Q4 2020 Velocity Financial Inc Earnings Call
Good day and welcome to the velocity financial incorporated fourth quarter 2020 earnings Conference call all participants will be in a listen only mode.
[noise] assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone and towards draw. 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 Open. Please go ahead Sir.
Thank you Chuck.
Hello, everyone and thank you for joining us today from velocity financials fourth quarter 2020 earnings call.
With me today are Christopher our velocity as President and Chief Executive Officer, and Mark <unk> velocity as Chief Financial Officer.
Earlier. This afternoon, we released our fourth quarter 2020 press release and 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 made in our communications with shareholders.
<unk> the risk factors disclosed in our filings with the Securities and Exchange Commission.
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.
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.
I would like to turn the call over to Chris <unk> for opening remarks.
Thanks, Chris appreciate it welcome everyone to the Q4 earnings call.
As you can see from our press release, we obviously had a very strong quarter to finish the year.
And we're really proud of the fact that we overcame the difficult challenges.
As we faced in 2020, so well.
Despite elevated delinquency levels, our portfolio continued to provide positive income in all four quarters and we also improved on last year's net income, which is really impressive under the extreme conditions we faced.
Our people are so important to our business and I want to thank every team member at velocity, who worked so hard to quickly adapt to the rapidly changing world that we all faced from.
A macro perspective, we continue to see strong real estate values in most parts of the country.
Fortunately, we have no credit exposure for the types of commercial properties that were most hard hit I E hospitality movie theaters in Standalone restaurants.
On the residential side of things, we're starting to see many states rollout tenant <unk> landlord relief for those impact impacted by the pandemic.
And our special servicing team is sharing relevant information with our borrowers as it becomes available.
We hope that these programs will allow folks to survive the difficulties they've encountered and get back on track.
Tremendous government stimulus and low interest rate environment, that's been a strong backdrop for real estate in general.
And we continue to see impressive origination demand and healthy functioning real estate markets.
Turning to velocity more specifically.
On the asset side, we saw increased delinquency as well as an increased level of payoffs and carried loans.
So we still see some borrowers struggling with the impacts of the epidemic, obviously and other borrowers are catching up or paying off entirely.
Overall Q4's activity was much higher than Q3, as we see markets starting to normalize.
Fortunately, we realized very strong recovery rates in the quarter and we're very pleased with the quality of new lending opportunities that we see.
On the liability side, we recently completed two important financings designed to minimize market.
Mark to market risk and provide us with new growth capital.
We're confident with our risk profile now as a result of these important changes and decided to put this capital to work.
We're well positioned to organically grow our business with a more stable funding base as always we appreciate your continued support and want all investors to know that our entire organization is focused on performing for our customers and deliver like living real value to all stakeholders.
That concludes my prepared remarks, and now we'll turn to the presentation materials.
I'm on page three of the Q4 highlights I'll hit the first page here and it turned to present, our presentation over to Mark and wrap it up at the end but.
Again, it's a really great quarter for us strong net income and EPS.
The big differentiator here, that's a little bit unusual for US is that we sold just under $100 million of loans in the quarter typically we don't do that we aggregate everything obviously for securitization.
That was really driven by two factors one we had some very very attractive prices.
Two we really wanted to be prudent with our liquidity and manage that well up until the point, where we got a new corporate debt done so that would that was it the drivers for the kind of the change in the corner.
Gain on sale really boosted the earnings over and above our normal just kind of portfolio income.
Uh huh.
Also importantly saw NIM increased in the fourth quarter again is as our special servicing team continued to drive good strong recovery rates, we saw yield.
Yields that were higher even though we had a.
Tick up in delinquencies. So again, just very strong recovery rates on delinquent assets is driving that NIM wider.
In terms of the production in the portfolio, a really good fourth quarter of $179 million in new originations I mentioned that the strong resolutions, we got one O three and a half in terms of recovery rates, So again still it.
Making money over and above the contractual interest that's due so so good results there.
And then as I mentioned in my opening remarks, nonperforming loans did tick up to $332 million.
