Velocity Financial, Inc. (NYSE:VEL) Q4 2022 Earnings Call Transcript

Velocity Financial, Inc. (NYSE:VEL) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good afternoon, everyone, and welcome to the Velocity Financial, Incorporated Q4 2022 Conference Call. For your information, today’s conference call is being recorded. And at this time, I’d like to turn the floor over to Chris Oltmann, Treasurer and Head of Investor Relations. Please go ahead.

Chris Oltmann: Thanks, Jamie. Hello, everyone, and thank you for joining us today for the discussion of Velocity’s fourth quarter and full year 2022 results. Joining me today are Chris Farrar, Velocity’s President and Chief Executive Officer; and Mark Szczepaniak, Velocity’s Chief Financial Officer. Earlier this afternoon, we released our fourth quarter and full year 2022 results and our press release and the 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 and 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 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. With that, I will now turn the call over to Chris Farrar.

Chris Farrar: Thanks, Chris, I would like to welcome everyone to our fourth quarter earnings call. Despite continued headwinds from rapidly rising interest rates, we reported another profitable quarter and our most profitable year in the history of our company. Our loan portfolio increased by 36% to a record $3.5 billion. 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. 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, as we had zero charge offs in the fourth quarter and we continue 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 than prior quarters. Good news is that we’ll recognize that income in future periods and payoffs have already picked up in Q1, exceeding the Q4 activity through February of this year. From a real estate valuation perspective, we’re seeing some overheated markets come down, but others remain strong as we continue to actively sell REOs 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 improved this year and our first securitization in January saw much stronger demand than our October deal. We continue to see better execution in 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 have 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.

For the next several years, we will gradually transition the portfolio as new FVO loans replace the current loans held at amortized costs. We think this change is in the best interest of all shareholders and will communicate our value proposition more clearly through 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 3, we’ve got some highlights for the full year metrics. You can see GAAP net income up nicely, loan production year-over-year up 33%. Our HFI portfolio grew by over 40%, NIM was down about 20% and charge offs down 60% on a year-over-year basis.

On Slide 4, just highlighting, net income was essentially flat and 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 $0.10 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 were typically recognizing in prior quarters and for markets conditions that slowed down, we didn’t recognize that income, but we expect to recognize it in future periods. Also on that earnings bullet from an NPL recovery rate of 102.3% as opposed to 104%, so although the number of transactions slowed down and the volume of resolutions was lower, we still continue to resolve assets over and above the contractual interest that’s due.

In terms of the production and loan portfolio, you can see that we dramatically reduced originations by 44% from Q3 — sorry, from fourth quarter of ’21 and that was intentionally done, obviously, due to the conditions as I mentioned earlier in the securitization market. I’ve already mentioned the size of the portfolio in the FVO election, so I’ll move down to financing and capital. In terms of financing and capital, we did the October securitization of about $189 million. You can see there in January, similar sized deal. And as I said, the bonds were very strongly oversubscribed in the January transaction. In terms of warehouse capacity and liquidity, we are in a good position. We have got plenty of liquidity and warehouse capacity to continue to grow the portfolio and accelerate our originations.

Turning to Slide 5. 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 that impacted that adjustment. And on the right hand side, you can see from a book value perspective, we continue to consistently grow book value as we retain those earnings. On Slide 6, we 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 transition to the FVO accounting we think is going to more closely align with sort the bottom two sections of this graph, the fully diluted equity value as well as the embedded gain in the portfolio.

And so when we decided to change this method of accounting, we really — we are hoping that over the next few years, investors will start to appreciate the true GAAP value that’s going to be recorded in our financial statements as we transition the portfolio. You can see on the second sub-bullet in this slide, we had a pickup on the FVO loans, that was reflecting our other operating income, and then to offset by additional costs that we have to expense. And Mark will detail all of those numbers for you shortly. On Page 7, we wanted to kind of identify the reasons why we are making this election. And so I’ll turn this over to Mark to walk you through the drivers and the decisions behind the FVO option?

