Q3 2021 Velocity Financial Inc Earnings Call
Good day and welcome to the velocity Financial Inc. Third quarter 2021, the earnings conference call all participants will be unless a limo. So do you need assistance play signal conference specialists by pressing the star P followed by the era.
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Thank you grant.
Hello, everyone and thank you for joining us today as part of the discussion of philosophy. Some natural third Corps 2021 results joined.
Joining me today on the call or Chris for our philosophy, as President and Chief <unk>, Chief Executive Officer, and marks a penny I love cheese cheese financial officer.
Earlier. This afternoon, we really start third quarter 2021 press release and the accompanying earnings presentation, which are available on our Investor Relations website.
I'd like to remind everybody that today call may include forward looking statements, which are uncertain and outside of the companies control an 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 that other posher statements made in our communications with shareholders, including the risk factors.
Those are fine with the S E C.
Also note that the content of this conference call. It came 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 reconciliation of these non-GAAP measure 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.
Oh now turn the call over to Chris Rock.
Thanks, Chris <unk> and welcome everyone to the third quarter call. Obviously, we had a fantastic quarter as we broke numerous historical records.
First off I just want to thank all my team members, who work so hard every day to achieve the results that we can see lately.
People are highly engaged in enjoy helping our customers succeed.
And we're seeing really strong demand for our products are very healthy real estate environment, especially in the V. P. L segment, which is driven by a large supply demand imbalance.
And excellent securitization markets all of which are reflected in our operating results announced today.
In terms of originations, we funded just over $340 million in new loans in Q3, beating.
Beating our old record of $321 million funded in the fourth quarter of 2019, which was obviously prepandemic.
Our investments and automation and systems have empowered us to become more efficient than ever before and the momentum is building.
Recently, there has been a lot of press about rising mortgage rates and we're pleased to report that our new applications continue to increase.
As has been our historical experience in past raising rising rate environment.
September and October were sequentially historical record months for the dollar amount of new loans submitted with over $410 million of new applications coming through our broker portal in October.
Again, breaking a pre COVID-19 record of $316 million set in October of 2019.
Turning to asset quality. We're also pleased with the continued trend of reduced nonperforming loans and our special servicing team has done a great job working with customers to resolve issues.
Most loans are resolved well before finance put before final foreclosure and we see very few delinquent loans, becoming oreos.
On the financing side of the business or.
Capital markets team has been very busy keeping pace with our new originations closing our third deal with a year in October with a fourth securitization planned in December.
Our interest expenses, obviously, Benny sitting from these lower cost securitizations.
Our goal for 2021 was to fund a billion dollars in new loans and I'm excited that will pass that goal by next week.
As we continue to take market share and grow our portfolio were highly focused on improving customer service levels challenging our people to learn and developing new opportunities to help investors finance that real estate with the ultimate goal of enhancing shareholder value R.
Our team as well prepared to capitalize on the favorable market dynamics that are unique to our sector and we're confident in our ability to grow our business.
We appreciate the continued support from all stakeholders and will now review our earnings <unk> <unk> in more detail.
Starting off on page three I'll kick us off of the presentation here Uhm, obviously from an earnings perspective, a great quarter.
I focused primarily on core earnings and Uhm.
Those are are.
Down just slightly from the previous quarter and and the the one thing that I'd like to point out we tried to make clear in our press release was.
Uhm and Q2, we we sold about two and a half million dollars, we learned about two and a half million dollars off of all loans sales and we did very little of that in the third quarter and so how do we how do we kept at that pace unsold loans are core earnings obviously, it would've been much much higher.
We've talked about in the past that you know we evaluate those those <unk> those are decisions.
And try to be opportunistic about when we sell home loans and we Securitise obviously are biased is too.
Securitise and so those games, although not recognized in this quarter from a potential hold on sale will obviously be picked up in future periods.
So I'm really pleased with how earnings came out very strong, obviously and NIM and and good Uhm interest income growth has asked me added new loans.
