Velocity Financial, Inc.

Welcome to the Velocity Financial Inc. 4th Quarter and 4th Year 2021 Results Earning Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal your 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 now like to turn the conference over to Chris Altman. Please go ahead.

Thank you, Vish. Hello, everyone, and thank you for joining us today for the discussion of Velocity Financial's fourth quarter and full year 2021 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Sapaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our fourth quarter 2021 press release and the accompanying 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 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 in our investor relations websites. 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, and I'd like to thank everyone for joining our fourth quarter earnings call today. We obviously had another terrific quarter to finish off the year on a high note. Our year-over-year growth was impressive, and we successfully managed our costs to drive increased operating leverage as we grew the portfolio and by just over $500 million on a net basis. Originations were another record in Q4, up significantly over the third quarter levels. COVID-related delinquencies continue to decline as we recognize strong recoveries and resolve delinquent loans. Issued two securitizations during the fourth quarter and successfully financed some of our older, more expensive deals on significantly better terms. Demand for new loans was very strong in the fourth quarter, and we continue to see that demand carry into this year. From a macro perspective, the economy is strong. We're seeing great borrowers come to us for financing, and the real estate markets are still rising due to a demand-supply imbalance. Fed obviously signaled during the fourth quarter that they're planning to increase short rates this year, and the two- and three-year swap rates, which we price our securitizations from, increased about 70 to 80 basis points from December to today. We closed our first securitization of the year on February 15th with a coupon just under 4%, which was higher than the December deal, based mainly on the underlying move in base rates and saw good demand for the securitization with some spread widening. Our 10-year track record and strong credit performance helped us execute in a choppy capital markets environment. As we look forward, we expect originations to grow this year and NIM to normalize around the 4% area as the increased yield from delinquent loan resolutions stabilizes and older, higher rate loans are replaced with lower coupons. We've already increased rates this year to offset the underlying move I mentioned in swaps and expect to realize strong growth in our portfolio this year. remain optimistic about our future, and look forward to delivering another record year for our shareholders. With that, I'll turn it over to the presentation and go to slide three. In the handout there on slide three, you can see for 2021, just an overview of the year, great performance in all areas, net income up 64%, loan production up 200%, through the portfolio almost 30% on a net basis after payoffs. I mentioned the NIM had expand from that delinquent interest we picked up on the COVID loans. And finally, on the bottom right, you can see charge-offs decreasing year over year as we continue to see favorable resolutions. On slide four, Net income of $8.4 million, core income of $10.1 million, a new high for us. That core EPS growth was 25% from the third quarter and was driven, obviously, by the increased volume as well as some loan sales that we did during the fourth quarter. From an interest income perspective, that grew also nicely, 5% from the third quarter, which to me is very strong and very healthy, again, driven by record loan production volume. The fourth quarter NIM was down at 4.27%. Part of that is driven by kind of a one-time write-off of some deferred deal cost expenses with the securitization collapse. But I think the larger kind of point that I made in my opening remarks is that we expect NIM to kind of normalize around that 4% area. From production and portfolio perspective, again, 46% increase in volume quarter over quarter, very impressive. And then I think just as impressive as Carry-through into this year, we've already done $358 million through the first two months of the year, and that's up about two and a half times what we did last year. So we're seeing very strong production continue. I mentioned the increase in the portfolio, up to about $2.5 billion now, and then also continue to see very favorable improvement in our Consequent loan performance down to 10.9%. Getting to that area that we tell folks is kind of normal for the business, 8% to 10%, so we're real close to kind of stabilizing into sort of pre-COVID levels. Lastly, on page four, from a financing and capital perspective, outlined here the two different deals that we did. The second deal was a nice deal for us as we collapsed three older deals. and reduce the coupon on those borrowings by about 4%. Turning to page 5, during the fourth quarter we converted all of the preferred stock into common shares. It was good to clean that up and then as previously announced we acquired a majority stake, 80% stake in Sentry and we're very excited about the opportunity there. It's an interesting business and we'll address it in more detail on some slides. Subsequent to the quarter end, I mentioned in February we priced our securitization on February 15th. Issue out in the capital markets. Turning to page six, core income and book value per share. You can see the costs that were made up in the core net income add-backs, mostly related to the non-cash write-offs from the securitizations and some of the legal expenses for the century acquisition. So got kind of a more normalized book value per share, driven largely by the stock conversion, obviously. Um, turning to page seven, uh, in terms of production, it's not good increases across both products, both the one to four product up 45% quarter over quarter and the traditional commercial up 55% Q over Q. So both products participating, um, small portion in the, in the short term products. And again, at the majority of our business driven, as we've said in the past on, on the longer term. type product. Good impressive numbers in terms of new broker additions, up 21% quarter over quarter. And we're seeing a lot of broker activity in our internet portal at the beginning of the year as well. So we see a lot of good broker demand. As we said in the past, we think as the sort of A paper consumer refinance opportunities go away, we tend to see brokers show more interest in our products and our programs as they find new ways to generate income and we're seeing very healthy demand from those brokers. On page 8 we've got a little more detail around the century acquisition. Most of this was already released in our press release so I don't want to overdo it here but it's a very simple straightforward kind of fee-for-service business We don't take any credit risk. We originating these loans and then building a servicing strip. There's a little over $500 million in servicing portfolio rights at the end of the year, and we look to grow that going forward. In terms of a contribution to earnings. You can see that the pre-tax income for last year was $2.3 million. We own 80% of that now on a go-forward basis. We'd expect that to be somewhere in that level for this year and really hope that the different growth initiatives that we're going to undertake this year will start to show up in next year's results. I'll turn it over to Mark and let him handle the rest of the presentation.