Velocity Financial, Inc.

Good day and welcome to the Velocity Financial fourth quarter and full year 2024 conference call. All participants will be in 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, Director of Investor Relations. Please go ahead.

Thanks, Ashia. Hello, everyone, and thank you for joining us today for the discussion of Velocity's fourth quarter and for your 2024 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Cepaniat, Velocity's Chief Financial Officer. Earlier this afternoon, we released our fourth 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 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 a discussion of some of the risk 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 Security 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. And with that, I will now turn the call over to Chris Farrar.

Thanks, Chris, and welcome everyone to our fourth quarter earnings call. Our team is proud to announce another record quarter and year-end results for 2024. In short, the Velocity engine was firing on all cylinders last year, We have strong tailwinds supporting our business, and we're capitalizing on the unmet needs in our niche of the market. By lending to both residential and commercial real estate investors, we can serve a larger base of customers and provide capital to underserved people. Our customers tell us that banks are limiting their lending in our target niches, and we believe that will allow us to capture market share. We saw very strong demand from our borrowers in 2024 as evidenced by our 64% increase in originations, and that momentum is carried into the new year. Importantly, we remain disciplined in our credit process while preserving our risk-adjusted margins at lower loan values. Our portfolio growth led to a 37% increase in net revenue, and Q4 pre-tax ROE was an impressive 26.8%. In terms of our portfolio, our special servicing team did a great job resolving NPLs and REOs for net gains, and our nimble, hands-on approach consistently contributes to our earnings. As most of you know, we prefer to lend in larger, more liquid MSAs, and we still see healthy demand for the types of real estate we lend on. On a more somber note, we recently experienced devastating wildfires in Southern California, and all of us extend our deepest sympathies and concern for everyone impacted. From the business perspective, we were fortunate that only two of the properties backing our loans were destroyed and fully insured, so we expect no impact financially. On a more positive note, all Velocity team members are safe and healthy, and we will do our part to help those affected recover. From a capital markets perspective, we saw significant improvement post the presidential election, as evidenced by tighter spreads for our securitizations and increased investor participation, which enable us to achieve high ROEs on our invested capital. As we've explained before, our business is far less rate sensitive than other mortgage segments. And while much energy is spent by others prognosticating future Fed moves, we simply continued to deliver much needed capital to underserved borrowers. This is an important differentiator as we successfully originated loans over the last 20 years in both higher and lower rate environments. Looking forward, we can expect another strong year of growth and our team is engaged and proud to provide solutions for real estate investors nationwide as we look to create long-term shareholder value. With that, that concludes my prepared remarks and we'll turn over to the presentation materials starting with page three. Obviously from an earnings perspective, a fantastic year, 60 cents of core earnings in Q4 and a full year core earnings of 203. So fantastic earnings across all the different segments of the business. From production and portfolio perspective, another great quarter, 563 million TB, 18% increase sequentially over last quarter, and 60% year-over-year. The portfolio is just over $5 billion now. Non-performing loans is pretty steady with where it was from the last quarter. And impressively, in the fourth quarter, from an NPL resolution perspective, we had just over $5.5 million of gains from resolved delinquent assets. On the financing and capital side, I mentioned the securitization market, and we did a couple of deals in the fourth quarter that went off extremely well. We also issued a little over $7 million in new equity through the ATM program and the The strategy there is really just to continue to increase float and broaden out our investor base as best we can. From a capital and liquidity perspective, really great at year end, almost $96 million of liquidity, so we've got plenty of capital to fund future growth. Turning to page four. We outline our strategy here, just continuing to retain earnings and building book value. And you can see the bridge from 930 to 1231 there as we retain earnings and grow the book value. On the upper right-hand corner, we have two bars that take our gap book value at 1231. and adjust to what we call adjusted book value, and that's simply to reflect all of the assets that are carried at amortized cost. If GAAP allowed us to mark those assets to fair value, we think that adjusted book value would be about $18.73 a share. So there's tremendous value, we think, still in the platform that doesn't show up from a GAAP perspective. And with that, I will turn the presentation over to Mark on page five.