Mark Szczepaniak: Thanks, Chris, and good afternoon, everybody. As Chris mentioned, we made a strategic decision starting in Q4 October 1st to elect Fair Value Options, FVO accounting for all of our originations on a going forward basis and we did apply that to all the originations in Q4. And strategically, it’s just better alignment. It’s actually more economic value to the shareholders. We have been presenting the economic value kind of embedded in our securitized loan portfolio, through the economic equity slide that Chris just went through previously, but it’s not really reflected within the financial statements, because it comes in over time, as you know, as net interest margin over time. So it’s not reflected in our statement of equity, for example, when you’re carrying it just at amortized cost.

So the 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 — onto our financial statements immediately as opposed to dribbling it over time. So that’s one better alignment. It also really helps us out in terms of our GAAP to tax. For tax purposes — for IRS tax purposes, we’ve always had to mark the loans and our securities are at a market value. So for tax, it’s always the mark-to-market on both sides, where we’ve been doing the amortized costs on book. This better also aligns or kind of converges our GAAP book and our tax bases, being one the same. So there’s some future strategic alignment there that really help us out. In terms of the impact of the fair value accounting election, just to have a feel for how it’s going to impact the financial statements.

So all new loan that we’re originating are put on the books now at fair value. As we do the securitizations, we did one securitization in January, so the securitizations, starting with the January 1, will also go on the books at fair value as opposed to the amortized cost. But keep in mind that any costs or revenues that we use to defer for those originate loans, or the securitization — securitized debt, they will no longer be deferred, because there’s nothing to amortize them over, right, because they’re not at amortized cost. So the direct origination costs to originate a loan, direct compensation expense, commissions and all, that used to be deferred and then amortized as a yield adjustment back up in margin. Those costs now come right into the financial statements in the income statement as operating expense.

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The fair value of the loan, the loans at amortized cost you see go on the books as UPB, now the underline at fair value, and that fair value — the difference in fair value and the UPB will be in the other income section as unrealized gain or loss in the fair value loans. And the same thing on the securitized debt. We used to have we had deal costs, we still do have deal costs to originate the securitization, those deal costs now will be expensed in operating expense immediately. So what you’re going to see as a shift to the income statement is you’re going to see the gain pick up on the loans, and/or securitizations, the fair value swings in those two financial instruments will be in the other income section. But then the cost to put those instruments on the books that used to be deferred and amortizes yield adjustments, those costs will run through the operating expense section.

So that’s what’s going to look different is 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 we’re putting through exclude the current period interest, which is getting accrued in margin. And you really won’t see a big impact in the margin because you’ll still have the accrued interest, both ways interest income and interest expense. If anything, that margin may start to widen out over time. 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 to margin.

Now, we won’t have those deferred costs under new loans going forward, so the amount of amortization expense going up there is going to get less and less as the older amortized costs loans as of 9/30, September 30th, continue to pay down. So you’ll probably see a widening of that margin. So it’ll be less and less deferred amortized costs being put into margin, because the costs you’re running through as the loans and bonds are coming on the books through operating expense. I know there’s a lot moving on there. But that’s kind of how it’s going to change the financial statements. And in terms of transition, on the bottom of Page 7, this is kind of what we see like over a four year period. If we continue just to originate the loans, the new loans at fair value, and the existing amortized cost portfolio as of September 30, 2022 continues to pay down and pay off over around a four year timeframe.

You kind of see what’s happening there, the gray amortized cost portfolio becomes less and less, and you start to kind of converge or transition to almost a full fair value. Now, this is an illustrative purpose. Now there 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 in organically as well. I mean, if we decide to acquire loans from other institutions, we’ll look at that on a case by case decision. And we want to take acquired loans and apply fair value or maybe already amortized, we leave and amortize. So there’s some things that causes transition look a little bit different. But for the most part, you’re going to start seeing the amortized portfolio coming down, and the fair value side of the portfolio going up into this transition.

