Q3 2023 Velocity Financial Inc Earnings Call
Good day and welcome to the Deluxe refinance show Q3, 2023 conference call.
Now I'd like to turn the conference over to Mr. Chris Open. Please go ahead.
Thanks, Rachel Hello, everyone and thank you for joining us today for the discussion of velocity as third quarter 2020 results.
Joining me today are Christopher our philosophy, as President and Chief Executive Officer.
In March the panning out philosophy as Chief Financial Officer.
Earlier. This afternoon, we released our third quarter 2020 results.
And the press release and accompanying presentation are available on our Investor Relations website.
I want to remind everyone.
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 risks and other factors that could affect results. Please see the risk factors.
Other cautionary statements made in our communications with shareholders.
Included in the risk factors disclosed in our filings with the Securities and Exchange Commission.
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 and will be available on the company's website later today.
With that I will now turn the call over to Chris Rock.
Thank you Chris.
Welcome everyone to our third quarter earnings call.
Earlier today, we released the results from a strong quarter as we continue to execute very well on our growth strategy.
Our core earnings increased 29% over the prior year quarter, which is quite impressive given the various headwinds we faced.
Despite the uncertainty in various crosscurrents, we expect to continue to take market share and expand our portfolio.
One of the key themes, we're experiencing is the tightening of credit from the banking system.
We're seeing more high quality borrowers that have been turned away by traditional lenders come our way.
We expect this trend toward alternative credit to continue for a long time and our team is well positioned to capitalize as we've spent the last 19 years building our platform to shine in times like this.
Consequently, our pipeline is strong and growing which allows us to be selective and extending credit as well as increase our coupons to me.
In terms of our portfolio, we experienced minimal charge offs this quarter and our special servicing team continue.
Solve delinquent assets favorably.
Real estate markets and single family rental and small cap CRE are healthy in terms of valuation and outperform.
Cap segments.
We believe our focus on small properties with neighborhood, serving essential services will continue to be a winning strategy.
<unk> been very busy in the capital markets completing two securitizations in Q3, and we just priced our last deal of the year on Tuesday of this week.
One of those Securitizations as an inaugural transaction collateralized by our short term loans with a revolving structure that allows us to replace loans that pay off with new similar production.
We also collapsed the last of our older sequential pay deals during the quarter.
Our track record of strong credit performance allows us to access the capital market sufficiently and enjoy support from a broad base of fixed income investors.
The other significant policy change you made during the quarter was to hedge our future debt issuances backed by newly originated loans we.
We were very fortunate that our timing as we offset most of the move in the underlying base rate treasuries before we priced our deal earlier this week.
These hedges are cash flow hedges that will accrete into our income statement over time in support of our strategy of achieving a stable predictable NIM.
We will continue to hedge future debt issuances before we securitize a good risk management practice.
Regardless of uncertainty about interest rates the economy and other events outside our control, we will grow and be opportunistic.
Our strategy is to remain nimble and lean on our many years of experience to navigate whatever comes our way I want to congratulate all our team members on another great quarter. Our people are our greatest asset and we will continue to work hard for all shareholders.
That concludes my prepared remarks, and I'll turn it over to be the earnings materials.
Starting on page three.
As I mentioned.
Strong growth in <unk>.
Core net income.
Very very positive quarter there.
Stable NIM up 10, bips from the prior quarter.
We continue to put on.
New production.
Coupons that are attractive in terms of our historical spreads.
And then I also mentioned the hedge strategy.
Which didn't affect earnings for Q3.
It will it will show up in our future deals as I mentioned at overtime.
As we as we issue those transactions.
In terms of the production and the loan portfolio October was a record month for production were all throughout the year, we've seen volumes grow.
Even while we're raising coupons. So we're we're very encouraged there and like the trends.
In terms of Npls were flat quarter over quarter and continue to realize positive gains as we resolve assets.
Our team is doing a great job there.
