities as an integral part of the entire loan resolution process.
Mark Szczepaniak: But operationally, management views the REO foreclosure and related sale evaluation activities as an integral part of the entire loan resolution process. For 2023, we had a net gain on loan charge-offs and REO evaluation activities of $2 million. And in 2022, a net gain of $5.5 million, further demonstrating the strong resolution activities from kind of a loan to a disposal process. Page 11 shows our durable funding and liquidity position at the end of the fourth quarter and at the end of the year. Total liquidity at the end of the year was $63 million.
For 2023 with a net gain on loan charge offs in Oreo valuation activities of $2 million in 2022, the net gain of $5 5 million.
Further demonstrating the strong resolution activities from kind of a loan to a disposal process.
Page 11 shows our durable funding and liquidity position at the end of the fourth quarter at the end of the year total liquidity as we ended the year with $63 million. That's comprised of about 41 million in cash and cash equivalents another $22 million in available liquidity that we have on finding us collateral.
Mark Szczepaniak: That's comprised of about $41 million in cash and cash equivalents, another $22 million in available liquidity that we have on unfinanced collateral. We did issue one securitization in Q4 in November. We issued, as Chris mentioned, 2023-4 security, totaling just under $203 million of securities issued. Our available warehouse line capacity at the end of the year was 554 million with an overall maximum line capacity of 860 million.
We did issue one securitization in Q4 in November we issued as Chris mentioned 2023 Dash for security totaling just under 203 to.
Two or $3 million of securities issued.
Are there a billable warehouse line capacity at the end of the year was 554 million with an overall maximum line capacity of $860 million.
Chris Farrar: Subsequent to year-end, we completed our first securitization in 2024, totaling just under $210 million of securities issued. And again, as Chris mentioned, in February 24, we issued $75 million of five-year fixed-rate senior secured notes to support the continued growth of the company. With that financial recap, I'd like to now turn the presentation back to Chris for his overview of Velocity's outlook on its key business drivers. Thank you, Mark.
Subsequent to year end, we completed our first securitization of 2024 totaling just under $210 million in securities issue and again as Chris mentioned in February 24, we issued $75 million five year fixed rate senior secured notes to support the continued growth of the company.
Yeah.
With that financial recap I'd like to now turn the presentation back to Chris for his overview of velocities outlook on its key business drivers.
Thank you Mark looking forward, we think the market is in a good position, particularly in our niche.
Expect to see strong demand, there and continued favorable asset resolutions.
Operator: Looking forward, you know, we think the market is in a good position, particularly in our niche. We expect to see strong demand there and continued favorable asset resolution. Credit, I think, remains tight, certainly, from the banks and the credit unions and other institutions like that, so we think that's potentially a strong tailwind for us. We're in a good position, and the securitization markets are definitely helping us right now, and we're very hopeful about future issuances and the market looking forward. And then from an earnings perspective, we think there are significant growth opportunities here as we continue to build out our strategy, develop new products, and grow the portfolio. So overall, we look very favorably into 24 and are excited to continue to grow the firm. With that, that concludes our prepared presentation, and we'll open it up for questions. We will begin the question and answer session. To ask a question, press star, then 1 on your telephone. At any time, your question has been answered. Please press star again.
Credit Ah I think remains tight certainly from the banks and the and the credit unions and other.
<unk> like that so we think that that's potentially a strong tailwind for us.
Capital.
We're in a good position in the in the securitization markets are definitely.
Helping us right now and we're very hopeful.
Hopeful about future issuances in the market looking forward.
And then from an earnings perspective, we think there's significant growth opportunities here as we continue to build out our strategy.
Develop.
New products and grow the portfolio. So overall, we look very favorably into 'twenty four and excited to continue to grow the firm.
Without that prepares our Oh, sorry. It concludes our prepared presentation and then we'll open it up for questions.
Thank you.
We will begin the question and answer session.
To ask a question press Star then one on your telephone keypad.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
And the first question today comes from Sara Baack home with B T I G.
Sarah Barcomb: And the first question today comes from Sarah Barcomb. P.I. Hi, good evening, everyone.
Hi, good evening, everyone. Thanks for taking the question I'm. So I was hoping you could talk a bit more about your outlook for production this year and funding that new production you know you've obviously been a frequent issuer in the securitization market, but now you've got the secured notes and excess warehouse capacity.