Seeing.
The majority of that is really driven by my folks that were given forbearance and then unfortunately, you have to have gone back to delinquent status. So even though we had a.
A lot of.
Assets resolved favorably and we are seeing some people still still fall behind.
And then again I guess just to kind of wrap up here at from that from the financing and capital perspective.
Out of the $200 million non mark to market from warehouse facility.
So that was a great achievement.
Achievement for us.
Really helps us minimize any risk going forward as we aggregate for securitization that we closed out in February.
And then also entered into debt the new syndicated term loan, which we've got some really great partners. There that are supporting us in.
That transaction gave us roughly $80 million of growth capital going forward. So we've got a couple of years of capacity here as we continue to grow the portfolio and make more loans.
So that that's kind of a high level.
Wrap up on the corner I'll turn it over to Mark on page four to take you through the rest of the presentation.
Thanks, Chris Hi, everybody on page four just kind of go over the earnings for Q4 from a pretax standpoint, as Chris mentioned, a very strong quarter from velocity financial.
$11.7 million in total pre tax income for the quarter $7 million of that was generated by the in place portfolio, we talked about the in place portfolio and the spread that we generate all day portfolio. So again nice earnings from that portfolio of $7 million for the quarter.
A lot of that some of that also being the default interest and prepayment fees were going to see in a couple of slides. The resolutions that we had on the NPL loans as Chris mentioned on these nonperforming loans, we still have strong resolution again, where we collect all contractual principal and interest as well as default interest and prepayment fees as well so we'll see that nickel.
Slide again.
$4 7 million up 11, seven with gain on sale of loans as Chris mentioned is very strong demand for our product in Q4.
Because of the strong demand for the product as well as wanting to make sure we have plenty of liquidity to the origination the pipeline volume saw coming through as we were working on this corporate debt deal as Chris mentioned, it's hard to say.
I feel that came through in February so we wanted to really strengthen our liquidity position and strong liquidity. So we did sell about $96 million worth of U P. B in Q4 generating net four $7 million gain.
We sold a little bit more in January again, just to get in the market with strong short that liquidity. This debt deal came through in February. Our goal now is to kind of get back to our basics of originating loans and holding the loans in our portfolio and then putting them into long term securitization and locking in at fixed rate spread so we will.
Particularly look maybe to sell loans once in a while but the main goal is to file the <unk>.
This model that we've always had in terms of holding these loans for securitization purposes.
Book value per share on the same page to the rate increase from $10 44, a share at the end of Q3 to $2 93.
Okay.
On page five kind of mentioned the volume picking up again in Q4. So you can see in Q1 day at about $248 million in volume then you see the second and third quarter was basically the suspension of loan originations during the pandemic and then starting up our origination platform again.
Full quarter's originations in Q4, Chris mentioned 179 million.
From Q4 with all of our 30 year product. There was no short term product in those originations were currently not offering the short term product, we're just kind of watching the market and looking at the appropriate reentry point to start off the net short term profit visit now we're still offering of 30 year product.
On page six.
Showing our held for investment loan portfolio to the left you can see the loan portfolio composition basically all held for investment loans. As you can see you can see the loan portfolio at the end of Q4 came down slightly from Q3 and from end of year 2019, and as was mentioned, it's mainly because six months with no.
<unk> just starting up again in Q4 from for 2020, the principal prepayments and some of those sales in Q4 were greater than the amount of new loans put on to get a little bit of run off that portfolio, but now we're back to fully origination again, we expect to be adding to that in place portfolio on the fixed rate spread on a go forward.
Basis.
And then the right side of that is just kind of showing the waterfall on the loan portfolio from Q3 to Q4 and you can see I'm talking about the principal prepayments and loan sales kind of exceeded the total production for the quarter.
Page seven is our nonperforming loan resolution activity.
And as Chris had mentioned very strong resolution activity you see in Q3, we resolved 12 and a half million dollars. In total you can be nonperforming loans was two and a half times that for Q4 at $30 million of resolution and a $1 $1 million gain for the quarter. Those resolutions. So you can see even for Q3 and Q4.
