Velocity Financial Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to the velocity financial first quarter 2023 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Chris Oltman Treasurer and director of Investor Relations. Please go ahead.
Thank you Danielle Hello, everyone and thank you for joining us today for the discussion of philosophy is first quarter 2020 through results.
Joining me today are Christopher our philosophy, as President and Chief Executive Officer.
In March the Panty philosophy, as Chief Financial Officer.
Earlier. This afternoon, we released our first quarter 2022 results and the press release and accompanying presentation 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 that the content of this conference call.
Time sensitive information that may 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 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 and with that I will now.
Now I'll turn the call over to Chris Ferrara.
Thanks, Chris and we'd like to welcome everyone to our first quarter earnings call earlier today as Chris mentioned, we reported another strong quarter as we continue to grow in a disciplined and profitable way.
Our successful matched funding strategy of locking in fixed rates spreads has held up very well considering the rapid rise in rates.
As you're all keenly aware theres been a tremendous amount of volatility in the regional banks, many of whom were essentially borrowing short and lending long.
Continue to see these competitors tightened.
Credit or step away entirely from the market, which has naturally led to an increased lending opportunities for us.
We believe this team will continue to play out for the remainder of the year and we're seeing better borrowers and higher quality assets as a result of this banking stress.
In terms of our portfolio, we continue to see expected levels of performance.
First quarter resolutions rebounded to a more typical rate, which contributed to a 49 basis point portfolio portfolio yield increase from Q4 of 22.
Perhaps more importantly, we've constructed our portfolio in such a way as to avoid the most problematic commercial real estate assets.
Over 50% of our loans are secured by single family rental properties.
75% of the portfolio has a residential component on.
On the small commercial segment of our business the property's backing our loans tend to be small neighborhood, serving assets that are usually in very high demand.
We do not have exposure to large office buildings, where other lenders are starting to see significant realized losses.
As we look forward, we believe we're well positioned to succeed in a variety of potential outcomes as we experienced a slowing economy.
With respect to growth.
We were very conservative with new originations in the first part of the year, but have recently started to increase our volumes.
Although real estate market transactions have slowed we can just continue to see plenty of borrower demand.
As an example, we received over $3 billion in new loan requests in the first quarter of 'twenty three and.
And originated just over $200 million in new loans as.
This healthy demand disciplined credit discipline cresap credit process and our stable in place portfolio income allows us to be very selective in adding new assets.
On the capital market side of our business. We're pleased to see continued support for our platform as we just priced our second regular way deal of the year with strong investor demand.
In April we completed our most significant transaction of the year by re securitizing a portion of our retained bonds at attractive rates on our non mark to market basis.
New structure frees up capital to fuel further growth and provides us a more stable alternative to short term repo financing.
Looking forward, we expect continued earnings and portfolio growth positive asset resolutions and another successful year very proud of how well our team has prepared our company to navigate the shifting times and want to thank all our stakeholders for their continued support.
That concludes my remarks, and I'll pop over to the earnings presentation on page three.
From an earnings perspective, a very clean simple straightforward quarter.
You know nice core earnings.
Slightly below where they were the prior quarter from last year, and I think that speaks to the strength of our business model to be able to.
Absorb all the change that we've seen in the last 12 months and almost do the same same type of number in terms of recovery rates again, another strong quarter of.
Positive.
Earnings from from NPL recoveries. So we were very pleased with those results.
And as I mentioned.
You're going to see our yields increases not only from higher wax on new originations, but that bounce back and resolutions on npls.
In terms of the portfolio things are pretty healthy there kind of performing as I said as expected.
We did.
Reduced volumes intentionally we could've could've done more production, but really wanted to see how capital markets, we're going to behave in the rest of the.
Markets in general and as I said, because we're getting good demand on the securitization side, we're going to increase that production going forward.
In terms of financing and capital Ah I Didnt mentioned, the second securitization that we just priced.
Went off very well.
And as I said as I mentioned, the the re remic was a really important transaction for us.
<unk> generated just under $65 million of.
Of new capital that we put into the business paid off $15 million of repo that was against those those bonds and.
Excuse me.
As we continue to retain assets in the future. We we certainly have the ability to.
To re remic those as well so we're very.
I'm pleased with the support that we got in the capital markets there.
On page four looking at book value another strong quarter of book value growth as we execute on our strategy to retain earnings and grow book value you can see we did well there.
And.
Oh no.
Core basis.
Theres, a little bit of add back here for.
From the some of the equity components.
Even though we've got healthy book value growth and.
You know four on slide four we showed you GAAP book value, we think the economic book value is much higher.