From the production perspective, I mentioned record Porter.
Portfolios growing nicely and importantly, we saw N. P. O has come down 260 basis points quarter over quarter. So uhm as we've said before slowly just eroding that backlog of COVID-19 related stuff and seeing good performance there as well.
On the financing and capital side.
Mentioned, the securitization market, it's been very good to us and we see it still continuing to be strong.
We did establish an a T M program.
And we're pleased to have that in place we didn't tell a very small amount of stock just to make sure that all the plumbing worked and.
So so it's a good program they have in place for us as we continue to grow.
And then finally here on slide three we did upsize one of our facilities two from 100 to 200 million in an extended that renewal period out to a two year period. So we've got very good support and in a good position from a financing capital perspective.
Page for subsequent to the quarter and.
We previously announced that the conversion of the preferred shares. So that's gonna be cleaned up that and there's no uncertainty hanging out there about what's gonna, what's <unk>, what could potentially happen there and then finally I didn't mention we closed at third securitization in October so.
All in all just been great momentum and with that I'll turn it over to Mark to walk you through the rest of the presentation.
Thanks, Chris Good afternoon, good evening everybody.
On page five core income and book growth or get didn't call me for income was the same for two three there really were no unusual items sell at $8 million for the quarter.
As Chris mentioned, that's comparable to a core income of eight and a half million for Q2, but in Q2, we did sell more loews, yeah. We hit it an overall again on sale about two $2.2 million, we only had to gain on sale about $500000 in Q3, because we made a conscious decision to.
Hold more of our originated loans and put them into a securitization is because it is we'll see in the next couple of slides are noon has widened out because the securitization cost has come down. So we got a great prudent to put more loans into our security nations and kind of build that go forward Lockton spread if you did it out of <unk>.
Emmeline basis, and take out there at 2.2 million gain in queue to put in just a 500000 that we had in Q3 normalized basis run right Q3 chord income was actually about 11% higher in queue too I'm, just a pure knitting basis.
And then the book value per share to see this quarter over quarter to increase from 11 62, a share to 12 O five at the end of the third quarter.
Looking at loan production loan production again, we hit a record for for the company in two three with just under $341 million production. So production is very strong.
And in October, we actually get a little bit over $138 million just for the month, that's a record for the company for a single month, So as Chris mentioned the <unk> the appetite for our product is out there to real estate market is very strong and we're seeing great production numbers.
On the loan portfolio is kind of gives you look at the portfolio. We ended the quarter just under 2.3 billion compared to about 2.1 billion for Q2 and and the growth that we've been experiencing throughout the last four or five quarters has been good growth and all of our products not any one product taken off more than the other.
Great growth across all the products and while we're growing our production and <unk> and plays portfolio at the bottom of that slide you can see that our L. T. V's are holding very consistent for about 66, 67% and the average loan balances or staying right right round the $350000. So everything's been staying the same in terms of our commitment to quality and L. T V. A good credit.
But at the same time growing the production.
Our net interest margin for the third quarter was 4.97 to 14 basis point increase over two two's net interest margin 483.
That was mainly driven by to talk to the the cost of fun just to look at the right hand side. Our average cost of funds from Q2, two three declined from 481 to 448 says we continue putting on these lower cost securitizations were reducing our entire complete and total cost of funds and lightning out the name.
And you can see the net interest income for Q3 was $26 6 million compared to 24.4 million for Q2 10 per cent increase there.
Unloaded investment portfolio performance as Chris mentioned you know.
Some of the higher non-performing loan ratios that we experienced during the heat of COVID-19 towards the end of last year and with our Covid Forbearance program, we've been continuously working to head off and very successful with our special servicing department getting these things resolved successfully and we ended up the quarter at 12.7% non-performing right and that's it.
<unk> compared to 15.3 at the end of Q2, I think all the back to the end of the year. When I was 17 point too so coming out the end of nine months at 12.7 with great success and working off this nonperforming loans.
