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Operator
Good day and welcome to the Velocity Financial Incorporated first quarter 2024 earnings 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, then one on your touchtone 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, Treasurer. Please go ahead.
Treasurer
Thanks, Danielle. Hello, everyone, and thank you for joining us today for the discussion of Velocity's first quarter 2024 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Sopaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our first quarter results. and you can find the press release and accompanying presentation we will refer to during this call on our investor relations website at www.bellfinance.com. 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. 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.
Chris Farrar
Thanks, Chris, and welcome everyone to our first quarter earnings call. I'd like to start out by thanking all my team 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 the previous year and reflect strong demand in our niche, especially since the first quarter is typically lighter in terms of new volume. Our team continues to originate target assets in a disciplined way while controlling expenses to drive increased earnings and higher returns on equity. Markets are adjusting to the new interest rate realities, and we see healthy activity across the U.S. in our lending segment. as we step in with favorable terms where banks have pulled back. The securitization market remains very supportive as we saw spreads tighten more than the rise in base rates this year for improved 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. We see 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 the portfolio to $5 billion in UPV by 2025. Importantly, as you saw in the press release, we have plenty of liquidity to meet those targets as we grow. Speaking of growth, we issued a company record $2 billion worth of LOIs in the month of April and received the most new applications we've had in over two years at just under $400 million in combined UPV. Obviously, our pipeline is strong and customers are responding to our offering. The team is excited and engaged to persist in taking market share in our strategy of retaining earnings, growing book value, and redeploying capital into high returning assets. We'll continue to drive earnings growth and shareholder value into the future. That concludes my prepared remarks and we'll turn over to the presentation starting on page three. 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. In terms of production and the loan portfolio, again, very strong production for the first quarter continued into April, as I mentioned, and the pipeline is very healthy. Portfolio is up nicely year over year. NPLs are manageable at just around 10%. And most importantly, from that metric, we continue to see positive gains in the resolutions. 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 growth. Turning to page four, on the left-hand side is a reconciliation of our core adjustments related to stock transactions. 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, 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. We 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.
Mark
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 securitization market. On page five, loan production for the first quarter was almost $379 million in UPB. That's 7.5%. increased from 352 million in Q4 of last year, and I think, as Chris mentioned, almost a 75 percent increase year over year. The strong production growth during Q1 was achieved with the new weighted average coupon on originations at 11.1 percent for the quarter. And the weighted average coupon on our originations has averaged 11 percent for the last five quarters. The growth in originations in Q1 was also at tighter credit levels, with the weighted average loan-to-value for the quarter at just under 64%. The strong Q1 production growth at the high weighted average coupon and the low LTV further demonstrates the continued borrowing demand for our product. As a result of the strong growth in production, on page six shows a similar growth in Q1 for our overall loan portfolio. The total loan portfolio as of March 31st was almost $4.3 billion. That's a 5.1% increase from Q4 of last year and over a 19% increase year over year. The weighted average coupon on our total portfolio as of March 31st was 9.07%, 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 60 basis points year over year. The quarter over quarter slight decrease in NIM was mainly driven by the timing of NPL interest, which is recorded as it's received on a cash basis. While short-term base financing rates increased during Q1, we continue to see an improvement in the overall securitization market, and a strong growth in originations coupled with the healthy NIM is reflected in our Q1 earnings. On page 8, Our non-performing loan rate at the end of Q1 was 10.1% compared to 9.7% for Q4 of last year and 8.7% for Q1 year-over-year. The ongoing strong collection efforts by our Special Servicing Department has resulted in continued resolutions of our NPL loans and favorable gains. And the table on page 9 highlights this continued success of our NPL resolution efforts. In Q1, we resolved almost $55 million worth of UPV of NPL loans and REOs. for a net gain of 1.3 million or 2.3 percent. We've averaged about a 2.5 percent 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. 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 CESA reserve is within our expected range of 15 to 20 basis points. The CESA 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 and liquidity position at the end of Q1. Total liquidity as of March 31st was almost $79 million, comprised of about $35 million in cash-to-cash equivalents and another $44 million in available liquidity on unfinanced collateral. We did issue, as Chris mentioned, one securitization in Q1. In January, we issued The 2024-1 security totaling just under $210 million of securities issued. Our available warehouse line capacity as of March 31st was 529 million with a maximum line capacity of 885. In February, we entered into a $75 million five-year senior secured note at a fixed rate of 9.875 to support continued growth of the company. And then subsequent to quarter end in April, we completed our second securitization of the year, totaling $295 million of securities issued. 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?
Chris Farrar
Thanks, Mark. Yeah, I think as we look forward, the market seems healthy and values are holding up, as I mentioned. We think... Good employment levels and the economy seems to be well. Capital perspective, as I mentioned, the securitization markets are a tailwind for us right now, and we're very fortunate to take advantage of that. And 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 about the future, and that wraps up our prepared presentation. We'll open it up for questions.
