Q3 2024 Velocity Financial Inc Earnings Call
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Good day and welcome to the velocity financial third quarter 2024 conference call. All participants will be in a listen only mode centered and assistance. Please signal a conference specialist by pressing the Bartlett Starkey followed by zero.
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Please note. This event is being recorded I would now like to turn the conference over to Chris <unk> Director of Investor Relations. Please go ahead.
Speaker Change: Thanks, Danielle Hello, everyone and thank you for joining us today for the discussion of velocity third quarter only 24 result.
Speaker Change: Joining me today are Chris Ferrara, philosophy, as President and Chief Executive Officer, and Mark The tenure Watson's Chief Financial Officer earlier. This afternoon, we released our third quarter results and you can find the press release and accompanying presentation. We will refer to during this call on our Investor Relations website at Www Dot belt for net dot com.
Yeah.
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.
Speaker Change: For a discussion of some of the risks and other factors that could affect results. Please see the risk factors and other cautious statements made in our communications with shareholders, including the risk factors disclosed in our filings 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 for reconciliations of these non-GAAP measures you should refer to the earnings materials in our Investor Relations website.
Speaker Change: Finally, today's call is being recorded and will be available on the company's website later today.
Christopher: And with that I will now turn the call over to Christopher.
Christopher: Thanks, Chris.
Christopher: And thank you all for joining our third quarter earnings call.
Christopher: After the close we reported another record quarter for the company as our team continues to execute well across the board we.
Christopher: We saw strong demand for new lungs, as our origination volumes grew by 64% over the prior year quarter.
Christopher: And our net portfolio growth was $876 million or 22% and total U P. B.
Christopher: I want to congratulate our production team on clothing, just under 1200 loans in the quarter, while maintaining our margins and credit standards as the weighted average LTV actually dropped to 63%.
Christopher: In terms of the financials, our net interest income increased by 29%. Our NIM was up 26 basis points and earnings grew by 31%.
Christopher: Turning to credit performance, our special servicing team delivered another great quarter by successfully resolving delinquent assets favorably when.
Christopher: And we continue to see healthy real estate markets in our niche, especially with stable rising values and plenty of liquidity from new investors.
Christopher: From a financing perspective, we're well positioned to fund our growth as our capital markets team continues to take advantage of the very strong market conditions.
Christopher: Well our most recent deal closed in early October.
Christopher: It was six times oversubscribed on the AAA bonds, which allowed us to realize an excellent cost of funds of approximately 6%.
Christopher: Looking forward, our pipeline is healthy and growing and we received a new company record of over 900 applications for more than $450 million in new P. B in the month of October alone.
Christopher: As borrowers look to finance I'm, sorry look to lock in financing by year end.
Christopher: Obviously as our met him momentum continues we will exceed our portfolio goal of 5 billion by W. P V by 2025, and the Future's bright.
Christopher: As always we appreciate all the support we have from our partners and shareholders as we work everyday to create long term value for all.
Speaker Change: That will turn to our earnings presentation materials.
Speaker Change: That were released after the close starting on page three.
Speaker Change: As we take a look as I mentioned earnings were up significantly.
Speaker Change:
Speaker Change: We are seeing nice portfolio growth in the <unk>.
Speaker Change: Income coming off that portfolio NIM up to three 6%, which was great for the quarter.
Speaker Change: In terms of production.
Speaker Change: 476.8 million, which is really just an incredible quarter for us our team's doing a great job.
Speaker Change: In terms of the nonperforming loans.
Speaker Change: Typically flat with where we were last quarter.
Speaker Change: And most importantly, continuing to see very healthy resolution with a three 4%.
Jane: Jane over U P b.
Jane: Turning to the financing and capital part of the business mentioned that we.
Jane: We did a couple of securitization.
Jane: The market there is very healthy and very strong and we see a lot of demand from investors.
Jane: We also collapsed the 2020, that's two securitization during the quarter, which was under Levered and got it at.
