Good afternoon, everyone. Welcome to the Velocity Financial Incorporated Q4 2022 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. For your information, today's conference call is being recorded. At this time, I'd like to turn the floor over to Chris Oltmann, Treasurer and Head of Investor Relations. Please go ahead.
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. Our press release and accompanying presentation are available on our investor relations website. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain 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. 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.
Thanks, Chris. I'd 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 as 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. We continued to profitably resolve delinquent assets.
With respect to market conditions, the real estate markets are slowing as the quantity of transactions are down, which impacted us in the fourth quarter as we experienced fewer payoffs and realized less past due interest 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. 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. I 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 three, 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 four, just highlighting net income was essentially flat and core net income was down slightly over the prior year's quarter, mainly due to NIM, 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. For market 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. Although the number of transactions slowed down and the volume of resolutions was lower, we still continued 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, from fourth quarter of 2021, 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 and 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. Then in January, similar size deal. As I said, the bonds were very strongly oversubscribed in the January transaction. In terms of warehouse capacity and liquidity, we're in a good position. We've got plenty of liquidity and warehouse capacity to continue to grow the portfolio and accelerate our originations. Turning to slide five. On 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.
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 six, 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. As I mentioned in my opening remarks, this transition to the FVO accounting, we think is gonna more closely align with sort of the bottom two sections of this graph, the fully diluted equity value, as well as the embedded gain in the portfolio.
When we decided to change this method of accounting, we really were 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 reflected in our other operating income, and then to offset by additional costs that we have to expense. Mark will detail all of those numbers for you shortly.
On page seven, we wanted to kind of identify the reasons why we're making this election. I'll turn this over to Mark to walk you through the drivers and the decisions behind the FVO option.
Thanks, Chris. Good afternoon, everybody. As Chris mentioned, we made a strategic decision starting in Q4, October first, to elect a fair value option, FVO accounting, for all of our originations on a go-forward basis, and we did apply that to all the originations in Q4. Strategically, it's actually more economic value to the shareholders. We've been presenting the economic value kind of embedded in our securitized loan portfolio through the economic equity slide that Chris just went through previously. It's not really reflected within the financial statements because it comes in over time as, you know, as net interest margin over time. It's not reflected in our statement of equity, for example, when you carry it just at amortized cost.
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 onto our financial statements immediately as opposed to dribbling it over time. 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 then our securities are at a market value. For tax, it's always been mark to market on both sides, where we've been doing the amortized cost on book. This better also aligns or kind of converges our GAAP book and our tax basis being one and the same. There's some strategic alignment there that really helped us out.
In terms of the impact of the fair value accounting election, just to let you have a feel for how it's going to impact the financial statements. All new loans that we're originating are put on the books now at fair value. As we do the securitizations, we did one securitization in January. Securitizations, starting with the January one, will also go on the books at fair value as opposed to the amortized cost. Keep in mind then, any costs or revenues that we used to defer for those originated loans or the securitizations or securitized debt, they will no longer be deferred. Because there's nothing to amortize them over, right? Because they're not at amortized cost.
The direct origination costs to originate a loan, you know, 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, it's operating expense. The fair value of the loan, the loans you had amortized costs used to go on the books at UPB. Now they're going to go on at fair value, and at fair value, the difference between fair value and the UPB will be in the other income section as unrealized gain or loss in the fair value loans. The same thing on the securitized debt. 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.
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. The cost to put those instruments on the books that used to be deferred and amortized as yield adjustments, those costs will run through the operating expense section. 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. The fair value adjustments we're putting through exclude the current period interest, which is getting accrued in margin.
You really won't see a big impact in the margin because you'll still have the accrued interest both ways, in 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 of margin. We won't have those deferred costs on the new loans going forward, so the amount of amortization expense going up there is going to get less and less as the older amortized cost loans as of 9/30, September 30th, continue to pay down.
