This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day and welcome to the Velocity Financial Incorporated First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode.
spk07: Should you need assistance, please signal a conference specialist by pressing the button on the right side of the screen. Okay. to ask questions. To ask a question, you may press star, then one on your touch-tone phone. Please note that this event is being recorded. I'd like to turn the conference over to Chris Altman, Treasurer. Please go ahead. Thanks, Danielle. Thank you. four results. and Mark Kupaniak, the Chief Financial Officer. Earlier this afternoon, we released our first quarter results, and you can find the press release and presentation we were referred to during this call on our Investor Relations website at www.investorrelations.com.
spk04: 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. 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.
spk07: First quarter earnings call. I'd like to start out by thanking all my members as we had a tremendous first quarter. as reflected in the results we released after the close. Origination volumes were almost 75% higher than they especially since the first quarter is typically lighter. Our team continues Hello. and higher returns on equity. Markets are adjusting to the new interest rate realities and we see healthy across the U.S. in our lending segment. More than the base rates this year.
spk06: execution of our second deal in April versus the January securitization. Moreover, participation was broad with 27 different investors purchasing bonds, and the deal was many times oversubscribed. Our tremendous performance has produced a healthy investor base that believe in our program, and we've worked hard to earn their loyalty. In terms of our portfolio, we continue to execute well by resolving delinquent assets favorably, and our special servicing team has done a great job of driving positive results. There will be plenty of fresh money available to purchase the real estate securing our loans when priced appropriately and values are holding up well. In terms of capital, we placed $75 million in new corporate debt in February to fuel our goal of increasing
spk07: Thank you. Speaking of growth, we issued a company And received the most new applications we've had in over two years. It's just under $400 million in income . Obviously, our pipeline is strong. Thank you. market share and our strategy every earnings Thank you.
spk06: That concludes my prepared remarks and we'll turn over to the presentation starting on page 3. Obviously, great results from an income perspective. The core EPS of 51 cents a share is an all-time high for the company, driven largely by the fair value gains from new originations and the net interest margin coming off the portfolio. The third bullet point there, you can see the NIM up nicely year over year, and all of those combined to drive higher pre-tax ROEs. We present ROEs on a pre-tax basis as many of our comparable companies are not taxpayers.
spk07: very strong production for the first quarter continued into April, as I mentioned, and the pipeline is very healthy. Portfolio is up. You're over here. And most importantly, from that metric, we continue to see positive changes in the resolution of the regulations. From a financing and capital perspective, I mentioned the January securitization and also completed the April securitization. Those markets are very, very strong right now. We've got plenty of liquidity and warehouse capacity. And as I mentioned, we issued those new notes to fuel our Turning to page four. On the left-hand side, this is the reconciliation for core adjustments. doctrine and then on the right hand side is a walk up in book value as we continue to retain our earnings and grow the book value as I mentioned on the far right
spk06: We added two bars there to try to give folks a sense of the embedded gains in the amortized cost portfolio and if they were to be brought into book value, you know, want to make the point that we think there's significant unlocked value there. And as we move forward as a firm over time and move the whole balance sheet to the fair value option, we think that there will be much higher a book value for all shareholders. With that, I'll turn it over to Mark to start on page five.
spk01: Thanks, Chris. Hi, everyone. Our first quarter of the year started out the year, as Chris mentioned, on a positive note with strong loan originations and a healthy secureization market. On page five,
spk07: Loan production for the first quarter was almost $379 million. That's 7.5% increase from $352 million in Q4 last year. And I think as Chris mentioned, it's almost 75% of an increase year over year. The strong production growth during Q1 was achieved with the new ways of doing it. Is averaged 11% The growth and origination in Q1 was also at tighter credit levels, with the weighted average loan on the value for the quarter at just under 64%. As a result of the strong growth in production, on page six, it shows a similar growth in Q1 for our overall loan portfolio. The total loan portfolio is about $1,000,000. from Q4 of last year. and over a 19% increase year over year. The weighted average coupon on our portfolio was 9.07%.
spk01: 19 basis points higher than at the end of last year and 92 basis points higher year-over-year. The portfolio weighted average loan-to-value ratio declined slightly to 67.6 as of March 31st compared to 67.8 as of the end of the year last year and 68.1 as of Q1 23. So, again, generating strong production at high weighted average coupons with still low weighted average loan-to-value ratios. On page seven, as Chris mentioned, our Q1 NIM decreased 17 basis points from Q4 and increased 12 basis points year-over-year, as our portfolio yield remained relatively flat quarter-over-quarter, but increased year-over-year by 71 basis points, while our cost of funds increased 18 basis points quarter-over-quarter and 50 basis points year-over-year.