We believe the embedded gains in our portfolio is not accurately reflected in GAAP book value and economic value are still quite healthy and in.
In excess of where we report GAAP book value.
So.
With those comments I'll turn it over to Mark on slide six to take us forward.
Thanks, Chris and Hi, everybody slide six looks at our loan production.
As we had mentioned we have strategically decided to pull back a little bit on loan production towards the end of Q4 and also beginning of first quarter. This year as a result of some of the volatility that we saw it in the markets at that time and we've since then began to pick up our originations.
You need to do that going forward this year.
Our loan production during Q1 to $217 million in U P. D. I think a key takeaway there is of that 217 million new originations the weighted average coupon on most of the originations was 11, 1%, but we had continuously during the second half of last year. This is the first quarter. This year continued raising of adult rates on it.
Loans that had been response to all the fed rates last year.
One this year. So we've continued to raise the interest rates on the loans as Chris mentioned still has very good strong demand in application pipeline activity from our borrowers and again, 11% weighted average WAC first quarter originations. This year, if you compare that to the first quarter of last year.
Nations those went off of WAC at six 3%, giving kind of an idea of the strong increase in the coupon that we've put out in our portfolio.
Page seven what's that done for the overall portfolio. The overall portfolio at the end of Q1 ended up at about $3 $6 billion in U P. B, that's a 25% year over year growth from the end of Q1 of 'twenty, two and that growth was driven pretty evenly by strong demand at investor one to four and multi.
Family properties.
The weighted average coupon of the entire portfolio at the end of Q1 was $8 one 5%.
As compared to $7 95 as of the end of the year and compared to seven five all at the end of first quarter last year, so year over year year over year total portfolio weighted average coupon growth of about 65 basis points and that reflects the strong increases we've been doing towards the second half of 'twenty two in first quarter of 'twenty.
Three on our adult rates.
We mentioned last quarter that beginning October one 2022, we had elected fair value option call FPL fair value option accounting for our new loan originations. It means putting those originations are it looks now at fair value.
Q4 originations went out fair value as well as our Q1 2023 originations. So at the end of Q1, we now have about $437 million in U P. B loans in our health investment portfolio that are fair value option loans are on our books at fair value.
Yeah.
On page eight our first quarter nonperforming loan and asset resolution activity.
The strong I guess you had mentioned during Q4, the NPL resolution activity was down a little at the rate of resolution, we were still in like a 3% gain but just the total U P. D resolutions were down and we mentioned that Q4 is just kind of a lower response muck and we thought we would see that pick up again in Q1, and we have we take.
Look at our first quarter of 'twenty, three NPL resolutions, almost $39 million and NPL resolutions for a $1.3 million gain or a one 3.5% gain.
If you look at Q4 of $25 million in NPL resolutions, but if you look at first quarter 'twenty two in year over year 37 million. So you can see first quarter of this year kind of back to our historical trend in terms of U P. D resolved and that type of games that we're used to seeing so that's very good news.
Yeah.
With all that done to our net interest margin on page nine as Chris mentioned, our portfolio yield increased 49 basis points from the end of the year ended the first quarter before he got a basis point increase is a combination of increase in the wax increasing adult rates as well as those NPL resolution dollars those gains come.
In stronger in Q1 that all goes into your yield so that drove up the yield cost of funds yield increased 10 bits. So again, our portfolio yield well outpaced the cost of funds, but we see a widening out of that.
Saw some compression in Q4 because of the volatility that we're seeing that widened back out again, so we ended the quarter with a 323% yield.
Thank you.
Yeah.
On page 10 for our investment portfolio performance, we ended Q1.
Nonperforming rate of eight 7% pretty much equal or consistent with year end at 8383, 7% is down 400 basis points from where it was at the end of Q1, 2022, which was at nine 8%.
So again, we're seeing that nonperforming loan ratio is fairly consistent and as the previous slide show were still on our historical average up three points or more gain on those NPL resolutions.
Our seasonal loan loss reserve ended the quarter at $5 million, which is.
Basically flat to where it was at the end of the year for 2022 at $4 9 million.
At 16 basis points, and we've kind of been holding constant at 15 16 basis point right around that level for the past five six quarters, we don't really see that changing.
Too much right now yeah and on the system of Earth keep in mind that that is on the portfolio that is at amortized costs. So the newer loans that we put out in Q4 last year and in Q1. This year that are the fair value option wells. They are not subject to a CSO loan losses, there because they're they're always carried at fair value. So the fair value is kind of risk.
Flat, yes, they need to be written up or down.