Thanks, Chris. Hi, everybody. Another year is in the books, and Velocity has really ended the year strong. We're also starting 25, kind of where we left off in 24. If we take a look at page five, the total loan production for Q4, as Chris mentioned, was $563.5 million in UPB. That's an 18.2% increase. over Q3, which was $476.8 million. There were over 1,200 loans funded in the fourth quarter. The strong production growth during Q4 included the weighted average coupon on new health and investment originations continuing strong at 10.8%. The whack on HFI originations for the last five quarter average trend has been at 11%, so great weighted average coupons over the last five quarters. The growth in originations in Q4 also continued at tight credit levels, with the weighted average loan-to-value for the quarter at just under 63%, at 62.9. The last five-quarter average trend has been at 63.9% LTV. So the strong Q4 production growth at the healthy WAC, the low LTV, tight credit, that still demonstrates, as Chris mentioned, the consistent borrower demand for a product in different market cycles and environments. And in 2025, so far 2025 year-to-date loan production through February was $429.49 million. So again, continuing where we left off in 2024. As a result of the continued strong growth in production, page six shows a similar growth in Q4 for overall loan portfolio. Total loan portfolio in September 31st was $5.1 billion in UPV. That's a 6.4% increase from Q3 and over a 24% increase year over year. The weighted average coupon on our total portfolio at the end of the year was 9.53%. That's a 16 basis points increase from Q3 and a 65 basis point increase in yield year over year. And again, the total weighted average loan to value ratio on the portfolio at the end of the year remained low at about 66.6%. On page seven, our Q4 portfolio net interest margin was 3.70%. An increase of 10 basis points. We're looking at Q3 and 18 basis points year over year. As our portfolio yield over to the right of the table, portfolio yield increased 16 basis points quarter to quarter, 64 basis points year over year. while our cost of funds actually decreased by one basis point, quarter-over-quarter, and increased only 39 basis points year-over-year, mainly due a lot to that tighter spreads that we're seeing in the securitization market that Chris previously mentioned. The quarter-over-quarter increase in NIM was mainly driven by strong loan production in the quarter and healthy spreads with the higher loan coupons coupled with the continued favorable execution in the securitization market on the debt financing side. Going over to page eight, Our non-performing loan rate at the end of Q4 was 10.7. It's relatively flat compared to 10.6% for Q3. And our non-performing loan rate has remained consistent for the last five quarters at an average of about 10.3%. We continue to see very strong collection efforts by our special servicing department that have resulted in favorable gain resolutions for MPL loans. The table on page 9 highlights the NPL resolution efforts. In Q4, the NPL resolution gains were 5.6 million or 7% of a little bit over $79 million in UPV results. On a trend basis, we've been averaging 3.3% quarterly NPL resolution gains over the last five quarters. It's not here on this table. If you look at all of 2024, our NPL resolution gains were 10.2 million for the year on over $283 million of UPV results. Page 10 shows our CECL reserve and also our loan charge-offs and our net gain loss and RO activity. On the left-hand kind of corner, the CECL reserves of September 31st was 4.2 million. That's 17 basis points of our outstanding non-fair value HFI portfolio. Our CECL reserve remains within our expected range of between 15 and 20 basis points. Keep in mind that CECL Loan Loss Reserve does not include our loans being carried to fair value. Over to the right, the table shows our net gain loss from loan charge-offs and also REO-related activities during the quarter. For Q4, we had a net gain on the combination of loan charge-offs and REO-related activities of $2.9 million, which is the net of the $700,000 in charge-offs you see in the table, netted with the $3.6 million gain on REO activities. For full year 2024, the net charge-offs between the net charge-offs and the area activity gain was $5.1 million. Page 11 shows our durable funding liquidity position. At the end of Q4, total liquidity was just under $96 million, comprised of almost $50 million in actual cash and cash equivalents and another $46 million in our available liquidity on unfinanced collateral. In addition, our available warehouse line capacity at the end of the year was 435 million. We have a maximum line capacity of 785 million. In Q4, as Chris mentioned, into two securitizations, we issued one in October, the 2024-5, and one in December, 2024-6. Combined, those two securities had over $586 million in securities issued. Already in 2025, in February, we issued our first security with a little over $351 million in securities issued. So with that, that concludes my 2024 financial recap. And I'll turn the presentation back to Chris for his overview on Velocity's 2025 key business drivers. Chris?

Thanks, Mark. On slide 12, you can see our outlook here from the market perspective. We still think everything remains healthy and very positive. On the credit side, we mentioned rates higher for longer is good for us, and we expect to continue to resolve NPVLs favorably, so we're very positive there. From a capital perspective, the strong securitization market is definitely a tailwind for us in helping us execute on our plan. And then lastly, from an earnings perspective, we expect to grow not only production but earnings as well and feel good about the future. So that wraps up our presentation and we will open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and two. The first question comes from Stephen Laws with Duane & James. Please go ahead.

Hi, good afternoon. Wow, you know, another fantastic quarter. Congrats on a really strong, I guess, close to 24. And, Mark, from your comments on January and February volumes, it seems like 25 is off to a continued strong start. So, you know... Maybe on that point, can you talk about production expectations for this year? I think you said $430 million through January and February. Is there a stabilized run rate on the production front that you think you reach on a quarterly level where things plateau? Or how much incremental volumes on a quarterly basis do you think you can put through the system?