You're going to probably see a widening of that margin because it'll be less and less deferred amortized costs being put into margin, because the costs are 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. In terms of the transition, on the bottom of page seven, this is kind of what we see, like, over a four-year period. If we continue just originating the loans, the new loans at fair value and the existing amortized cost portfolio as of September 30th, 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, you start to kind of converge or transition to almost a full fair value. Now this is an illustrative purpose. Remember, Fair Value Option is an election, we're talking about all of our originations going forward. We've also said that we like to grow the company inorganically as well. I mean, if we decide to acquire loans from another institution, we'll look at that on a case-by-case decision. We want to take acquired loans and apply fair value or maybe they're already amortized and we leave them amortized. There's some things that could cause this transition to 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, that's kind of our loan production. As Chris mentioned, we strategically decided to reduce or kind of put the brakes a little bit, tighten up the credit on our loan production in Q4 because of the volatility that we saw in the securitization market. We wanted to wait till the first of the year and see if that securitization market comes back, which again, we did a securitization in January. The execution of that security wasn't better than the one we had done, say, in October of Q4. It was a very smart decision to kind of pull back on that production. At the same time, though, we continued raising the interest rates on our loans. You know, kind of in response to what Fed did on interest rates.
We continued to raise them, Our overall WAC on our Q4 production was at 9.7%, which is up 78 basis points from the prior quarter's production. You can see from our fourth quarter of 2021 production was up 339 basis points. We continued to raise that WAC. And we like Chris said, even though the interest rate has gone up, the average WAC 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 nine, our loan portfolio. Portfolio growth continues to grow even as the weighted average coupon goes up. We were, as Chris mentioned, 36% just about year-over-year on our portfolio growth.
You have $3.5 billion compared to $2.6 billion total portfolio. You can see kind of the table below, it just really shows that growth. Very strong growth, still very strong appetite and demand from our borrower base for our product, all while still keeping that loan-to-value ratio right around 67%-68%. The average loan balance, again, still, you know, around $400,000 or sub $400,000 on average per loan. Page 10, Q4 asset resolution activity on our NPLs. Chris alluded to this. Q4, the volume of NPL resolutions was just low. Q4 was pretty much a market phenomenon where, you know, securitization market kind of went away. The borrowers weren't prepaying. It's just everybody kind of, I guess, took a Q4 holiday. 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. Give you an idea of the lower volume. If you took the first three quarters of 2022, Q1, Q2, and Q3, on average, they were all at around $44 million. Q4 was at $44 million resolutions. You're about 43, 44 on average for the first three, you get to Q4, for whatever reason it's just $25 million. The key point there, though, is even on that $25 million, you could see a 2.3% gain, meaning a gain over and above collecting the contractual principal and interest on those loans. We're still making the same percentage gain on the NPL resolutions. That's more of a temporary thing. Those resolutions will occur.
Those NPL loans will cure. We, you know, expect to make that gain going forward. It's more of a timing thing. We've already seen in January and February of this year, January and February, that NPL interest that we've received and defaulted we've received for two months it's already more than it was all of Q4. We are seeing it start to come back in Q1 of this year. Slide 11. On the net interest margin, we expect our portfolio 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. We expect to recover that going forward in future periods. We said that we're seeing that start to come back now in Q1. The portfolio WAC has increased.
Portfolio WAC quarter-over-quarter increased by 25 basis points. Again, the fact that Q4 was kind of, you know, the NPL resolutions were low, we're seeing it come back, so we're seeing the NPL dollars coming back in. On top of that, you've got a weighted average coupon on the portfolio that we had in the past. We do expect that NIM just to stabilize on a go-forward basis. Page 12, the loan investment portfolio performance. The second quarter of last year, we pretty much kind of come back to our normal range of non-performing. We said our 7%-9%'s kind of our sweet spot. 7%-9% doesn't make us nervous at all, as we've already said, on the overall gain on our non-performing. Over 95% of our non-performing loans resolve, gain position us.
We make money on those. You can see since June, we've been at, you know, 8.74, 8.3. We're 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. You didn't have the normal new production coming in Q4 to kind of help offset. That's, we expect that to kind of more stabilize in the eight to seven 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. That's compared to $5.3 million for Q3 at the end of September. Still at a 15 basis points. We're running right around 15, 16 basis points.