On the next slide, let’s pick up our loan production. As Chris mentioned, we strategically decided to reduce and put the brakes a little bit, tighten up the credit on our loan production in Q4, because of the volatility that we saw on the securitization market and we wanted to wait till the 1st of the year and see if that securitization market comes back, which again, we did a securitization in January, the execution of security was better than the one we had done, say in October Q4, those are very smart decision to kind of pull back on that production. At the same time, though, we continue to raise — are raising the interest rates on our loans kind of in response to what Fed did on interest rates. We continue to raise them. So our overall WAC on our Q4 production was at 9.7%, which is up 78 basis points from the prior quarter’s production.

And you can see from our fourth quarter of ’21 production is up 339 basis points. So we continue to raise that WAC. And we — like Chris said, and even though the interest rate has gone up, the track has gone up, we still have a very healthy pipeline in our portfolio, and we expect to kind of grow those originations now coming out of the first quarter going forward. On Page 9, our loan portfolio, the portfolio growth continues to grow even as the weighted average coupon goes up. We were, as Chris mentioned 36%, just about year-over-year and our pro forma growth $3.5 billion compared to $2.6 billion total portfolio. And you can see kind of the table below, which just really shows that growth. So very strong growth, still very strong appetite in demand from our borrower base for our product, all while still keeping that loan to value ratio right around 67%, 68%.

And the average loan balance again still around $400,000 or sub $40,000 on average per loan. Page 10, Q4 asset resolution active and our NPLs, Chris alluded to this. Q4, the volume of NPL resolutions was just low. Q4 is pretty much a market phenomenon where securitization market kind of went away, the borrowers weren’t prepaying, it’s just everybody kind of, I guess took a Q4 holiday. So the Q4 resolutions were low, you can see we resolved $25 million in total both long-term and short-term loans on our UPB compared to say, fourth quarter of $44 million, to give you an idea of the lower volume. And if you took the first three quarters of ’22, Q1, Q2 and Q3 on average, they were all at around $44 million. So Q4 was $44 million resolutions; about $43 million, $44 million on average for the first three; and then you get to Q4, it’s just $25 million.

The key point there, though, is even on that $25 million, you could see a 2.3% gain, meaning the gain over and above collecting the contractual principal and interest on those loans. So we’re still making the same percentage gains on the NPL resolutions. So that’s more of a temporary thing. Those resolutions will occur, those NPL loans will cure. We expect to make that gain going forward. It’s 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 defaulters we received for two months has already — it’s already more than it was all in Q4. So we are seeing it start to come back in Q1 of this year. Slide 11, on the net interest margin. We expect our portfolio of NIM to stabilize.

Chris mentioned the lower NPL resolutions in Q4 had an impact of 61 basis points on the NIM, 61 basis points because of that lower total NPL resolution dollars coming in. And we expect to recover that going forward in future periods. We said that we’re already seeing that start to come back now in Q1. And the portfolio WAC has increased. So our portfolio WAC quarter-over-quarter increased by 25 basis points. So again, the fact that Q4 was kind of — the NPL resolutions were low, we are seeing it come back. So we are seeing NPL dollars coming back in. And on top of that, you have got a weighted average coupon on the portfolio that we had to pass. So we do expect that NIM to stabilize on a go forward basis. On Page 12, the loan investment portfolio performance.

In the second quarter of last year, we pretty much kind of come back to our normal range of non-performing. And we said our 7% to 9% is kind of our sweet spot. 7% to 9% doesn’t make us nervous at all, to be very sad on the overall gain on our non-performing, over 95% of our non-performing loans resolve a gain position to us, we make money on those. And you can see since June, we have been 8%, 7.4%, 8.3%, we are kind of in there. Keep in mind, the 8.3%, the slight tick up in Q4. Again, we had low resolutions in Q4, timing 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 — we expect that to kind of more stabilize in the 8% to 7% range on a go forward basis.

Slide 13, the CECL loan loss reserve. CECL loan loss reserve at the end of the year was $4.9 million as compared to $5.3 million for Q3 at the end of September, still at 15 basis points. So we are running right around 15 basis points, 16 basis points. We feel that’s an accurate reserve rate on HFI, UPB. And keep in mind on the loan loss reserve, a slight tick down, because just you had less loans, a smaller portfolio at the end of the year that we’re subject to CECL because the fair value option loans that we put on in Q4, because they are at fair value, they are not subject to a loan loss CECL reserve. So you have got the portfolio start to pay down as of 9/30 that is subject to reserve, and you didn’t add any new loan subject to reserve in Q4, which kind of accounts for the tick down in dollars, but we are still at the same rate 15 basis points.