Jane: About $25 million of retained equity that we were able to redeploy.
Jane:
Jane: Great transaction for us.
Very good in terms of liquidity and warehouse capacity. So we've got plenty of room, there to grow the business and as I mentioned the October securitization.
Jane: Really went off well.
Speaker Change: On page four.
Speaker Change: We reconciled to coordinate and come with some of the adjustments there and then obviously grow.
Speaker Change: You bet.
Speaker Change: The chart here the book value again significantly in the quarter.
Speaker Change: As in prior periods reflect the adjusted book value reminding everybody if we were.
Speaker Change: Allowed under GAAP to Mark the rest of the portfolio to what we think is fair value you would come up with an adjusted book value of $17 76, So again, we think theirs.
Significant embedded gains in the legacy amortized cost portfolio and that is continuing to run off.
Mark Watson: With that I'll turn it over to Mark.
Mark Watson: Okay.
Mark Watson: Thanks, Chris Hi, everybody.
Mark Watson: The third quarter continued to reflect velocity strong 2020 for performance.
Speaker Change: Page five the loan production for Q3, as Chris mentioned was almost $477 million in U P. B, it's almost a 13% increase over the four of $22 million from Q2.
Speaker Change: Over 1100 loans funded in the quarter.
Speaker Change: This healthy production growth. During Q3 included the weighted average coupon of new held for investment originations remaining strong about 10, 8%.
Speaker Change: And the weighted average coupon on H by originations for the last five quarter trend, it's been right around 11%.
Speaker Change: This growth in originations in Q3 also continued tight credit levels with a weighted average LTV for the quarter.
Speaker Change: 63% in the last five quarter trend of 64, 4%.
Speaker Change: Our strong Q3 production with the healthy WAC and the low LTV continues to demonstrate borrower demand for our product.
Speaker Change: On page six as a result of the healthy growth in production, we see a similar growth in Q3 for our overall loan portfolio.
Speaker Change: Total loan portfolio as of September 30th was almost $4 8 billion.
Speaker Change: Six 1% increase from Q2, and a 22, 6% increase year over year.
Speaker Change: The weighted average coupon on the portfolio as of September 30th was $9 three 7%.
Speaker Change: Just 12 basis point increase from Q2, and a 74 year over year basis point increase.
Speaker Change: Our total portfolio weighted average LTV remains consistently low at 67% at the end of the quarter.
Speaker Change: Just flip to page seven.
Speaker Change: Our third quarter net interest margin increased six basis points from Q2, and 26 basis points year over year as our portfolio yield increased 20 basis points quarter over quarter, and 80 basis points year over year, while the cost of funds increased only 14 basis points quarter over quarter of 52 basis points year over year.
Speaker Change: Over quarter increase in net interest margins, mainly driven by the strong loan production as we just mentioned in the quarter and healthy spreads for the higher wax coupled with the continued favorable execution and securitization markets.
Speaker Change: Yeah.
Speaker Change: On page eight our nonperforming loan rate at the end of Q3 was 10 six per test six to 10, 6% relatively flat to Q2 with 10 and a half an.
Speaker Change: And our nonperforming loan rate has remained consistent for the last five quarters, averaging just over 10%.
Speaker Change: The strong collection efforts by our special searching Department continues to result in resolutions of our NPL loans have favorable gains, which is better illustrated on page nine.
Speaker Change: Q3, NPL resolution gains were $2 $3 million or three 4% of the total <unk> resolved.
Speaker Change: We resolved almost $69 million of MPV in the quarter and on a trend basis. If you look back at the last five quarters, we've averaged about a 2.2% gain on our NPL resolutions per quarter.
Speaker Change: Moving to page 10, let's take a look at our seasonal loan loss reserve and also our net loan charge off and gain loss on Oreo activity.
Speaker Change: On the left hand side the Sis the reserve as at the end of the quarter was $4 9 million or.
