Velocity Financial Inc (VEL) 2021 Q1 法說會逐字稿

And welcome to the Velocity Financial first quarter 2021 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Christopher Oltmann. Please go ahead.

Thank you, [Betsy]. Hello, everyone, and thanks for participating in Velocity Financial's first quarter 2021 earnings call. Joining me today are: Chris Farrar, Velocity's President and Chief Executive Officer; and Mark Szczepaniak, Velocity's Chief Financial Officer.

Earlier this afternoon, we released our first quarter 2021 press release and the accompanying earnings presentation, which are available on our Investor Relation website.

I'd like to remind everybody that today's call may include forward-looking statements, which are uncertain and outside of the company's control, and actual results may differ materially. For discussion of some of the risks and other factors that could affect results, please see the risk factors and other cautionary statements made in our communications with shareholders, including the risk factors disclosed in our filings with the Securities and Exchange Commission.

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.

I would like to turn the call over to Chris Farrar for opening remarks. Chris?

Great. Thank you, Chris. And welcome, everyone, to the 2021 Q1 call.

Our team is very pleased with the results we presented today as our business continues to perform very well. Originations were up from the prior quarter, and our pipeline for the second quarter continues to grow. This is especially impressive for two reasons. First, we produced almost the same volume in Q1 versus last year without offering any short-term loans, which were about 30% of last year's Q1 volume. Second, we accomplished this with fewer team members, which obviously indicates significant operating efficiency. Clearly, things are going well on the origination front.

In terms of our portfolio, our special servicing team had another very strong quarter of recoveries as we continue to resolve delinquent loans profitably. I think it's important to highlight that our portfolio yield is within a few basis points of the actual coupon, demonstrating that our recoveries are almost completely offsetting the interest shortfall from non-accrual loans. While real estate markets are very strong nationwide and continue to help us, our hands-on special servicing team is doing a great job.

Looking forward, there are two important areas we plan to detail in future quarters. From a financial reporting perspective, most other lenders use fair value accounting. And we choose to use an amortized cost method, which reduces quarterly volatility. As a result, we have significant embedded gains in the business that are not readily apparent.

We plan to develop an economic book value in future quarters to easily identify the inherent unreported value we've created, which is significant and hopefully helpful to investors when comparing our company to others.

On the ESG front, we are compiling a study that demonstrates the impact our lending has on underserved populations nationwide. We think this is an important attribute of our unique niche as we're fulfilling our mission to finance communities where people live, work, and play. Early results show that we have an impressive footprint in diverse neighborhoods across the US.

In summary, we're fortunate to have strong demand, healthy capital markets, and engaged team members to maximize our opportunities. As always, we appreciate your continued support, and we're energized to continue growing our company.

That concludes my prepared remarks. And we'll turn over to the PowerPoint presentation with the earning highlights.

On page 3, at a high level, just going through some of the items in the quarter, net income on a core basis, $0.20 a share. The real adjustment there is the cost associated with refinancing our long-term debt. Net interest margin is very solid at 4.1% and continues to impress, as I mentioned, with all of the recoveries that were made on non-performing loans. And then from a book value perspective, obviously, nice trajectory there as well.

From a production perspective, $233 million originated in the first quarter, a 30% Q-over-Q increase. Everyone on the operations sales team did a great job, and we're seeing tremendous demand there. In terms of NPLs, total recoveries of 102.7%, again, showing gains over and above our normal contractual interest. And we'll have some more details on that later on.

NPLs' starting to trend down slightly. It takes time and it's a slow-moving ship, but we're seeing progress there. And very pleased to see that charge-offs continue to remain extremely low. From a financing and capital perspective, we've already previously announced $175 million to our debt facility, which we drew down fully during the quarter to continue to fund the growth.

And then lastly, I'd just add here that we added another non mark-to-market warehouse facility with a very large bank in the quarter for another $100 million. So we've got plenty of capacity and all done on a non-mark-to-market basis. So all those things put together make us very optimistic about the quarters ahead.

With that, I will turn it over to Mark to take us through the details.

Thanks, Chris. And hi, everybody. On page 4, we take a look at the reconciliation between our GAAP income for the quarter and book income. Our GAAP income was about $3.4 million. But on a core basis, the core income was $6.7 million. And Chris alluded to, the $3.3 million delta there was related to the debt refinancing. And we did refinance our corporate debt in Q1, and we paid off the existing, the older corporate debts and paid off the existing corporate debt.

We had some deferred deal cost write offs and some prepayment fees as result to paying off that debts. And that resulted in about $4.5 million of write off pretax, or that $3.3 million that you're seeing a net effect of adjusting the GAAP income to the core income. So on a core basis, $6.7 million.