Hi, Steven. Thanks for the comments. We, you know, I would say, you know, the current run rate feels good to us as a forecast for the rest of the year. We are growing and we see increasing demand. So I don't, we're not, we don't formally forecast what that would look like. And I don't want to put any sort of limits or bookends on it. I just think current run rate is definitely a good, you know, forward forecast. But probably with a little bit of upward slope to that because we're seeing really good demand.

Appreciate that. And maybe to try to not read too much into numbers on a one-quarter basis, but certainly notice the average loan balance, you know, just shy of $450,000, you know, a little bit bigger than kind of the $380,000 to $390,000 or $400,000 the last year. Is that due to entering markets more traction with larger loans? Is it more due to the shift in mix with a higher commercial component if those carry higher balances? Can you talk about the mix of the production and impact that might be having on average loan size?

Sure, yeah. I think it's the latter, not the former. I think that we definitely did see an uptick in the second half of the year in the commercial assets, which, as you mentioned, rightfully, that They have larger balances. Definitely still continue to see the banks being very tight there. So we see great opportunities come to us all the time with a little bit larger balance there, and that's really driven the average up.

Appreciate those comments. And one last one, if I may. From a capital standpoint, you know, with retained earnings and then a little bit of proceeds from ATM issuance, Is that enough capital to support and feed the growth of the business? Do you think you'll need to look for ways to tap bigger chunks of additional equity as you grow? How do you think about managing your capital base?

Yeah, that's a great question. Based on current run rates, we're in good shape. If we really start to accelerate even more, I could see somewhere down the road where we might need additional growth capital. We have over $75 million of retained bonds that we can sell at any time to fund some of that future growth. And then also, as you mentioned, some of the ATM issuance. So at current levels, we're fine. It really is just going to depend on how much growth we experience. And that could drive some marginal capital down the road. You know, our view is we would do it on a kind of a balanced level, meaning, you know, a little bit of equity, a little bit of debt, just to try to keep our debt-to-equity ratio in line with where it is right now.

Great. Appreciate the comments this afternoon. And, again, congrats on a very nice end of 24.

Thanks, Stephen.

The next question comes from Steve Delaney with Citizen Capital Markets. Please go ahead.

Hi, Chris, and everyone, and congrats on just a great close to the year.

Thanks, Steve.

Yep. So, look, as you talk about your borrowers, when we think about this volatility and what's been going on in the 10-year and what's been going on in mortgage rates, I guess I just naturally think of homebuyers and how they're so fickle, and one month they're a buyer, one month they're not. Your borrowers and clients are must have a much different mindset about what they're out there doing. It's as simple as that their focus is to buy and manage properties, and the rates are just sort of something you deal with that's kind of like noise, but their focus is on the properties and acquiring and managing those properties kind of regardless of and across whatever the rate cycle is. I guess whenever we're talking to a mortgage company, it's so different, Chris, than what we normally hear about borrowers' sensitivity to rates. Yeah. A little color would be helpful.

Yeah, sure. Yeah, sure. No, it's a good question, and it's definitely something that's unique to our business model. I think you summed it up well. These folks need access to capital, and they're willing to pay for it. they're very smart, they're opportunistic, and they're doing creative things, and they need capital to manage their real estate portfolio, and they come to us, and we execute with certainty, and we give them some duration. We write a 30-year fixed-rate mortgage, which is very unusual, so some of their alternatives might be very expensive, shorter-term capital that really is a bullet coming at them, maybe in 6 or 12 months, so I think they like some of the optionality that they have with our product. But you're absolutely right. Unlike most mortgage lenders, the first question or the first concern is not rate with our borrowers. It's certainty of execution.

Got it. Yeah, because they might have a property that has to close by a certain date. Yeah, that's right.

They need to access capital in their balance sheet for some other opportunity.

Right. And they need a quick answer from you, right? Right. That's right. Not an extended, you know, got to go to loan committee three times over six to eight weeks. Right. That's right. The NPL resolutions are certainly remarkable. Let's just talk about that. You know, when you're, you have gains of 5.6 million on 79 million in 4Q. Are you, in these cases, are you That's the resolutions in the fourth quarter. But is this a matter of you taking back, taking title to properties and then actually reselling them? Or in some cases, are you working with distressed debt buyers? Are you actually being able to – are there buyers for your delinquent loans that you can offset your loans to another, quote, credit investor that's not a public company? I'm curious what the resolutions look like. Is it foreclosure or is it note sale?

Yeah, I mean, all those resolutions that you see are either us taking back a property and selling it for a gain or, you know, delinquent loans resolving sort of at the foreclosure steps, if you will. Maybe a different investor comes in and buys that. But, you know, we can only bid – up to the total amount that we're due and all of the costs and fees associated with that and so we get satisfied there oftentimes as well but I'm sure there are probably distressed buyers out there. We've never sold assets to anyone like that, so I don't know, but that's not our strategy. Steve, this is Mark.