Chris Farrar: Thanks for taking the question. So I was hoping you could talk a bit more about your outlook for production this year and funding that new production. You know, you've obviously been a frequent issuer in the securitization market, but now you've got the secured notes and excess warehouse capacity. How should we think about both the production mix and the financing mix for 2024? Sure. Hi Sarah.
How should we think about them both the production mix in the financing mix for 2024.
Sure Hi, Sir thanks for that.
I think we released our year to date numbers through February and you can see the you know the volumes are continuing to be quite strong so.
Chris Farrar: Thanks for that. I think we released our year-to-date numbers through February, and you can see the volumes are continuing to be quite strong, so we expect a significant uptick in volume this year and beyond. In terms of the mix, we're still seeing a little bit more of the one-to-four than we're seeing in the small multifamily and small commercial, but that could change over the year. We'll see how things shake out, but right now, it's running kind of consistent with what we saw in the last three quarters, I would say, of 23.
We expect a significant uptick in volume this year going forward.
In terms of the mix, we were still seeing a.
A little bit more of the one to four than we're seeing in the multi small multifamily and small commercial that could change.
Change over the year, we'll see how things shake out, but right now it's running.
Kind of consistent with what we saw in the last three quarters I would say of 23.
Chris Farrar: And then from a financing perspective, you know, we intend to securitize every two to three months, so we should do at least 4-5 transactions this year. We like having the extra warehouse capacity to support that growth and to make sure that we time our securitizations effectively. From a risk perspective, our goal is always to get the debt termed out as quickly as we can and get these assets into a non-recourse securitization as quickly as possible.
And then from a financing perspective.
We intend to securitize them every every two to three months. So we should do at least four to five transactions. This year, we like having the extra warehouse capacity to.
To support that growth and to make sure that we time, our securitizations effectively but.
From a from a risk perspective, our goal is always to get the.
The debt termed out as quickly as we can and get these assets into a non recourse securitization as quickly as possible.
Great and then just a follow up for me do you have any updated thoughts on the outlook for the century acquisition and when we could start to see that fee income kind of pick up any color on those volumes with that license.
Chris Farrar: And then, just to follow up from me, do you have any updated thoughts on the outlook for the Century acquisition and when we could start to see that fee income kind of pick up any color on those volumes with that license? Yeah, yeah, we think this year is going to sort of towards the second half of the year, we're going to see some pretty significant fee income come through. They have a very large pipeline. And unfortunately, working through HUD is often very slow and cumbersome.
Yeah, Yeah. We've we think this year is going to sort.
Sort of towards the second half of the year, we're going to see some pretty significant fee income come through.
They have a very large pipeline and unfortunately working through HUD off is often very slow and cumbersome, but the pipeline is is almost four times larger than it was last year and where I know we recently just got a couple of them.
Chris Farrar: But the pipeline is, is almost four times larger than it was last year, and we're, I know we've recently just got a couple of approvals out of them. So I think in the second half of this year, you're going to start to see some significant fee income flow through from, Great. Thank you and congratulations on the quarter. Thanks, Sarah.
Approvals out of them. So I think second half of this year youre going to start to see some significant fee income flow through from them.
Great. Thank you and congrats on the quarter.
Thanks, Sir.
Thank you. Our next question comes from Don Vendetti with Wells Fargo.
Don Fandetti: Thank you. Our next question comes from Don Fandetti with Wells Fargo. Hi, good evening.
Hi, Good evening. So you know it looks like you guys are hitting or at least you're in a little bit of a sweet spot here I guess as you sort of look at your five and twenty-five that's pretty strong loan growth. How do you think about that from a risk management perspective, just given you know what.
Chris Farrar: So, you know, it looks like you guys are hitting, or at least you're in, a little bit of a sweet spot here. I guess as you sort of look at your five and 25, that's pretty, you know, strong, long growth. How do you think about that from a risk management perspective, just given what we went through for the last three to five years? And then, can you expand secondarily on what you're seeing from banks and competitors? Is it just good, or is it getting increasingly better competitively? Sure. Hi Don.
What we went through the last.
Yeah, three years to five years.