To the right there, you just see the roll forward of the book value of equity per share from 12/31 to 3/31, as Chris mentioned, $10.93 to $11.12. A key point there, as you see, the $11.12 includes that $0.17 write off. That's the one-time write off that we talked about refinancing the debt.

So really, without having that debt refinanced during the quarter, just based on operations, you could add the $0.17 back to the $11.12, and you're really almost at $11.29 just based on operational basis. And as Chris mentioned, we are working on coming up with a more economic value of equity per share of [Tenneco] loan book to show the inherent gains and value embedded in the business.

On slide 5, production. Production has increased significantly from Q4 to Q1 by 30% increase, going from $179 million in UPB in Q4 to $233 million. As Chris had mentioned, the $233 million is very comparable to the first quarter of 2020 pre-COVID. And the $248 million, remember the $248 had our short-term loan product in there.

Q1 of 2021, the $233 million is all of our -- just our 30-year long-term product. There's no short-term product in there. That's a very strong quarter on not offering the short-term product.

Now in April, we did go out and announced to all the brokers that we are now offering our ARV Pro short-term product that we had offered pre-COVID, as well as a new short-term product called our Flex interest-only product. So we are now taking applications and back offering our short-term product.

On page 6, the loan portfolio. Loan portfolio ended the quarter just shy of $2 billion, $1.99 billion. And the $1.99 billion, that included selling $57 million worth of UPB during Q1. So absent that sale, that portfolio would been over 2 billion. But $1.99 billion ending the quarter.

Another positive to note there is comparing the first quarter of 2020 to first quarter of 2021 year over year, our 1-4 rental property portfolio has really grown. We've gone from about 40% of our total portfolio being the 1-4 family property to now at the end of Q1 2021 closer to 49%. So we've seen strong demand -- investor demand on this 1-4 residential properties.

And you see the loan portfolio waterfall in the bottom right of that slide just showing the growth from the $1.94 billion at the end of the year. So the $1.99 billion at the end of 3/31, you can see that $57 million UPB loan sale in that roll forward.

Page 7, Chris mentioned, NPL, non-performing loan resolutions have remained strong and consistent. In total, we resolved $49 million worth of UPB in the quarter, for a total $1.3 million gain over and above the contractual principal interest, or about 2.7% gain for the quarter.

What we've done now starting with Q1 of this year is we've taken those NPL resolutions, and we've broken them out into two separate tables. So the top table represents our normal long-term 30-year product, and that's the bulk of our portfolio. And it's the 30-year product for loans that did not receive a COVID forbearance during 2020. And we'll get into that just a minute.

In the bottom table is our short-term loans, as well as any of the long-term loans that did receive a COVID forbearance. The reason we felt that starting this year, it's appropriate to split it out is we wanted to provide more transparency and more information to the investors on the different types of products and the characteristics will resolve the loans. Our long-term 30-year loans, when those loans pay off, when the resolution is a full payoff, that we received default interest and prepayment fees. So that makes up the gain.

You can see on the top table by just comparing the long-term loans, it's $29 million resolution compared to fourth quarter of $30 million, and a [$3.2 million] gain compared to [$3.5 million]. So that's have an apples-to-apples comparison.

And what we're seeing now in Q1 apart from a couple of things, one, we now have the short-term loan resolutions. We didn't show those separately in 2020 because for most of 2020, the short-term loans were held for sale. They were part of our held-for-investment portfolio. It was until towards the end of Q3 that we moved them over to held-for-investment. And now, our special servicing team is tracking them and they're getting involved in the resolutions.

Prior to that, when we were selling the loans, once we sell them, we do not charge them. We don't do any of the resolutions. So now that we have those loans as held for investment, and it's our intent going forward with opening up the short-term product going forward that we're going to put them in held for investments. So starting this quarter or first quarter this year, we're tracking those loans.

And the short-term loans, the reason we're bringing them out separate, they do not have prepayment fees. So they have default interest if they pay off or pay current and their non-performing, but they don't have prepayment fees. So their gains would be expected to be a little bit less because there's no prepayment fees associated with the short-term product.

And then also in the bottom table are the longer-term loans, the 30-year product that did receive COVID forbearances. That's something new for the first quarter because the loans that did get forbearances during 2020, by the time they received the forbearance and majority of those loans were modified or brought current, by the time all that happened, it was going into, say, Q3. Then if the borrowers went non-performing coming out of their forbearance, so another 90 days and they went non-performing, that brought it right to year end.