Hi, Steve. This is Mark. Hi. I think another thing to kind of keep in mind is the resolutions are resolutions of our non-performing loan UPV, right? So in many cases, those never make it to the REO property, to your point of selling REO So over 90% of all of our non-performing loan resolutions, like that $79 million is offered Q4, probably over 90% of that are the borrowers either paying current, paying the loan current with default interest, which is part of the gain, or they refinance or they have capital somewhere else and they pay off the loan and we get the default interest. And depending on if it's still in the prepayment window, we get prepayment fees. 90% of those MPL resolutions is the original borrower either paying current or paying off the loan. And then the other 8% to 10% or whatever that goes to foreclosure, to Chris's point, that can either get to the foreclosure or sales steps, or we take possession of the REO and then sell the REO. But 90% of it is the borrower resolving it themselves. Oh, that's fabulous.

Thank you both so much for the comments. And again, congrats on just a fantastic year.

Thanks, Steve. Appreciate it.

Once again, if you have a question, please press star, then 1. The next question comes from Eric Hagan with BTID. Please go ahead.

Hey, thanks. I hope you guys are well. A couple follow-ups here. Do you guys see any response in the CMBS market so far related to the broader market volatility recently, and maybe how does your expected ROE change? if spreads were wider? And then a follow-up, you know, just kind of like a follow-up on the NPL resolutions. I mean, how do you gain visibility into that pipeline? In other words, like, how do you go about predicting the benchmark or the trajectory that you might see there under different scenarios? Like, do you eventually not expect to have any gains, or how does that even factor into the asset valuation and so forth? Thanks, guys.

Sure. Thanks, Eric. Appreciate it. So on the first question, We're not seeing the volatility on our securitizations that maybe you're referring to in larger CMBS, so no impact there. Our securitizations probably for most bond investors get comped more typically to like a non-QM RMBS execution, and we usually print a little wider there, so I think on a relative value basis, I think we represent a very good alternative for a lot of those investors. So we feel good about our execution there going forward. The second point, NPL resolutions are near impossible to predict. They're extremely lumpy. You know, obviously, we had a big resolution in Q4. One of those REOs happened to be a very large resolution, almost two and a half, a little over two and a half million dollars. So we certainly don't expect to get 107 every quarter. And you can see historically we haven't. But if you look back over the last 15 years of us doing this, you know, we think it's very fair to expect a, you know, two to three point gain on an average basis. And, you know, sometimes it will be higher, sometimes it will be lower. um because there's so much equity in the real estate here we've just historically always seen positive resolutions there so we think that's a durable source of part of our our total overall return yep that's helpful okay great um all right i realize the focus of the portfolio is the single family loan but how about the other assets like the mixed use

you know, plus the retail is now, you know, 20% of the portfolio. Are those borrowers looking for valuation improvement? This is a, you know, shorter-term leverage that they're sourcing. And then, you know, relatedly, I mean, is the REO mostly single-family, and how do we reserve for liquidity in the single-family versus the commercial?

Yeah, sure. Absolutely. So, on the first part – We did see an uptick in the commercial assets for sure. The portfolio is almost 50-50 between one to four rentals and then what we would call a small commercial on the other side. There's a wide array of reasons why borrowers are coming to us. They're purchasing assets that maybe they're having a hard time financing for. They're refinancing other assets they own to buy something else. They're buying properties and fixing them up and re-tenanting them. I mean, it's across the board, so I can't give you just sort of one little bucket there. But, you know, these are all smart, sophisticated, small investors that know how to, you know, see opportunity in real estate and maximize it. And I think, you know, on a go-forward basis, in terms of the REO, we've got definitely more REO from the 1 to 4 side than the small commercial side. There's been, I would say, more delinquency in the 1 to 4 space and more REO there. That REO tends to be very, very liquid and relatively easy to sell because even though it's rented as an investment property, it could continue to be used that way, but it also could be occupied by an owner or a consumer that wants to live there. So those markets tend to be very deep and very liquid, and they're relatively easy to liquidate and sell. As you know, all of the loans that are carried at fair value, we already mark those assets to what we believe would be some representation of the fair value. There's no loss provisioning on any of those assets. So as we continue to morph the balance sheet into a completely fair value type of classification, I think you're going to continue to see that loan loss reserve shrink and run off. And in a couple years, we won't even talk about CECL.

Yep. Great stuff. Always appreciate the color from you guys. Thank you.

You're welcome. Thank you, Herc. Welcome. Thank you, Herc.

This concludes our question and answer session. I would like to turn the conference back over to Chris Ferrar for any closing remarks. Please go ahead.

Thank you all for taking the time to listen to our story. We appreciate your support, and we'll speak to you again soon.

Thank you, everybody. Appreciate your time.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.