Velocity Financial, Inc.

Good afternoon, everyone, and 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 touchtone 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 Oltman, 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 Sapaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our fourth quarter and full year 2022 results, and 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 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.

Thanks, Chris, and 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. We're 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 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. 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. 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 we'll now review our presentation materials. If we turn to page three, we've got some highlights for the full year metrics. You can see gap net income up nicely, loan production year over year up 33 percent, 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 10 cents 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 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 so although the the number of transactions slowed down in the volume of resolutions was lower we still continued to resolve assets over and above the contractual and 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 the 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 elections, so I'll move down to financing and capital. In terms of the financing and capital, we did the October securitization of about $189 million. You can see there, and then in January, similar size deal. And 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, 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 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. And as I mentioned in my opening remarks, this transition to the FVO accounting, we think, is going to 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. And so 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 gap 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 And 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. And so I'll turn this over to Mark to walk you through the drivers and the decisions behind the FVO option.