On financing and capital I mentioned, the two Securitizations. We're excited on the the short term product to be able to to term out those loans and.
And create that revolving structure. So we've got additional capacity to grow that product going forward.
In terms of warehouse.
Liquidity, we're in good position there to support future growth.
Turning to page four.
Very nice build in and book value per share. We can you can see we're up 43 cents Q over Q.
The combination of a portfolio and earnings as well as other additional income generated in the quarter.
Turning to page five.
We've shown this slide for a number of quarters now and.
Try to demonstrate that we believe there's a significant amount of embedded equity.
In this platform and.
One of the changes you'll note if you compare this to the prior quarter as the embedded gain in the securitized portfolio has grown pretty significantly and that's a result of us slowing our assumptions on prepay speeds.
So we did that during the quarter and.
As we assume slower prepay speeds, that's obviously going to extend out the portfolio and increase future earnings. So we think there's a real good story here around the economic value of the equity that we've built in the platform.
So without I'll turn.
It over to Mark to continue in the presentation.
Thanks, Chris Hi, everyone. Thanks for joining me get our third quarter earnings call.
On page six loan production continues to improve during the year, even with the current high interest rate environment. As you can see Q3 production was almost 291 million in U P. D, which is a 12, 3% increase over Q2 and almost a 34% increase from our Q1 production and this.
Strong production growth during 2023 has occurred with the weighted average coupon for new originations for all three quarters remaining constant at about 11%, while the strong 'twenty 'twenty production growth at the higher wax continues to demonstrate borrower demand for our products.
As a result of the strong growth in production on page seven shows a similar growth in our overall loan portfolio.
Our total loan portfolio as of September 30th was almost $3 9 billion, which is a 4% four 2% increase from Q2, almost 13% increase on a year over year basis. The weighted average coupon on our total portfolio as of September 30th was 863%, that's 23 basis points higher than at the end.
Q2, and 92 basis points higher year over year compare to third quarter of last year.
While our loan portfolio is growing our loan to value ratio remains consistent on the overall portfolio at 68%.
And 2023 production the LTV is actually averaged a little lower at 66%.
On page eight our third quarter NIM increased 10 basis points over Q2 our.
Our portfolio yield increased quarter over quarter by 14 basis points, while our cost of funds all increased by about five.
So not only are we seeing growth in production, but we're also seeing an increase in our debt.
On page nine our nonperforming loan rates in Q3 was flat to 10% compared to Q2 and the ongoing strong collection efforts by our own special servicing Department as Chris mentioned has continued to result in resolutions our NPL loans have favorable gains.
If you look at page 10. It highlights the continued success of our NPL resolution efforts in Q3, we resolve $65 $7 million worth of U P. B of NPL loans for a net gain of $1 2 million.
Although not on this slide if you take a look at all of 2023 2023 year to date through September 30th we've resolved over $154 million of U P. B about NPL loans for a total gain of $4 million.
Page 11 presents our seasonal loan loss reserve and loan charge offs.
Well see some reserve as of September 30th was $4 7 million or 16 bps of our outstanding loans held for investment at amortized cost balance.
<unk> reserves have been very consistent at 15 to 16 bps over the last five six quarters.
Keep in mind, the seasonal loan loss reserve does not include our loans being carried at fair about it and it's the loans at amortized cost.
Q3 charge offs are also shown on the right corner on page 11, the third quarter. They were only $95000 in our charge offs have continued to be minimal over the last five six quarters.
Page 12 shows our durable funding and liquidity position at the end of Q3 total liquidity as of September 30th was $60 3 million.
It's comprised about $29 million in cash and cash equivalents and another 31 million and available liquidity are unwinding as collateral.
As Chris mentioned, we did issue two securitizations in Q3 in July.
Issued the 2023 RTL, one security with about $81 6 million of securities being issued.
Chris mentioned this is a very noteworthy security for us because it was the first security ever issued by velocity, that's collateralized by our short term loan product.