We feel that's an accurate reserve rate on, you know, HFI UPB. Keep in mind, on the loan loss reserve, the slight tick down was just you had less loans, you know, a smaller portfolio at the end of the year that was subject to CECL because the fair value option loans that we put on in Q4, because they're at fair value, they are not subject to a loan loss CECL reserve. You know, you've got the portfolio starting to pay down as of 9/30 that is subject to the reserve, and you didn't add any new loans subject to reserve in Q4, which kind of accounts for the tick down in dollars, but we're still at the same rate, 15 basis points. The real positive takeaway is the charge-offs. As Chris mentioned, there were no charge-offs for Q4.
If you look at the Q1, Q2, Q3, and Q4 charge-offs, total charge-offs for the year were $520,000, you know, on a $3 billion portfolio. On slide 14, our funding and liquidity is still very durable. We've got plenty of warehouse capacity and funding. We did six securitizations in 2022, as Chris alluded to. We have significant reserves and warehouse capacity. We ended the year with total liquidity of about $64 million. That includes, you know, cash equivalents, as well as unfinanced loans, so unfinanced collateral that we could pledge. We have about $64 million in available liquidity. We said that our maximum capacity on the warehouse lines is $810 million. At the end of the year, we had $500 million available capacity.
Plenty of capacity in terms of both cash and liquidity, as well as warehouse capacity to grow the business and pick up the originations, as Chris mentioned, coming out of Q1 into the rest of 2023. Chris, with that, I'll turn it over to you for kind of our key business drivers and outlook.
Great. Thank you, Mark. Just kind of wrapping up where we're headed and how we see things in terms of the market. There's certainly a lot of crosscurrents going on. Definitely seeing a softening in the real estate markets in terms of price and volume. However, it has been modest so far, and we've been able to, as I said, execute on our REOs comfortably, and we see markets generally holding up fairly well. In terms of credit, again, same story. A lot of crosscurrents there. We have tightened our credit box recently, and fortunately, with our business model and the portfolio earnings, we can modulate volumes as we see fit and manage risk appropriately. On the capital front, expect to do a securitization next quarter.
Again, we're continuing to see, you know, good trends there and expect that that will go well, and looking for other opportunities to continue to grow our capital base, accretively in, in a way that will be helpful to all shareholders. Lastly, on the earnings front, as Mark expressed, we do think yields will improve going forward and so will our volumes as we start to step on the gas pedal here. Lastly, we're still, you know, 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. That wraps up our presentation, and I think we should open it up for any questions.
Ladies and gentlemen, we will begin the question and answer session. To ask a question, once again, you may press star and then one on your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Stephen Laws from Raymond James. Please go ahead with your question.
Hi. Good afternoon, Chris and Mark. You know, or sorry, Chris, let's start maybe with, you know, you talked about volumes, ramping those back up. You've mentioned the prepared remarks that Q1 will be the trough. You know, where do you see those ramping back up to on a, you know, say, monthly or quarterly basis, as we, you know, by the second half of the year, you know, where do you see those leveling out?
Yeah. Hi, Stephen. Good question. You know, I think we're projecting somewhere in the, I would say, the $2 million-$250 million range would probably be what we expect on a quarterly basis. I think for the year, we think we'll be in excess of $900 million. Q1 will be the low point, but it will start to grow from there.
Great. Thanks for that, Chris. Mark, you know, I wanted to touch base on the NPL resolutions year to date, you know, 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?
Right. Hey, Stephen, how you doing? What I'm saying is, in terms of for the first two months of this year, we've seen more actual gain coming through than we did in all of Q4. That's the actual resolution gain dollars.
Great. Thanks for that clarification. I wanted to make sure I was clear on that. On the WAC, you know, big increase on your 4Q production, 9.7%, I believe. You know, here we are in mid-March. Can you talk about where that is today? Have you increased it further since year-end, or has it kind of settled in at that level?
Yeah. We continued to follow the bond market and our benchmarks. Current production right now we're just a tad under 11%. Yeah, 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 a securitization.