Or 19 basis points of our outstanding non fair value each by portfolio.
Speaker Change: Our CS reserve remains within the expected range of 15 to 20 basis points keep in mind that seasonal reserve does not include loans being carried at fair value.
Speaker Change: The right hand side table shows our net gain loss from loan charge offs and Oreo related activities during the quarter for Q3, we had a net gain of.
Speaker Change: $900000.
Speaker Change: And the last three quarters, if you take a look at it on average we're averaging about one and a half million dollar average gain per quarter over the last three quarters.
Speaker Change: Page 11 shows our durable funding and liquidity position at the end of Q3, our total liquidity at the end of the quarter was almost $93 million comprised of about $44 million in cash cash equivalents and almost $49 million in available liquidity on finance to collateral. In addition made available warehouse.
Speaker Change: Today at the end of the quarter of $349 million.
Maximum line capacity was $785 million.
Speaker Change: As Chris mentioned in August during the quarter, we issued our fourth securitization of the year with just over $253 million in securities issued.
Speaker Change: In September during the quarter, we did collapse of 2020 desk to security.
Speaker Change: Freeing up $25 million in collateral that was then subsequently refinanced on warehouse lines and will also be able to take most of this collateral and put it into future securitizations.
Speaker Change: Then in October after following the quarter, we have issued our fifth securitization in October and that issue was over $300 million in securities.
Speaker Change: Yeah.
Speaker Change: So with that I'd like to turn the presentation back to Chris for an overview of last year's outlook on key business drivers.
Chris Ferrara: Thanks Mark.
Chris Ferrara: As we look forward you know, we think the market is healthy and functioning well.
Chris Ferrara: We're very happy with our credit performance and the continued resolution of delinquent assets.
The capital markets are very robust and we think we've got a lot of support there.
Chris Ferrara: From an earnings perspective, as we continue to grow we should be able to continue to grow the earnings and.
Chris Ferrara: You know that that should show up not only in our NIM, but.
Chris Ferrara: The overall results.
Chris Ferrara: Results of the business, so with that we'll open it up for questions.
Speaker Change: Thank you well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: The first question comes from Stephen Laws from Raymond James. Please go ahead.
Stephen Laws: Hi, good afternoon.
Stephen Laws: We started marketing hey, congrats on another great quarter I feel like man you guys really.
Stephen Laws: Consistent to a volatile rate environment and a lot of things going on in the last year or two and you've done really well.
Speaker Change: So I guess what would that statement you know can you talk about the recent volatility in rates clearly probably good timing you gotta securitization done in October and probably cleared a lot of those warehouse loans that you had on it at quarter end, but can you talk about how the volatility might impact your origination.
Speaker Change: Origination pipeline or anything we need to think about as far as you know the the move we've seen both up and down the last few months and in rates.
Speaker Change: Yeah sure Hi, Stephen Thanks for the question.
Speaker Change: You know, we're very fortunate in that.
Speaker Change: The niche that were in.
Speaker Change: Typically remain pretty stable in terms of grades to the end user and you can see that over the five quarter average.
Speaker Change: We're.
Speaker Change: Very high tens low elevens, we move rates a little bit I think only one time during the quarter. So what we you know we're not changing rates daily.
Speaker Change: Ultra sensitive to that.
Speaker Change: And then just to remind everyone. We also hedge our production so.
Speaker Change: Some months that'll be favorite both of them and so it'll be unfavorable in terms of where those those marks are but we've kind of headed out interest rate volatility and so as we're putting loans on where we're hedging out that.
Speaker Change: Red and so that that kind of dampened some of the volatility in.
Speaker Change: In terms of the they're quite your question about the pipeline as I mentioned October was was really really strong. So even though you know rates have been bouncing around quite a bit we're not seeing it impact the pipeline and we think you know we think we're going to.
Speaker Change: We continue to have strong origination level.