And then can you expand secondarily on what you're seeing from banks and competitors is it just good or is it getting increasingly better competitively.
Sure Hi, Don.
Chris Farrar: On the first question... You know, I mentioned in my opening remarks, we just have to stay disciplined on credit. We don't need to reach for volume. We're very disciplined in kind of sticking to where we like to extend credit. So in terms of risk management, I think we'll stick to what's been working over the last five years, and I don't see much of a change there. We are pretty in touch with our markets, and we're nimble, and we'll stay. Aware as to any changes, but right now, our outlook is positive, and this kind of leads into your second question: banks continue to be constrained. We think that that's going to lead to a driver of that volume.
On the first question.
You know why.
I mentioned in my opening remarks, we we just have to stay disciplined on credit we don't need to reach for volume Ah. If we're very disciplined in and kind of sticking to.
Where are we like to extend credit so in terms of risk management I think we'll we'll stick to what's been working over the last five years and I don't see much of a change there.
We are pretty intouch with our markets in and we're nimble and well stay well.
Aware as to any changes, but right now our outlook is things are positive and and as kind of leads into your second question. The banks continue to be constrained, we think that that's going to lead to a driver of that volume.
Chris Farrar: Now whether we hit that goal in, you know, the first part of 25 or the very end of 25, is probably not as important to us as maintaining our margins and maintaining our credit discipline, and when we get there, we will get there. But I would say for sure, answering your second question, the banks are only lending right now to their best customers. And below that, it's a struggle, people, so we're seeing.
Whether we hit that goal in the first part of 'twenty five or at the very end of 'twenty five you know probably as not as important to us.
Maintaining our margins and maintaining our credit discipline and when we get there we get there.
But I would say for sure but.
Filling in your second question the banks are only lending right now to their best customers.
And below that it's a struggle people, where we're seeing so we're seeing.
Chris Farrar: Better borrowers for sure come to us that we normally would not see, saying that they need financing, and they need capital. Thank you, Church.
Better borrowers for sure come to us that we normally would not see.
Saying that they need they need financing and they need capital.
Thank you.
Sure.
Our next question comes from Stephen laws with Raymond James.
Stephen Laws: Thank you for your question. Stephen Laws, Hi, good afternoon. I guess, first off, congrats on a very strong close to the year, a very impressive quarter. You know, to touch back on Sarah's question about production, you mentioned 254, which I believe is in the press release for the first two months. I've kind of always thought of Q1 as we'll see this morning light.
Hi, Good afternoon, I guess first off congrats on a very strong close to the year very impressive quarter.
You know to touch back on <unk> question about production you May you Didnt mentioned 254, I believe it's in the press release for the first few months and you know I've kind of always thought of Q1 is seasonally light you know what do you think kind of that as you look out what are what is your expectation for a quarterly number I mean is that is it for.
Chris Farrar: What do you think, kind of as you look out, what is your expectation for a quarterly number? I mean, is it $400 million, or kind of where do you think that settles in? Yeah. Um, you know, we don't provide exact forward guidance on that, but you're right, the fourth quarter is usually a touch lighter. So I would expect growth as we go through the year, much like we did last year, obviously barring any crazy disruption or circumstance, but I think we would expect sort of the Q1 run rate to pick up slightly throughout the year.
Under a million or kind of where do you think that settles out.
Yeah.
You know what.
Well, we don't provide an exact forward guidance on that but you're right. The fourth quarter is usually a touch lighter so I would expect.
<unk> growth as we go through the year much like we did last year, obviously, barring any crazy disruption or or circumstance, but I think.
We would expect you know sort of Q1 right run rate to tick up slightly throughout the year.
Great I appreciate that you know when you look at the the capital you just raised $75 million to the senior secured notes you know how much growth can that support have you been considering your ATM at all you know and when you. When you look at that do you look at it versus the GAAP book value or versus the adjusted.
Chris Farrar: Great, I appreciate that. But when you look at the capital you just raised, you know, 75 million through the senior secured notes, you know, how much growth can that support? Have you been considering your ATM at all? You know, and when you do when you look at that, do you look at it versus the gap book value or versus the adjusted book value that you've provided in the new slide deck? And, you know, how much?
Book value that you've provided in the the new slide deck and you know how much.