Bringing in about three and a half point gain under NPL resolutions. So we're kind of really following our historical resolutions on outperforming loans, we've said that over 90% of our nonperforming loans either pay off or paid current.
When it does that we collect that only 100 per cent of the contractual principal and interest, but also default interest and in many cases, depending on when the loans paying off prepayment fees on top of that so that's what's generating net $3, 5% gain for Q3 and Q4, you'll see in the 10-K that we had a 3.5% average nonperforming resolution.
<unk> for the entire year of 2000 and twice we did average screen. After simple here. So it's very steady and consistent and as Chris mentioned, if other nonperforming that kind of uptick in that because of the pandemic hasnt been there troubling to us because historically, we've always made money on these nonperforming loans and we continue to do that strength through all of 2020.
[laughter].
Yeah.
Page eight shows the net interest margin over to the left side for Q4, our net interest margin was 4.07%.
Improvement over Q3 of $3 77, and again, we just saw the resolution activities from Q4 strong resolution to 30 million, bringing in at three five per cent gained bolt interest prepayment fees. So that helps the net interest margin and obviously the margin. So part of the reason for the uptick there to the right you can see kind of the components of net interest.
Margin. So the top line is the loan yield so eight.
<unk> 21 to 840 from Q3 to Q4, but also the debt cost overall average debt cost improved as well.
So a widening of the margin, which is really a good sign for us going forward.
Yeah.
On page nine loan portfolio performance, Chris mentioned, the uptick in the nonperforming so you'd see at the end of Q4, just a little over 17% compared to the $15 eight for Q3 and the main reason for that as Chris mentioned was loans that came out of our Covid Forbearance program that then Mrs.
Their next three months payments coming out and then we'll put it on nonperforming. So forbearance program ran from April through June, but we gave them. The 90 day forbearance fault if theyre getting this three months after that that's going to end up right in Q4, and that's one of the main reasons for the uptick you know going down to January February that debt is pretty much leveled off we don't see more.
Uptick going in right now.
We expect to start working through that as you saw $30 million in Q4, we're working on resolving those NPL loans.
Overall charge offs remained very very consistent you can see from 36 basis points for Q4 1933 basis points from Q3 of 20, and 37 basis points Q4, 'twenty. So we've been very consistent in that.
About 35 basis points of nonperforming loans.
That's been consistent with a two three year historical trends, so very consistent over time, and our charge offs very little charge offs.
Yeah.
And on page 10 in terms of the loan loss Reserve you had mentioned that we had implemented our seasonal reserve first January one 2021 day.
Fans of the GAAP and <unk>.
Does the Covid pandemic, we felt it was prudent to increase that reserve in light of the pandemic and the nonperforming is increasing it was prudent to increase net reserve during Q2.
In Q1, and Q2 and you can see we did that we went from $2 3 million starting out the year to $5 2 million at the end of Q2 28 basis points and we felt that that was probably a very good level of reserve to have that we've kind of maintained that level over the second half of 'twenty twice. So for Q3 Q4, it's gone up you know water.
Two basis points. So we ended the year at 30 basis points $5 $8 million in reserve and again based on the low charge off level and still with 3.5% gain we see on resolving the NPL loans, we feel that we're very comfortable with that Missouri, where it's at right now.
Chris I'll turn it back to you kind of talk a little bit about velocity outlook for 2021.
Great. Thanks, Mark I appreciate it just to kind of finish up the presentation here from from an economic perspective, obviously, we are hopeful that we'll start to see things reopen and the economy start to.
Get back on track and expecting to see good growth as we go forward.
We think we'll be able to take advantage of that and build on that by originating more loans and we're seeing really good lending opportunities. There. So we're encouraged by that.
From a portfolio perspective, hoping to see that begin.
Begin to normalize and start to trend down in terms of delinquency.
I think we've been very conservative with our with our loan loss reserves in case things don't go the way that we hope but.
I think I've been talking to our special servicing team we're seeing good.
