Q3 2022 Velocity Financial Inc Earnings Call

Good afternoon, and welcome to the Boston Financial Inc. Third quarter 2022 conference calls.

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Now I'd like to turn the conference over to Chris Open Treasurer. Please go ahead.

Thank you Hello.

Hello, everyone and thank you for joining us today for the discussion of velocity of financial third quarter 2022 results.

Joining me today are Christopher our philosophy, as President and Chief Executive Officer, and Mark <unk> Philosophy, Chief Financial Officer.

Earlier. This afternoon, we released our third quarter 2022 press release and the accompanying presentation, which are available on our Investor Relations website.

I'd like to remind everybody that today's call may include forward looking statements, which are uncertain and outside of the company's control and actual results may differ materially.

For a discussion of some of the risks and other factors that could affect results. Please see the risk factors and other cautionary statements made in our communications with shareholders, including the risk factors disclosed in our filings with the Securities and Exchange Commission.

Please also note.

And 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.

May also reserved certain non-GAAP measures on this call for reconciliations of these non-GAAP measures you should refer to the earnings materials and our Investor Relations website.

Finally, today's call is being recorded and will be available on the company's website later today and with that I will now turn the call over to Christopher.

Thanks, Chris and we appreciate everyone joining the call today.

After the close we reported another very strong quarter performance despite continued market headwinds.

Our originations were consistent with the prior quarter as we continued to raise rates based on the general rise in our underlying benchmarks our.

Our delinquency level has returned to a more typical range and we're still recognizing impressive gains from resolved assets by our special servicing team.

Real estate market's softening to a more balanced level as investors adjust to the change in federal Reserve policy.

Unlike many originators a large portion of our earnings come from our in place portfolio, which allows us to manage origination volumes appropriately.

We're still experiencing strong borrower demand for new loans, but have recently begun to tightened our credit policy as we can be choosy about deploying our capital.

We look forward, we plan to intentionally slow originations a bit and take a slightly defensive posture until we have more certainty about federal reserve policy, especially as it relates to inflation and the terminal fed funds rate.

Our balance sheet is strong from a liquidity standpoint and earnings perspective.

Our lenders are very supportive and we're in a good position to operate in this volatile environment.

She has been very challenging and I'm very proud of how well our team has responded well.

We're prepared to successfully navigate our way forward and we will always remain focused on our goal of enhancing shareholder value.

That concludes my prepared remarks, and we'll come we'll turn it over to the materials.

On the presentation starting on page three.

Yeah.

Very good earnings.

Yeah.

Growth in the portfolio NIM as long as we grew the portfolio.

As I mentioned before a very strong N P L recovery rate of almost.

Over and above contractual interest and principal.

From a production perspective as.

As I mentioned, 34% increase over the prior year's quarter.

Very healthy levels.

Into a rising rate environment.

And then.

Interestingly there for the nine months of 'twenty two.

Most of 50% Inc.

That's an increase over the prior period.

Hum.

You mentioned October Oh that would be slowing originations October originations came out at $105 million.

Hum.

Absolutely.

Ability to do more than that there was plenty of demand, but we as I mentioned tightened our box and have been cautious here.

I want to see better clarity out of the fed before we get more aggressive.

I'm, a nonperforming loan perspective.

Okay.

Prior year, we've had a nice improvement in the trend there and.

I feel like we're stabilizing and settling into a more historical level of where we typically see npls.

From the financing and capital perspective completed one securitization in August and an additional securitization.

October totaling six deals for the year.

Our liquidity is very strong at $96 million at the end of September and we have plenty of warehouse capacity. So we've got.

Lots of room for growth and.

Additional fundings, there and getting.

Getting great support from all of our warehouse lenders.

On page four.

Very simple slide just to show that you know, we're continuing to execute on our strategy of growing book value.

By retaining earnings and we saw a nice positive pick up there in the quarter.

I spent with them many prior quarters.

So that's my overview on the first two slides and I'll turn it over to Mark page five.

Thanks, Chris and thank you again, everybody for joining today's call.

