Q3 2020 Velocity Financial Inc Earnings Call

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Good day and welcome to the velocity financial Inc. Q3, 2020 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Chris Coleman, Chief Accounting Officer. Please go ahead.

Thank you Matt.

Hello, everyone and thank you for participating in block the international third quarter 2020 earnings call.

Joining me today are Chris Ferrara, lobbies, President and Chief Executive Officer, and Mark the Penny I Blocky, Chief Financial Officer earlier. This afternoon, we released our third quarter 2020 press release and the accompanying earnings 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.

You did in our communications with shareholders, including the risk factors disclosed in our annual and quarterly reports.

Also note that the content of this conference call contains time sensitive information that is accurate only as of today and we do did not take undertake.

Undertake any duty to update forward looking statements.

We will also.

Mapr to certain non-GAAP measures on this call for reconciliations of these non-GAAP measures you should refer to the press release and earnings presentation on our Investor Relations website. Finally, today's call is being recorded and will be available on the company's website later today.

I will now turn the call over to Chris for opening remarks.

Thanks, Chris and thank you all for joining US today, we had a great quarter and excited to host the call today.

On our last earnings call I outlined our plans to restart originations in the third quarter and I'm very excited to report that we are completely operational.

Our new applications have returned to pre coded levels in the pipe.

Blaine is expanding rapidly.

The silver lining of our production pause was a chance to work on the nice to have projects that are often tough to accomplish when a company is growing.

We use the downtime to reevaluate our entire production platform and we made significant improvements to our process as well as our technology.

These improvements will make us more efficient and more customer friendly going forward. We also restructured job functions and responsibilities, which resulted in a reduction of force at the end of September.

While these decisions are never easy our team is convinced that they were necessary and beneficial to our future growth.

In terms of the portfolio we.

A stabilization of the nonperforming loans in our asset managers continued to do an excellent job of resolving delinquent loans.

We continue to see strong recovery rates in the real estate markets are performing better than many had predicted.

Additionally, it's important to note that we saw provision expenses returned to a normalized level in Q3.

So as the economy is performing above the adverse levels that we were assuming in our Cecil model.

Looking forward our team is working hard to create new relationships on the liability side of the balance sheet to eliminate mark to market risk and explore other debt structures to finance our growth during the fourth quarter and well into 21.

With regard to our people most of US continue to rework <unk> remotely, but weve recently allowed certain of our team members to return to work in our physical locations. So.

So long as protocols are followed.

Happy to report that Weve had minimal issues by reopening our offices. Fortunately, we are healthy motivated and happy to be serving our customers again.

With that we'll turn to our presentation materials.

Relatively short and straight forward presentation today, so I'm going to just go through it top to bottom I'm Mark is on the call as well and we'll both be available for Q and a.

Obviously from an earnings perspective, we're very pleased net income ups.

Inefficiently <unk> as I mentioned in my opening remarks, driven largely by a return to just normalized provision expense.

Oh.

Portfolio NIM expanded as we as we saw fewer NPL loans and we're very pleased that the earnings result for the quarter.

In terms of production board.

So you highlighted that we got restarted but had tremendous response from the market saw near.

Pre cove at levels right out of the gate and I'm very pleased to see how quickly our customers have been responding to our reopening.

In terms of resolutions again very strong.

<unk> for the quarter, one or three and a half on assets resolved.

HM, we and expect that to that.

Good performance to continue going forward and we see.

Strong real estate markets as we as we continue to.

Resolve these assets.

Another.

Important milestone in the quarter or about $335 million of loans that were in the forbearance program. We're actually brought current.

Any amounts that were past due were.

Tacked onto the end of the alone and they sit in a non interest bearing account that will be recovered upon liquid.

Equitation, so that was a it was a big blow.

I'll give that of the forbearance loans that we had done in the prior quarter coming back to current status. So that was a very good improvement for us in the third quarter.

And from a financing and capital perspective, where we're working on some new agreements right.

Now that all have <unk>, a non mark to market provisions as Weve indicated in the past, that's our desire and our plan going forward and we're making very good progress there.

And I'm looking forward to doing our next securitization in Q1.

Turning to page four.

From.

Just a core earnings perspective, you can see core earnings were a touch higher as a result of the of the workforce reduction costs and the charge that we took there from restructuring.

So you know.

Good results, there and good book value growth.