<unk> is for the older portfolio at amortized cost so as we put on more and more loans at fair value and amortized cost loans pay down you would expect to see that reserve in terms of dollars hopefully start to come down as that portfolio gets smaller and smaller.
In terms of charge offs in the bottom right.
Hey, John section on page 11, we had for about $484000 in charge offs in Q1 that was compared to zero in Q2, and you know charge offs is kind of comes and goes and you can look at the last five quarters. Our average charge offs has been about 29 basis points. So very very low in charge offs and the one thing I'd point out on the <unk>.
Charge offs is higher.
Jos.
GAAP terminology for what happens when the loan goes away and the majority of charge off some time come on when Youre converting alone to an Oreo.
Charge off the loan and then keep in mind when we have that are yellow.
Picks up the property and work on the property and then we sell the hour yellow for resolution and if you go back to the resolution table. The NPL resolution table that previously showed you. Many cases, we make gains on the sale of our yellow. So a lot of times, we're recovering those charge offs.
Accounting you don't show it as a credit to the charge offs, it's a whole separate gain on our yellow, which was reflected in the resolution table.
And on page 12, durable funding and liquidity strategy.
Our cash reserves at the end of the first quarter and on finance collateral was very strong at about $45 million about $39 million of that was actual cash and cash equivalents of about $6 million and finance collateral. Our total maximum capacity on our warehouse lines $832 million is the maximum.
At the end of Q1, we still had about 533 billion of available capacity, so plenty of available capacity for financing broadcast reserved and available liquidity.
Christopher He mentioned we did the securities our first securitization in 'twenty three in January and saw improved execution on that.
One we did in Q4 in October showing the markets coming back a little bit and the indicative pricing that we're seeing now for securitization market right now just given a little bit better pricing.
And the main other takeaway as Chris mentioned that we can't stress enough is that in April of this year, we did that re remic, where he received about $65 million in financing taking.
Retained certificates are tranches from older Securitizations that we had not issue we decided to retain them at the time and we re leveraged those in a new security and do not mark to market security and generated almost $65 million in financing.
Could a repo goes at any time as Chris mentioned when you do the repo that's mark to market, that's subject to margin calls and something happens. This is a non mark to market facility on older retained tranches.
The new financing vehicle for us a new non mark to market financing and I think that just shows kind of the adaptability that we have in our non mark to market World.
Very proud of that.
With that Chris I'll turn it back to you to give kind of an outlook on velocities 23 key business drivers.
Great. Thank you Mark I appreciate it.
In terms of the market.
Certainly seeing.
The pressures from higher rates and lower transactions as I mentioned, but I'm still seeing functioning markets and were able to liquidate assets. When we do end up with Oreo so that seems to be stable. There, obviously theres a lot of crosscurrents in the market and we'll see how things go from a credit.
Perspective, we're being we're being more cautious and choosy with our lending and I think that's paying off.
And we will continue to monitor on a market by market basis. Some of these markets.
We're seeing you know price.
<unk> come down and other markets are actually still seeing gains so we're monitoring that.
Geographic location.
In the portfolio in terms of capital.
I mentioned the successful transactions that we had and that really put us.
Creates a lot of capital going forward for us to be in a good strong liquidity position.
And then in terms of earnings we're just going to continue to stick to our knitting and.
Originated assets with good healthy spreads and.
I think that will contribute to earnings growth going forward, so that wraps up our prepared.
Our remarks and presentation, we can 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 telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
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The first question comes from Steve Delaney from JMP Securities. Please go ahead.
Oh, sorry about that.
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, Good afternoon, Chris Martin.
First one to start.
Very solid numbers really want to applaud you guys. You know when I look at the U P. B recoveries for non accrual rates you know things are really holding in there in a volatile environment, where we're not.
Few companies can say that about their portfolios.
And so you know looking at that and see all the action you've ever been to take the free up of liquidity with the re remic you know how do you think about opportunities today I know the WAC was 11, one I mean can that be increased additionally, in this environment when banks and others pull back and you.
How do you think about returns on new money, you're putting to work today.
Sure good questions.
Yeah.
Think you know we feel like we're where we want to be in terms of spread could we go higher probably but if there is an upper limit where you start to get into private money funds that would be competitive with us. So.
If you look at the current spread and where we're executing.
On our last two X two securitizations.
We're seeing roe's, well north of 25% and so we think that's.
You know very healthy level.
Nims or you know 4% or more.
We think that's.
Where are we want to be and it hits our target. So I don't I don't think we will probably raise it much more from here.
Yeah.
Obviously, we're going to have to monitor the treasury market and we'll see but.
Sure and you know.