And the real positive takeaway is the charge offs, as Chris mentioned, there were no charge offs for Q4. And if you look at the Q1, Q2, Q3 and Q4 charge-offs, total charge-offs for the year were $520,000, on a $3 billion portfolio. On Slide 14, our funding and liquidity is still very durable. We have got plenty of warehouse capacity in funding. We did six securitizations in 2022, as Chris alluded to. We have significant reserves and warehouse capacity and we ended the year with total liquidity of about $64 million and that includes cash, cash equivalents as well as unfinanced loans, so unfinanced collateral that we could pledge. So we have about $64 million in available liquidity. We said that our maximum capacity on the warehouse line is $810 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 tick up the originations as Chris mentioned coming out of Q1 into the rest of 2023. Chris, with that, I’ll turn it over to you for kind of our key business drivers and outlook.

Chris Farrar: Great. Thank you, Mark. Just kind of wrapping up, where we are headed and how we see things in terms of the market, there’s certainly a lot of cross currents 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 on our REOs comfortably and we see markets generally holding up fairly well. In terms of credit, again, same story, a lot of cross-currents there. We have tightened our credit box recently and fortunately, with our business model and our portfolio earnings, we can modulate volumes as we see fit and manage risk appropriately. On the capital front sector, expect do a securitization next quarter.

And, again, we’re continuing to see good trends there and expect that, that will go well. And looking for other opportunities to continue to grow our capital base accretively and in a way that will be helpful to all shareholders. And lastly, on the earnings front, as Mark expressed, we do think yields will improve going forward. And so will our volumes as we start to step on the gas pedal here. And lastly, we’re still open and looking for strategic opportunities and haven’t found anything that’s compelling yet. But if we do, we’ll certainly execute on that. So that wraps up our presentation, and I think we should open it up for any questions.

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Q&A Session

Operator: And our first question today comes from Stephen Laws from Raymond James.

Stephen Laws: Mark — or sorry, Chris, let’s start maybe what’s, you talked about volumes. Ramping those back up. You mentioned the prepared remarks that Q1 will be the trough. Where do you see those ramping back up to on, say monthly or quarterly basis as we — by the second half of the year, where you see those leveling out?

Chris Farrar: Yes. Hi, Stephen. Good question. I think we’re projecting somewhere in the — I would say the 200 million to 250 million range would probably be what we expect on a quarterly basis. I think for the year, we think will be in excess of 900 million. So it will — Q1 will be the low point, but it will start to grow from there.

Stephen Laws: Thanks for that, Chris. Mark, I wanted to touch base on the NPL resolutions year-to-date. You mentioned more versus Q4. Is that more in volume or more in the margin on the recovery, or is it more in referring to both?

Mark Szczepaniak: Hi, Stephen, how you’re doing? Now I think is — in terms of the first two months of this year, we’ve seen more actual gain coming through than we did in all of Q4. So that’s the actual resolution gain dollars.

Stephen Laws: Thanks for that clarification. I wanted to make sure I was clear on that. On the WAC, big increase on your 4Q production, 9.7, I believe. Here we are in mid-March. Can you talk about where that is today? Have you increased it further since year-end? Or is it kind of settled in at that level?

Chris Farrar: So we’ve continued to follow the bond market and our benchmarks and current production. Right now we’re just a tad under 11%. So we’ve raised the coupon significantly to follow with the market. And we feel like we’re at the right level from a margin and a NIM perspective to where we would execute on the securitization.

Stephen Laws: And last one, if you don’t mind. I know NPLs picked up a touch. I needed to normalize that, so I think due to pulling back a little in Q4, that probably takes out about 150 million or 200 million of performing loans to the denominator. So maybe the number over-reflects the uptick there. But I noticed in the back of the supplement, your 60-day to 90-day, I think went from about 120 million to 185 million. Can you just touch on maybe what you’re seeing inside the portfolio year-to-date from a credit migration standpoint just given the backdrop and maybe some additional color, there would be fantastic? And I appreciate your comments this afternoon.

Chris Farrar: Yes, sure. Absolutely. Yes, definitely saw the uptick there. I mean, I think it’s — our read is that clearly some borrowers are feeling stressed and seeing the impacts of what the Fed has done. And that shows up in delinquency. There does tend to be a lot of noise in that 30-day bucket. So we don’t really sweat that one too much. People bounce around quite a bit there. But when you start getting into 60, 90, that’s when you’re definitely going to have to get involved. And we’ve seen the number of non-performing loans that our special asset team works on, increased in the fourth quarter. So clearly, borrowers are feeling the pressure of what the Fed has done. And as we’ve always said, if we did our job right and got the value right, we’re not concerned, we’ll be fine.

And in a paradoxical way, those delinquencies actually end up being quite profitable for us unless we screwed up the value. So I would say we’re watching it. But we’re not concerned or seeing anything that is flashing red at this point.

Operator: Our next question comes from Steve Delaney from JMP Securities.

Steve Delaney: I guess just to start, I’d like to applaud your FVO decision. I think probably a lot of the people on this 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 book value and your economic value definitely more transparent. So congratulations. I think that’s good progress, and will be well received. Well, back to the current quarter, 4Q. So got a little fuzzy. Understood. Okay, core was only down $0.02 and understand the resolution. So that was $0.10. We’ve got fuzzy in my old brain was, what was the key factor that — or factors that were offsetting the lower resolution income of the net-net, you picked up $0.08 somewhere, and I know you’ve got some higher coupons, but could you — Mark, could you kind of comment on that and help connect the dots for me?

Mark Szczepaniak: Sure, Steve. I think one of the things you are seeing that kind of helps offset the lower resolutions and the earnings per share, and just total dollars — pretax dollars is again the FVO election for Q4, right? So on the fair value election, as we said, instead of bringing in that embedded value of our loan portfolio slowly over time to margin, you are bringing that value in on day one when you are funding the loans. So we probably brought in somewhere in the neighborhood of maybe $5 million to say $6 million on a pretax basis in the quarter based on the say $270 million worth of UPB that we funded and applied FVO to in Q4.

Steve Delaney: Got it. Okay. Yes, just kind of blanked on that. Despite my compliment on the FVO option, I didn’t apply it to 4Q. So the market today — we have got your WACs and everything and the fourth quarter originations. Chris, could you just comment on like your loan products today? Well, one, I think I know what you are focused on. What products are you specifically focusing on? And what kind of coupon and fees are you able to achieve in today’s market on the loan side?

Chris Farrar: Sure. Yes. So I would say throughout the year, it was definitely an adjustment, borrowers had to react to ever increasing rates. So there is kind of a give and take there, back and forth. People — we’d see borrowers walk away and then call us back 60 days later and say, oh my god, it’s 100 basis points higher, okay I’ll take it. So there is definitely some adjustment period going on there. But we are still focused in the core areas of where we have always been. We see good demand in the investor one to four. We see good demand in short-term loans, where we do like some fix and flip, in the bridge lending and fix and flip. So it’s strong there. We have been very, very tough on office space. We are not bullish on office space at all. So we are very tough there. But other than that change, I would say, we are seeing good demand on all those types of products, and we are anywhere from the low side kind of 10% to 11.5% depending on the property type.

Steve Delaney: And that’s on the coupon, right?

Chris Farrar: Yes, that’s the coupon.

Steve Delaney: So fees are plus, right, on that?

Chris Farrar: That’s right. Fees are plus.

Steve Delaney: Okay. Well, thank you for the color. I would say this though on office because Stephen Laws and anybody else on the call, that’s all we live with today 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 are good

Chris Farrar: Yes.

Steve Delaney: if you want to make a dental office.

Chris Farrar: I think that’s a fair point. And we also — I would add to that the neighborhood serving office can be very good, so — which is typically what we do. We’re not doing Class A downtown centers. So a lot of that business — sorry, community serving kind of small office stuff has been holding up well, too.

