Q2 2023 Velocity Financial Inc Earnings Call
Good afternoon, and welcome to the velocity financial second quarter 2023 conference call.
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I would now like to turn the conference over to Chris Altman Treasurer. Please go ahead.
Thanks, Danielle Hello, everyone and thank you for joining us today for the discussion of last year's second quarter 2023 results.
Joining me today are Christopher our philosophy, as President and Chief Executive Officer, and Mark Japan, yet.
Whilst these chief financial Officer earlier. This afternoon, we released our second quarter 2023 results and the press release and accompanying.
And presentation are available on our Investor Relations website.
I'd like to remind everyone 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 SEC filings.
Please also note that the content of this conference call contains time sensitive information that is accurate only as of today and we do not undertake any duty to update forward looking statements.
We may also refer to certain non-GAAP measures on this call.
For 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.
We will be available on the company's website later today.
With that I will now turn the call over to Christopher.
Thank you, Chris and we appreciate everyone joining the call today.
I'm pleased to report another excellent quarter and thank all of our team members, who work so hard to support our mission.
Our continued growth in earnings and book value are a result of a sound strategy and attention to detail from everyone at the firm.
Our origination pipeline is very healthy and we continue to be choosy with credit as we've seen increased demand with banks tightening their lending activities.
This pullback has allowed us to create attractive risk adjusted yields for new portfolio loans.
We recognized a 19% increase in originations versus the prior quarter, while holding expenses flat, which obviously improves our operating margins.
Spec to credit performance, we continue to profitably resolve delinquent loans and recognize overall gains from recognizing default interest.
Our delinquency rates increased this quarter and we expect that net resolutions of these assets to continue to drive future gains similar to our long term history.
The real estate market remains stable in terms of valuation.
Our our special servicing team continues to sell at a healthy pace in the markets are liquid when priced reasonably.
Profits come off some of the overheated markets as fed policy has called the rapid price appreciation, we were experiencing which we view as a long term positive for our business.
Capital markets are improving as we see spreads starting to tighten and better investor participation in the new issue market.
Due to limited supply and the potential of a terminal rate from the fed.
Our financing relationships and capital sources are strong as we continue to grow earnings and work to improve our return on equity.
In short our business is performing very well and the team is passionate about growing our assets our people and our opportunities.
As always we appreciate all shareholders and we will work to deliver value every day.
Oh, I'll turn it over to the presentation now and walk walk folks through a couple of slides and then hand, it over to Mark I'm on page three.
From an earnings perspective, really really nice growth in earnings per share a great quarter for us.
I mentioned, the net revenue growth.
Earlier up six 8% quarter over quarter with flat.
Operating expenses, that's a testament to our operating team and doing a great job of growing volume and controlling costs to improve margins.
Overall.
The overall portfolio yield increased up 24 bps year over year, which.
As a result of putting on these new loans at much higher coupons, obviously who's got a barge fixed rate component there so to move that coupon up that much.
It speaks to the the volume that we've been doing it takes much higher levels.
In terms of production.
I mentioned $258 million up for the quarter up from the previous quarter down significantly from last year, but.
As you can see from the earnings.
Earnings are not driven by current months her current quarter production. So we're very comfortable with the levels that we're at right now and we're more focused on allocating capital with attractive returns as opposed to just doing volume.
Hum.
Portfolio is growing nicely from from the net growth of the originations.
And in terms of credit performance the Npls for the quarter moved up to 10% from eight 2% in the previous quarter.
There are really three things going on there one.
The portfolio seasoning.
And you know just as a reminder, last year, we did $1 7 billion in originations.
And delete delinquency tends to peak 24 to 36 months after originating a new loan so as the portfolio seasons, we will see some of that delinquency come on.
Two were quick to put borrowers and foreclosure many lenders who will work with a borrower when their delinquent or are delayed.
In making payments if if borrowers will communicate with us we're often open to doing that and if there's a viable plan to work them out.
But if not we're very quick to put someone into foreclosure, especially if they're not communicating with us.
To make sure we get a resolution and we protect the equity that we have ahead of our long.
And then thirdly.
The npls come on a lot faster than they come off so we had a little boy, if we moved quickly to pop them into foreclosure.
It takes several months for something to resolve so there's kind of a lag effect there.
Most importantly.
We continue to see the positive gains over and above contractual principal and interest and we.
Continually monitor our portfolio and look at delinquent assets and based on everything we've seen and reviewed we we don't expect our results to be any different than what we've historically seen.
In terms of financing capital.
Really nice transaction earlier in the quarter, where we did a re remic of <unk>.
Several of our retained interests from previous deals. This was a great transaction for us because it continues down the theme of non mark to market financing.
Almost all of our financing now in the books, because non mark to market.
Investment banks.
Offer us repo facilities on those.
Securities, but they come with mark to market risk. So we think this is a a more elegant solution to control risk and it was a great transaction for us.
And then I guess I would just say in terms of liquidity $72 million. So we're in real good shape, there with with all of our financing Counterparties and have plenty of capital to grow.
Turning to page four.
Very straightforward and simple nice earnings growth, adding to book value as we've kind of always said as our strategy and you can see we ticked up to 12 57.
On a GAAP basis, so I'm continuing to just focus on growing earnings and growing book value.
On page five we think that we've created a lot more value than they know what the GAAP book value would.
Indicate and this is a buildup of the not only the inherent value in the platform, but also what we think is created in.
In the future value of the of the business and a potential premiums if someone were to maybe I'd be interested in acquiring the business. So.
Suffice it to say, we think the economic value of the company is much higher than the book value on a GAAP basis.
So with that I'll turn it over to Mark on page six.
Thanks, Chris Hi, everybody.
With the financial results on page six we can see the improved loan production as interest rate increases has slowed down Q2 production was just under 259 billion in U P B and as Chris mentioned, the 19, 2% increase from the 217 billion in Q1 the.
The weighted average coupon for both Q1 and Q2 production. So so far year to date 2023. It was 11% that's about 3.25% year over year increase over Q2 of 2022 and our weighted average coupon.
The strong production increase in Q2 at 11% whack demonstrates the continued borrower demand for our products.
Moving to page seven shows the strong portfolio of growth attributable to the improved loan production.
Total loan portfolio as of June 30th was $3 7, Billion% to 334% increase from Q1 to 20% increase in Q4 of last year.
The weighted average coupon on our overall portfolio as of June 30th was eight 4%. That's 25 basis point increase from the portfolio of Q1, and 87 basis point increase year over year from Q2 2022. So we've increased our coupon our production is growing and all of this with the LTV.
She'll still remaining consistent quarter over quarter at 68%.
On the next page our Q2 net interest margin remained consistent with Q1 at about 3.25% looking.
Looking at the components of net interest margin our cost of funds increased 25 basis points quarter over quarter, driven by higher utilization of our warehouse line in cost in the warehouse line.
Our portfolio yield on the loan side increase consistent the same increased 25 bps quarter over quarter, driven mainly by the 11% overall weighted average coupon on our year to date 20 reproduction net result.
Q2, NIM is consistent with Q1.
On page nine our nonperforming loan rates in Q2, as Chris mentioned increased to 10% driven by a combination of portfolio seasoning as Chris mentioned, we did $1 7 billion last year. We did 1 billion of that really in the first six months of last year as that portfolio starts to season, we're going to see a little bit more delinquencies and also the <unk>.
On collection efforts by our special servicing department during the first six months of 'twenty, two we funded that $1 billion.
Special servicing department is being more aggressive in collecting.
The efforts on the NPL loans.
Of that 10% nonperforming as Chris mentioned, we're quick to put borrowers into foreclosure, because that's where we get the attention that's where we get the pay off from the paid current that we see on the resolution table, that's where you get the gains so that 10% over 7.5% of that was for closure.
Page 10 illustrates the continued success of our NPL resolution efforts in Q2, we resolved over $50 million in nonperforming U P. B.
Net gain of $1 5 billion over and above collecting all the contractual principal and interest and again, maintaining that three 3% or three point gain on our NPL resolutions.
Moving to page 11 presents our seasonal loan loss reserve.
I see some reserves at June 30 of this $4 6 million or 15 Bips of our outstanding loans held for investment amortize class balance our CS reserve has been very consistent between 15 and 16 bps over the last five quarters.
Just as a reminder, the loans carried at fair value that we started doing in fourth quarter of last year are not subject to a seasonal reserve.
Q2 charge offs are shown.
On page 11 to $717000 for the quarter second quarter.
Subsequent to closing the books for the quarter during our post close internal review process, we discovered that our one of our Servicers have received funds from a borrower in the amount of $393000 that had not been applied to the outstanding loan balance taking this borrower payment into consideration the actual Q2 charge offs.
For Q2 were 324717 or 39 basis points of nonperforming loans, not the 87, which is actually a decrease from Q1.
But determined that the adjustment was immaterial to the overall results of the quarter as opposed to reopening all of the books, we will record this $393000 recovery in Q3.
Finally page 12 shows our durable funding and liquidity position at the end of Q2 total liquidity as of June 30th $72 million comprised of $34 million in cash and cash equivalents and another $38 million and available liquidity.
Finance loan collateral.
Chris mentioned, we issued two Securitizations in Q2 in April we issued the 2023 Dash one hour security that security is a re remic refinanced retained tranches from previous securitization. So we re leveraged securitization of tranches that we kept the previous securitization.
New type of financing demonstrates the diversification of financing options for our company and is another type of very cost effective non mark to market financing for us. This re remic generated about $48 million.
Cash proceeds to US and then in May we issued the second securitization in 2023 Dash, two which is one of our long term normal securitizations issued about $202 million of securities.
And then finally, our available warehouse unused capacity as of June 30th was $573 million. So still plenty of capacity to continue pursuing growth in our production.
That wraps up the financial now I'd like to turn the presentation back to Chris for a discussion of velocities economic outlook.
Thanks, Mark I'm looking forward you know, we think the market is doing very well, especially in light of all of the fed action.
Continue to see very strong real estate market I think some of the.
Areas that were over heated cooled down which is good and.
In terms of credit performance we are.
Keeping a close eye on it but we think that where we're going to do very well and continue to see good positive resolutions.
We're in a good shape from a capital position and you know we think we continue to grow earnings and.
Still see strong demand for our products. So we expect to grow the portfolio and grow earnings.
I think I think all in all everything looks really good so with that we'll open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to.
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The first question comes from Steve Delaney of JMP Securities. Please go ahead.
Good afternoon, everyone can you hear me yes.
Great well I've had to be on myself, but so I apologize for that.
Nice quarter again, I think as we say that every quarter.
Never gets old.
Yes for sure.
Can you speak a little bit about 23 gas to and just how that execution with <unk>.
Compared to 23 dash one.
Sure.
Yeah, So I think.
I would say it was pretty similar not quite as strong demand as we saw in and dash one because it was kind of pre the banking crisis.
I think things are really starting to tighten up at the beginning of the year and then that would obviously put a damper on things but.
Oversubscribed and able to get.
Very good execution and then.
Or or.
We're out in the market actually right now with our our next deal for Q3 and well.
Okay.
Getting good response, there. So I think I think we're seeing good activity from from bond investors.
Just the absolute rate, you're getting 11% coupons and.
A lot of that obviously passes to the to the bond buyers is that back.
Factor or people looking at that as a positive or these scared that that's going to lead to credit.
Poor credit performance without much Kerry.
Yeah.
I would say it's probably.
Probably the former not the latter I mean, if you look historically over the last 18 years.
That coupon is not outside of the band of where we've been so.
I I mean, everybody always asks why is that the case and et cetera, but I haven't heard anyone say, it's a concern or a predictor of bad things to come.
I have one for Mark if I may and then that'll be it for me nice book value growth in the quarter.
A couple of them.
Residential credit mortgage Reits in the last 24 hours report.
And then your security stations and there were there were declines in book values and.
E Bay moat, Mark both sides of their securitization.
I'm sure there was some credit spread impact in this but we thought the book value decline that were in the 4% to 5% range quarter over quarter. I was just curious mark if you can comment on you know.
I know you have your H F. I portfolio had been held for investment and now you have your fair value portfolio correct.
Correct, I guess, I'm really asking about the fair value portfolio and and how that worked out.
Particularly in the second quarter given the the increase we've seen in the tenure.
And you're exactly right I mean, the one thing remember what we did we started marketing our loans our loan originations to fair value beginning with Q4 last year October versus last year right. But then starting this year first in 2023, we also elected to Mark our securitization at fair value So you're right there.
Some decline in the fair valuation of the loans quarter over quarter, but then on the on the converse side, because remember our securitizations our fixed rate securitizations.
Yeah exactly equal so much hedge it's a natural hedge on the loan. So when you haven't heard that you're watching on the loans are a natural hedge as kind of kicking in and we picked up youll see fair value gains on the securitization and look at the financials, we put out the Q, you're going to see a good size fair value gains quarter over quarter on the securitization. So that kind of what maintains that growth in book value was that natural hedge.
Well that securitized portfolio.
Okay, Alright, well I'll leave it there and give someone else a chance for questions. Thanks for your comments thanks, Steve.
As a reminder, if you have a question. Please press star one. The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, good afternoon.
As Steve mentioned before me nice quarter again, those things are pretty recurring here and I know you guys see some tailwind from the business.
And Mark do you want to start with that can you talk about that.
Competitive landscape or lack thereof from the banks I know three months ago, we talked.
On the call and you talked about being able to improve kind of your underwriting credit standards on new production and maybe getting some stuff that you know, possibly would have gone to banks previously.
Our banks pull back even more have they reentered. It all can you maybe give us an update on those comments versus last quarter.
Sure that was directed to mark to Mark or I think.
Oh, no I'm sorry for US that's for you.
Got it okay. Thanks.
Sorry, Mark in Japan, that's sorry, that's part of your question no problem yeah.
Yeah, I would say I would say that the environment feels pretty similar to where it was in Q1 I don't think it's gotten worse or better, but you're definitely seeing the banks be cautious and we're hearing.
From borrowers who come to us and say I can't believe you know the bank would do this for me can you guys help me out so.
I would say the opportunity set seems to be about the same.
Great and then as far as your origination volumes as you look out and apologies. If it was covered in the first couple of minutes I'll touch late but it.
It seems like it picked up a little in Q2 I know early in Q1, you guys have sort of become cautious got more active later in the quarter do you think you're kind of at your normal run rate here for the second half do you think things are more.
I can maybe pick up go down kind of how do you frame volume as we move through the back half of the year I know there's 24, yeah. I think this is a good run rate I think you know we're projecting for the rest of the year and and I think you know.
We think that will well end the year right around $1 billion. So I think I think this feels right.
Great well again nice quarter and appreciate the comments this afternoon.
Tim.
This concludes our question and answer session I would like to turn the conference back to back over to Christopher <unk> for closing remarks.
Well thanks, everybody for joining we appreciate all your support and look forward to talking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.