Chris Farrar: You know, how much new production and growth can your current liquidity and capital position support? Yeah. Good question, Stephen.
You know how much new production and growth can your current liquidity and capital position support.
Yeah.
Good question Steven.
Chris Farrar: This new capital that we took down gives us a pretty long runway, well into next year, in terms of our growth ambitions and plans. So we feel very good about our capital position and supporting that growth. As you know, we retain all our earnings, so that helps fuel that growth. And so on. I think we're not only so comfortable and good about that, but we have a lot of sort of flexibility and other things that we could do.
This new capital that we took down gives us a pretty long runway well into next year in terms of our growth ambitions and plans.
So we feel very good about our capital position and supporting that growth as you know we retain all our earnings so that that helps fuel that growth and.
And so.
I think I think we not only feel comfortable and good about that but we you know we have a lot of sort of flexibility and other things that we could do.
Chris Farrar: So, I would say we're confident in our ability to work well into next year. All right. And then, one last one, if you don't mind, you guys have been remarkably successful on the resolution and REO front. Can you talk about that process? You know, most others that I follow have seen delinquencies and problem loans kind of ticked up. You guys actually have ticked down slightly.
So though.
I would say, where we're confident in our ability to work well into next year.
Great and then one last one if you don't mind me.
You guys have been remarkably successful on the resolution and Oreo front.
Can you talk about that process you know most others, you know that I follow ups and delinquencies and problem loans kind of ticked up.
Actually ticked down slightly you continue to generate gains on those resolutions, but can you talk about how you guys run that process internally what the average time is as far as getting something from when it goes say delinquent to getting a resolution maybe give us a little more color on what's driving your success there. Thank you.
Chris Farrar: You continue to generate gains on those resolutions. But can you talk about how you guys run that process internally, what the average time is as far as getting something from when it goes, say, delinquent to getting a resolution? Maybe you could give us a little more color on what's driving your success there. Thank you. Sure, you bet. I realize I forgot to ask your earlier question about the ATM as well. We will utilize the ATM.
Sure you bet.
I realized I forgot to ask your earlier question about the ATM as well you know when we will we will utilize the ATM or as you know our trading volumes light. So it's not a huge generator of capital for us, but we're hopeful as we continue to go forward.
Chris Farrar: As you know, our trading volume is light, so it's not a huge generator of capital for us, but we're hopeful as we continue to grow, people will understand the story, and we'll be able to tap that more. In terms of asset resolution, you know, it varies by state. The shorter states, you know, Texas, you can foreclose in 60 days, California, those types of places, the trustee states. The other states that you have to go, you know, sort of judicially in your foreclosure. New York, New Jersey, Florida, those types of states can take up to two, three years to get a resolution.
People will understand the story and we will be able to tap that.
More in terms of asset resolution.
It varies by state.
The stronger States you know, Texas, you can foreclose in 60 days, California, those types of places the trustee states.
Uh huh.
Other states that you have to go you know sort of judicially and your foreclosure.
New York, New Jersey, Florida, those types of states are those those can take up to two or three years to get a resolution.
Chris Farrar: So, you know, we take that into account when we do our underwriting, and it's really important to make sure that we have a lot of equity when we make these loans because Default Interest and Interest is accruing all during those periods, so we can get some really nice gains in those longer states, assuming we've gotten the LTV right at the front end. So, it's a combination of very disciplined underwriting, a tough focus on real estate values, and then our super talented asset management team that really knows how to take an asset and get it resolved as quickly as we can. So, it's a combination of all those factors and a lot of experience in this particular niche that guides us through where to be aggressive and where to be conservative on the front end, which ultimately affects the back end. Great I appreciate your comments this evening. Sure. Our next question is from Steve DeLaney with CitizensJN. Thank you. Hello Chris and Mark, and thanks for taking the question. Look, I mean, fantastic.
So it's you know we take that into account when we do our underwriting and it's really important to make sure that we have a lot of equity when we make these loans because.
Default interest and interest is accruing all during those periods. So we can get some really nice gains.
In those longer states, assuming we've gotten the L. T V right at the front end so.
You know, it's it's a combination of a very disciplined underwriting.
That's tough focus on real estate values, and then you know our super talented asset management team that really knows how to take an asset and get it resolved as quickly as we can so.