Operator
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.
Steven Laws
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 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 market, you know, and what that should do longer term. Should we eventually see, you know, 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.
Chris Farrar
Sure, Steven. Good questions. I think, as we said before, we're seeing better opportunities at lower LTVs, so we're taking advantage of those. But we are very protective of our margins. We want to deploy capital efficiently and make sure we earn the return. And to us, the way we look at it, risk-reward is very important. We're not the kind of firm that's going to just do volume to do volume. 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, you know, the overall economy and how things go going forward. I would expect with lower LTVs, you know, to continue to see very positive resolutions. you know, our sort of forecast for those resolutions remains the same. We still think we'll end up with positive outcomes there. So, you know, we like the credit dynamics that we're seeing and hope to continue to grow there.
Steven Laws
Great. And one follow-up question, you know, kind of looking at the mix of loan production and You know, the investor 1 to 4 rental, you know, kind of looking at the trailing four-quarter average, you know, 167 sort of right in line with what you've been doing. Commercials grown, you know, materially. So, you know, is that filling a void? You know, why are you seeing a better opportunity there? And maybe that points a little more to the competitive landscape. But curious to get your thoughts on kind of a little bit of a shift or more opportunity you're seeing on the commercial side.
Chris Farrar
Yeah, that's a good observation. I think that's an uptick as a result of the banks continuing to tighten and pull back. 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 banks are being tougher and so we're seeing more share
Steven Laws
Great. Well, again, congrats on a great start to the year, and appreciate your comments this afternoon.
Chris Farrar
Thank you. Appreciate it.
Operator
Again, if you have a question, please press star 1. The next question comes from Steve Delaney from Citizens JMP. Please go ahead.
Steve Delaney
Hello, everyone. Great quarter. Nice to be on with you tonight. Chris, gosh, the growth in the production, and this has spread 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. But can you talk a bit about the regional management structure that you have around the country? 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.
Chris Farrar
Sure, sure. Hi, Steve. So, you know, we kind of split the country in two. We have two operation centers, if you will, one east coast, one west coast, just to handle the different time zones. Okay.
Steve Delaney
Makes sense.
Chris Farrar
Yeah. And then we have, you know, several different sales locations to, you know, reach our customers. But from a geography perspective, we try to target the larger MSAs where we're Properties are more liquid, and 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 if you look at the portfolio, we're pretty highly concentrated in the coasts. and then along kind of the Texas, you know, area as well.
Steve Delaney
So that's helpful. And your contact with the borrowers, I assume you use the internet. Are you also working, coordinating, working through local market mortgage brokers?
Chris Farrar
Yes, that's our primary source of business.
Steve Delaney
I thought it would be, yeah.
Chris Farrar
Yeah, we call them lead generators and And so they basically bring us the transaction and we take over from there. And that's primarily how we market and educate folks.
Steve Delaney
Well, 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 and over the last year or two, is that increasing? Yes. Your number of touch points?
Chris Farrar
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 – little over 2,000 approved brokers, and we're adding to that list, you know, quarterly.
Steve Delaney
Very helpful. Thank you very much.
Chris Farrar
Okay. Thank you, Steve.
Operator
This concludes our question. Oh, I'm sorry. There's another question. The next question comes from Eric Hagan from BTIG. Please go ahead.
Eric Hagan
Hey, thanks. Hope you're well. Thanks for sneaking me in. On the REO sales, can you share how, you know, any trends on what What has sort of led to successfully exiting those assets at a gain and how quickly you might be able to work through the remainder of the REO pipeline?
Chris Farrar
Yeah, sure. We try to price our REOs, you know, where they'll move fairly quickly. We are pretty disciplined there and try to avoid kind of the perception of a kind of distressed 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. Our team's pretty good at trying to figure out where that property will transact. 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. I would say it's going to take us time to work through 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.
Eric Hagan
Yep, that's helpful. Thank you. Eric, this is Mark.
Mark
I think one other thing just to note is that over 95% of our non-performing loans resolved by either paying off or paying current. You know, less than 5% ever even make it to foreclosure of the REO process.
Eric Hagan
Yep. No, that's definitely helpful. Thanks for fleshing that out. You know, looking at the liquidity position, it's around $80 million. How comfortable do you feel there? Any kind of minimum level of liquidity you feel like you have to run with with your leverage at this level? And then are there any opportunities to call and maybe re-lever any of the securitized debt that you have in the stack. Thank you.
Chris Farrar
Sure, absolutely. So yeah, from a liquidity perspective, we feel very good there. You know, 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 was sort of done on all of our delinquent assets from prior collapse deals. There's a significant amount of equity locked up there. 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. You know, 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.
Eric Hagan
That's great. Thank you guys so much. Appreciate it.
Chris Farrar
Welcome. Thank you, Eric.
Eric Hagan
Thanks, Eric.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Chris Farrar for closing remarks.
Chris Farrar
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.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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