Speaker Change: Yeah. I know you said you mentioned October was a great month in your prepared remarks.
You know around the pipeline and I noticed the government insured multi loans can can you talk a little bit more about that how how big of an opportunity could that be as you think about a contributor to you know you know a monthly or quarterly production going forward.
Speaker Change: Sure.
Speaker Change:
No. It's a it's a great.
Speaker Change: Niche of the market or our century division has a very well.
Speaker Change: Robust pipeline of of well established borrowers that are.
Speaker Change: Our high net worth folks and Theyre very patient they don't have to do anything immediately and they they are very very rate sensitive. So unlike the core velocity business or kind of.
Speaker Change: At the other end of the spectrum. If you will in terms of the rate sensitivity and so you know in the last 12 months or so we havent seen them transact a lot.
Speaker Change: As we look into 'twenty five we do think that's going to increase and we've got a healthy pipeline there of deals. The interesting thing there is you know.
Speaker Change: All of those loans that we originate will sell immediately for cash and we will just recognized as it has cash gain on sale. So those wont sit on the balance sheet for more than 30 to 60 days.
Speaker Change: But I think going into next year, we're very comfortable that well, we'll see you know north of $150 million and in originations, they're still just you.
Speaker Change: It's kind of a high ROE capital light a.
Speaker Change: Execution that will add to our our earnings growth.
Speaker Change: So it sounds like a great niche you carve out there.
Speaker Change: Lastly, if I may get one more in on the the collapse of 'twenty 'twenty dash to how do we think about that as far as the accretion to earnings or is it kind of just a normal seasoning process for the portfolio, but no more deals can probably collapsed in the next you know year or so your two you know how do we think about the potential impact on earnings there.
Speaker Change: Yeah that particular deal I would say well you know by collapsing will probably have a positive lift to earnings because we'll be able to re lever that equity more efficient efficiently and effectively.
Speaker Change: I wouldn't say that's true of the vast majority of the rest of the remainder of our deals that deal was somewhat unique it was done during COVID-19 is kind of a low advance rate.
Speaker Change: The others are are are fairly.
Speaker Change: Well levered and because of their.
Speaker Change: Progress their pro rata Paydown structure, we get good leverage on throughout the duration. So.
Speaker Change: I would not expect much of an earnings Delta from.
Speaker Change: The vast majority of deals collapsing or going away in the future.
Speaker Change: It's it's probably not material.
Speaker Change: Okay understood I appreciate the color on that and think so thanks for all the comments this afternoon.
Speaker Change: Thank you.
Speaker Change: The next question comes from Don Vendetti from last Fargo. Please go ahead.
Speaker Change: Hi, Chris.
Chris Ferrara: The competitive dynamic has been very favorable it's a fragmented market.
Speaker Change: You guys continue to see very strong origination volumes and I was just curious if you're seeing any new players come in if you expect them to or is this the type of thing Thats just too niche.
Speaker Change: I assume you have some barriers to entry.
Speaker Change: In terms of doing this for a while you could securitization issuance as well can you just talk about those dynamics.
Don: Sure Don Thanks for the question, Yeah, Yeah, I would say.
Don: We we hear rumblings of people, starting or coming in or wanting too, but I, we haven't seen any material competitors that design their program exactly like ours to go after this niche so.
Don: It's I don't want to say that there are no competitors because there certainly are on that and as you've mentioned, it's fragmented, but we feel like we've got a lot of runway to continue to develop new clients and new customers and grow. So we don't see a lot of pressure from the competitive set there.
Don: And I'd say also.
Don: Banks most of the banks and credit unions are still very cautious in and constrained based on their balance sheets. So I think that's.
Don: Also a tailwind that we think will continue for some time.
Speaker Change: Got it and the Npls have been pretty steady or are you thinking you're going to stay in this range and is there anything to watch on collateral values are you feeling pretty good on that front.