As a result of the the earnings in the quarter.

On five I mentioned, the the good asset resolution activity, we continue to see strong.

Performance, there and good resolutions as loans are paying off and and borrowers are.

Rectifying delinquent assets and expect to continue that.

Formats on a go forward basis.

Turning to six.

In terms of the portfolio, we the one significant transaction in third quarter was our transfer of about $214 million of.

How fast loans to Hfive.

For for somewhat confusing I think the GAAP requirements. It can sometimes distort the picture a little bit sense.

Essentially you'll see in our loan loss provision a number of Oh one.

1.6 million so it might look like at first blush that that reserve provision is up for the.

The quarter, but we had a.

Offsetting low comp adjustment on the books already for those HFSA loans and so this is really just a reclassification under the GAAP requirements and so it actually ended up being $141000 positive to net it.

Two income rather as a result of the Reclass and so that transaction took place during the acute third quarter as a result of our AR securitization of those loans.

Resulted in no real meaningful change to loan loss provision.

On seven.

We talked about the production restart.

Got really great response from our customers and generate velocity our broker portal had just under 400, new brokers sign up with us and in some of the technology enhancements there were.

Find ways for folks to interact with us more seamlessly make a website more friendly and just continually improve that broker and borrower experience and early.

Early returns are fantastic, we're getting much better applet.

Application level and response level.

He will then than we had even forecasted or hope for so.

They'll all those in investments and enhancements I think are going to continue to serve us well as we expand.

Turning to page eight net interest income I mentioned that NIM expand in the court expanded in the quarter probably.

It's really driven by fewer.

New Npls and and as we go forward, we hope that this will.

We can continue to improve on this NIM as we expand and grow the portfolio.

[noise] on nine in terms of loan portfolio performance you can see.

On the left hand side nonaccrual loans.

Stabilize then ticked down slightly our projection there and our expectation is that that we've we have in fact stabilized and over the next.

12 to 18 months, we expect that to trend down as we resolve the assets it has the.

He they come off the balance sheet. So we're pleased with with what's going on there from an NPL perspective, especially in light of the positive resolutions.

Excuse me from a charge off perspective on the right hand side.

Mrs. The only kind of being in the quarter that Unfortunately, we had one large loan that.

Charged off it was not a result of Cove in it was a it was a large loan that we made about a year ago and it was kind of a murphy's law alone everything that could have gone wrong did go wrong we.

We had some people internally that didnt follow procedure and we let them go we are pursuing this borrower.

And from legally for a deficiency judgment and were also.

Actually pursuing the insurance from the appraiser.

I don't want to get too far into the weeds, but if if if we need to in Q1 day, we can but the bigger point that I'm trying to make here is that it was kind of a one off unfortunate situation.

I think the last time something like this happened was five or six years ago and more importantly, it's not in an indication of a larger trend or a large number of loans. You know that were delinquent that we had to charge off it was just kind of an unfortunate event on our side and.

We believe one.

Hi, I'm and not indicative of future performance.

[noise] on 10, I'm, just a little perspective on the Cecil Reserve you can see running right around 29 basis points I think were very well was reserved.

I did mention that we use it in.

Converse highly stressed forecast model for.

For for this Cecil calculation.

So far the economy has been performing better than that.

That that those assumptions and those outcomes are predicted to be we'll see how things go in the future, but we feel very good about our Cecil reserve in the <unk>.

I will Oh reserve piece of either portfolio.

[laughter] 11, I'm just talking about the future. We expect continued strong demand for our products. We think there's some market dynamics. There. We think there's some competitive dynamics, there, but very pleased to see with.

Let's see the response that we've received so far.

And in terms of performance, we're very hopeful that we've got our arms around the the delinquency and continue to work that off and.

We're seeing pockets of weakness across the country, but overall in terms of.

Let's state values, there, they're holding up very well and we remain very optimistic on our ability to continue to to liquidate a delinquent assets.

Lastly in terms of profitability and growth, obviously very excited to be putting new assets on the balance sheet and belief.

I believe that by Q2 next.

We'll be back to.

Pretty cold in origination levels and are driving higher net interest income into the profitability.

And then an important obviously foundation in that strategy is to continue to expand our financing capacity and we're working on that and and especially.

You're in the warehouse side of the balance sheet, just trying to make sure that we eliminate that mark to market risk. So I.