And again with very little of that going through foreclosure working last successful I ended up paying off or paying current.
<unk> looked at the next slide you can see what's happening yeah, we're maintaining that very successful nine resolution activity by how you P b and the painful paying current very low in terms of the hour yellow and we're continuing to make positive gains nonperforming loans over about the contractual principal and interest due to the collection of default interest and.
In the long term loans I'm gonna be paying the fees and keep in mind. The short term loans by the table short term loans are not subject to prepayments days, but we still collect the default interest. So you can see overall still making a nice game on the resolution of these laws.
Next slide I'm Gonna see so reserved seasonal reserve stay fairly constant to Q2 right around the 4 million Mark just under 4 million for for Q2, and we're right run 18 19 basis points feel very comfortable with that level. It is height. It was like 29 or 30 basis points.
And that was due to the macro economic forecast.
Call, we use a COVID-19 stress scenario macro economic forecast in our C smile and during the height of the Covid pandemic of course, all the economic factors that go into that natural economic forecast for stress very heavily in the reserve went up now those same economic factors and returned to much more of a normal type status or at least close to normal and.
And economic forecast comes back with less severe reserve requirements. So now we're running right amount of 18 or 19, we feel comfortable that because there's a comparison pre COVID-19 at the end of 2019, we around 12 or 13 basis points. So even even bringing it now we're still one and a half times, what a reserve is running pretty cold it too.
You're very comfortable dad as our loan production continues to grow.
And in charge off on that side, you see charge also very low for the quarter about $162000 for the quarter kind of coming back closer to our normal charge off rate is right around the $350000 per quarter. If you go back to that you know several years. So hard for 2000 is kind of starting to come back down to what we expect.
I think you'll see those charge offs coming down because again that non-performing loss rate is coming down as well.
First I'll start over to you for the outlook for go for business.
Great. Thanks, Mark.
Yeah on 12 here, just kind of summing up in terms of the addressable market you know seeing very good activity there and strength.
Uhm mentioned that we we think rising mortgage rates actually help us as our clients tend to look for alternative ways to generate revenue and often end up originating the tech Virginia the types of loans that that we focus on.
And so we think just there are a number of good factors out there that give us a lot of confidence in the in the.
Four at outlook in terms of demand.
On the financial performance again, I'm still think that building the portfolio and having that stable earnings stream as soon as <unk>.
Continue to grow as we add more loans.
And then obviously.
Working on our delinquency.
Uhm.
Right should slow down just because we came from such a high level, but we still expect improvement in to get you know look back down.
To normal levels, some time next year.
And then lastly from the liquidity and capital perspective, we mentioned the different steps, we've taken but we've got access to capital.
Within the short term from the warehouse side and then the longer term from my from the capital markets to Securitizations. So feeling good about about capital R capital position.
The last final met mentioned is 13, we <unk>. We introduced this last time was the economic value of book.
Equity.
As as you know most of our competitors use a fair value accounting, we do not carry alright are loans and amortize costs so far.
You feel it's important to try to lay out it.
You know if we were to do some type of fair value type presentation, we think that there would obviously impact our presentation of the balance sheet.
So we've got a build up here of of.
Not only the fully diluted value of equity, but the embedded gains in this in the portfolio as well as the platform value.
The premium there I've seen a couple more platforms trade in the last quarter or so again around that sort of 10% of annual production level. So.
So we think 150 million plus it's very fair for for the platform Guy and you can see there's a.
Pretty significant pick up in book value of equity under under this method so uhm.
That'll wrap up our our formal presentation and we'll open it up for questions now.
We will now begin the question and answer session.
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First question today comes from Stephen laws with Raymond James. Please go ahead.
Hi, good afternoon.
Fantastic progress on the the N P. LS and also notice that there's continued decline in your 60 day delinquencies of performing loans. So it seems like you know, making a lot of headway. There is there any type of target you look at it.
You guys can't public right right before Covid.