Yeah, Yeah, I think our view is that they'll stay in this range Oh, and I think a lot obviously depends on the economy going forward, but we're not seeing anything concerning no no.
Speaker Change: Dangerous exposures or anything that's that's giving US indigestion. We think you know real estate markets are holding up well and we're doing a good job of it.
Speaker Change: Managing risk so there's nothing that we see that's concerning in that pipeline right now.
Speaker Change: Thanks.
Speaker Change: You bet. Thank you.
Speaker Change: The next question comes from Steve Delaney from citizens JMP Securities. Please go ahead.
Speaker Change: Hey, Hello, everyone and congrats on another yet another great quarter.
Speaker Change: Well that's good.
Speaker Change: There seems to be just such a strong Florida man.
Speaker Change: And for your product and I heard you mentioned your WAC. Your your average coupon has actually gone up I think you mentioned a 9% figure.
Speaker Change: You know at the heart of this.
Speaker Change: We we've got.
Speaker Change: Housing issue in the country in terms of supply of rental for rental housing in particular.
Speaker Change: And.
Speaker Change: When we get to the bottom or is it really a your borrowers.
Speaker Change: Just an incredible opportunity to acquire rental properties with rents going up properties depreciating and even your pricing. They still look at that is one of the best investments they can make so.
Speaker Change: I'm trying to just bring it back.
Speaker Change: Two why this opportunity exists and props to you guys for figuring it out and getting in front of the right people and being able to exploit it.
Speaker Change: Yeah. Thanks, Steve I appreciate that it it is a unique niche it is definitely underserved when you look at our average loan size is.
Speaker Change: It's not.
Speaker Change: For a lot of our a lot of financial institutions banks credit unions, it's not super exciting to.
Speaker Change: Originated $350000 alone and they tend to be slower and take their time at it and that was really kind of are.
Speaker Change: Core thesis and it's proven out over time I think we've built a good reputation for being able to to do what we say, we'll do and our clients Trust us for that and.
Speaker Change: There's a lot of different reasons, why a borrower needs access to capital you mentioned one of them, but there you know there's a broad spectrum of reasons and.
Speaker Change: Are we.
Speaker Change: We feel like we've just we've been a steady consistent provider of capital to the markets that overtime people recognize us as it is reliable and that certainty of execution is something that they they really put a premium on.
Speaker Change: And do you have a lot of repeat borrowers and are your borrowers like and you know just the basic read the agency loans it seems that volume.
Speaker Change: It goes up 50 basis points.
Re fast stop.
Speaker Change: Everything slows down as your borrower.
Speaker Change: Just.
Speaker Change: Far less rate sensitive and you don't see like when the 10 year and you know in October here did you see your.
Speaker Change: Applications fall off dramatically.
Speaker Change: Yeah. So.
Speaker Change: B.
Speaker Change: It is it is a unique segment of the market. We just to give you a perspective, we change rates one time during the quarter. So you know, whereas I think most lenders you know or maybe changing rates daily or weekly.
Speaker Change: We changed once so it's just a different.
Speaker Change: Segment of the market and in <unk>.
Speaker Change: There's just there's less rate sensitivity in much more transaction sensitivity here for our borrowers and then to your second question that you know in terms of applications in October.
Speaker Change: Well, it's actually a new record for the company Hum 900 applications for more than $450 million in your P. D. So.
We're actually seeing growth there, so even though I know.
Speaker Change: The rates have moved dramatically just from the end of September.
Impacting our our origination pipeline.
Speaker Change: Wow.
Well congratulations keep it rolling.
Speaker Change: Thank you Steve we appreciate it.
Speaker Change: As a reminder, if you have a question. Please press star one. The next question comes from Eric Hagen from BTG. Please go ahead.
Eric Hagen: Hey, Thanks, good afternoon.
Speaker Change: Following up on the NPL pipeline for the for the Npls, which are in foreclosure I mean, how how long are the loans typically in for foreclosure for and do you think about the foreclosure timeline itself being maybe a source of risk at all going forward.