Great. Last one, if you don't mind. You know, I know NPL ticked up a touch. You know, I need to normalize that, though. I think, you know, due to pulling back a little in Q4, that probably takes out about $150 million or $200 million of performing loans, the denominator. Maybe the number over reflects the uptick there. You know, I noticed in the back of the supplements, your 60-90 day, I think, went from about $120 million - $185 million. Can you just touch on maybe what you're seeing inside the portfolio, you know, year to date from a credit migration standpoint, just given the backdrop and maybe some additional color there would be fantastic. I appreciate your comments this afternoon.
Yeah, sure. Absolutely. Yeah, definitely saw the uptick there. I mean, I think it's, you know, our read is that clearly, you know, some borrowers are feeling stress and seeing, you know, the impacts of what the Fed has done. It 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. When you start getting into 60 and 90, that's when you're, you know, definitely gonna have to get involved. We've seen the number of non-performing loans that our special asset team works on, increase in the fourth quarter. Clearly, you know, borrowers are feeling the pressure of what the Fed's done.
As we've always said, you know, if we did our job right and got the value right, we're not concerned. We'll be fine. In a paradoxical way, you know, those delinquencies actually end up being quite profitable for us unless we screwed up the value. I would say we're watching it, but we're not concerned or seeing anything that is flashing red at this point.
Right. Well, you've certainly shown the recovery with the NPL resolution. Appreciate the time this afternoon. Thank you.
Thank you.
Our next question comes from Steve DeLaney from JMP Securities. Please go ahead with your question.
Hello, everyone. I guess just to start, I'd like to applaud your FVO decision. I think probably a lot of people on the call know that both Redwood Trust and MFA use the fair value method on their securitized portfolio. I really do think it will help you get across your make your book value and your economic value, you know, definitely more transparent. Congratulations. I think that's good progress. It'll be well received.
Thanks, Steve.
Sure thing. Back to the current quarter, 4Q. Got a little fuzzy. Understood, you know, okay, core was only down $0.02, and I understand the resolutions. That was $0.10. What got fuzzy in my old brain was what was the key factor that or factors that were offsetting the lower resolution income of, you know, the net-net, you know, you picked up $0.08 somewhere. I know you've got some higher coupons, but Mark, could you kind of comment on that and help connect the dots for me?
Well, sure. Steve, I think one of the things you're seeing that kind of helps offset the lower resolutions and earnings per share and just total, you know, dollars, pre-tax dollars is again, the FVO election for Q4, right? On the fair value election, as you said, instead of bringing in that embedded value of our loan portfolio slowly over time through margin, you're bringing the value in on day one when you're funding the loan. You know, we probably brought in somewhere in the neighborhood of, you know, maybe $5 million to say $6 million on a pre-tax basis in the quarter based on the, say, $270 million worth of UPB that we funded and applied FVO to in Q4.
Got it. Okay. Yeah, I just kind of blanked on that. Despite my compliment on the FVO, I didn't apply it to four Q. The market today, we've 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're focusing. 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?
Sure. I would say, you know, throughout the year it was definitely an adjustment. You know, borrowers had to react to ever-increasing rates. There's kind of a give and take there, back and forth. We'd start to 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." There's definitely some adjustment period going on there. We're still focused in the core areas of where we've always been. We see good demand in the investor one to four.
Mm-hmm.
We see good demand, in short-term loans where we do, like some fix and flip.
Bridge.
Yeah, the bridge lending and fix and flip. It's strong there. We've been very tough on office space. We're not bullish on office space at all. We're very tough there. Other than that change, I would say, you know, we're seeing good demand on all those types of products, and we're anywhere from the low side, kind of 10% - 11.5%, depending on the property type.
That's on the coupon, right?
Yes, that's the coupon.
It's fees or plus, right, on that so.
That's right. Fees or plus.
Okay, great. Okay. Thank you for the color. I would say this, though, on office, 'cause Stephen Laws and I, and anybody else on the call, that's all we live with today, talking to people about bad office loans. I just wanna make the point, I think dental offices and medical offices are really still good. You're good there.
Yes.
If you wanna make a dental office.
I think that's a fair point. I would add to that, you know, neighborhood serving office can be very good. Which is typically what we do. We're not doing Class A, you know, downtown center.
Of course.
A lot of that business, sorry, community serving kind of small office stuff has been holding up well, too.
Sure thing. Appreciate the comments.
Yeah. Thank you, Steve.
Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Arren Cyganovich from Citi. Please go ahead with your question.
Thanks. I was wondering if you could talk about what the cost of the January securitization was. I'm not sure if I didn't quite see that in the deck or don't recall hearing it.
Sure. Hi, Arren. that was in the very low 7% coupon.
Okay. Got it. Maybe you could help walk through an example, maybe of the FVO accounting if you were to say, all right, I originated a $100,000 loan. I know you typically do closer to $400,000.
Yep.
Simplistic brain, using 100 would be easier.
Yeah, sure. Just the way I think about it is, you know, do a $100,000 loan. Say we put it on the books for three points. We'd mark, you know, Sorry, it's a $3,000 gain in your example of, you know, of unrealized gain. We'd also book some additional income that we collect from the origination process that, you know, we give you a breakout of those costs and how much that is. There's some money there. When you think on the expense side, you know, instead of deferring some of our overhead and cost to originate that loan that was required under the GAAP method, we'll go ahead and expense that whole dollar amount.
That, you know, I think probably, I can't give you the numbers on the $100,000 loan, but Mark could take you through if, probably, if it's helpful, you know, what happened in the fourth quarter, and show you those numbers. But I can tell you on a net basis, for $270 odd million, we booked about $6 million worth of income.
On a pre-tax basis. Yes.
Yeah, pre-tax. Right. Pre-tax.
In terms of the, you know, the decision to mark the loans at a premium, including the gain up front, you know, how do you come across or how do you come up with that, you know, 3%? In your example and, you know, would that fluctuate over time depending on market conditions and then the existing book that would be, you know, I'm assuming at fair value, would you then be, you know, marking that down over or, you know, if or up, I suppose, if, you know, rates or conditions changed? What are the biggest dynamics that impact the fair value marks on the existing portfolio?
Yeah, absolutely. Our capital markets team has a discounted cash flow model that we use to, you know, project what we think a willing buyer would pay for those assets. That's how we start with our baseline then come up with what we think, you know, the fair value of that asset is. Over time, absolutely, those assets will move up or down, you know, depending on discount rate, you know, interest rates, prepay speeds, all those kinds of things. It's important to point out also that we will mark the corresponding debt associated with those assets as well.
We believe there will be limited volatility, as we go forward because we think there's gonna be, you know, movement on both the asset and the liability side that should go in the same direction based on that. 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, and they sold right around that 103 price. We think we have a good, you know, market clearing transaction as extra confirmation.
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, you know, what we think are fairly and conservatively. The interesting part obviously is that, you know, that's obviously just an estimate of what some buyer would pay for those assets. It's not where we're gonna necessarily sell them. Over time, we think we'll probably end up recognizing more income than that 103 level for sure. you know, that will come in over time through the NIM as opposed to be through fair value marks.
Okay. Just last one for me is when you, when you have loans that go into non-performing, would you then mark those lower by some certain level? Since you've had the, you know, nice benefit of re-resolving non-performing loans at 100% or above 100%, you know, is there a period where, you know, house prices go down, commercial properties go down, and you start having resolutions below 100%? Does that then force you to kind of remark the entire portfolio or specifically, I guess, the NPLs on your book?
Right. Yeah. 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. Yes, short answer is we will mark those down based on our history and where-
I'm sorry, Arren, this is Mark. I was gonna say, on the NPL loans, we will still have the same policy where when a loan goes non-performing, you know, we will start to look at the value of the underlying collateral. 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 a difference. We're still going to take a look at the value of the underlying collateral when it goes non-performing. The model will say, here's the value of a loan and a performing loan, once it goes non-performing, we'll look to the underlying value of that collateral. As Chris mentioned, if the underlying value of that collateral is less, yes, that loan would get marked down.
Okay. I will likely have to follow up with you guys to help me figure out my model. I appreciate the answers. Thank you.
You bet.
Ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.
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Thank you, everybody.
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