Q2 2024 Velocity Financial Inc Earnings Call
Speaker Change: Good afternoon and welcome to the Velocity Financial Q2 2024 conference call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key, followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Mr. Chris Oltmann. Please go ahead.
Chris Oltmann: Thank you, Rachel.
Speaker Change: Hello everyone and thank you for joining us today for the discussion of Velocity's second quarter 2024 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Szczepaniak, Velocity's Chief Financial Officer.
Speaker Change: earlier this afternoon. We released our second quarter results and you can find this press release and accompanying presentation that we will refer to today during this call on our investor relations website at www.bellfinance.com.
Speaker Change: 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.
Christopher Farrar: for a discussion of some of the risks and other factors that could affect results. We may also refer to certain non-GAAP measures on this call. And finally, today's call is being recorded and will be available on the company's website later today.
Speaker Change: for a discussion of some of the risk and other factors that could affect results.
Speaker Change: Please see the risk factors and other cautionary statements made in our communications with shareholders, including the risk factors disclosed in our following with the Securities and Exchange Commission.
Speaker Change: 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.
Speaker Change: We may also refer to certain non- GAAP measures on this call.
Speaker Change: And finally, today's call is being recorded and will be available on the company's website later today.
Mark Szczepaniak: Thanks, Chris, and thank you all for joining us on our second quarter earnings call. After the close, we will report another great quarter as our business continues to perform well across all segments. Our originations were healthy, with a 63% increase in volume versus Q2-23, with the ultimate goal of rewarding all shareholders. That concludes my prepared remarks, and we'll turn over to page 3 of the earnings presentation as we go through some of the numbers. 2Q of 23 by 30 bips, again, showing up.
Speaker Change: And with that, I would like to turn the call over to Chris Farrar.
Chris Farrar: Our net revenue increased 41% over the prior year's quarter, resulting in a 23% increase in core earnings.
Speaker Change: Our originations were healthy with a 63% increase in volume versus Q2'23, and importantly, we maintained our margins and credit standards.
Speaker Change: Our charge-offs remain low, and we realized over $2 million in net gain from our REO activity this quarter. As a result of our increased originations,
Speaker Change: We issued two securitizations in April and June .
Speaker Change: Both deals priced well and saw strong demand from our bond investors.
Speaker Change: which is a drag on current period earnings, but the tradeoff is increased spreads going forward as we have no amortization expense to recognize on this debt.
Speaker Change: I want to congratulate all my team members on another great quarter as I truly appreciate their commitment to excellence.
Speaker Change: The NIM widened out from earlier.
Speaker Change: [inaudible]
Speaker Change: 2Q of 23 by 30 bips, again, showing up.
Mark Szczepaniak: Total portfolio growth on a year-over-year basis of 20%, and we continue to see positive resolutions on those NPLs and expect to do that going forward. In terms of financing capital, excuse me, I mentioned earlier that we had done two securitizations during the quarter. We highlighted here that there was a $0.06 per share drag on current period earnings from that second securitization. And, as I said, help in terms of the NIM going forward.
Speaker Change: In terms of the financing capital, I mentioned earlier that we had done two securitizations during the quarter.
Speaker Change: We highlighted here that there was a $0.06 per share drag on current period earnings from that second securitization.
Speaker Change: help in terms of the NIM going forward.
Mark Szczepaniak: Century Health and Housing acquired $3.6 million in MSRs from a bank that originated some recent Ginnie Mae loans. That was a great trade for us because we're continuing to build out the platform and establish new relationships with new borrowers for more business. We're in a strong position there. You can see just under $84 million at the end of the quarter with plenty of warehouse capacity to go forward on page four.
Speaker Change: Forward On.
Speaker Change: Page four.
Speaker Change: We break out the core adjustments here, and then also on the right-hand side.
Speaker Change: As most of you will remember, there's a buildup here to our adjusted book value per share. I will point out that we had a typo there.
Speaker Change: That covers it for me and I'll turn it over to Mark on page 5.
Mark: Thanks Chris. Hi everybody.
Mark: Kind of to note, there were over 1,100 loans funded in the second quarter, so it's a great demand for the product. The strong production growth during Q2 was achieved with the weight average coupon for the new originations remaining at 11%, continuing a five-quarter trend of an 11% coupon.
Mark Szczepaniak: This growth and originations in Q2 were also very tight credit levels with the weighted average loan-to-value for the quarter at 64.7%, a 4.6% increase from Q1 and over a 20% increase year over year in the portfolio. However, the Portfolio Weighted Average Loan-to-Value Ratio remained consistently low at 67.4% as of June 30.
Speaker Change: This growth and originations in Q2 was also a very tight credit levels with the weighted average loan to value for the quarter at 64.7%
Mark: The strong Q2 production growth with the high WAC and the low LTV again demonstrates the continued consistent borrower demand for the product.
Speaker Change: A 4.6% increase from Q1 and over a 20% increase year-over-year in the portfolio.
Speaker Change: The weighted average coupon on this portfolio as of June 30th was 9.25 percent, which is an 18 basis point increase from the Q1 weighted average coupon and an 85 basis point year-over-year increase.