I think we put all the pieces in place to to have a great year next year and continue to expand on our growth plans.

So as I said that was a pretty pretty quick presentation.

Actually I'm pretty high level, and I think it's probably be appropriate to just open it up for Q and hang out for both myself or mark.

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 are using a speakerphone. Please pick up your handset before pressing the keys.

And that if any time your question that's been a trust and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Our first question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good afternoon.

Chris.

I guess first.

Can you talk about I think $63 million of production in October is.

That kind of a good run rate as we think about November and December or is there seasonality or how do you think about that ramping and then kind of coupled with that it seems like the focus recently, it's been exclusively one to four rental is that is that likely to come.

Revenue for the foreseeable future or how do you think about the the mix of the new loan production.

Sure.

So I think you know it takes it takes some time for applications to build and for your pipeline to build so I don't think the 63 million is the run.

And take 'em, we do expect that to increase over the over the quarter.

And there's a little bit of seasonality in Q1 kind of January February.

So you know it could maybe.

Level off or pull back a little in Q1, but we think by the time we.

<unk> Q2 will be back to a more normalized levels that we were you know pre covance.

And then in terms of the second part of your question.

We tightened up on our on some of our small commercial guidelines and.

We get essentially you know wanting to have a little bit less exposure there.

Just in light of all obviously all of the things going on in the economy. So yeah I think on a go forward basis.

We would expect a higher level of the one to four production than the small commercial.

A little bit too.

But a rate, but but I think it's going to be it's going to be a weighted a little more towards the one before.

Great appreciate the color on that and kind of as a follow up are you know given.

But the trends, we're seeing coming coming out of co bit what's you know.

Migration shifts of you.

You know about half the portfolio as New York, and California have you seen a change in demand of where the loan applications are coming from are you seeing anything interesting that that just ship the geographic concentration of the loan demand.

Yeah, I'm not yet not yet, it's it's probably too new to rate.

<unk> still in the large MSC. That's you know we we'd like to stay in the more liquid market. So I would expect our originations to continue there.

A lot of what we do is out in the suburbs and has always been there. So so we're seeing a lot of demand there, but I don't think there's anything material yet.

We would highlight.

Great and then Mark up you know can you give us what goes into the other income line that you know 1.3 million for the quarter, a nice pick up its been a little bit up and down. This year. So you can you give us an idea of what is.

Then that line item and how do we think about that as we model forward.

Yeah, what's in the other income line Hi, Steve I doing what's in the other income line for Q3 is we talked about we moved the hfs loans not $214 million with U.P.B.

Held for sale loans held for sale category up into held for investment because those loans were pledged in their securitization that we did in July so what is clear.

Securitization were not able to sell it we have to hold him. So GAAP requires you to move it up.

So those loans, though when they were held for sale held for sale loan you apply lower of cost or market accounting. So we had already built up over time ever since those loans on the books say end of last year January February of this year, we're still doing originations we had built up.

Valuation allowance of about 1.3 million that goes into other income as an expense it sounds weird, but that's how it got books and when you're building up an allowance for a lower of cost or market valuation for each of US alone. It's it's it's a contra other income so weird built up a 1.3 million dollar kind of write off to other income overtime.

Time and listening in this allowance account once we move those loans up into held for investment you have to reverse out that allowance that you had put in other income. So we actually took a positive 1.3, it's the reversal of that 1.3 allowance that we built up so that positive 1.3, it's kind of a nonrecurring big hit to other income because.

We reversed out that HMS allowance and when you move those loans up an h. EPS why now snakes, if I live and they still have an allowance as well, but that's called loan loss reserve.

So that's why you see the provision of about a million six provision expense, but about a million two would that million 6 million three dozen other income.

I'm really into went up into provision expenses, just a re class and other income up into provision. So most all of that 1.3 million that you see is just that one time reversal food nature as our other income is normally very small.

Great appreciate the color there fit the same and then one other thing no one other thing.

Thing I'll point out just in the presentation materials. The last slide slide 16 has a a breakout of that walks you through that whole entry. So kind of you delineated over there. It is up I paused on 15 on my geographic question. So I. Appreciate you pointed out was one [laughter] Uh Huh lastly, and I'll I'll.

Up off but can you talk about.

Financing costs went up due to where the markets were in June and July. It was good to get those deals done can you talk about I know it's early for your targeted one Q securitization, but maybe where do you see the market today, what what type of.

