VEL - NYSE

Good day, and welcome to the Velocity Financial Incorporated First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer. Please go ahead.

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 Szczepaniak; 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.velfinance.com. I would 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 a 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.

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 reflects strong demand in our niche especially since the first quarter is typically lighter in terms of new volume. The 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 US 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 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 UPB 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 UPB. 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 will 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 3. Obviously, great results from an income perspective. The core EPS of $0.51 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 of 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, which represent 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 4. 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 I want to make the point that there's -- we think there's significant unlocked value there. And as we move forward as a firm over time we're -- and move the whole balance sheet to the fair value option we think that there will be a much higher book value for all shareholders. With that I'll turn it over to Mark to start on page 5.

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 5, loan production for the first quarter was almost $379 million in UPB that 7.5% increase from $352 million in Q4 of last year. And I think as Chris mentioned, almost a 75% increase year-over-year. The strong production growth during Q1 was achieved with the new weighted average coupon on originations at 11.1% for the quarter. And the weighted average coupon on our originations has averaged 11% for the last five quarters. The growth in originations in Q1 was also at tighter credit levels with a weighted average loan to value for the quarter at just under 64% with strong Q1 production growth at a high weighted average coupon in the low LTV further demonstrates the continued borrowing demand for our product. As a result of the strong growth in production on page 6 shows a similar growth in Q1 for our overall loan portfolio. The total loan portfolio as of March 31 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 31 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 31 compared to 67.8% as of the end of the year last year and 68.1% as of Q1 2023. So again, generating strong production at high weighted average coupons with still low weighted average loan-to-value ratios. On page 7 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 based financing rates increased during Q1. We continue to see an improvement in the overall securitization market and the strong growth in originations, coupled with the healthy NIM is reflected in our Q1 earnings. On Page 8, our nonperforming 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 have resulted in continued resolutions of our NPL loans as 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 UPB of NPL loans and REOs, 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 again over and above collecting all of the contractual principal interest. Page 10, presents our CECL Loan Loss Reserve and net loan charge-offs & 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 & 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 2023. 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 and cash equivalents and another $44 million in available liquidity and 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?

Thanks Mark. Yeah. I think, as we look forward the market seems healthy and values are holding up, as I mentioned. We think, it's good employment levels and the economy seems to be doing 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. And we'll open it up for calls -- for questions, sorry.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Laws from Raymond James. Please go ahead.

Hi. Good afternoon. Congrats on a great start to the year. Chris, I wanted to touch on a few things with regards to your production. April obviously started off where you're kind of on pace to meet or exceed Q2, but 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 I just wanted you to touch on that. And what you're seeing in the market. 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?

Sure Stephen. Good questions. Yeah. I think, we're -- 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. So we're not the kind of a firm that's going to just do volume to do volume. We want to do it at healthy margins. So that's really what's driving those decisions. I do think the delinquency is going to largely just depend on the overall economy and how things go going forward. I would expect with lower LTVs, we continue to see very positive resolutions and -- or are sort of forecast for those resolutions remains the same. We still think we'll end up with positive outcomes there. So we like the credit dynamics that we're seeing and hope to continue to grow there.

Great. And one follow-up question, kind of looking at the mix of loan production. The investor wonder for rental kind of looking at the trailing four quarter average, 167 sort of right in line with what you've been doing, commercial's grown materially. So is that filling a void? 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 of more opportunities you're seeing on the commercial side?

Yeah, it's a good observation. I think that's an up-tick 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 they're just banks are being tougher, and so we're seeing more share.

Great. Well, again, congrats on a great start to the year. And I appreciate your comments this afternoon.

Thank you, appreciate it.

[Operator Instructions] The next question comes from Steve Delaney from Citizens JMP. Please go ahead.

Hello, everyone. Great quarter. Nice to be on with you tonight. Chris, yes, the growth in the production, and this is spread all over the country. Can you just talk for a minute -- I know you guys are out in the LA 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 how are you using -- how you attacking individual targeted geographic markets? So just sort of your management structure underneath you or just on the production side? Thanks.

Sure. Hi, Steve. So we kind of split the country in two. We have two operation centers, if you will, on the East Coast, one West Coast just to handle the different time zones.

Okay. Make 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 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 into coasts and then along kind of the Texas area as well.

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?

Yeah. That's our primary source of business --

I thought it would be. Yeah.

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.

We cover United Wholesale, it's working pretty well for them in terms of...

Yeah. 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 -- like last year or two. Is that increasing -- the number of touch points?

Yes. We are growing the number of approved brokers. We're also adding sales folks. So, by adding sales folks, they tend to bringing 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.

Very helpful. Thank you very much.

Okay. Thank you, Steve

Welcome. Thank you, Eric

Thanks, Eric.

This our question-and-answer session. I would like to turn the conference back over to Chris Farrar for closing remarks.

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.