Good afternoon, and welcome to the Velocity Financial, Inc. Third Quarter 2022 Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I’d now like to turn the conference over to Chris Oltmann, Treasurer. Please go ahead..

Thank you, Ari. Hello, everyone, and thank you for joining us today for the discussion of Velocity Financial’s third quarter 2022 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 third quarter 2022 press release and the accompanying presentation, which are available on our Investor Relations website. 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 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 reserve to certain non-GAAP measures on this call.

For reconciliations of these non-GAAP measures, you should refer to the earnings materials in 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 we appreciate everyone joining the call today. After the close, we reported another very strong quarter of performance despite continued market headwinds. Our originations were consistent with the prior quarter as we continue to raise rates based on the general rise in our underlying benchmarks.

Our delinquency level has returned to a more typical range, and we’re still recognizing impressive gains from resolved assets by our special servicing team. Real estate markets softening to a more balanced level as investors adjust to the change in federal reserve policy.

Unlike many originators, a large portion of our earnings come from our in-place portfolio, which allows us to manage origination volumes appropriately. We’re still experiencing strong borrower demand for new loans, but have recently begun to tighten our credit policy as we can be choosy about deploying our capital.

If we look forward, we plan to intentionally slow originations a bit and take a slightly defensive posture until we have more certainty about federal reserve policy, especially as it relates to inflation and the terminal Fed funds rate. Our balance sheet is strong from a liquidity standpoint and earnings perspective.

Our lenders are very supportive, and we’re in a good position to operate in this volatile environment. This year has been very challenging, and I’m very proud of how well our team has responded. We’re prepared to successfully navigate our way forward, and we’ll always remain focused on our goal of enhancing shareholder value.

That concludes my prepared remarks, and we’ll turn over to the materials on the presentation, starting on Page 3. Very good earnings, growth in the portfolio NIM as we grew the portfolio. And as I mentioned before, a very strong NPL recovery rate of almost over and above contractual interest in principal.

From a production perspective, as I mentioned, 34% increase over the prior year’s quarter, very healthy levels into a rising rate environment. And then interestingly there, for the nine months of 2022, almost a 50% increase over the prior period. I mentioned October that we’d be slowing originations. October originations came out at $105 million.

We absolutely had an ability to do more than that. There was plenty of demand, but we, as I mentioned, tightened our box and have been cautious here and want to see better clarity out of the Fed before we get more aggressive.

From a non-performing loan perspective, you can see prior year, we’ve had a nice improvement in the trend there and feel like we’re stabilizing and settling into a more historical level of where we typically see NPLs.

From the financing and capital perspective, completed one securitization in August and an additional securitization in October, totaling six deals for the year. Our liquidity is very strong at $96 million at the end of September, and we have plenty of warehouse capacity.

So we’ve got lots of room for growth and additional fundings there and getting great support from all of our warehouse lenders. On Page 4, a very simple slide just to show that we’re continuing to execute on our strategy of growing book value by retaining earnings.

And we saw a nice positive pickup there in the quarter, consistent with many prior quarters. That’s my overview on the first two slides, and I’ll turn it over to Mark, Page 5..

Thanks, Chris, and thank you again, everybody, for joining today’s call. On Page 5, for loan production. As Chris mentioned, we had a very good third quarter, a little over $457 million in UPB originations during the quarter, very consistent with second quarter of $445 million.

The main positive takeaway is the WAC on our third quarter production was 8.89%, which was 114 basis points higher than the 7.75% WAC on our second quarter production. So we’ve been very aggressive in raising our loan rates, kind of consistent with the Fed and with the bond market, trying to stay on top of that.

And I think you see that in the quarter-over-quarter difference in the WAC. On Page 6, for loan portfolio, again, adding the $445 million in UPB growth in the portfolio, we ended the quarter at a little over $3.4 billion. In terms of our loan portfolio, it’s an 11% increase from the second quarter.