I don't know if it's a margin you're thinking about or how you are.

No one answer towards outlook for financing costs, but kind of how does the securitization market look today versus what you know what you were able to execute in June and July.

Yeah, so in talking to our investment bankers, we think it's it's significantly improved from that time frame.

And we've got some pretty it's a pretty good.

Good data points to just show that I think into.

In terms of <unk> in terms of where where spreads will be we think they will be at least where they were kind of pre cove. It. So it's spread and what I mean by spread as I think you know our interest.

Turning spread in other words, the difference between the loan yield and our debt cost.

So.

I think the result of all of the fed intervention, we believe we'll be able to be back to pre coven levels on a on a margin basis.

Great I appreciate the time this afternoon and Uh huh.

Tend to need you to do a good job you know you guys were conferences as Tobin impact from March so yeah, good job with that thank you.

Thanks very much.

Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Yes can you talk a little bit about where yields are on new originations versus.

Pre covanta and also can you reconcile the share count the diluted shares in terms of you know where the press and warrants in there and we'll <unk> are they all in there I was just having gone through all the numbers in detail.

Sure Hi, Don I'll take the first part and I'll, let mark cover the second one hmm and on the first part we're seeing.

Coupons about 75 basis points lower than where we were pre coded.

But we think on the debt side <unk>.

It's it's probably lower than that so.

Again from a from a spread perspective, we think will be at least.

At our our normal spreads it's not wider going forward.

Hey, Dan This is mark in terms of the the shares and you're talking like on a fully diluted basis. You know there is little over 20 million on a common shares outstanding for Q3 on a fully diluted basis.

It goes up to a little over 32 million shares because you take your average stock price for the quarter average price was about 440.

So all of the convertible preferred fall into the dilutive category, which is like 11.7 million shares because they had a 385 strike price. So that's below the 440, so that goes into his alluded.

And if you recall there were warrants or if you would like in two tiers two different strike prices, a 296 strike price and a 494, obviously the 296 strike price would be considered dilutive because it's under the 440 average philosophy price, but the second tier the 490 491 strike price would not be dilutive because it's still more.

And the 440 average so what's causing that the extra 12 million of dilution is assuming that the preferred convertible converts and all so this is the first tier of B warrants.

Thank you.

Sure.

Our next question comes from Steve Delaney with JMP Securities. Please.

Please go ahead.

Thanks, Hello, everyone I'm couple of mine have been taken but.

Chris I was wondering if you could just provide after the September reduction enforce if you could provide your current full time headcount today versus where you stood at pre Cove it.

Yes were reduced by 60.

Or in terms of FTD.

Okay price, let me how many does that put you with I don't have done all figure and I think were 180 182.

Okay, Alright, alright, yeah, Okay very good and then following up on Dawn's question on the Q.

Coupons I was going to ask the same thing and if you're down 75, I'm looking at my rate sheet looks like the 10 years, probably down about 100 and.

Credit spreads could be anywhere, but it sounds like maybe the.

You're able to get a slightly higher coupon relative to the tenure today than maybe you did.

You know last late last year early this year that I don't even know to even think about it versus the 10 year 'cause you what really matters is the MBS credit spread right [laughter], but the 10 year night I measure everything off the tenure because [laughter].

It's easy to its easy to find right you just look at your school Yep Yeah.

Yeah, Yeah, no I think you're thinking.

Got it the right way and the other.

Thing that that doesn't immediately jumped through is that you know we've reduced loan to values so effectively.

We're getting a higher coupon for a lower loan to value loans. So.

When you put those two together, yes, we're effectively getting a.

At least the same spread but probably a little bit wider than.

Where we were pretty cool.

Better risk adjusted anyway, and Wayne Woody generally quoting on LTV today, where do you where you're trying to come out. So yeah. I mean, we're we reduced all of our commercial LTV by 5% so.

At Lapa Allison Yeah, Yeah, Yeah, it's a smaller percentage of the production so.

Overall, I don't I don't think you'll see as big of a of Oh.

A notch down in terms of weighted average LTV because were more skewed to the one to four bright but for those assets where risk adjusted.

Got.

Got it thanks for the comments.

Absolutely. Thank you.

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

I just want to say thanks to everybody for joining the call. We appreciate your support and interest and we're available if you have a.

Some are the follow ups. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect [noise].

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