Velocity Financial, Inc.

Good day and welcome to the Velocity Financial Inc. Q3 2020 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Chris Holtman, Chief Accounting Officer. Please go ahead.

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

Thanks, Chris, and thank you all for joining us today. We had a great quarter and excited to host the call today. On our last earnings call, I outlined our plans to restart originations in the third quarter, and I'm very excited to report that we are completely operational. Our new applications have returned to pre-COVID levels, and the pipeline is expanding rapidly. The silver lining of our production pause was a chance to work on the nice-to-have projects that are often tough to accomplish when a company is growing. We used the downtime to reevaluate our entire production platform, and we made significant improvements to our process as well as our technology. These improvements will make us more efficient and more customer-friendly going forward. We also restructured job functions and responsibilities, which resulted in a reduction of force at the end of September. While these decisions are never easy, our team is convinced that they were necessary and beneficial to our future growth. In terms of the portfolio, we saw a stabilization of the non-performing loans and our asset managers continued to do an excellent job of resolving delinquent loans. We continue to see strong recovery rates and the real estate markets are performing better than many had predicted. Additionally, it's important to note that we saw provision expense return to a normalized level in Q3 as the economy is performing above the adverse levels that we were assuming in our CECL model. Looking forward, our team is working hard to create new relationships on the liability side of the balance sheet to eliminate mark-to-market risk and explore other debt structures to finance our growth during the fourth quarter and well into 21. With regard to our people, most of us continue to work remotely, but we've recently allowed certain of our team members to return to work in our physical locations so long as protocols are followed. I'm happy to report that we've had minimal issues by reopening our offices. Fortunately, we are healthy, motivated, and happy to be serving our customers again. With that, we'll turn to our presentation materials. It's a relatively short and straightforward presentation today, so I'm going to just go through it top to bottom. Mark is on the call as well, and we'll both be available for Q&A. Obviously, from an earnings perspective, we're very pleased. Net income up significantly, as I mentioned in my opening remarks, driven largely by a return to just normalized provision expense. Portfolio NIM expanded as we saw fewer NPL loans, and we're very pleased with the earnings result for the quarter. In terms of production, I've already highlighted that we got restarted but had tremendous response from the market, saw near pre-COVID levels right out of the gate, and I'm very pleased to see how quickly our customers have been responding to our reopening. In terms of resolutions, again, very strong for the quarter, 103.5 on assets resolved. We expect that to... good performance to continue going forward, and we see strong real estate markets as we continue to resolve these assets. Another important milestone in the quarter, about $335 million of loans that were in the forbearance program were actually brought current. Any amounts that were past due were tacked on to the end of the loan, and they sit in a non-interest-bearing account that will be recovered upon liquidation. So that was a big slug of the forbearance loans that we had done in the prior quarter coming back to current status. So that was a very good improvement for us in the third quarter. And from a financing and capital perspective, we're working on some new agreements right now that all have non-mark-to-market provisions, as we've indicated in the past. That's our desire and our plan going forward, and we're making very good progress there. And looking forward to doing our next securitization in Q1. Turning to page four, from just a core earnings perspective, You can see core earnings were a touch higher as a result of the workforce reduction costs and the charge that we took there from restructuring. So good results there and good book value growth as a result of the earnings in the quarter. On five, I mentioned the good asset resolution activity. We continue to see strong growth. performance there and good resolutions as loans are paying off and borrowers are rectifying delinquent assets and expect to continue that performance on a go-forward basis. Turning to six, in terms of the portfolio, the one significant transaction in the third quarter was our transfer of about $214 million of HFS loans to HFI. It's somewhat confusing. I think the gap requirements can sometimes distort the picture a little bit. Essentially, you'll see in our loan loss provision a number of 1.6 million, so it might look at first blush that reserve provision is up for the quarter, but we had a offsetting low-com adjustment on the books already for those HFS loans. And so this is really just a reclassification under the GAAP requirements. And so it actually ended up being $141,000 positive to income as a result of the reclass. And so that transaction took place during the third quarter as a result of our securitization of those loans. but resulted in no real meaningful change to loan loss provision. On seven, we talked about the production restart. Got really great response from our customers in Generate Velocity. Our broker portal had just under 400 new brokers sign up with us. And some of the technology enhancements there were to find ways for folks to interact with us more seamlessly, make the website more friendly, and just continually improve that broker and borrower experience. And early returns are fantastic. We're getting much better application level and response level than we had even forecasted or hoped for. So all those investments and enhancements, I think, are going to continue to serve us well as we expand. Turning to page eight, net interest income. I mentioned the NIM expanded in the quarter, primarily driven by fewer new NPLs. And as we go forward, we hope that we can continue to improve on this NIM as we expand and grow the portfolio. On nine, in terms of loan portfolio performance, you can see on the left-hand side, non-accrual loans stabilized and ticked down slightly. Our projection there and our expectation is that we have, in fact, stabilized. And over the next 12 to 18 months, we expect that to trend down as we resolve assets and as they come off. the balance sheet, so we're pleased with what's going on there from an NPL perspective, especially in light of the positive resolutions. Excuse me, from a charge-off perspective on the right-hand side, this is the only kind of ding in the quarter. Unfortunately, we had one large loan that charged off. It was not a result of COVID. It was a large loan that we made about a year ago, and it was kind of a Murphy's Law loan. Everything that could have gone wrong did go wrong. We had some people internally that didn't follow procedure, and we let them go. We are pursuing this borrower legally for a deficiency judgment, and we're also actually pursuing the insurance from the appraiser. I don't want to get too far into the weeds, but if we need to in Q&A, we can. But the bigger point that I'm trying to make here is that it was kind of a one-off unfortunate situation. I think the last time something like this happened was five or six years ago, and more importantly, it's not an indication of a larger trend or a large number of loans that were delinquent that we had to charge off. It was just kind of an unfortunate event on our side, and we believe one time and not indicative of future performance. On 10, just a little perspective on the CECL Reserve. You can see running right around 29 basis points. We think we're very well reserved. I did mention that we use an adverse, highly stressed forecast model for this CECL calculation, and so far the economy has been performing better than those assumptions and those outcomes are predicted to be. We'll see how things go in the future, but we feel very good about our CECL reserve and the level of of reserve vis-a-vis the portfolio. On 11, just talking about the future, we expect continued strong demand for our products. We think there's some market dynamics there. We think there's some competitive dynamics there, but very pleased to see the response that we've received so far. Performance, we're very hopeful that we've got our arms around the delinquency and continue to work that off. And we're seeing pockets of weakness across the country, but overall in terms of real estate values, they're holding up very well. And we remain very optimistic on our ability to continue to liquidate delinquent assets. Lastly, in terms of profitability and growth, obviously very excited to be putting new assets on the balance sheet and believe that by Q2 next year, we'll be back to pre-COVID origination levels and driving higher net interest income into the profitability. And then an important, obviously, foundation in that strategy is to continue to expand our financing capacity, and we're working on that especially especially in the warehouse side of the balance sheet, just trying to make sure that we eliminate that mark-to-market risk. So I think we've put all the pieces in place to have a great year next year and continue to expand on our growth plans. So as I said, that was a pretty quick presentation, pretty high level, and I think it'd probably be appropriate to just open it up for Q&A now for both myself or Mark.