You know unfortunate timing, but how do we think about a normalized N P L level and and kind of what's the the glide path to that over the coming quarters.
Sure Hi, Stephen Yeah. So we we got it folks on this road show to kind of a 7% to 9% range for delinquency, that's historically, where it's been over the last 15 years.
So so that's where we expect to end up.
You know where.
We're making good progress there we aren't having any delays or problems you know foreclosing or running through this to court system. So.
Sometimes it's just a matter of of the clock running out on people enforcing them to make a decision, but we think by it.
By the latter half of next year will be back into that that's sort of normalized arrange it's difficult to predict weak and I could be off by a quarter or two but.
Most importantly, as long as we continue to see that trend going that way, we'll we'll be pleased.
Alright, thanks crest and and.
Thinking about the <unk> continue to see that's widened again this quarter.
I guess to start on the financing costs side.
No you've made a lot of progress there, especially if you've increase the mix of of new Securitizations saw on the release you've done another deal in queue for you know can you talk about the legacy deals that they'd have some higher rates attached.
You know how are those paying down in in any opportunities to collapse, those and re securitise those loans that that could further reduce that you know financing costs the portfolio.
Sure. Yeah, we we are constantly monitoring monitoring all of those deals each one has a different call level and we're working on a couple of them right now that we think we can call.
In the fourth quarter, and then next year will probably be able to.
To call a few more so we have to you know make sure we check all the boxes in line everything up but we definitely intend to do that uhm.
I think.
You know, there's some pretty significant saving their even though these some of these older deals are a smaller posts portion of the overall financing it'll still it'll still be a meaningful pick up so yeah, we we expect that to help.
Help us over the next few quarters definitely next year as well.
Great and last question replace afternoon, you you know you've cited and your last page some of the the transactions of other platforms being required in the state certainly a lot of people looking to get in the the P. P O.
Industry, how was competition change that some of those platforms for now and bigger balance sheets or maybe have the ability to fund large origination volumes have you seen material pricing pressure is it is it too soon to tell since many of those transactions just occurred and does that change the competitive landscape at all.
Yeah, we we haven't seen any any pressure on our pricing I'm just I'm sure the competitive landscape is constantly changing.
But a lot of these platforms, it's amazing how they play we ended up in sort of different little niches and so we don't really have anybody stepping on our toes right now I know the the the fix and flip space you know a lot of people going after that we're doing a very small amount of that so I I.
That's where I see the most amount of competition.
But in terms of where we land you know, we always have competition, but uhm, we're not feeling any pricing pressure or anything it's just.
Is forcing us to act irrational.
Great. Thanks for the comments this afternoon.
Thank you.
Our next question comes from Dawn Vendetti with Wells Fargo. Please go ahead.
I just had a question you know obviously originations continue to ramp very nicely. What are you doing internally in terms of just trying to increase marketing and robbing than that for larger originations over the next year or so.
Yeah.
Yeah, Hi, Dawn. It's a good question, we've got a number of marketing initiatives that our team has undertaken in doing a great job of dry driving traffic to our website and driving leads we've we're doing virtual presentations. We're doing trade shows so we're doing a number of different.
Things to continue to get our name out there and expand we're also adding account executives and I'm trying to expand in markets, where we have less penetration so.
All those things combine more obviously working and showing up in our results and we think we think that'll continue next year as well.
Okay, and then just kind of a follow up to your last question typically in these types of markets when they're hot <unk> workstation volumes are strong you do see yelled compression is that something that we should all just assume will happen I know you're not seeing currently but you know if that's something that we should prepare for.
You know as we go into next year.
Yeah we're.
We're not forecasting it for our model.
I I don't know how to predict the the broader market, whether or not that it'll happen.
We we we price our right cheap based on where we can execute and the security station and capital markets and that really drives you know our pricing so.
I don't know if we'll see a bunch of crazy competition come in and say it start driving yields lower I.
Kind of don't think so because what I tend to see mostly out there is a lot of our competitors offer any products.