spk07: was mainly driven by the timing of NTL interest, which is recorded as it's received on a cash basis. Well, short-term financing is increasing during Q1. We continue to see an improvement in the overall situation. is reflected in our Q1 earnings. I'm going to go to the next page. I'm going to go to the next page. rate at the end of 2021 was 10.1%. and they you you you like that The table on page 99 highlights the success of our NPL Resolution efforts. In Q1, we resolved almost for a net gain of $1.3 million or 2.3%. We've averaged about a 2.5% gain on NPL resolutions over the last five quarters. And again, that's a gain over and above collecting all of the contractual principal interest.
spk01: Page 10 presents our CECL Loan Loss Reserve and Net Loan Charge-Off and REO Activity. The CECL Reserve, as of March 31st, was 5.3 million, or 19 basis points of our outstanding non-fair value loans held for investment portfolio. And our CECL Reserve is within our expected range of 15 to 20 basis points. The CECL Loan Loss Reserve, as a reminder, does not include loans being carried at fair value. The table to the right of the page shows our net gain loss from charge-offs and REO-related activities during the quarter. For Q1, we had a net loss on charge-offs and REO-related activities of $800,000 compared to a net loss of $300,000 for Q4-23. Page 11 shows our durable funding
spk07: and liquidity position at the end of Q1. Total liquidity at the end of March 31st was almost $79 million, comprised of about $35 million in cash, cash, cash, cash, and another $4.34 million, in available liquidity and unfinanced collateral. We did it just because we wanted to get your organization into one. One, in January, if you The 2024-1 security is totaling just under $210 million of security issues. Our available warehouse line capacity as of March 31st was $529 million, with the maximum line capacity eighty eighty-five note at a fixed rate of $9.875 to support continued growth of the company. And then at the quarter end in April, we completed our second securitization of the year, totaling $295 million of securities issued.
spk01: With that, I'd like to now turn the presentation back to Chris for an overview of Velocity's outlook on key business drivers. Chris?
spk07: Thanks, Mark.
spk06: I think as we look forward, the market seems healthy and values are holding up, as I mentioned. We think employment levels and the economy seems to be well. Capital perspective, as I mentioned, the markets are a tailwind for us right now, and we're very fortunate to take advantage of that. From an earnings perspective, obviously, we're seeing the benefits pick up there and expect to continue to grow our earnings going forward. So all in all, very positive and very optimistic. And that wraps up our prepared presentation. presentation and we'll open it up for questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you would like to withdraw your question, please press star then 2. The first question comes from Steven Laws from Raymond James. Please go ahead.
spk03: Hi, good afternoon. Congrats on a great start to the year. You know, Chris, I wanted to touch on a few things with regards to your production. You know, April obviously started off where you're kind of on pace to meet or exceed Q2, but, you know, notice the LTV on new originations continues to drop. So it seems like you're sacrificing volumes to improve credit while you're able to maintain the coupon. And, you know, just wanted you to touch on that and what you're seeing in the markets. and what that should do longer term. Should we eventually see trending down on non-performing loans or is that part of this type product and we'll eventually see larger gains on resolutions given you're attached to a more conservative level on collateral?
spk07: Sure, Stephen. Good questions. I think we're As we said before, we're seeing better opportunities for LTVs, so we're taking advantage of those. But we are very protective of our margins. We want to deploy capital, you know, and make sure we earn the return.
spk06: And to us, the way we look at it, you know, risk-reward is very important. So we're not the kind of firm that's going to just do it all. We want to do it at healthy margins. That's really what's driving those decisions. I do think that delinquency is going to largely just depend on the overall economy and how things go going forward. we continue to see very positive resolutions and our sort of forecast for those resolutions remains the same. We still think we'll end up with positive outcomes there. So we like the spread of the dynamics that we're seeing and hope to continue to grow there.
spk03: Great. And one follow-up question, you know, kind of looking at the mix of loan production, you know, the investor one to four rental, you know, kind of looking at the trailing four-quarter average, you know, once doing commercials grown you know materially so you know is that filling a void you know why are you seeing there and maybe that point
spk07: more of a competitive landscape, but curious to get your thoughts on kind of a little bit of a shift or more opportunities you're seeing on the commercial side. Yeah. Yeah. Good observation. I think that's
spk06: We're definitely seeing more demand there. We sort of set up our program on an agnostic basis where we're happy to do either product and we try to price accordingly. So we haven't made many changes there. It's mainly been a market shift where I think they're just Banks are being tougher, and so we're seeing more share.
spk03: Great. Well, again, congrats on a great start to the year, and appreciate your comments this afternoon.
spk06: Thank you. Appreciate it.
spk00: Again, if you have a question, please press star 1. The next question comes from Steve Delaney from Citizens JMP. Please go ahead.
spk05: Hello, everyone. Great quarter. Nice to be on with you tonight. Chris, gosh, the the growth and the production, and this is spread, you know, all over the country. Can you just talk for a minute? I know you guys are, you know, out in the late L.A. area, and you've got your headquarters there.