Age five for loan production as Chris mentioned, we had a very good third quarter little over $457 million and UCB originations during the quarter very consistent with the second quarter of $4 45 billion.

The main positive.

Positive takeaways the WAC on our third quarter production was 89, which was 114 basis points higher than the 775 WAC on our second quarter production. So we've been very aggressive in <unk>.

Our raising our loan rates.

Assistant with the fed with the bond market trying to stay on top of that and I think you'll see that in the quarter over quarter difference in the WAC.

On page six for loan portfolio, adding the $400 for a $45 million in <unk> growth in the portfolio. We ended the quarter at a little over $3 $4 billion in terms of our loan portfolio. That's an 11% increase from the second quarter, our weighted average WAC on the portfolio at the end of September was.

771 on the entire $3 4 billion and Thats up 18 basis points from the 753 whack.

June 30 again, the portfolio start to reflect the increase in loan rates that we've been doing second quarter third quarter.

And also consistent the bond in the slides you can see in the second and third quarter, we're still putting the volume on we're increasing the wax, but we're keeping that loan to value ratio very consistent right around 68%.

On our net interest margin the portfolio NIM for Q3 was $3 59 that was down 51 basis points from four <unk> again, the decrease was driven as Chris just mentioned by we had record loan production.

You'll remember in the first half of the year, we really like a $1 billion in production. So we had record loan production very early in the year much lower interest rate environment.

In the higher coupons on recent production and the rising interest in our arm loans is going to help kind of recover some of that on a go forward basis at the end of the quarter, 20% of our portfolio was adjustable rate product.

And we've already seen those rates starting to adjust more kind of talk about that.

Weighted average coupon on new production on the arms was 775.

I mean, all productions are all production was 775 in Q2. It was 889 as we said in Q3 and in October the weighted average coupon on our new production just in the month of October was 98, so again very aggressively raising rates were up over 200 basis points from new production in Q2 to new production in October .

And we're going to consistently monitor the bond market and as the bond market adjust we're going to adjust accordingly to kind of stay consistent with the bond market.

Did raise rates yesterday.

With the fed three quarters of a point increase and we will keep up we'll keep adjusting accordingly, as I said as the bond market or Josh.

On page eight with asset resolution another great quarter in terms of asset resolution, Chris mentioned, almost a 6% gain for resolutions in the third quarter, we resolved over $45 million of UPC at about a $2 $7 million gain compared to about $60 million of resolution UBB second.

Order for $2 one game. So we continue on both our long term and short term product to resolve loans right.

Right around four five point gain on a regular basis.

On page nine loan investment portfolio performance, the nonperforming loan rates you could see it come down now to seven 4% from $8 two in the second quarter at seven four and if you compare it year over year back to third quarter of last year, it's about a 42% decrease in our nonperforming rate we feel that.

Where we're at right now is pretty much stabilized.

We've always said that we feel very comfortable anywhere between six to say, 8% nonperforming range, that's kind of our business niche type of business we do.

And because of the strong resolutions again 90 95 plus percent of all of our Npls are resolved with that four five point gain that we feel very comfortable within a 6% to 8% NPL rates. So we think the seven four at the end of Q3, that's probably a start to stabilize in our normal kind of comfort band, we kind of think that's where it's going to stick around too.

Yeah.

Okay.

On page 10 is our seasonal loan loss reserves, we ended the quarter at $5 3 million compared to $4 9 million for Q2, it's about $4000 increase in reserve and it's just mainly because of the portfolio growth you saw the portfolio growth grew 11%. So the reserve is really just a factor of a higher bigger portfolio Youll have a reserve on there.

See in the lower left chart, we're very consistent in terms of our bps or basis points reserve on our <unk> portfolio were right around $15 16 bps has been pretty consistent all year at that level, we feel very comfortable with the reserves that we have if you look at the charge offs in the bottom right. These are actual loss charge offs. If you look at the last five quarters.

Our average dollar charge offs per quarter have been a $165000 a quarter. So extremely low charge offs on there. So we feel very comfortable with the reserve that we have.

Yes.