So we're first starting to see the resolutions coming through on those loans in Q1. And again, because there are loans that went to COVID forbearance, more often than not, if the borrower wants to pay off the loan, we probably would waive the prepayment fee. It's a case-by-case basis. But because we gave them a COVID forbearance, we're more likely to waive it. So we felt that's a different characteristics than the long-term loans without prepayment fees.

So that's why the tables are split. We're hoping that it gives investors, the analysts more information and detail about the different characteristics of our products as we monitor these non-performing loan resolutions.

On page 8, Chris mentioned our net interest margin ended the quarter at 410 basis points compared to 407 for Q4. And there's like 418 basis points all the way back to Q1 of 2020. Again, the very positive there is even during a tumultuous 2020 with COVID and suspension of loan production for over six months, we've maintained a very constant margin of over north of 400 basis points.

And we've talked before about our locked-in spread and our in-place portfolio generating a locked-in spread. And I think that was very, very strongly demonstrated through the pretty rough year last year. And we've maintained that 400 bps or higher throughout the entire year.

The right-hand side shows our portfolio yield and the cost of funds that comprise the 400 basis points of net margin. The yield has remained strong at 8.41%. At the end of the quarter, as Chris mentioned, our yield is pretty much on top of our [WACC], which is a positive. Obviously, the WACC, we have non-performing loan to take away from the WACC. And as Chris mentioned, our strong resolutions, default interest, and prepayment fees is pretty much offsetting the loss of interest income from the non-performing loans to keep that WACC in check.

And on the cost of funds, again, very consistent, just 4-basis point change from end of the year to Q1. And a slight uptick for Q1 is, as Chris mentioned, some of these new warehouse lines that we put in place in Q1, we're just first ramping those up in the quarter. And they do have fixed fees. So we have the same fee for the quarter, but you don't have the full balance of a loan on there for the quarter.

So that's just results in a little bit of a tick up in the cost of funds. As we now get more and more loans on those warehouse lines and fully utilize the lines, those costs would be absorbed into the higher average balance.

Slide 9, the loan investment portfolio performance. We've talked about non-accruals have stayed pretty moderate consistent. From Q4 to Q1, it actually went down slightly by 40 basis points. In terms of non-performing rates, 17.2% to16.8%. As Chris mentioned, it will take some time to start working off all those non-performing loans. But the key takeaway is as we are working off the non-performings, we're maintaining that close to 3 -- 4.3% gain on all the resolutions. So still strong resolutions as the result -- resulting those.

And slide 10 is our CECL reserve. CECL reserve at the end of Q1 was around $5.9 million, which is where we ended the year. So the CECL reserve, the loan loss reserve is flat. We ran multiple different models under COVID stress scenario, just like we did at the end of the year. I know you've heard about some companies saying they're backing off some reserves [versus some reserves].

We just thought we're growing our portfolio again. We're adding a lot more loans in the line. We've got more warehouse lines in place to be able to fund the higher originations coming in. And yes, COVID vaccines are out there. People are getting them. It's just a little soon to tell what the impact is going to be long term. So I guess I say it's with cautious optimism that we're watching the economy and the market as everything starts to reopen. And we're just holding that reserves steady for now until we get another quarter or two under the belt and see where things go.

And at the bottom-right of that slide, as Chris mentioned, our charge-offs remain very, very low. And even for Q4, it was only 37 basis points on an annualized basis. But based on the charge-offs at Q1, it's 8 basis points on an annualized basis. So our charge-offs remain low. And part of the reason for that is we just said those resolutions remain high. In Q1, 94% of all the resolutions in Q1, the [non-formal] resolutions for Q1 were loans that paid off or paid current at an overall 2.7% gain. So that's one of the reasons that the charge-offs are also so low, the strong resolutions.

Chris, with that, I'll turn it back to you.

Great. Thank you, Mark. I'll just wrap up here on 11 and then we can take some questions. I think from a high-level view of the economy, we're starting to see things improve and loosen up, definitely see that government stimulus and programs is starting to help some of our borrowers and their tenants indirectly.

So we hope that that will continue to help us resolve those delinquent loans, and as well as make new loans to new borrowers. I think I mentioned, but I think everybody knows the real estate market is extremely strong right now. So that's obviously helping us as well.

And then from just a capital and liquidity perspective, we've got plenty of financing in place to handle our growth. We're out in the market right now with our first securitization of the year. So I can't really say anything about that, but we'll update everyone as soon as we can on that. And I think we're very well positioned to take advantage of all the different growth we see going forward.

So that wraps up our prepared presentation, and we'll turn it back for question.

(Operator Instructions) Don Fandetti, Wells Fargo.

Hi. I'm just wondering if you can elaborate a little bit on where your embedded gains would be coming from, given that it's a loan portfolio.