Our weighted average WAC on the portfolio at the end of September was 7.71% on the entire $3.4 billion, and that’s up 18 basis points from the 7.53% WAC as of June 30. Again, the portfolio is starting to reflect that increase in loan rates that we’ve been doing in second quarter and third quarter.

And also consistent, at the bottom of the slide, you can see in the second and third quarter, we’re still putting the volume on. We’re increasing the WACs, but we’re keeping that loan-to-value ratio very consistent, right around 68%. On our net interest margin, the portfolio NIM for Q3 was 3.59%. That was down 51 basis points from 4.10%.

Again, the decrease is driven, as Chris just mentioned, by we had record loan production. I remember at the first half of the year, we ran like $1 billion in production. So we had record loan production very early in the year in a much lower interest rate environment.

And the higher coupons on recent production and the rising interest in our ARM loans is going to help kind of recover some of that on a go-forward basis. At the end of the quarter, 20% of our portfolio was adjustable rate product. And we’ve already seen those rates starting to adjust, we’ll kind of talk about that.

The weighted average coupon on new production on the ARMs was 7.75%, we had said – I mean, on all productions. On all productions, it was 7.75% in Q2. It was 8.89%, as we said in Q3. And in October, the weighted average coupon on our new production just in the month of October was 9.80%. So again, we’ve been very aggressively raising rates.

We’re up over 200 basis points from new production in Q2 to new production in October. And we’re going to consistently monitor the bond market. And as the bond market adjusts, we’re going to adjust accordingly to kind of stay consistent with the bond market. We did raise rates yesterday, consistent with the Fed, 0.75 point increase.

And we’ll keep adjusting accordingly, as I said, as the bottom market adjusts. On Page 8, with asset resolution, another great quarter in terms of asset resolution. Chris mentioned, almost a 6% gain for resolutions in the third quarter.

We resolved over $45 million of UPB at about a $2.7 million gain compared to about $60 million in resolution UPB second quarter for $2.1 million gain. So we continue on both our long-term and short-term product to resolve loans right around a 4 or 5 point gain on a regular basis. On Page 9, loan investment portfolio performance.

The nonperforming loan rates, you see it’s come down now to 7.4%. So went from 8.2% in the second quarter at $7.4 million. And if you compare it year-over-year back to third quarter of last year, it’s about a 42% decrease in our nonperforming rate. We feel that where we’re at right now is pretty much stabilized.

We’ve always said that we feel very comfortable anywhere between a 6% to, say, an 8% nonperforming range. That’s kind of our business niche, the type of business we do. And because of the strong resolutions, again, 90%, 95-plus-percent of all of our NPLs resolved with that 4 or 5 point gain that we feel very comfortable within a 6% to 8% NPL rate.

So we think the 7.4% at the end of Q3, that’s probably going to start to stabilize. It’s in our normal kind of comfort band, and we kind of think that’s where it’s going to stick around to. On Page 10, it’s our CECL loan loss reserve. We ended the quarter at $5.3 million, and that’s compared to $4.9 million for Q2.

It’s about a $400,000 increase in reserve, and that’s just mainly because of the portfolio growth. You saw the portfolio growth grew 11%. Saw the reserve as really just a fact of a higher, bigger portfolio yield or reserve on there.

You can see in the lower-left chart, we’re very consistent in terms of our bps, our basis points of reserve on our total HFI portfolio. We’re right around 15 bps, 16 bps. We’ve been pretty consistent all year at that level, and we feel very comfortable with the reserve that we have.

If you look at the charge-offs on the bottom right, these are actual loss charge-offs. And if you look at the last five quarters, our average dollar charge-offs per quarter have been $165,000 a quarter. So extremely low charge-offs on there. So we feel very comfortable with the reserve that we have.

In terms of overall funding and liquidity, see we had $3.2 billion on outstanding debt balances at the end of the quarter. And you kind of see the composition, the majority of that, of course, being the securitizations at just under $2.7 billion. As Chris mentioned, we did five securitizations as of September 30.