Speaker Change: The portfolio weighted average loan-to-value ratio remained consistently low at 67.4 as of June 30th.
Mark Szczepaniak: On page seven, our Q2 portfolio NIM increased 19 basis points from Q1 and 30 basis points year over year, as our portfolio yield component increased 27 basis points quarter over quarter and 74 basis points year over year, while our cost of funds increased only eight basis points quarter over quarter and 43 basis points year over year. On page eight, our non-performing loan rate at the end of Q2, as Chris mentioned, was 10.5% compared to 10.1% for Q1. Our non-performing loan rate has remained consistent for the last five quarters, and the ongoing collection efforts by our special servicing department continue to result in resolutions of our NPL loans at favorable gains.
Speaker Change: On page 7, our Q2 portfolio NIM increased 19 basis points from Q1 and 30 basis points year-over-year.
Speaker Change: This quarter-over-quarter increase in NIMS, mainly driven by, again, the strong loan production growth in the quarter and healthy spreads, the higher coupons, and also due to the recent improvement in the securitization market, keeping the costs fairly low.
Speaker Change: On page 8, our non-performing loan rate at the end of Q2, as Chris mentioned, was 10.5% compared to 10.1% for Q1. Our non-performing loan rate has remained consistent for the last five quarters, and the ongoing collection efforts by our Special Servicing Department
Speaker Change: continues to result in resolutions of our NPL loans at favorable gains.
Speaker Change: Page 10 reflects our CECL loan loss
Cecil: The Cecil Loan Loss Reserve number does not include our loans being carried at fair value. It's only the amortized cost loans.
Speaker Change: The table to the bottom right shows our net gain and loss from loan charge-offs and REO-related activities during the quarter.
Speaker Change: of a little over $2 million compared to a slight net loss of only $800,000 for Q1. So again, doing really well on low loan charge-offs, selling a lot of these REOs at a gain, and booking a net gain activity for the quarter.
Speaker Change: Page 11 shows our durable funding and liquidity position at the end of Q2.
Speaker Change: As Chris mentioned, our total liquidity as of June 30th was just under $84 million, and that's made up of over $47 million in cash and cash equivalents, and another about $36, $36.5 million in available liquidity on our unfinanced collateral.
Mark Szczepaniak: As a result of our strong loan production, we did issue two securitizations in Q2. In April, we issued our 2024-2 security with $286 million of securities issued. And in June, we issued our 2024-3 security with almost $205 million of securities. Thanks, Mark.
Chris: As a result of our strong loan production, we did issue two securizations in Q2. In April, we issued our 2024-2 security with 286 million of securities issued. And in June, we issued our 2024-3 security with almost 205 million of securities issued.
Speaker Change: Seeing a lot of mixed signals out there. Obviously, it feels like the Fed's probably going to do some softening here. But we do expect to continue to get those positive NPL resolutions on a go-forward basis.
Speaker Change: Securitization market's healthy and feels good going forward, so we're very positive there. And from an earnings perspective, you know, just continue to execute like we do, and we think that...
Mark Szczepaniak: And from an earnings perspective, you know, just continue to execute like we do, and we think that
Speaker Change: Things look very good for the future. So, with that, we'll open it up for questions.
Speaker Change: Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star, then two.
Speaker Change: The first question comes from Stephen Laws with Raymond James. Please go ahead.
Stephen Lords: Hi, good afternoon and congratulations on a very nice second quarter.
Stephen Lords: Chris, I want to start on page five with the loan production. I mean, really strong across the board. Investor loans have rebounded from a little seasonality in Q1.
Speaker Change: showing pretty consistent growth in commercial and particularly short-term loan products, so that was the 140 million a month pace.
Stephen Lords: Thank you for watching!
Mark Szczepaniak: Yeah, Stephen, you cut out a little bit there, but I think your question was, you know, just going forward, what do we think about production levels? Yeah, I would expect for the rest of the year around this Q2 run rate feels right, and I think
Stephen Lords: Be great
Speaker Change: You know around this this q2 run rate feels right and
Speaker Change: And I think, you know, sometimes the product mix moves around a little bit, but it'll be something like you're seeing here in Q2. And so, yeah, I think for the rest of the year we think it should look pretty similar to that.
Mark Szczepaniak: All right, and do you maybe have an update on the address book?
Speaker Change: All right, do you have an update maybe on the address book?
Speaker Change: Then, you know, the rate move, you know, quarter-to-date. Curious how, you know, how that fair value mark may have changed as of end of July.
Mark Szczepaniak: Yeah, um, you know... I mean, if we were to mark today, yeah, you're right, there would definitely be a change.
Speaker Change: Yeah, um, you know...
Speaker Change: I mean if we were to mark today, yeah, you're right, there would definitely be a change.
Speaker Change: To the positive, obviously, it's going to be largely dependent on where things settle out at the end of the quarter.
Speaker Change: If things were to stay where they are today, yes, I think you'd see...
Speaker Change: an increase in the overall.
Speaker Change: book from
Speaker Change: returning interests.
Speaker Change: Yeah, not hearing much there, seeing a lot of borrowers come to us that...