You know, it's a combination of all those factors and a lot of experience in this particular niche the guide us through you know where to be aggressive in where to where to be conservative on the front end, which ultimately affects the backend.
Yeah.
Great I appreciate your comments this evening.
Sure.
Our next question comes from Steve Delaney with citizens JMP.
Hello, Chris and Mark and thanks for taking the question look I mean fantastic.
Hi, Chris So look fantastic quarter, great year, you guys just keep defying.
Steve DeLaney: Hey Chris, so look, fantastic quarter, great year; you guys just keep defying the roadblocks, I guess. Chris, you guys built this thing, you know, over the last 25 years. What is so different about your business model? that you can continue production flows when every other residential commercial mortgage lender was facing headwinds, you know, in volume and saw severe, you know, reductions and originations and, You know, I think I know what it is, but I want to hear from you. I mean, is it that your product is so...
The the roadblocks I guess and.
Chris you guys built this thing you know over the last 25 years and.
What is so different about your business model that you can continue production flows when when every other.
Residential commercial mortgage lender was facing headwinds you know in volume and saw severe.
Reductions in originations and.
You know I think I know what it is but I'm I want to hear from you I mean, there's.
Is it is it.
That your product is so.
Specific and unique and fits a niche that is less rate sensitive economically sensitive just trying I think it's telling us something about your business that.
Chris Farrar: I think it's telling us something about your business that is unique, and I just would love to hear your story so that I can relay it to clients tomorrow exactly what the special sauce is, that you can move forward while others are standing still or going backwards. Sure. Sure. Thanks, Steve. You know, we can't give away the secret sauce. That's true. Yeah, I guess not. That wouldn't be very smart.
Is that is is unique and I just would love to hear your so that I can relate to clients tomorrow exactly what the special sauce is that while you can move forward, while others are standing still or going backwards. Thank you.
Sure sure. Thanks, Steve you know, we can't give away the secret sauce.
That's true.
I guess not that wouldn't be a smart huh [laughter], so I would attribute it to two or three things.
Chris Farrar: So I would attribute it to three things. One, our company philosophy that we eat our own cooking. Everybody here knows that when we make a loan, it goes in the portfolio, and we own the risk. I think that's really important. A lot of other mortgage platforms are set up to sell off risk, and they don't ever see the final resolution of an asset and the life of that asset and what happens to it. Two, I would say our unique sort of balance sheet approach, in other words, you know, putting things in a portfolio and securitizing them. We're really unique in that we're basically the investor and the originator all in one, and most mortgage companies are split By combining the two, we feel like we get better alignment all the way through the process.
One Ah Ah or our company philosophy that we eat our own cooking everybody here knows that when we make a loan that goes in the portfolio and we own the risk I think that's really important a lot of other mortgage platforms are set up to sell off risk and they don't ever see.
The final resolution of an asset and whatnot and the life of that asset and what happens to it to I would say our unique but.
Sort of balance sheet approach in other words, you know putting things in portfolio and securitizing, It where we're really unique in that we're basically the investor and the originator all in one and most mortgage companies are split into two and I think that sort of.
Each of those you know functions have different drivers and different goals by combining the two we feel like we get.
Better alignment all the way through the process and then number three I would say you're right. The niche that we've focused in is clearly underserved and it has been for a long time and continues to be these assets are tricky to originate or.
Chris Farrar: And then, number three, I would say you're right, the niche that we focused on is clearly underserved, and it has been for a long time and continues to be. These assets are tricky to originate, and tricky to value, and, quite frankly, most of the other institutions.
Tricky to value and quite frankly, most of the other institutions.
Chris Farrar: Overlook them or or don't get that excited about them, and it's allowed us to be a provider of capital. I mean, the average loan size is the thing that jumps off the table. You know, to me, 350,000. Other people are, you know, just so much larger. So economically, other people, it wouldn't move the needle, but it certainly does for you with your volume. Thank you for that. And I noticed you changed your book value presentation a little bit. There are all kinds of reasons why.
Overlook them or or don't get that excited about them.
It's allowed us to to you know.
Be a provider of capital.
Yeah, I mean, the average loan size is the thing that jumps off the table you know to me 350000, other people or yeah, just so much larger so.
Economically I mean.
It's oh.