We did the sixth one after quarter end in October. So we’ve done six securitizations this year. And five of the six warehouse lines that we have are all non-mark-to-market lines. So we feel very comfortable in this environment.

The rate’s changing, possible recession and all that we have non-mark-to-market lines, and we feel very comfortable that in our risk position on net debt. With that, Chris, I’ll turn it back to you for the economic value of equity..

Great. Thank you, Mark. On 12, this is a slide we’ve prepared for a number of quarters now. Again, just to remind folks, this is current book value plus the expected earnings that we think we will recognize over all of the on-balance sheet securitizations.

It doesn’t include any future earnings or future cash flows from new production, it’s just what is on the balance sheet as of the end of the quarter and an additional premium for the platform value. So we think true economic value is significantly higher than book value as reported under a GAAP basis.

On 13, just kind of a general overall perspective, and I think the business is doing incredibly well. We feel like we’re firing on all cylinders. And obviously, there’s a lot of volatility and difficulties out there in the markets that we’ve been able to navigate. As I said, we’re going to be cautious going forward because we can and we want to.

We’re hopeful to see some stability and some clarity out of the Fed, maybe by the first quarter of next year, I don’t know. But that’s our expectation is to sit tight a little bit and wait to see how things develop with the Fed. So that’s kind of our outlook and how we’re planning to manage the business going forward.

So that concludes our presentation, and I think we can open it up for any questions..

[Operator Instructions] Our first question today comes from Steve Delaney of JMP Securities. Please go ahead..

Good evening, guys and congratulations on a solid report. And we’re not seeing many of those this quarter with the volatility that you and everyone else has been going through. I think first thing, I’d just like to say congrats on the credit performance.

My question was going to be, where can it go? 7.4%, where can it go? And it sounds like, Chris, you guys pretty much think you’re kind of at your baseline. You mentioned, I think, a 6% to 8% range.

I’m sure Mark and every – the team’s going to be working hard for every deal and every dollar, but it sounds like you’re kind of where you think you’ll be for the long run.

Is that a fair assessment?.

Yes. Hi, Steve. Thanks for the encouragement. Yes, I think that’s right. That’s where we kind of – we’ve always, historically, if you go back over 18 years, kind of been in that 6% to 8% range. And so I think we were working off some of the COVID effects. And so I think now we feel confident that, that’s going to be somewhere and kind of stabilizing here.

Obviously, we’re taking stuff off but new stuff comes on, so it should be pretty stable here..

Yes. And it was funny, I was – you mentioned COVID, that’s a great point because we’re looking back to where kind of loan yields were early 2021.

And it’s easy to forget kind of where we were and then a lot of stimulus from the government, from the Fed, zero rates, putting in money, that we actually have come down despite the recent move in the bonds when we look back more like 12 to 18 months. So interesting observation there.

Your sixth VCC deal in October, I kind of read between the lines of what you were saying. I guess my question is, is there going to be a seventh? And I guess there could be given your originations, but it almost sounds like with your warehouse lines that you’ve got, you feel pretty good about those.

And we’ve just had this extreme volatility and blowout in spreads. Should we sort of think that – I think you said sit tight or – it might have been your phrase, but just let this ride. You’ve got good collateral. It’s financed safely. And just wait and see if you’ve got a better RMBS market in the first quarter than we have right now..

Yes, I think a good job of reading between the lines, that’s right. I think that’s a fair assessment. And we’ll – we’re in a good position to just kind of wait and see. So a lot of our bankers have told us that folks are wrapping up year-end and probably better just to wait until next quarter, which we have absolutely plenty of ability to do.

So we’ll probably do that..

That’s great. Thanks for the comments..

Thank you..

[Operator Instructions] Mr. Farrar, there are no further questions at this time.

Would you like to make some closing comments?.

Great. Thank you. Appreciate everybody investing their time, and we look forward to speaking again after the end of the year, and we’ll just continue to execute on our plan and grow our business. So thank you all for participating..

Thank you, everybody..

Thank you. That concludes today’s call. You may now disconnect your lines..