In terms of overall funding and liquidity Sea, we had $3 $2 billion on outstanding debt balances at the end of the quarter and you kind of see the composition of the majority of that of course being the securitizations with just under $2 $7 billion.

As Chris mentioned, we did five securitization as of September 30, we did a six to one after quarter end in October we were down six securitizations this year.

Five of the six warehouse lines that we have are all non mark to market line. So we feel very comfortable in this environment.

<unk> changing possible recession now that we have non mark to market lines, and we feel very comfortable that our risk position on that debt.

With that Chris I'll turn it back to you for the economic value of equity.

Great. Thank you Mark.

On 12. This is a slide we've always prepared for a number of quarters now again.

To remind folks this current book value plus.

The expected earnings we think we will recognize over all of the Ah.

On balance sheet securitization. So it doesn't include any future earnings or future cash flows from from new production is just what is on the balance sheet as of the end of the quarter.

And an additional premium for once a part of.

The platform value. So we think of true economic value is significantly higher than book value.

As reported under GAAP basis.

Oh 13.

And just kind of a general overall perspective.

I think the business is doing incredibly well, we feel like we're firing on all cylinders.

Obviously, theres a lot of volatility and difficulties out there in the markets.

We've been able to navigate.

As I said, we're gonna be cautious going forward, because we can and we want to.

Helpful too.

See some stability and some clarity out of the fed maybe maybe by the first quarter next year I don't know.

But that's our expectation is to.

Sit tight a little bit.

Wait to see how things develop at the fed so that's kind of our outlook and how we're planning to manage the business going forward. So.

That concludes our presentation and I think we can open it up for any questions.

Okay. This is the operator. Thank you we will now begin the Q&A session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the.

Keith.

To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Our first question today comes from Steve Delaney of JMP Securities. Please go ahead.

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

My question was going to be you know.

Where can it go you know seven 4% where can it go and it sounds like Chris you guys pretty much think youre kind of at your baseline you mentioned I think a 6% to 8% range I'm sure Mark and the team is going to be working hard for every deal and every dollar but it sounds like youre kind of where you think you'll be for the long run is that a fair assessment.

Yeah, Hi, Steve Thanks for the for the encouragement and yes, I think that's right.

That's where we kind of we've always historically if you go back over 18 years has kind of been in that six to eight range.

And so.

I think we were working off some of the Covid.

Effects and so I think now we feel confident that that's going to be somewhere in that kind of stabilizing here is obviously, we're taking stuff off but new stuff comes on so it should be pretty stable here.

And it was funny I was you mentioned Covid, that's that's a great point, because we're looking back to where.

Loan yields were.

Early 'twenty, one and it's easy to forget you know kind of kind of where we were and then a lot of stimulus from the government from the fed.

Zero rates, putting your money, but.

We actually have come down.

Despite the recent move in the bonds. When we look back you know more like 12 to 18 months. So that's right.

<unk> observation there.

Youre six DCC deal in October .

I kind of read between the lines of what you were saying I guess my question is is there going to be a seventh.

And I guess, there could be given your originations, but almost sounds like with your warehouse lines.

That you've got you feel pretty good about those and we've just had this extreme volatility in blowout in spreads should we sort of think that.

I think you said sit tight or where it might have been your phrase, but let's just let this ride you've got good collateral it's been enhanced safely and just wait and see if you've got a better our MBS market and in the first quarter than we have right now.

Yeah, I think a good job of reading between the lines Thats right.

I think that's a fair assessment.

And well.

We're in a good position to just kind of wait and see so a lot of.

Our bankers have told us that folks are wrapping up year end and.

Better just to wait until next quarter, which we have absolutely plenty of ability to do so we'll probably do that.

That's great. Thanks for the comments thank you.

A reminder to ask a question can you squeeze Star then one to ask a question. Please press Star then one.

We will post on further questions.

Mr. Perrault there are no further questions at this time would you like to make some closing comments.

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

Okay. Thank you everybody.

Thank you that concludes today's call you may now disconnect your lines.

Yeah.

Okay.

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