As opposed to just what we focus on and and so I don't see.
You know two big Gorilla is that are just.
Trying to buy at the market or or use the pricing to to gain share. So.
You know I I you know, we think we can maintain our spreads going forward. We've done it over the last 15 years and think it'll continue.
Thank you.
Sure.
Our next question comes from Steve Delaney with JMP Securities. Please go ahead hi.
Hi, everyone of course, the highlight that really jumps off the page Christmas the 33 per cent sequential growth in volume and also the commentary just about how vibrant strong. Your your target markets are on page six you do mention.
And I think you're probably being modest about you you almost may sound like Hey. This is just get good good is happening to us, but I'm sure you talked about adding Sleepy I'm sure is a hell of a lot of effort from you and the team and everybody that <unk> that resulted in that thirty-three it's more than just a strong market. So [noise].
But you did mention introduction of lending products could you highlight comment on you know what you what did you bring out you know new to the market that you think might might have contributed to the growth and we'll help going forward banks.
Sure absolutely tasty.
Yes.
Yeah. So I guess I guess, there's two things I would say on that number one you're absolutely right that this is a tremendous amount of hard work and and too.
To Dawn's earlier question about competition a lot of people say, they're gonna go after this space and don't do it successfully it's very difficult and and it's a tricky.
Niche to get into so you're absolutely right number one is just heavy lifting and hard work from our people.
The main the main driver in terms of products Uhm, we did introduce some of these short term products that helps the more you can kind of open up opportunities for a salesperson to to speak to a client and give them options. The better chance you have of landing some business with them but.
But we haven't really.
Materially tweaked our programs to a level that you know I could point to and say this is what drove you know 20 per cent of that increase or whatever it's I think it's just more of a combined effort and all of our our hard work paying off yeah.
Yeah, and it's it's clearly in the Investor Wonder for just just look at Yeah. Bart Bar chart, there is really driving it so.
You've got that worked and you don't want to spend too much in just energy and create distractions with with little you know kind of marginal things that are cute, but maybe not really moving the needle. That's right you made a comment about your customers and just and you know taking the time to do more of this business.
If if I think about alone broker somewhere hoops. The last two years was just crushing refis for you know near Prime borrowers you know no brainer borrowers and just pumping out the agency Refis.
You know even with marginally higher rates you know that game has slowed and talk about competition right in in terms of diet that space is it just a matter of these the loan brokers basically having the capacity and the time to look for something else to do and say Hey, you know I'm a good them up my.
Phone directory and I'm a.
Visa wonder for a rental guys that I used to work with before I got busy with Refis you know I'm just gonna call. This guy was taken to lunch and and and try to build that network back up yeah.
Yeah, Yeah, no you're you're premise is spot on.
Guess I would just add.
You're right if if their phone starts to slow down they can go back to all those previous customers and when you look on those loan applications. It's amazing how many times they own another piece of property and can be kept create an upgrade an opportunity there.
In other of them other situations quite frankly, they they literally you know need to generate some revenue and spend just.
Turn on the marketing and start marketing or product, we have a number of good clients that.
Exclusively market, our product and they're highly successful and they generate a lot of business. So.
We we provide marketing materials to to our brokers and show them how they can.
Direct their dollars effectively and and grow this in this space. So that that's another way to to continue to grow our pipe and do you think your product you know obviously, there's an agency investor product you know like everything with the G. S. C. So it's a tight box and you know.
The Documentations just insane, but do you think there's plenty of business for you you know I guess, the FHFA reverse the caps right. They there was gonna be a cap on and they took that off when she looked Thompson got in but you take your product is different.
And shaded enough easier yeah, maybe the agency has the lowest possible coupon, but you know is there are there are other things that make your products and your process you know easier on the borrower than than an agency execution yeah.
Yeah, absolutely that's emailed it spot on we we never really thought the cap was really kind of do much for our business and really never paid much attention to it cause uh-huh to your point if they can if they want to go through the brain damage and they have the all of the qualifications, they're not gonna come to us anyway. So running always you know sir.
Served a different slice of the market and I can tell from talking to our account executives that.
Cold, calling our broker now they're they're more open to hearing about what we have to offer so I I see mine's opening being because I think because you mentioned things are changing on that side a bit.
Great well good color I appreciate it enjoyed the conversation and stay well.
Thanks, you too steep.
[noise] again, if you'd like to ask you a question. It has started that in one.
Our next question will come from Erin.
<unk> with city. Please go ahead.
Thanks, the the rising home price appreciation I would imagine is kind of helping you and two fold by increasing the size of loans needed for your single family rental and also helping on the resolutions of of any of your.
Uhm pasty loans.
You know at what point does does the rising H P. A become an issue or a little bit of it and that negative.
Yeah, Hi aren't good question yeah.
Personally for me I I Kinda hope for just a very.
<unk> flat market kinda up 1% type market I think those are the best healthiest markets for everybody because it doesn't get too hot or too cold.
If it if it continues to go <unk>.
Is this clip.
I think that that could create a problem.
Just for them affordability perspective and.
I I will say, though I I <unk>, let me see a number of pockets across the U S where that rate of acceleration is definitely slowing. So I think that's actually you know healthy sign for everybody.
We'll have to watch and see.
You know where that goes next year, but if it continues it and a double digits for a couple more years I I think that would definitely be a problem.
Okay and then the.
The.
The lower cost of funds as you continue to issue new securitizations that it more attractive pricing is the expectation that you'll pass on some of that too acquire to to get some some new or make your product more attractive to new borrowers or.
Or is it just more of a function of you know the competitive environment They say.
Yeah, we we definitely pass that on and it shows up in our <unk>, depending on how we execute so absolutely. We we figure out you know where we need to be from a spread perspective, and where where are are are we targets are and and and that's where we send our rates and if our competitors are high.
Or lower.
So be it we we we just feel like we have to be disciplined and make sure that we were in the right returns risk adjusted on our capital so.
We we definitely deliver those benefits to our customers.
Okay, and then lastly, maybe maybe mark and help me with this one that the your your issuing a small amount of equity via your your a T M.
Is there is there a metric that we should be looking at in terms of leverage debt to equity et cetera, where they can kind of guide us to to think about you know how much equity, you'll need and and how much you'll be issuing.
The 18th higher out of the a T M.
We didn't issue much in September because when the ATM became functional number one we only had like four or five trading days left in our open trading period, we a blackout periods of course, so I think we had like four five trading days, that's why it it really is she's like 10 11000 shares.
It kind of goes along with the average trading volume correct right. We watched the average trading volume we'd have to you don't Wanna issue, a large percentage of the average trading volumes, depending how the liquidity the stock rose and you have a trading volume we watch it very closely and we kind of set R. R. A T M issuances based off of your help maybe seven per cent of the average trading lines. So.
It depends on how to train those and then we just added a lot more shares.
Converted to refer to the common as well so we've got more comments here is out there now so we need to kind of see how that plays out what it does to the average training.
And is there is there kind of a guiding leverage factor that you are trying to stay with him or any kind of metric that can help us from a modeling perspective.
Yeah, I'll take that one that I I think you know we've been talking to bankers and.
We think we need to be somewhere close to where we are today, we'd like to stay and it's like kind of five and a half to six and a half range just depending on.
On how we grow we'll add a little bit of equity a little bit of that you know depending on.
Where we where we are and how the balance sheet looks but I think that type of leverage level is where we wanna.
I Wanna sit.
I I agree I was gonna say right about 6% of so I agree I may have to 16 ounce perfect Yep.
Okay perfect alright, thanks, so much.
Okay.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over there Crisper R. C E O for any closing remarks.
[noise] great. Thank you all for taking the time to listen to our story. We appreciate it and look forward to talking to everybody. After the end of the year. Thanks, everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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