Speaker Change: And then a follow up to that I mean in the case, where there's a sale of the property.
Speaker Change: In most cases who's the counterparty like is it another S. If our investors like how durable do you think the demand is for resolving these npls that especially at higher interest rates.
Eric Hagen: Sure Eric.
Eric Hagen: So a couple of things there one in terms of foreclosure timeline, you can foreclose it depends it state dependent in Texas, you can foreclose in 60 days.
Eric Hagen: A lot of the.
Eric Hagen: The non trust now that the non legal foreclosure states you know you're in a call. It 90 to 150 days timeframe, if you get into the non judicial foreclosure states.
Eric Hagen: You get quicker resolution when you go there before a judicial foreclosure those can extend out you know two three years in New Jersey, and New York type things. So weighted average were R. R.
Eric Hagen: Assets sit in foreclosure, probably somewhere around nine to 10 months.
Eric Hagen: Hum.
Eric Hagen: There is some risk of deterioration there.
Eric Hagen: Where where we've got a very good hands on special servicing team that stays on top of those assets and make sure that yes.
Eric Hagen: The assets are being preserved the rents are being protected in you know properties are in good condition. So we do our best to manage that.
Eric Hagen: But I think.
Eric Hagen: The other.
Eric Hagen: Important part to understand there isn't there.
Eric Hagen: You know two different product sets here on the on the one to four properties.
Eric Hagen: Yeah that end buyer can be anybody that can be a family buying a home it can be an investor investing in the neighborhood. You know there are a lot of different users for a single family home. So.
Eric Hagen: That's you know kind of unique.
Eric Hagen: That part of the portfolio on the on the small commercial side almost always you tend to see.
Eric Hagen: You know some type of real estate investor or owner user who's either using that real estate in their business and it's let's say, it's a you know automotive repair shop that goes out of business and Theres.
Eric Hagen: A dozen people behind it and are waiting to get to that location. So.
Eric Hagen: The commercials are a little more investor oriented and business oriented, but the one to force those in buyers.
Eric Hagen: Can be can be literally just people looking for a home.
Speaker Change: Gotcha Yeah.
Speaker Change: And stuff thank you for answering that.
Speaker Change: Going back to the the October securitization, when we think about the total return there.
Speaker Change: What is the total return that you feel like you Eclipse is there a way to actually tease apart or at least think about like the valley or the return you get from delivering the loans into the securitization versus capitalizing of credit risk.
Speaker Change: On the balance sheet and how that's maybe changed at all yeah. Yeah. I mean, when you get when you get an execution like that you know that.
Speaker Change: E D R O R R.
Speaker Change: You know well north of 25% so it's I mean, that's.
Speaker Change: That's an outstanding execution, we're not going to get that every time in every every deal. It's you know it moves around but.
Speaker Change: We're in the market market frequently enough that sometimes you get you know you get incredibly great execution and other times you get on average and sometimes you get poor execution, but on a blended basis. All in you know, we think we're doing very well and.
Speaker Change: Even when you bake in sort of losses for credit and in that type of thing so.
Speaker Change: Well you know each deal.
Speaker Change: Well you know the market is a little different in each time and yes. It.
Speaker Change: You know you'd have to see so.
Overall, though I think.
Speaker Change: If we do our job right manage manage the portfolio properly in the originations you know to the Rois are very compelling.
Speaker Change: Got you I appreciate you guys great quarter. Thank you.
Speaker Change: Thanks, so much.
This concludes our question and answer session I would like to turn the conference back over to Christopher Marr for closing remarks.
Christopher Marr: Thanks, everyone for joining the call thanks to everybody at velocity for continuing to do a great job and we look forward to speaking to everyone.
Christopher Marr: At the end of I guess at the beginning of next year for the fourth quarter. So thank you all.
Christopher Marr: Thank you everybody.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.