I do agree with your point, though like the less competitive environment, that's why it'd be more selective as well, but the credit side and.
From a growth out look or maybe originations over the balance of the year. You know you mentioned you purposely.
Purposely pulled back some in Q1 and kind of how should we think about a monthly or quarterly run rate number as we move forward.
I think the good I think $2 50 is a good number going forward I think we'll see a slow steady decline this year barring any craziness, but.
I think $2 50 is a good number for you to use and for us to talk her out.
Great and then lastly on the financing side, if I understand it correctly, the re remics, where some security issues pertain that you were able to put.
Into a new deal I assume out of more recent deals.
Can you talk about some of the legacy transactions that may be amortized down sequentially and get more expensive any opportunities there to call those or look to do some type of re securitization or collapse there yeah.
Yeah, Yeah, absolutely. So we've transitioned almost all of our deals over to to the sequential pay structure. So there are there are two more deals left where we could do that.
A 2016 deal that is that is sequential that's pretty expensive, it's very small balance I think it's.
Under the under $30 million and then we also have our.
Are mixed collateral deal it was really a deal that financed.
Nonperforming assets we've got.
A big chunk of capital their one stop pays off but it's probably got another 12 to 18 months before that pays off so that that will free up some future capital.
Those notes are not callable, so we need to get a full pay down there before we can access that capital.
Got it great I appreciate the comments this evening.
Steven.
As a reminder, if you have a question. Please press star one. The next question comes from Steve Delaney of JMP Securities.
Hello, everyone I apologize for disconnecting myself I don't I don't know, whether it's this market or it's just old age kicking in but I managed to get that.
Way back.
You're stuck with me I thought you got thrown off your horse.
No you know that could have been but it's hard to take a call with the cell phone on a horse, but I have done that before.
[laughter] seriously great.
Great presentation to kick this off.
I was intrigued by your comment about you know.
Former bank customers you know, obviously unfortunate what we're going through now.
Yeah, it's hard to believe that at this day and time, we have major financial institutions with asset liability management failures, but you know it's it's the crazy World.
These the bought the borrowers you're talking two does it go beyond the three brand name companies that have failed at this point are you seeing it kind of broadly across the country.
Yes, yes, the short answer there is yes.
<unk> seeing.
Most banks, if not all pulling their horns, and just be more cautious for sure.
And specifically on real estate, you think Oh, yes, yeah, okay yeah.
We're seeing.
A higher quality of borrowers, Denmark, Dunmore, he used to coming to us that quite frankly.
Six nine months ago definitely would have probably ended up at the bank.
Yeah, Yeah that's.
I don't wish anything you know, we want we need financial system stability. So perhaps you know we're not going to root for problems anywhere else because that comes back to haunt us right all of them pay the price, but you know it is a competitive world and you know it sounds like the the little Guy he's going to have some better opportunities.
It would appear were seeing it onto the bridge to commercial mortgage REIT bridge lenders too on the calls this week they were all talking about.
Lots of demand.
The competition is not among the banks anyway is not what it was even two months you know month or two ago. So what will be interesting to see that going forward.
Let's think about you've got 11.1% WAC on your new originations.
If the fed the fed sort of trying to tell us are done and whatever you know, let's just say, we have lower rates and 2020 for and that could be.
I mean, the long end it could be 100, maybe or or maybe a little more dependent on the timing of the economy.
I mean.
What I'm sensing about where you are is your opportunity what between the banks and the potential for rate relief.
Your your opportunity set is only going to grow and I'm just curious like I think there's a one of them.
Charming things about velocity is it's not so big and Ugly EBIT you know, it's you really can manage your business right and you're not just given up quality to get big but it strikes me that there is like over the next two years there is a gross.
[noise] aspect to where where you sit today.
Yeah, No I think that's right Steve I appreciate it it's.
We've been doing this 19 years, so we've seen all different kinds of market conditions and.
You know, we I think we kind of took our medicine last year. When you know when rates were rising so fast a lot of the banks their deposit lag and so I.
I think they they had.
The music later than we did so yes, we feel like we've put ourselves in a good position to to really grow from here selectively.
And and thoughtfully, but.
Definitely see an opportunity here and it's showing up in AR.
And the inquiries and the demand side, we get a lot of requests for financing. So youre right I think if if rates were to tick down.
That would only probably help us even more.
Well congrats on a great start to 2023, and we will look forward to doing this again in a few months. So great. Thank you Steve nice job. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Christopher <unk> for closing remarks.
No further remarks, thank you all for joining and we'll be in touch next quarter. So thank you.
Thank you everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.