Other people Wouldnt make it wouldn't move the needle, but it certainly does for you with your volume. So I want. Thank you for that and I noticed you changed your book value presentation, I'm, a little bit I, they're all kinds of reasons why I like you know you I think you've made your point to the market in terms of.
Steve DeLaney: I think you've made your point to the market in terms of sort of the franchise value and other things. Just looking at your stock at 124% and the commercial mortgage rates are 76%, I think people realize there's something different about your business. I like this because fair value is an extremely important, you know, accounting and economic measures, especially in difficult markets, right, where assets might have to be sold. So, you know, I applaud that move. I don't... You have any problem there with people saying, why is that number lower than that economic book value?
Sort of the franchise value and other things just you know looking at your stock at 124% in the commercial mortgage Reits are 76, I think people realize you know there's something different about your business I like this because you know fair value is an extremely important.
E accounting and economic measure, especially in difficult markets right, where we're asset light where might have to be sold. So you know I I applaud that move I don't think you'll you know you have any problem there with people, saying why is that number lower than that our economic book value. You know that you threw out yeah. Mark you could you could help me one quick follow up.
Mark Szczepaniak: Mark, you could help me. One quick follow-up. I know I've rambled. On page 10 in the REO, just can you explain those, the adjustments like on the gain, on the transfer of the REO, and then the REO valuations? Just help me understand that the, you know, the gain you're taking and then the write-down it appears on the REO, how those kind of work through. Sure, Steve.
No I've rambled on page 10, and the Ari Oh, just can you explain those the adjustments like on the gain on transfer of Oreo and then the Oreo valuations just help me understand you know that the you know the gain you're taking and then the write down it appears on the already.
How those kind of work through.
Sure Steve So on Thunder under GAAP accounting, when we foreclose on an Oreo property, we now acquire real estate. So we have to write off the loan and put the real estate on the books and whenever you're foreclosing on how are you all of that real estate has initially come on your books at share value. Yes. So for example, and you'll give them.
Mark Szczepaniak: So, it's under GAFA accounting. When we foreclose on an REO property, we now acquire real estate. So, we have to, you know, write off the loan and put the real estate on the books.
Mark Szczepaniak: And whenever you're foreclosing on REO, that real estate has to initially come on your books at fair value. Yes. So, for example, you know, given the LTVs, if the loan is at, you know, $350,000, but the REO is, you know, worth $440,000, when I foreclose that REO, I'm going to put the REO on the books for $440,000, and I'm going to write off the $350,000, and I've got a $90,000 gain on transfer to REO, coming on at a higher fair value.
Tvs or if the loan is at 350000, but the oracles you'll work for 40.
Fortunately our element with yard on the books for 440 of them to write off the $3 50, and I've got a $90000 gain on Oreo.
At a higher higher value now.
Mark Szczepaniak: Now, once that REO is on the books, it's carried at a lower cost to markets, carried at a low cost. So, on a go-forward basis, then you have to value that REO every period, every quarter, wherever, going forward, and then you're going to mark that up or down based on the lower cost of the market. Your cost is considered that initial fair value when you put it on. So, in my example
Now once it already on the books is carried at lower of cost or market Street locale.
So on a go forward basis, then you have to value that are you know every period every quarter wherever going forward and then youre going to have mark that up or down based on the lower of cost or market. Your cost is considered that initial fair value. When you put it out. So my example of 440.
Mark Szczepaniak: So, the 440. If then, let's say, two quarters later, for whatever reason, the market changes, and that REO is worth 420, now I have a $20,000 valuation REO loss, and you can mark it back up again, but you can only mark it back up to its initial cost, which is that 440. So, if it comes back to 440, I can mark it up; if it goes to 470, I can't do anything with it. I'm limited by the ceiling of that initial fair value that brought it on. That's that fluctuation going forward is that lower cost of the market. That helps very much, and just comparing 22 to 23, I would think that higher interest rates were really the thing that caused that fair value change. Yes, yeah, interest rates definitely played into that.
40 is that let's say two quarters later, we have raised the market changes and there are real this is more for 'twenty now I have a 20000 dollar valuation are real loss.
You can market back up again, but you can only go back up to its initial cost which is at four four it so because it really comes back to four four he can knock it off but it was a 470 I can't do anything with it.
