Velocity Financial, Inc. (NYSE:VEL) 2024 First Quarter Earnings Report Call Record May 3, 2024
Velocity Financial, Inc. wasn't among the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
operator: Hello. Welcome to the Velocity Financial Incorporated Q1 2024 Earnings Conference Call. All participants will be in listening-only mode. [Operator Instructions] Please note that this event is being logged. I would now like to hand over the proceedings to Chris Ortman, Treasurer. Please move on.
Chris Ortman: Thank you, Daniel. Hello everyone. Thank you for joining us today to discuss Velocity's Q1 2024 results. Joining me today is Chris Farrar, President and CEO of Velocity. and Mark Szczepaniak. Chief Financial Officer of Velocity. Early this afternoon, the company announced its first quarter results. The press release and accompanying presentation will be available for viewing during this conference call on the Company's Investor Relations website at www.velfinance.com. We would like to remind everyone that today's conference call may contain forward-looking statements that are uncertain and beyond our control, and that actual results may differ materially. I think. Some of the risks and other factors that could affect results include the risk factors made in our communications with shareholders, including those disclosed in our filings with the Securities and Exchange Commission. and other notes.
Please also note that the content of this conference call contains time-sensitive information that is accurate only as of today, and we undertake no obligation to update any forward-looking statements. This discussion may also refer to certain non-GAAP measures. For reconciliations of these non-GAAP measures, please refer to our earnings documentation on our Investor Relations website. Finally, today's call was recorded and will be made available on his website at the company later today. He will now turn the call over to Chris Farrar.
Chris Farrar: Thank you, Chris. Welcome to the first quarter results briefing. First of all, I would like to thank all of our team members for a great first quarter, as reflected in the results we announced after the meeting. New issuance volume is up approximately 75% year-over-year, reflecting strong demand in our niche market as new issuance volumes were particularly low in the first quarter. The team continues to originate target assets in a disciplined manner while managing expenses to drive revenue growth and return on equity. Our lending division is seeing healthy activity across the U.S. as the market adjusts to new interest rate realities and banks enter where they have left on favorable terms.
The securitization market remains very supportive as improved execution of second trades in April compared to January securitizations has resulted in tighter spreads than this year's rise in benchmark rates. situation. Additionally, there was broad participation, with 27 different investors purchasing the bonds, and the deal was oversubscribed multiple times. Our incredible track record has created a healthy investor base that believes in our programs, and we have worked hard to earn their loyalty. Regarding our portfolio, we continue to perform well by resolving delinquent assets favorably and our special services team has done an excellent job of delivering positive results. If priced appropriately and values holding up well, there may be plenty of new capital available to purchase the property that secures the loan.
On the capital side, we issued $75 million in new debt in February to further our goal of growing our portfolio to $5 billion in UPB by 2025. Importantly, as you saw in the press release, we have sufficient liquidity to achieve these goals. we grow Speaking of growth, we issued a company record $2 billion worth of LOIs in April and received the most new applications in more than two years for a total UPB of just under $400 million. Clearly, our pipeline is strong and our customers are responding to our services. The team is excited to continue gaining market share with our strategy of preserving revenue, increasing book value, and reallocating capital to high-yielding assets, and we continue to drive revenue growth and shareholder value. Continue to promote.
This concludes my prepared remarks. Let's move on to the presentation from page 3. From an income perspective, that's clearly a great result. Core EPS of $0.51 per share is a record high for the company, primarily due to fair value increases from new origination and net interest margin earned on the portfolio. In the third bullet point, we can see that NIM has increased significantly year over year, all of which combine to increase pre-tax ROE. This represents his ROE on a pre-tax basis since many of our comparable companies are not taxpayers. In terms of production and financing portfolio, as I mentioned, the very strong production in the first quarter continues into his April, and the pipeline is very healthy. The portfolio has been steadily increasing compared to the previous year.
Bad debts can be managed at just 10%. And most importantly, its metrics continue to show positive improvement in resolution. From a funding and capital standpoint, I mentioned his January securitization, we also completed the April securitization, and those markets are very, very strong right now. We have sufficient liquidity and warehouse capacity. And, as I said earlier, we issued these new banknotes to encourage growth. Move to page 4. On the left is a reconciliation of our core adjustments related to stock trading. And on the right side, as I mentioned earlier, book value is increasing as we continue to maintain revenue and increase book value. On the far right, he added two bars there to give people a feel for the gains built into the amortized cost portfolio.
And I would like to point out that if they are translated into book value, we think there is great untapped value there. And as we move forward as a company over time and move our entire balance sheet to the fair value option, we believe that book value will be much higher for all shareholders. So I'll turn it over to Mark and start on page five.