Good resolutions in and expect to start working off kind of that backlog of loans and lastly, you. Obviously mentioned that we've got the capital in place.
To fuel our growth and so we're very bullish there and excited to be to me going on offense here.
The business.
And from a risk perspective, getting everything over to non mark to market really allows us to sleep well at night and we won't have to.
Deal with any surprises there so we've really I think strengthened.
<unk> strengthened our balance sheet in the business to grow going forward. So.
That wraps up our all of our prepared remarks from presentation with that was I guess open it up for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the key.
And to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Aaron <unk> with Citi. Please go ahead.
Thanks, maybe just touching on the new production it looks like you're on pace to do around 190 million of free use the first two months as a gauge.
That would be a bit of a decrease for from.
The year over year, but a modest increase from from the prior quarter. You don't have the short term product, which is the primary impact there what what's your expectation.
For new production kind of it for the year. It will it be around this pace is there any kind of seasonal pick up that you would expect in <unk> and three kids some some thoughts on that.
Sure Hi, Eric.
I think.
Our guidance has been we expect to do $1 billion per the year Q1's, usually seasonally a little light in January and February and a little bit light I.
I think March will be at at a stronger level than we saw in January and February so.
I think this we do expect the quarterly production numbers to grow from this level.
We think $1 billion is very doable for the year.
As Mark mentioned, we'll probably reintroduced the short term product soon and that'll be another helped in terms of that overall growth. So.
Excluding that product and looking at the levels we're at.
Brett we feel really good about about how much capacity and demand there is out there for.
Or this product. So yeah. We think it's income this is probably the low quarter of the year.
Okay. Thanks, and then the the portfolio yield ticked up a little bit quarter over quarter I believe that was referenced as being related to our increased collections of nonperforming loans and default interest is that is that viewed as an elevated level or do you expect this to kind of stay at this level.
As you're continuing to work through some of Vietnam.
Yeah. That's a really good question, it's very tough for us to forecast because it is so lumpy.
Depends on oil weighted assets resolved. So you know whether they will fall in the first quarter or the second quarter, it's tricky for us to forecast.
But.
I mean, I think we like to.
Build our model and our projections kind of in the low eights. So.
Yeah, you'll see you'll see it bouncing around in there from.
You know to eight and a half depending on.
Went and the timing of when some of these loans are resolved. So sometimes we have a loan that's been delinquent for two years and you obviously have a big catch up on that how long like that other times, you'll have a loan that's only been delinquent for 120 days and it's not as impactful.
And Eric This is mark there's a little bit of a trade off there as well because when the loans ago nonperforming, we don't accrue interest that's why we call them nonperforming right. So we're not accruing interests with financials, but then as Chris mentioned, it's our special servicing department is working with the borrowers and getting them to pay current and then we received that cash as we get the cash in.
Tristan to default interest will then bookings that actual cash received the financials. So you're right as they start catching up they may not be as much cash coming in but then if they catch up because they are paying parent once they go to parent theres not as much lumpy cash coming in but then we're back to accruing the interest so that accruing interest.
Statements once again, so there's kind of a tradeoff there.
Yeah, It's a fair point, Okay, and then on the cost of funds are maybe discuss the you know the new financing that you've added the non mark to market, obviously isn't a big positive, but how is that going to impact your expectation for cost of funds.
You roll through 2020 one.
Yeah. So we're definitely going to have a higher cost of funds on the corporate debt side, obviously cause we upsized their so that that will be.
You know a drag on this year's results but.
We thought it was the most attractive capital to grow the business. So we don't have to do an equity raise or anything like that at the levels, where they were trading.
So yeah. It will it will be an earnings drag this year, but as you've.
You've seen when we when you build a model.
Production, that's put on this year fully scales into the following year or so.
Oh, it will be a bit of a headwind for this year next year, which we know we should see very strong.
Growth.
Okay alright, thank you.
The next question will come from Stephen laws with Raymond James. Please go ahead.
Hi, good afternoon.
Nice nice end of the year, especially with opportunistic loan sales.
Wanted to touch base really follow you know Aaron's question from AR.