Curious fixed rate security with the reinvestment period, where our newly originated short term loans can be added to the security as existing loans pay off this new type of financing for us demonstrates further diversification and financing options for velocity and it's another type of cost effective non mark to market financing.
In August of the quarter, we issued the 2023 dash three security collateralized by our long term loan product almost $235 million in securities issue.
As Chris mentioned in tandem with this long term security we collapsed one of our older Securities 2016 Dash one that was an older higher cost debt. The 2016 as one securities one of the older sequential waterfall securities.
The the higher rated low cost tranches paid off first so as those things pay down they became more expensive remember in 2017, we started doing the pro rata with the tranches all pay off kind of evenly so it's nice to be able to collapse one of those securities they've got more expensive over time and take that freed up collateral loan collateral and bring it into the 2023 deaths.
Three securitization at a lower cost.
I only available warehouse line capacity as of September 30th was almost 595 million.
Total maximum wind capacity of $810 million.
So with that I'll turn it back over to Chris to go over the economic outlook.
Thanks, Mark are on page 13, just a high level overview of where we're headed.
As I mentioned at the beginning the market continues to be strong in terms of valuation and when we price.
Oreos and assets, if they're priced right. They move quickly when we expect to continue to see positive gains from the portfolio there.
Still a murky economic outlook with lots of different predictions and expectations, but we feel like we're well positioned regardless of which way things break them based on our.
Prior years' experience in our low ltvs.
I did mention that.
We're starting to see prepay speeds slow so.
At all.
Potentially be an uptick for us in future income in and.
Help us in growing the portfolio on more scale.
In terms of capital I mentioned that we already that we priced them the last deal as of year end.
I believe that we have good access to capital markets and I expect that going forward.
And then lastly, I just from an earnings perspective.
Really think that this theme of.
Tight credit is going to help us and be a tailwind for us as we as we grow going forward. So.
That concludes our prepared presentation and we'd like to open it up for questions. If there are any.
Thank you well now begin the question and answer session to ask a question you May press star one on your telephone keypad.
He was on a speakerphone, please pick up the handset before pressing the case.
If any time your question has been addressed and you'd like to withdraw your question. Please press Star then two.
Your first question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon.
Another nice quarter, so congratulations Bob on that yeah, Chris.
Chris wanted to get an idea about your pipeline right October strongest month, I think in a year and I think the same for <unk>.
Q3 volumes were the most of them I think four quarters can you talk about production outlook, you know where do you see.
It was October pace, the new normal or kind of how does how do you think that plays out and then any seasonality to the production numbers round the year out.
Yeah sure.
So yeah, I think you know I think the fourth quarter will be our strongest quarter of the year.
November is always a little light because of the holidays of Thanksgiving and whatnot, but December is always a good month for us with people tried to close everything up by the end of the year. So I think.
I expect it to be our strongest quarter and then.
Next year, you know I think.
We're on pace for you know significantly higher volumes than what we did this year.
First quarter again January and February shows starts off a little slow but builds.
So.
Yeah, We think we think that the run rate and in October is.
Yeah.
Probably a touch high if you wanted to use that on a on a forward run rate for every month, but but not not too far away from that.
Well, great to see the strong volumes Oh, it looks like they'll continue and now can you talk about terms on these new originations you know I don't I don't think you'd probably pushing coupon as much as you could given less competition, but can you talk about some other places where you focus to you know really high quality pre the new production on the underwriting.
Todd.
Yeah sure. Thanks Steven.
So you're right one of the things that we are seeing is is.
Some of these borrowers.
Borrowers come to us with a little bit larger loan sizes, we've been able to capitalize there were.
Yeah someone coming to us with a three or four or $5 million loan.
Historically, it would be at a bank and we wouldn't even get a crack at it.
And we're seeing those folks.
They tend to have higher credit scores and hanging a little stronger balance sheet. So we put a.
Number of those assets on here at the end of the third and started the fourth quarter. So we think that that trend will continue.