Limited with the ceiling of that initial fair value, but that's that fluctuation going forward as that lower cost of market that helps very much in a the just comparing 'twenty to 'twenty three I would I would think that higher interest rates, where the it was really the thing that you know that caused that fair value change in.
Interest rates definitely played into that yesterday, that's right sure listen thanks. Thank you both for your comments and congrats on a great great year. Okay. Bye bye. Thank you appreciate it.
Mark Szczepaniak: Yes, that's right. Listen, thank you both for your comments and congratulations on a great year. Bye-bye. Thank you. I appreciate it. Thank you. Reminder, if you have a question, please press star then 1. Our next question comes from Arren Cyganovich. Thanks. I just had a quick question on, you know, your production continues to grow. Wondering if that's just more productivity from existing brokers that you're using or expansion into different geographies.
Thank you.
In mind or if you have a question. Please press Star then one.
Our next question comes from Oren <unk> with Citi.
Thanks, I just had a quick question on your production continues to grow.
I was wondering is that just more productivity from existing brokers that you're using.
Expansion into different geographies, maybe you could talk a little bit about what's giving you that success.
Arren Cyganovich: Maybe you can talk a little bit about what's giving you that success. Yes, sure. And we added, we continue to grow by adding sales folks. We do get productivity gains from existing account executives, for sure, but we also added some folks last year. And we'll add some more this year. We like to find people who have pre-existing relationships and a book of business to bring. We also have an internal training program where we take junior account executives and train them up.
Production site.
Yeah sure. We are added so we continue to grow through by adding sales folks, we do get productivity gains from existing account executives for sure. But we also added some folks last year end and will add some more this year, we liked to find people who.
Our pre existing relationships in our book of business to bring.
We also have an internal training program, where we take junior account executives and train them up so.
Chris Farrar: So I would say that most of that growth is market penetration and taking market share gains through adding new loan producers. Okay, so you're not really expanding into new geographies that much. Yeah, not really.
I would say that most of that growth is market penetration and taking market share gains through through adding.
New new loan producers.
Okay, So youre not really expanding into new geographies.
Not much.
Yeah, not really we like to stay in the more liquid large msas. So.
Chris Farrar: We like to stay in the more liquid, large MSAs. You know, over the years, we've been pretty consistent about where we lend. We like to stay there, so I think it's more of a market penetration than it is new geography.
If you look over the over the years, we've been pretty consistent about where we land.
To to stay there. So I think it's more of a market penetration and it is new geographies.
Okay.
Great. Thank you.
Chris Farrar: Thank you. You're welcome. This concludes our question and answer session. I would like to turn the conference back over to CEO Chris Farrar for any closing remarks. Thank you all for taking the time to hear our story. We're going to continue to work hard to execute on our plans and look forward to speaking to everybody next quarter.
Youre welcome.
Thank you this.
This concludes our question and answer session I.
I would like to turn the conference back over to CEO, Chris Farrar for any closing remarks.
Thank you all for taking the time to hear our story and we're going to continue to work hard to execute on our plans and.
Look forward to speaking to everybody next quarter. So thank you.
Chris Farrar: So thank you. Thank you everybody, the conference has concluded. Thank you for attending today's presentation. Chris Farrar, Mark Szczepaniak, Chris Oltmann, Mark Szczepaniak, Chris Farrar, Mark Szczepaniak, and Mark Szczepaniak. And that's all for today.
The conference. Thank you everybody.
Conference has concluded thank you for attending today's presentation you may disconnect.
Okay.
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Operator: Thanks for watching, and Mark Szczepaniak, and Mark Szczepaniak. Thank you. Thank you. Thank you, and Mark Szczepaniak, and Chris Farrar. Thank you. Thank you, and and Mark Szczepaniak. Sarah Barcomb, Chris Farrar, Christopher Oltmann, Chris Farrar, Mark Szczepaniak, Chris, and Mark Szczepaniak. Thank you. Steve DeLaney, Chris Farrar, Mark Szczepaniak, Christopher Oltmann, Steve DeLaney, Chris Farrar, and Mark Szczepaniak, and Chris Oltmann. Thank you. Thank you. Steve DeLaney, Chris Farrar, Mark Szczepaniak, Chris Oltmann,
Yeah.
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