Financing costs, but more on the portfolio side you know the.
The older Rob sequential pay deals looks like there you know a couple of them are below 20% of their opportunities to call that and re securitize them at lower cost or do you have you know how do you expect those to pay down in and change the mix of funding cost in 'twenty one.
Yeah. So we are absolutely do have that opportunity, it's a little bit tricky to predict exactly but we will definitely in the next 12 months.
A couple of deals.
And that will be a good opportunity for us too.
Swap out some funding cost.
It tends to be smaller balances, so it's probably not a huge impact to our overall cost.
And just to give you the backdrop there you know historically when we first started out.
Call rates on these securitizations, where maybe five or 10 per cent of the original deal as we progressed and got a better track record.
<unk> stepped up to 20, and 25 and 30% so.
I don't I don't think there'll be much in the way of a meaningful.
Swap out their overall costs, but as the business matures there will be some some more significant savings probably in 'twenty two 'twenty three.
Okay. That's great to know just given that the cost of those first three deals and where we stand there, but but I see your point about the small balance, but it does move it a little bit give us a little bit Yep force.
And then the follow up on a comment in the press release I think it was the the shorter term deal the 'twenty dash to M. C. One paying down a little faster than others or is that expected to continue you know it looks like it's about 138 million. How quickly do you think that pays down as we think about this blended mix.
Yeah. So the majority of the collateral and that deal in the short term loans that were kind of 12 to 24 months duration. So we do expect that to be a much faster speed relative to the other deals. So yes, we expect that to continue.
Throughout the year.
Great and then on the loan sales is that.
Do you expect to do any of that this year and now with the facilities closed the corporate that's in place here you've got the the preferred to retain them and do the securitizations are that they are kind of.
You know is that something we should expect to see on a recurring basis or are.
Yeah.
I don't think we you know we've talked about it quite a bit internally I don't think you should expect it on a recurring basis, we did sell probably $50 million 50 in C&I in the first $50 million of January okay. So in the first quarter about $50 million. So you'll see that when we do next.
<unk> results, but on a go forward basis.
We're gonna be opportunistic where we have to allocate capital smartly. So if we see a really great price or the right opportunity. We'll go ahead and take advantage of it.
But in terms of the way we model the business and the way we're forecasting.
We're not we're not counting on something like that.
Was that sold it at five points or.
Uh huh.
I don't know the exact number but it's it's you can use something probably pretty close to what we used on the on the ends in Q4, it it'll be very close to that.
Yeah, I haven't have points.
Okay.
And then lastly.
You still have a return in the short term business. You mentioned you continue to watch that market can you really making me provide a little color on what what metrics you're looking at you know what what is it that you'd like to see before you do start off from that that product again.
Yeah. So it's more driven on the financing side, we're just looking at the securitization in capital markets to make sure that we've got a.
Rock solid exit in place and so that's really what we're working on right now and we've made a lot of good progress there. So I think you'll see us just get back in.
And the next quarter or two.
Great well. Thanks, Thanks for the comments this afternoon I appreciate it thank you Stephen.
The next question will come from Steve Delaney with JMP Securities. Please go ahead.
Hello, everybody and congratulations on your your reopening and back to a normal more normal times.
Great quarter. So my my my very capable compatriots in the research good day kind of checked off about six of my a seven or eight questions. So they did a great job on their Q&A I've got a couple of things that I'm following up on Steven's question about the bridge loans you know in the past.
When that was kind of rocking and rolling two or three years ago. What would you say your average quarterly volume in that short term product was and if you could give us kind of a range of expected gain on sale margin. Thanks.
Sure so.
Thanks for that Steve.
I can take the second one first we probably won't do gain on sale there.
Aggregate securitize.
In the past Chris didn't you didn't you normally sell that product.
Well I guess it can always be a matter of opportunistic versus NIM, but yeah, I just thought of it as a gain on sale yeah.
We did all the way through 19, and then we started.
At the beginning of 'twenty, we stopped selling it and where aggregate off or for our first securitization. So.
We are I kind of took a one year pause here and hopefully.