As we move forward.
Okay, Great and last one mark.
Mark you touched on the the new AR securitization with a replenishment feature of the reinvest period, which which sounds fantastic and congrats on getting the last sequential pay deal done I remember we were first talking about those years ago, what they wouldn't actually I'll go away.
But let me talk about the reinvest period, you know that the benefits of that with new production I mean, how what's the expected life of loans, So how often will that turn and.
How do we think about deal expenses as we amortize those over a longer period of time, given a longer expected life. Thank you.
Yeah, well on the short term loans those loans are mostly you know anywhere between 18 to 24 month loans.
So eight to 24 months the average like you know or be anywhere you know 12 to 15 months somewhere in that range and that's an 18 month reinvestment period, so any new loans originating as the original loans in the deal start paying off and remember those are interest only in short term interest only loans. So the principal paid at maturity because they're paying off then we can.
Replace them with new loan what what it helps us with is we don't have to go to market to finance them right up to go into a whole new securitization occur a bunch of securitization cost again, just to kind of re Adam and continue to keep that financing out there. So that's a big plus for US yeah and in terms of the deal cost you might all the loans that we're doing now we are applying fair value accounting too.
So on all of the origination costs, if the word deal costs, we don't defer and amortize it anymore on the fair value loans, you have to recognize those costs upfront in the short term loans, we are applying fair value too just as we are the long term loans.
Great I appreciate you highlighting that I appreciate the comments this afternoon. Thank you.
Thanks Steven.
The next question comes from Sarah <unk> with BT I Jay. Please go ahead.
Hey, everyone. Congrats on the quarter and thanks for taking the question. So you had another quarter of strong gains on those NPL resolutions.
I was hoping you could give a little bit more context on your outlook for Npls and resolution.
If we kind of assume that we could see another rate hike and that we're in is higher for longer you know Q2 cycle.
Higher interest rate backdrop through next year to.
Give your outlook on how that might evolve.
Yeah sure Hi, Sarah Thanks for joining I think.
So we feel very good about the outlook there.
There's a whole lot of capital on the sidelines for these assets and when we go to sell them either at the foreclosure of steps or when we market we see good activity.
A lot of cash buyers.
So.
Uh huh.
Our view is that the the rate hikes or not.
A huge impact on the on the value of the deal.
The recoveries that we're getting right now and we expect those to continue I think if we saw.
You know the economy really started to tank and high unemployment and stress there.
Probably.
No change my.
Outlook or projection if you will.
So I think it's.
As long as we continue to see strong economic activity, we believe that well will come out very favorably there.
Great. Okay, and then you know I was just thinking about next year I was hoping you could talk a little bit more.
About the value.
The earnings outlook for on.
Fee based income.
<unk> got a lot of the century.
Portfolio value.
The HUD license there just hoping you could kind of highlight that to investors about that.
Sure Yeah, we're very excited with what's going on there we spent.
This year really building out the team in developing some muscle there and.
We've got a great team of originators that we've we've.
Increased and our pipeline is very robust. So we didn't do a lot of loans this year, but we think.
Next year is going to be quite robust and expect to see some.
Some very nice.
Gain on sale income there, which as you know from our perspective is great because it's high Roe.
And then also builds the servicing book, so I'm very bullish on.
On the opportunity for next year as they.
Paul this pipeline through.
Great. Thanks, so much for taking my questions and congrats again, thanks, Sarah I appreciate it.
Once again, if you wish to ask a question. Please press Star then one.
Your next question comes from Steve Delaney with JMP Securities. Please go ahead.
Thanks, and good afternoon, everyone, Chris Mark and Chris.
Just curious hi.
Hi, So curious about the bridge lending and it's great that you've got that that that new product working for you.
Is there I'm trying to think it disappointed the market.
And with rates, where they are and maybe I guess, maybe one higher until today.