Mark Szczepaniak: Thank you, Chris. Hey, guys. The first quarter of this year started the year on a positive note, as Chris mentioned, with strong loan originations and a healthy securitization market. Page 5 reports that UPB's loan volume in the first quarter was approximately $379 million, an increase of 7.5% from $352 million in the fourth quarter of last year. And like Chris said, I think it's up almost 75% year over year. The strong production growth during the first quarter was achieved by new weighted average coupons of 11.1% in the quarter. Also, our origination weighted average coupon has averaged 11% over the past five quarters. Q1 loan growth was also driven by tighter credit standards, with weighted average loans to value for the quarter at just under 64%, and Q1 production growth at lower LTV and higher weighted average coupons. Strong and further evidence of continued demand for our financing. product.
As a result of the strong growth in production, page 6 shows that our entire loan portfolio showed similar growth in the first quarter. As of March 31, the total loan portfolio was approximately $4.3 billion. This is a 5.1% increase from last year's fourth quarter and more than 19% year-over-year increase. The weighted average coupon across our portfolio as of March 31 was 9.07%, 19 basis points higher than at the end of last year and 92 basis points higher than the same period last year. The portfolio's weighted average loan-to-value ratio decreased slightly to 67.6% as of March 31, compared to 67.8% at the end of last year and 68.1% as of the first quarter of 2023. Therefore, it is still producing strong production with a high weighted average. Coupons with still low weighted average loan-to-value ratios. As Chris mentioned, on page 7, our portfolio yield was relatively flat sequentially, but up 71 basis points year over year, so our first quarter NIM was up 17 basis points from the fourth quarter. point decrease and increased 12 basis points year over year. Meanwhile, cost of funds increased 18 basis points sequentially and 60 basis points year over year.
The slight quarter-over-quarter decrease in NIM was primarily due to the timing of bad debt interest, which is recorded as received on a cash basis. Meanwhile, short-term lending rates rose in the first quarter. We continue to see improvement across the securitization market, and strong origination growth, coupled with healthy NIM, is reflected in our first quarter earnings. On page 8, our bad debt ratio was 10.1% at the end of the first quarter. This compares to 9.7% in the fourth quarter of last year and 8.7% in the same period last year. Continued strong collection efforts by our special debt collection department have resulted in successful ongoing resolution of bad debts. The table on page 9 highlights the continued success of our NPL efforts.
During the first quarter, we resolved approximately $55 million worth of bad debt loans and REO UPBs, resulting in a net gain of $1.3 million, or 2.3%. Over the past five quarters, bad debt disposals have increased by approximately 2.5% on average. And again, this many times exceeds collecting all of the principal and interest on the contract. Page 10 shows CECL allowance for loan losses and net loan charge-offs and REO activity. As of March 31, our CECL reserves were $5.3 million, or 19 basis points of our non-fair value loan balances held for our investment portfolio, and our CECL reserves were between 15 and 20 basis points. It is within the expected range of points. Note that the CECL allowance for loan losses does not include loans carried at fair value. The table on the right side of the page shows the net income loss from amortization and REO-related activities during the quarter.
Net loss from charge-offs and REO-related activities in the first quarter was $0.8 million, compared to a net loss of $300,000 in the fourth quarter of 2023. Page 11 shows our durable funds and liquidity position as of the end of the first quarter. Total liquidity as of March 31 was approximately $79 million, consisting of approximately $35 million in cash and cash equivalents and $44 million in available liquidity and unfinanced collateral. As Chris mentioned, he issued one securitization in the first quarter. In January, the Company issued 2024-1 Securities, bringing total outstanding securities to just under $210 million. As of March 31, our available warehouse line capacity was $529 million, with maximum line capacity of $885. In February, the company entered into a $75 million five-year senior secured note at a fixed rate of $9.875 to support the company's continued growth.
At the end of the April quarter, we completed our second securitization of the year, totaling $295 million in issuance. I would now like to turn the presentation back to Chris and give an overview of his outlook for Velocity on key business drivers. Chris?
Chris Farrar: Thank you Mark. Yeah. Looking ahead, as I mentioned earlier, the market appears to be healthy and values are being maintained. Employment levels are good and the economy seems to be doing well. From a capital perspective, as I mentioned earlier, the securitization market is currently a tailwind for us. And I'm very lucky to be able to take advantage of that. And from a revenue perspective, obviously they've been profitable and we expect revenue to continue to grow, so overall we're very positive and very optimistic about the future. This concludes the prepared presentation. If you have any questions, please give us a call. I'm sorry.
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