Yes. Sure, Don. We -- I think if you just looked at the economic value or fair value even of the loans that we have on the sheet, it would be much higher. You can indirectly, if you wanted to take a quick look at it, you could just look at our fair value disclosure footnote, and that would probably be the best way to see it on the asset side.

But we're going to fine tune that a little more and make a full presentation. And obviously, if we were to use fair value accounting, that increase on the loan side would come through to equity as well through the earnings statement in the equity and increase book value. So that's where it's coming from.

Got it. And is there anything to the NPL improvement? Is that just going to -- we should just expect to see that slow improvement throughout the year that just sort of the pace?

Yeah. I think that's our expectation. It's slow and steady. It's going to take a while. We don't expect it to just quickly recover. We think a lot of these resolutions are going to take time to work through the process and work themselves out.

Got it. Thank you.

Yes.

Arren Cyganovich, Citi.

Thank you. The production volume number was impressive for the quarter, particularly in the investor 1-to-4 side. Is that just indicative of a change in demand, or has there been some changes to your marketing to get that higher level of volume?

Yeah. Hi, Arren. Good to hear from you. That I think -- that's a function of both. We think it's increased demand, but also no change to our programs, but I think just operationally hitting our stride and getting back in the groove. And then also there's a little bit of seasonality in there that January -- December, January, year-end stuff can always bounce around a little bit.

But -- so I think all three of those combined, add to the to the growth. But we definitely see across the Board, our account executives are being more productive. So -- and that's not from changing our guidelines or new programs. That's just their inherent productivity.

Okay. And then offering your short-term loan product again starting in April, are you changing the underwriting standards at all, or will it be similar expected volumes as what you used to post?

Yeah. It's hard to say. We're not sure yet how or what kind of traction we're going to get there. I can tell you early on in the month of April, we did see a lot of demand there, saw a lot of apps. So I'm pretty optimistic that it's going to come back to somewhere at that level. We didn't raise our credit minimums and tightened the box a little bit. So it might not be quite as robust as it was before, but it should be significant after we get a couple of quarters under our belt.

Okay. And then just lastly, following up on Don's question. When we look at the breakdown on slide 9 of the delinquency status of the loans, those non-accruals there, it looks like a big chunk of them are in foreclosure. What's the typical timeline? I know it probably varies by state depending on if traditional or non-traditional. But like, I know that sometimes some of the judicial states can take years maybe. I'm just trying to think about like how long some of this might hang out.

Yes. So yeah, what you see is it -- the delinquency quickly rolls 30, 60, 90 and then into foreclosure, and then to your point, sits in foreclosure quite a while because that's where -- it depends on how fast we can get through the various state processes. But on average, we're running about 10 months to 11 months in foreclosure, in that foreclosure status before we see a resolution. So that doesn't mean that it's of quote-unquote, foreclosure sale. It just means finally that the loan either comes current or gets paid off.

And so, in some of the longer states, you have borrowers who to see it, they wait till the very last minute and then they reinstate or pay us off. And then you can have a short state like Texas where you can foreclose in 60 days. So to your point, it varies across the US, but on average, 10 months or so is what we experience.

Okay. Thank you.

Yes.

(Operator Instructions) Chris Miller, JMP Securities.

Hey, guys. Thanks for taking my questions. I'm on for Steve today. And I have a couple of things I had. But I guess just a follow up on origination volumes. I guess once we do reach that normalized market, do you think the volumes will be closer to that 30% in each bucket breakout, or do you feel like SFR is going to be heavier weighting going forward?

Yes. So on the short-term product, that's all 1-4. So it'll skew more heavily to the 1-4 because we don't offer that short-term product on for the commercial assets yet. We may offer that sometime in the future. But right now, it's all 1-4.

Got it. And then on the other side of the equation, do you guys have any expectations for repayment levels after this year?

We don't. We don't try to forecast that. It's too tricky to do so. We're accruing default interest while it happens. So whether it happens this week or next week or next month, we're somewhat indifferent because it's very profitable for us. And it's lumpy. It's very hard to predict, so we don't try to forecast that.

All right. Thanks. And I have that anyway and --

Sorry, I just wanted to add in there. When Chris said we accrue for default interest to be really clear, it's because we just accrue it when it happens, meaning we record the default interest on a cash basis. We don't reserve or accrue for it. We just book it when we receive it.

Right. And I got it. Thanks, Mark, for clarifying that. It's accruing to the borrower at all times is what I meant to say. I didn't mean in our financial statements, but you it's something that's owed to us.

Right.

Makes sense. Thanks, and thanks for taking my questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Farrar for any closing remarks.

Thank you all for participating. We appreciate it and look forward to our next update after Q2. Thank you.

Thank you, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.