Okay, we'll do that soon we could sell it for cash and we made but the the strategy right. Now is to is to go out and securitize. It.
Nice Okay, Yeah, and then in terms of volume.
You know it was roughly running about 30% of our business. So.
Yeah, what we were doing.
So again, it'll take them 70 80.
D 80 million a month, yeah, yes, yes.
It was significant so.
We'll see we'll see.
How things go as we turn it back on here, but it can be meaningful volume.
Okay, great and thanks for the color on the.
The new financings, obviously, you know getting getting a term loan facility as this quasi capital for you in the non mark to market. So thank you for the guidance on the higher cost of funds I'm curious on the warehouse facility now with that 200, what is your total warehouse funding capacity at.
This time.
So we're $350 million today.
Right.
We'll probably put another facility or two in place just to expand that probably get to like 500 600, something like that.
On a go forward basis.
And yeah and the.
The we have the.
The two other facilities in place once 100, and the others 50, so that's how we get to the $3 50, right now got it.
It.
Okay, well listen thanks.
Thanks for the comments that's great.
Amazing to see the stock up 70 plus percent since September 30, and I'm happy clients are happy and keep it rolling in 2021. Thank you. Thanks, Stan appreciate your support.
Yeah.
The next question will come from Don <unk> with Wells Fargo. Please go ahead.
Hey, Chris I, just wonder if you could provide your thoughts on the housing market.
Given that mortgage rates have moved up here and then also the competitive environment for your lending business.
Sure.
So in general obviously.
I would say the markets are on fire I think obviously refinancing is probably going to cool off if rates continue doing what they're doing.
But we still see strong purchase activity strong demand there when we.
If we have to sell a one to four or if we see people that are facing foreclosure, they're able to sell them very quickly. So.
I think.
You know, it's it's there's still more demand than supply from our perspective, So we expect that market to stay pretty strong even with with a rising.
Rising rates.
And then in terms of competition.
Very fortunate in that we do.
We don't have people shopping us a lot where we have you know our.
People, putting pressure on us to drop rates to match somebody else I know there are other lenders out there getting share and that's great I mean, there's plenty of.
Bush of Pi for everyone.
But we we havent felt competitive pressures to price our product or.
Or do anything like that I know theres some of the non QM lenders out there that are there.
Offering products that are similar to ours in the one to four.
On the small commercial side we're.
We're doing.
Last volume there than than we were pre COVID-19 intentionally or just being cautious there. So.
Not seeing a tremendous amount of pressure from from competitive set right now.
Thank you.
Sure.
Again, if you have a question. Please press Star then one our next question will come from Mark Cooper Investor. Please go ahead.
Hi, good afternoon, thanks for taking my call.
I was just wondering the the warehouses commodity that you have in place how difficult is it to expand your facilities to get more loans done.
Yeah sure Mark Thanks for the question, it's it's relatively straightforward or Ireland, our lenders are very supportive and helpful and as we as we reach capacity there there.
Then willing to upsize you kind of do it in chunks, if you need it we have plenty of capacity right now.
But I mentioned earlier that we're going to add another one or two credit facilities. So that will that will give us another couple hundred million of capacity there, but all.
All of the lenders.
Uh huh.
They're willing to or have already done in the past, where they from where they've upsized for us. So there's there's plenty of capacity there if we need it.
Okay and also for further growth the model of going through brokers. There another method to get to our borrowers other than brokers that you were looking at thank you.
Sure.
No there's not we we we exclusively work with brokers. We're built for that model. There are other ways to do it that can be pretty expensive.
And so it's not nothing that we intend to do on that front.
We think we've got plenty of.
Of growth ahead of us with the current model.
Okay I appreciate it thank you very much youre welcome.
This concludes our question and answer session I would like to turn the conference back over to CEO, Chris Farrar for any closing remarks. Please go ahead Sir.
Thank you again I appreciate everybody, taking the time out of your day to listen to the call and thanks for your support we're going to continue to work hard to grow our business and execute on the plan. So thank you all for joining the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Sure.