spk07: But can you talk a bit about the regional management structures that you have around the country
spk05: And, you know, how are you using, how are you attacking individual targeted geographic markets? So just sort of your management structure underneath you or Jeff on the production side. Thanks.
spk07: Sure, sure. Hi, Steve. So, you know, we support the country in two ways. operation centers, if you will, one east coast, one west coast, just to handle the different time zones. Okay, makes sense. Yeah, and then we have several different sales locations to reach our customers. But from a geography perspective, we try to target the larger MSAs where properties are more liquid and
spk06: We tend to stay away from the rural and tertiary markets where we don't want to be sitting on an asset for a year or two trying to sell it in smaller type settings. So those are the two things that drive our portfolio strategy, and we've been If you look at the portfolio, we're pretty highly concentrated in the coast and then along kind of the Texas area as well.
spk07: your contact with the borrowers. I assume you use the internet. Are you also working, coordinating, working through local market mortgage brokers?
spk06: Yes, that's our primary source of business.
spk05: I thought it would be, yeah.
spk06: Yeah, we call them lead generators, and so they basically bring us the transaction, and we take over from there, and that's primarily how we market and educate folks.
spk05: Well, good. We cover United Wholesale. It's working pretty well for them in terms of a recommendation. That's right. I'm not surprised that you're using that. Can you share with us, have you been growing these broker relationships? Can you comment on how many you have over the last year or two? Is that increasing your number of touch points?
spk06: Yeah, we are growing the number of. approved brokers, we're also adding sales folks. So by adding sales folks, they tend to bring relationships with them or prior existing contacts. And so we have a little over 2,000 approved brokers, and we're adding to that list quarterly.
spk05: Very helpful. Thank you very much.
spk06: Okay. Thank you, Steve.
spk00: This concludes our question. Oh, I'm sorry. There's another question. The next question comes from Eric Hagan from BTIG. Please go ahead.
spk02: Hey, thanks. Hope you're well. Thanks for sneaking me in. On the REO sales, can you share any trends on what has sort of led to success in those assets that have gained and how quickly you might be able to work through the remainder of the REO? Yeah, sure.
spk06: Hi, Eric. We try to price our REOs where they'll move fairly quickly. We are pretty disciplined there and try to avoid kind of the perception of a kind of distraction lender bank kind of blow out so oftentimes we will put a little TLC into our REOs to get them ready for market so I think we probably take a little longer than most folks to sell REOs but it shows up in the recovery rates and you can see in the actual final resolutions we typically sell them for a little better or right where we had them marked so Our team's pretty good at trying to figure out where that property will transact. And fortunately, we see a lot of buyers show up at either foreclosure sales or after the fact once we get the property on the market. So I would say it's going to take us those REOs, and I think that we still have new ones coming on, so I would say we'll stay at this level probably for the rest of the year, kind of on a net basis as new ones come on and old ones come off.
spk02: Yep, that's helpful. Thank you. Eric, this is Mark. I think one other thing just to note
spk01: is that over 95% of our non-performing loans are resolved by either paying off or paying current. You know, less than 5% ever even make it to foreclosure or the REO process.
spk02: Yep. No, that's definitely helpful. Thanks for fleshing that out. You know, looking at the liquidity, it's around $80 million.
spk07: How do you look at the non-performing loans? do you feel there?
spk02: Any kind of minimum level of liquidity you feel like you have to run with your leverage at this level? And then are there any opportunities to call and maybe relever any of the securitized debt that you have in the stack? Thank you.
spk06: Sure, absolutely. So yeah, from a liquidity perspective, we feel very good there by retaining our earnings That's also additional fuel and capital as we go forward, so we just continue to recycle that capital. So we've got very strong visibility well into next year from that perspective. And then in terms of collapse opportunities, we do have two securitizations out there. One of them is a – was sort of done on all of our delinquent assets from prior there's a significant amount of equity locked up there that that will roll off sometime next year and then there's one other transaction that we have an opportunity to pull some capital out of as it ultimately pays off or call it away. Combined, that's in excess of probably $75 million. The rest of the transactions are structured as pro-rata paydowns. So we did that intentionally because we own this risk. And so it kind of works nicely that We're really not incented to call those deals away because our cost of funds are staying very stable, whereas in a sequential structure, those cost of funds tend to spike near the end of their lives. They stay very stable for us. So by and large, most of the deals we probably won't call or collapse until near the very end because of that stable fixed rate financing.
spk02: That's great. Thank you guys so much. Appreciate it.
spk06: You're welcome. Thank you, Eric.
spk02: Thanks, Eric.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Chris Farrar for closing remarks.
spk06: Thanks again for everybody on the call taking the time to hear our story, and we look forward to catching up with everyone again next quarter.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer