Q2 2022 Velocity Financial Inc Earnings Call
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Good day and welcome to the velocity Financial Inc. Second quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by <unk>.
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I would now like to turn the conference over to Chris Ultimate Treasurer, and director of Investor Relations. Please go ahead.
Thank you Andrew.
Hello, everyone and thank you for joining us today for the discussion of velocity Financial's second 2020.
And they are Christopher our philosophy as president.
I Could've officer.
And yeah velocity as Chief Financial Officer.
This afternoon, we released our second quarter 2022 release and accompanying station, which is well on its website.
Just to remind everybody that today's call food forward look.
Which are uncertain and outside of the company.
Actual results differ materially.
Or some of the risks and other factors.
Please see the risks are there.
Statements made it you know what you mean.
Oh shareholder Volkmann.
Oh, yes, I'm sorry to interrupt your voice is breaking up is it possible to.
Pick up a handset by any chance.
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Hear me better now.
Oh, yes, I believe so I've been up all up I'm not sure if you'd like to maybe just to begin from the start just to make sure everyone hears the.
The safe Harbor et cetera.
Okay.
Okay.
Thank you for joining us today, everyone for blocks of financial second quarter 2022 result.
Joining me today are Chris Ferrara, President and Executive Officer.
And yet philosophy is cheap.
Sure earlier.
Earlier. This afternoon, we released our second quarter 2022 press release the company.
So are available on our Investor Relations website.
I'd like to remind everybody that while 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 affect results.
Please see the risk factors.
Statements made in our communications, which includes the factors.
And our filings with the Securities and exchange.
Please.
The content of this conference call.
Information.
That is only at the end.
And would you undertake you need to update forward looking state.
We may also refer to certain non-GAAP measures on this call.
Correct.
Fisher.
You should refer earnings material on our Investor Relations website.
Today's call is being recorded and will be.
Oh on the company's website later today.
I will now turn the call over to Chris Rock.
Thanks, Chris and welcome everybody to our second order second quarter earnings call.
Before we dive in I want to recognize Mark our CFO Mark <unk>, a recent award from the Los Angeles Times as CFO of the year.
Anyone who's worked with Mark knows he's a true leader in a genuinely great person his commitment and work ethic pardon me, it's our culture and we're very fortunate to have mark on our team.
So congratulations mark on a well deserved award.
In terms of our results we reported another outstanding quarter in and obviously uncertain time, our unique portfolio approach continues to generate stable earnings with limited volatility.
Originations moderated this quarter as our recent coupons increased to the mid 8% range. Unfortunately, we're continuing to see healthy loan submissions that dose levels were.
We're currently in the market with our fifth securitization of the year and we're pleased with the strong support we have seen from our investor base for seasoned loans, our delinquency continues to normalize and our special servicing team consistently delivers impressive results.
We're beginning to see a cool down in the real estate market, which we think is healthy and there are still plenty of loan opportunities for us to invest in.
Due to the recent market volatility were also being shown some interesting opportunities to acquire good assets from distressed operators, we intend to capitalize on those situations as they develop in the second half of this year.
From a liquidity perspective, we're in the strongest position we've had in many years due to our stable portfolio earnings we can be patient in deploying our capital and we'll manage our liquidity carefully as the market evolves over the next six to 12 months.
Despite the recent headwinds we are very confident in our ability to grow and deliver start strong returns for our shareholders.
With that I'll.
Turn it over to the presentation materials starting on page three.
Looking at the second quarter from an earnings perspective.
A nice strong earnings a $10 6 million, both on our core and GAAP basis.
The increase year over year.
Down a touch from the first quarter on a core basis, and that's mainly driven by fewer loan sales, we made more loan sales in the first quarter and second.
In the second quarter decided to securitize more assets.
And as we've said that overtime, we'll be opportunistic when we make those sales.
From a net interest income perspective up almost 25% year over year. So very very good strong net interest income growth has the portfolio grew.
And an exceptional quarter from the NPL recovery rate of 111% over above our accrued interest and outstanding U P. B.
We saw some really nice pickups, there from from some older seasoned loans that had been unresolved for a long time.
A couple of Oreo gains so just great performance there.
In terms of production.
You can see a year over year about 74%, so very nice growth on a quarterly basis.
And then for the first six months of the year over $1 billion, which is more than twice the amount that we had.
I had done the prior year, so fantastic growth across the platform.
<unk> ended the quarter with $3 1 billion.
In terms of your P b and as we as we've come out of Covid in and started to see borrowers get back on their feet and we've seen the north nonperforming rate.
Reduced dramatically as borrowers care in Npls get resolved.
From a financing and capital perspective.
We completed three securitizations during the quarter.
I think that speaks to our strength out there in the hit and the track record in the history that we've had of bringing good deals to market and so we're proud to be able to continue to execute and choppy times.
One of those transactions was a refinance of a deal that we've done during the heart of Covid and we had a tremendous amount of capital tied up in that transaction. So.
That freed up a lot of liquidity for us and probably in my mind one of the most important highlights of the quarter as we're sitting on 100 and sort of $34 million of liquidity at the end of the quarter, which really puts us in a good position to.
Not only.
Take advantage of interesting opportunities, but also just patiently watch and see how markets develop.
Lastly, here, we we did increase our warehouse capacity.
$100 million during the quarter and as a reminder.
All but one of those facilities is non mark to market. So we've eliminated that risk.
Entirely across the portfolio.
With securitization and non mark to market facilities.
Turning to page four you can see book value per share 11, 26, I think this share just this sorry. This slide just highlights.
Our unique portfolio approach of building book value and in trying to.
Maximize shareholder return with limited volatility so number of our peers are seeing big marks I'm just based on.
Market volatility and in our sort of approach and in.
Accounting methods I think eliminate a lot of that so I'm proud of.
How the business has performed in an.
With that I'll turn it over to mark to handle the rest.
Thanks, Chris Good afternoon, and good evening everyone.
Thank you Chris for the for the kind words person had to pay them enough to say all of those things, but that's a different story.
Slide five for loan production.
Chris mentioned, we had very strong loan production for the first half of this year, a little over $1 billion compared to about $489 million for the six months of 'twenty, one which is a 110% increase in production.
We had 1 billion three fundings for all 12 months of last year. So we're at $1 billion for six months you were still seeing very strong demand for our product we.
We have 445 million funded in Q2, and as we've seen a little bit we've been raising our wax on their loans are new loan applications to kind of keep up with the interest rates that we're seeing on the finance side to maintain that spread and see that in just a moment, so even even after raising our lax and actually our Q2 production.
Thank you to our weighted average coupons are up 145 basis points from the new originations that we had in Q1, so we've been aggressively raising the rates and still seeing good strong production coming in in Q2 and again in the first six months of the year, So very happy to see that.
On slide six.
The production comes in strong loan portfolio was growing accordingly, because we're putting most of that into our portfolio. Our in place portfolio with a lot spread our total loan portfolio at the end of June was $3 1 billion up seven.
7% from the $2 9 billion as at the end of Q1 and up 49% year over year compared to June of last year again, just showing the very very strong demand for our product.
The weighted average coupon was 753 and that's up from $7 50 for the first quarter. So again, we're raising the rates getting the coupon.
To offset the rising interest rates on the financing side and still getting in the volume and able to grow the portfolio.
Yeah.
Slide seven the net interest margin and we're saying that's more of a return to normalized levels on our NIM. If you go back to second quarter of last year and you can see on the page 43, we have said in previous calls.
That margin was kind of inflated we're getting higher margins because we're getting a lot of the default interest prepayment penalties that we were bringing the NPL rates consistently down so the yield coming through.
Our sustainable yield over the long haul and we normally run like a lot of four point.
Margin and that you see we're normalizing back to kind of our normal run rate margins, we feel really good about that and he is a known as our nonperforming loans are resolved the default interest and prepayment fees of kind of starting to normalize because our NPL rate has come significantly down and we will take a look at that but while we're doing that we're still maintaining that spread. So if you look at.
The right hand side, the portfolio yield and cost of funds you can kind of see them go back to Q2 of last year. When interest rates were higher we were charging more on the loans and of course, our debt costs were a lot higher at 481, you can see as Q1 came into play as rates came down in the second half of 'twenty one into the first quarter 'twenty two we love.
The WAC on the loans, you still maintain that spread and we've been very aggressive now going into Q2 and through Q2 as interest rates have gone back up on the financing side again as I said, we've increased lacks almost immediately to keep that yield on our loans still maintaining that spread throughout.
Yeah.
Page eight the asset resolution activity continue to see great strong resolutions on our Npls NPL resolutions for Q2 $50 million and you can be for a $5 $7 million gain that's on an 11 point gain on a resolution. So historically, we've run about three and a half four point gain.
On a resolution of NPL loans, and we were at 11 point gains for Q2 and as Chris mentioned some of the things in there in Q2, we did sell a couple large oreos that probably brought in about $1 million gain and then if you look at the resolution activity one term loan side up in the top you see paid in full for Q2 was.
About $17 million, you can be painful for $3 3 million gain where Q.
For Q2 of last year, so it was $21 million, but even if a smaller gain and the reason that's happening is some of them as Chris mentioned some of those loans that were in foreclosure in the judiciary judicial states, where it takes about a year and a half to two years to settle those loans. Some of those are now finally coming through and remember we've got that four point default interest tacked on and that's accruing.
The whole time, it's in their foreclosure process. So it's these borrowers are now paying off those loans, because we're getting to the point, where we can foreclose on the properties that I'll lose a property. He says are paying off these loans they have to pay it off and they have to come up with all that default interest too and that's why you're seeing a lot of those big gains coming through.
And one thing to point out it's not on the slide but with that growth in production the growth your in place portfolio and maintaining net spread.
We're seeing you know great core diluted earnings per share you saw was 31 cents for Q2 year to date, which was not one of the slides year to date, our core diluted EPS of <unk> 67, a share versus <unk> 45 cents a share for the first six months of 'twenty, one so year over year or six months over six months and you've seen a 50% increase in that core diluted earnings.
For sure.
On the next slide the loan investment portfolio performance and as I mentioned with all that strong resolutions that were doing the NPL rate continues to come down. We ended Q2 at an eight 2% nonperforming rate.
Year over year comparison that compares to $15 three where we were at Q2 of 'twenty, one and remember it was at the end of 2020, we were as high as 17.1. So we feel very very good about the way we've been able to get these loans performing again or resolve alone by having them pay down or pay current all at the same time still making a four point or even you saw 11.
In Q2 gain on those resolutions and that's mainly because of our own in house special servicing Department allows us to take charge of those nonperforming assets really work with the borrowers and getting very very successful resolutions and that kind of in house strategy really pays off and you can kind of see the results here.
In terms of our loan loss reserve of six reserve. It remains very consistent in terms of basis points of reserve on your P. D. That's into kind of the bottom left hand chart. You can see we were 19 bps back in Q2 of 'twenty. One we kind of had additional reserves on there not knowing the uncertainties of COVID-19.
And now we're kind of evening out right around the 16 to 17 basis points in terms of total dollars. We ended the quarter $4 9 million, which is a five 2% increase from Q1 and 24% increase from June of last year, and that's really as a result of just the growth of the portfolio as our in place portfolio grows and you're maintaining a 16th.
Basis points spread dollars or other reserve are gonna grow accordingly, the key point is on the right hand side of the bottom you see our charge offs are charge offs has been running consistently below historical two and if you just look at the last four quarters. The average charge offs loan charge offs, it's been about $168000 a quarter with this.
Recent quarter, it's coming in at under $38000. So again strong resolutions NPL rate coming down very low charge offs very good game and kind of maintaining our margin in a very widely moving interest rate environment. So we kind of feel very good about our results and where we're headed so far this year.
Page 11 of the durable funding liquidity strategy and Chris I think hit most of the high points. There. We did four securitizations already in 2022 things like we did for all of last year and we've already done four during six months three of those Securitizations where in Q2. So we actually do Securitizations April may and June which again just goes to show the the inverse.
Demand for the product that's out there we're having no problem getting the securitization is done in a pretty kind of widely moving market. So we feel really good about that we did $896 million worth of Securitizations issued.
This year of which $623 million of most was in Q2.
And we achieved a couple of things with these securitizations, one we're able to collapse.
A couple of older deals one deal as far back as 2015, which was the old sequential structure I'm sorry, yeah. The sequential structure in that sequential structure as it pays down gets more expensive. So that was a higher yield deal wherever the collapse that and we securitize it and our pro rata structure and actually lower cost and then the old M. C. One youll mixed <unk>.
<unk> deal that we did back in July of 2020 kind of in the heat or cold it to get the securitization and liquidity I was only at a 65% advance rate. So we have a lot of equity in collateral tied up in that deal and we and as it paid down our equity just went up because all the payments was a turtle went right to the bondholders pay them down in our equity just kind of kept growing we were able to re leverage.
That's almost like a 75% advance rate and generate quite a bit of liquidity as Chris mentioned, so we were able to doing those deals ending up the second quarter with about $134 million in available liquidity 46 million of that being the cash that you see on the balance sheet and then another $88 million in loans that are <unk>. So we can put online at any time.
Hi, and draw the liquidity off up so we feel really good about our liquidity position ending the quarter and as Chris mentioned, we raised the maximum capacity of our warehouse lending from five from 650 million to $750 million, so under $100 million capacity as we again see the production growing in the portfolio growing.
Yeah.
So with that I'll turn it back to Chris to go over the economic value of equity.
Thanks, Mark I appreciate it.
I'm on slide 12 shown this slide a few quarters in a row now so I won't spend a tremendous amount of time on it but.
I want to make the point that most of our peers you know mark their balance sheet to fair value and we believe if if we were to do something like that we'd see a much higher mark.
Then you see just looking at the face of the financial statements.
Largely driven by the <unk>.
Locked in spread embedded gain in the portfolio. So we think from a van.
Value perspective.
We're undervalued.
Based on where our stock is trading today and want to try to highlight it that way.
There's a lot of.
Future value, that's yet to be realized.
Hum 13.
Just kind of talking about the outlook we mentioned.
We're still seeing good demand.
From a credit perspective, we feel very very safe there and.
There's been a lot in the press about what's going to happen and what may happen, but so far we think things are good and I expect it to continue that way.
We do plan to do two more securitizations this year and.
I think from an earnings perspective, just wanted to continue to focus on.
Managing the portfolio, providing that stable spread and I'm looking for for your.
These opportunities to grow both organically and strategically so.
With that we'll turn it back over to Andrew and we can see if there are any questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily.
To assemble our roster.
The first question comes from Erin <unk>.
<unk> with Citi. Please go ahead.
Thank you on the production side obviously.
Obviously, it's a solid quarter, a little bit lower in.
It sounds like you you were able to pass through some of the increase which are in price, which which you know slowed.
Slowed down the production.
What level of production are you expecting in the second half of the year, you know relative to I guess, maybe you could talk about how the cadence happened throughout the quarter.
Yeah, Hi, Eric Good question, I mean, I think the right guidance is kind of at the second quarter level and we feel good.
To be able to deliver that for the next few quarters. So I think that's a good run rate.
Okay. That's good and then on the securitization that you did.
Recently, how have those been pricing relative to some of your earlier securitization.
Yeah, so they're they're definitely pricing a lot wider than then certainly 'twenty. One 'twenty one was a banner year for something we weren't getting some incredible pricing, there, so and and I would say their pricing a little wider than even even for 'twenty one so.
Margins aren't as strong on the most recent deals.
Probably they have been historically, but I think on a go forward basis, we feel like we've got the pipeline up now and think it will be there. It obviously depends a lot on where the market goes from here, but.
We're feeling like we're back in line from a spread perspective now.
And that would be kind of around that 4% type of NIM. That's the expectation, yes, that's right.
Okay, alright, thanks, a lot.
Welcome.
Again, if you have a question. Please press Star then one.
The next question comes from Steve Delaney with JMP Securities. Please go ahead.
Thanks, Hey, guys. Congrats on a really strong quarter and are obviously, a very challenging market and mark Congrats to you from another a former public company CFO . It is tight it's tough work man so great job.
Chris you talked about distress situations I'm seeing some things out there boy, we we have seen some.
Some shops shut down and just this morning, I saw a mortgage REIT right off over $20 million of a private equity investment and an originator who had ceased operations. So.
We know those kind of things are out there I'm just curious as you look at those opportunities is it a matter of just looking at loan collateral, but maybe sitting on warehouse, some raw where or is there any interest in infrastructure and in any product expansion opportunities banks sure. Thanks.
I appreciate it yeah.
Yeah. So.
We we've seen both asset opportunities and strategic opportunities.
And so nothing huge yet, but I feel like it's it's the beginning of a probably a larger opportunity set.
On the asset side, Yeah, we I think you are largely seeing.
Assets that are probably home either on a warehouse line or or maybe have some.
Scratch and dent characteristic or something like that where we would obviously look to to pick those up at a discount.
Hmm.
And then and then I think strategically.
We've seen a couple of platforms.
We've looked at and nothing compelling yet.
And we haven't seen anything.
In terms of new products, but we're open to that and so my gut tells me. So over the next six months, we may see something like that.
Okay, Yeah, Okay, well that's it.
It's been the last year or so it's been just a matter of you know your own keeping things straight in your own kitchen, right, but do you guys have really gotten yourself squared away and thank you.
You've got a strong position to take advantage I'm, just curious where your pricing today I mean, I'm I assume we're probably up to something near an eight handle.
And how the demand is looking at it at that type of a coupon yeah, So where the more recent production is just kind of.
Eight and a half to nine ish coupons.
And yeah and.
Just in the last few weeks submissions have been very strong so I think there's.
Well, what I call the kind of the sensitivity period, where where you know.
Customers and clients borrowers are kind of adjusting to to things and then.
There's nothing like a hold back or a lull if you will and then and then people start to realize.
This is the new reality and they transact so.
We there was a there was a little bit of an adjustment period, there for sure, but I'm very pleased to see how strong.
Submissions have been.
That's great. Thank you both for the comments I appreciate it Steve.
This concludes our question and answer session I would like to turn the conference back over to Christopher Farrar for any closing remarks.
I just want to say, thanks again for everybody for participating in all of your support and are grateful for <unk> for the.
Years of support that we've seen from everyone. So that'll conclude our call and thank you.
Thank you everyone says.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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