Are you detecting Chris Theres, a some sort of a right place strategy on the part of borrowers that if they've got a project underway, but they just.
Buying time, they go refi into another floater and then hope the long end comes down in the next one to two years before locking into permanent I'm. Just curious if there's anything any gaming chip like that going on or do you think the bridge lending is it's more organic just in the form of new projects starting up.
And.
Entrepreneur is actually just despite the environment, taking on new projects, especially thoughts yeah, yeah sure.
It's a good it's a good question.
I think we see a lot of.
Uh huh.
The former that you posed.
But most of those we ended up passing on because it kind of feels to us like.
Somebody who's distressed are stretched thin and probably not a good reason so we kind of got us on those.
The ones that we we ended up doing and we see that our most successful or are there more seasoned experienced slippers, who.
No Theyre markets and you know theres still a lot of aged housing out there that needs to be rehabbed and refurbished and those are the folks that we like to bet on.
Okay.
Okay. So it's nice to hear that activity is still still.
Running along nicely for you.
What I was looking at page 11, maybe.
Maybe it's an anomaly, but it appears that the charge offs were down a good bit.
Trying to just get a handle on why why that would be necessarily.
Just looking at your where you are in the third quarter versus the first two quarters of the year.
Yeah, Mark do you want to handle that one.
Yeah on that one.
If you recall on our second quarter earnings call and the 716000 charge offs there was $393000 that's.
That charge off probably should've been less like 393000, and there was a borrower payment they came into our servicer of 393000 that lowest carry you guys alone lowered the charge off.
But we didn't get the information from the servicer to Atwood closed out the quarter and that was 392 young immature.
Immaterial to our total P&L. So we just said well we'll book that recovery in Q4. So that's what you see in there Steve. So if you really wanted to normalize. It you had lowered the 716 by 393 and put it in Q3.
Oh got it okay, well, thanks, I wasn't aware that that anomaly that makes no trend. There I would have would have been surprised if it was going down that much anyway.
One just final thing yeah, not not a bit surprising obviously, you'd see npls going up year over year.
To about 10%.
Chris I guess, when you're looking at the situations.
There is there one.
The primary cause of this or is it multiple I mean, the cost of care. He's the first thing that comes to my mind.
Just a heck of a lot more expensive to be a borrower. These days, but we're also running into problems with terminal fair amount of market value of properties Oh, the problems with borrower execution, just curious kind of looking back anecdotally.
When you look at your set of workout loans problem loans is there is there one major dynamic that you would point to.
Yeah.
Good question Steve.
There's not one dynamic that I would point to what.
What I do agree with you completely there's a there's a lot of cost burdens on borrowers were fixed rate loans. So that I think we've helped them in quite a bit there.
But if someone's getting behind and they're starting to dig a hole.
It's hard to get out of it.
The interesting thing to me that I would sort of add to that or is that I see out there is I think.
The most <unk>.
A significant part of that uptick.
<unk>.
Just anecdotally I don't have hard data for you, but just being in the business and close to it and talking to our managers.
As I think I think we're seeing a lot of people that we're speculating get flushed out, particularly on the on the one to four side.
Pete borrowers, who say you know saw show on TV, and said I'm going to flip some homes and found out it's not quite as easy as they maybe thought so I think we're seeing that on the one to force on the small commercial assets.
The delinquency rates are actually lower there than they are even in the one to four sitting there they're holding up extremely well so.
I think it goes to to kind of like I said that neighborhood serving.
Characteristic that are still in high demand but are.
Definitely seeing some of the speculators get washed out on the on the Wonder force.
Yep that makes perfect sense well. Thank you so much for the comments and great quarter, another great quarter and are an extremely challenging market out there.
Got it.
I appreciate it.
This concludes our question and answer session I will now hand back for any closing remarks.
Yeah.
Nothing further thank you all for joining and we'll talk to you next quarter.
Thank you everybody I appreciate your time.
The conference call has now concluded. Thank you for attending you may now disconnect.
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