Operator: . Our next question comes from Arren Cyganovich from Citi. Please go ahead with your question.

Arren Cyganovich: Thanks. I was wondering if you could talk about what the cost of the January securitization was? I’m not sure, if — I didn’t quite see that in the deck or don’t recall hearing it.

Chris Farrar: Sure. Hi, Arren. That was in the very low 7% coupon.

Arren Cyganovich: Got it. And then maybe you could help walk through an example, maybe of the FVO accounting, if you were to say or they originated $100,000 loan, I know you typically do closer to $400,000 but just for my simplistic brain using $100,000 to be there?

Chris Farrar: Yes, sure. Just the way I think about it is, I do $100,000 loan, say we put it on the books for 3 points. So we’d mark — sorry $3,000 gain in your example of unrealized gain. Then we’d also book some additional income that we collect from the origination process. We give you a break-out 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 costs to originate that loan that was required under the GAAP method, we’ll go ahead and expense that whole dollar amount. And so that, I think probably — I can’t give the numbers on the $100,000 loan, but Mark could take you through, probably, if it’s helpful, what happened in the fourth quarter, and show you those numbers. But I can tell you on a net basis for $270 million-odd we booked about $6 million worth of income.

Arren Cyganovich: Pre-tax basis? Yes.

Chris Farrar: Yes, pre-tax, right. Pre-tax.

Arren Cyganovich: And in terms of the decision to mark the loans at a premium including the gain upfront, how do you come across or how do you come up with that 3% in your example? And would that fluctuate over time, depending on market conditions? And then the existing book, that would be — I’m assuming at fair value, would you then be marking that down over — if, over up I suppose if rates or conditions changed? What are the biggest dynamics that impact the fair value marks on the existing portfolio?

Chris Farrar: Yes, absolutely. So, our capital markets team has a discounted cash flow model that we use to project what we think a willing buyer would pay for those assets. And so that’s how we start with our baseline, and then come up with what we think the fair value of that asset is. Over time, absolutely, those assets will move up or down, depending on discount rate, interest rates, prepay speeds, all 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 will be limited volatility as we go forward, because we think there’s going to be movement on both the asset and the liability side that should go in the same direction based on that.

And then lastly, as an extra level of comfort, we actually sold $20 million worth of loans in the first quarter, just to prove ourselves out and to make sure that we were right, they sold right around that price. So we think we have a good market clearing transaction as extra confirmation. We may not do that every quarter on a go forward basis, but we’re pretty dialed into the capital markets and where things execute. And we’ll be careful to mark those assets what we think are fairly and conservatively. The interesting part, obviously, is that that’s obviously just an estimate of what some buyer would pay for those assets. It’s not where we’re going to necessarily sell them. Over time, we think we’ll probably end up recognizing more income than that level for sure.

But that will come in over time through to NIM, as opposed to be through fair value marks.

Arren Cyganovich: And then just last one for me is, when you have loans that go into nonperforming, when — would you then mark those lower by some certain level? And since you’ve had the nice benefit of resolving nonperforming loans at 100% or above 100%, what’s — is there are a period where house prices go down, commercial properties go down and you start having resolutions below a 100%? Does that then force you to kind of remark the entire portfolio or specifically, I guess, the NPLs on your book?

Chris Farrar: Right. Yes, so on the NPLs, we definitely will mark those down as they go more delinquent, because the standard under GAAP is what would a willing buyer pay. So yes, short answer is we will mark those down. Based on our

Mark Szczepaniak: Arren, this is Mark, as I say — and on the NPL loans, we 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 there’s a difference when you’re valuing a loan, which is a financial instrument with future cash flows and you’re valuing real property, right? There’s adjustment. 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 a performing loan, once it was nonperforming, we’ll look to the underlying value of that collateral. As Chris mentioned, if the underlying value of that collateral is less, then yes, that loan would get marked down.

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

Chris Farrar: Thanks everybody for joining the call and we look forward to getting back together soon and appreciate everybody taking the time to hear our story. Take care.

Mark Szczepaniak: Thanks, everybody.

Operator: And ladies and gentlemen, with that, we will conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.