Speaker Change: I think normally would expect.
Speaker Change: to be handled by the banks, so I'm not really seeing any signs of that.
Speaker Change: everything that I hear is it's just
Speaker Change: They're very constrained and limited on the new credit.
Mark Szczepaniak: Thank you.
Mark Szczepaniak: Your next question comes from Steve Delaney, the Citizen JNP. Please go ahead.
Steve DeLaney: Good evening, everyone, and a great quarter. Just kind of remarkable, Chris, the consistency of your production and, you know, the market is the market, but do you, if you come right down to it, do you,
Steve DeLaney: Do you tie that to your relationships with brokers and borrowers, and is it really a defensible market presence that you have that somebody's not going to just come in and undercut you on rates and steal that loan flow?
Chris: It's the franchise, right? It's the brand. Yeah, I think so. We've always believed that this was an underserved niche. It's highly fragmented. There are a lot of different players out there. We kind of just stick to our knitting.
Speaker Change: Because we are a portfolio lender, and we have this spread income that comes in,
Speaker Change: We don't feel the same pressure that other originators do to...
Speaker Change: to, you know, always put as much volume on the sheets as we can. We can be more disciplined around margins, so...
Speaker Change: Yeah, I think people, our customers certainly recognize that we're reliable and there's a certainty of execution there.
Mark Szczepaniak: I think that loyalty shows up in.
Speaker Change: I think that loyalty shows up in our margins and in our production volumes.
Mark Szczepaniak: yeah
Speaker Change: So you've been on about a, you've got sort of a commitment, a target 11%, you know, just in the last couple months.
Speaker Change: Since late May, the tenure is off 70 dips.
Speaker Change: You know, if we get three or four cuts, you know, over the next...
Mark Szczepaniak: [inaudible]
Mark Szczepaniak: When the world, when the, when. And so we monitored the bond markets. We took rates just down a quarter point. So... Right. So your securitizations obviously are fixed-rate funds. The, uh, I guess the only benefit you would get on the liability side would assume your warehouse lines are floating with, again, on SOFR, right?
Speaker Change: When market rates change, you know, are you going to have to respond? Are you happy that like a credit card your credit cards are 18 to 21 percent regardless? Yeah, yeah, yeah good question
Mark Szczepaniak: a couple weeks ago, and so we monitored the bond markets. We took rates just down a quarter point.
Speaker Change: We won't necessarily move.
Speaker Change: Lockstep with with you know the markets because there is some volatility there But you know we priced our debt mainly off of sort of somewhere between three to five year bonds depending on the
Mark Szczepaniak: We'll pass that along to our borrowers and as long as we're maintaining our spread, we're happy.
Mark Szczepaniak: Right. Correct. Congratulations, guys. Thanks so much. Thank you.
Eric Hagen: The next question comes from Eric Hagen with BC IG. Please go ahead.
Eric Hagen: We've spent a lot of money on technology, and in order to do 1,000 units a quarter, you've got to have that in place. I think we have excess capacity. I don't know, I'd say probably 10 to 20 percent more. As we go into the end of the year, we probably will increase some head count to accommodate, hopefully, some growth, but it's on the margin, and it's not too significant. So I think we can do quite a bit more volume with it.
Eric Hagen: We've spent a lot of money on technology, and in order to do 1,000 units a quarter, you've got to have that in place.
Eric Hagen: I think we have excess capacity, I don't know, I'd say probably 10-20% more. As we go into the end of the year, we probably will increase some head count.
Eric Hagen: to accommodate, hopefully, some growth. But it's at the margin and it's not too significant. So I think we can...
Eric Hagen: We can add quite a bit more volume with...
Eric Hagen: Yep. Okay. That was really helpful.
Eric Hagen: Not too much to the cost structure.
Eric Hagen: Yep. Okay, that was really helpful.
Eric Hagen: Thanks for listening.
Speaker Change: What do you feel like is the all-in ROE from originating and delivering into securitization with spreads at these levels, even if you have a benchmark for the two deals that you did last quarter? And if we see securitization spreads tighten, what does that mean for your ROE? Is there a way to benchmark that and sensitize that?
Eric Hagen: Yeah, yeah, good question. Um, you know I...
Eric Hagen: Yeah, yeah, good question.
Speaker Change: north of 25% at these levels.
Speaker Change: You know, we'll see the benefit of that over a multi-year period, obviously, because we're locking in fixed-rate loans against fixed-rate debt. So, yeah, if we see some tightening in the spreads, I think that could significantly boost ROE on the go-forward deals. Obviously, it's a blend of all of the transactions.
Eric Hagen: At the margin, I think, you know, new stuff is well north of 25.
Eric Hagen: Really helpful. Thank you guys so much. No, thank you.
Eric Hagen: This concludes our question and answer session. I would now like to turn the conference back to Mr Chris Farrar for any closing remarks.
Mark Szczepaniak: Now, thank you everyone for joining the call. We appreciate your support, and we're going to just continue to execute on our plan and look forward to speaking to everyone next quarter. Thank you. Thank you, everybody, for your time.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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