Velocity Financial (VEL) Q1 2025 Earnings Call May 01, 2025 05:00 PM ET Speaker0 Good day, and welcome to Velocity Financial Inc. First Quarter twenty twenty five Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Altman, Treasurer. Please go ahead. Speaker1 Thanks, Kaylee. Hello, everyone, and Speaker2 thank you for joinin ...

Financial Data and Key Metrics Changes - The first quarter net income was $12.4 million, essentially flat compared to the fourth quarter of 2024, resulting in a return on assets (ROA) of 1.17% and a return on equity (ROE) of 12.4% [11] - Net interest income grew by 12.4% year-over-year but declined slightly from the previous quarter due to a decrease in Fed funds sold and other interest-earning assets [12] - Non-interest expenses increased by 3.2% or $878,000 in the first quarter, and were up 8.5% or $2.2 million compared to the same quarter last year [12] - The net interest margin improved by nine basis points to 3.8% [9][12] Business Line Data and Key Metrics Changes - The bank successfully executed a significant commercial real estate loan securitization, enhancing balance sheet management and generating fee income that will positively impact the net interest margin in the second quarter [7][8] - Loan growth in April was reported at over $50 million, with a quarterly average growth of $42.5 million [13] - Nonperforming loans declined by $9.3 million, improving the nonperforming loans to total loans ratio by 23 basis points from the prior quarter [15] Market Data and Key Metrics Changes - Deposits declined by $62 million for the quarter, resulting in a loan to deposit ratio of 93.9% [12] - The bank's investment securities increased by $13.4 million to $397 million, with an accumulated other comprehensive income (AOCI) gain of $10.3 million [12] Company Strategy and Development Direction - The company is focused on disciplined loan growth, robust credit management, and improving operational efficiencies while increasing shareholder value [6][9] - The management emphasized the importance of maintaining a healthy balance sheet and promoting long-term sustainable growth through proactive asset management strategies [8][20] - The bank is evaluating additional securitizations as a tool for managing concentrations and supporting sustainable profitable growth [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's credit risk strategies and the overall economic outlook, noting that borrowers remain cautious but optimistic [27][29] - The company anticipates achieving $325 million in loan growth for the year, translating to an 8% annual run rate compared to the prior year [19][49] - Management acknowledged the potential for rate cuts and their impact on loan growth and customer behavior [48][49] Other Important Information - The bank's book value and tangible book value grew by 4.4% and 4.7% respectively over the prior quarter, and by 14.3% and 15.2% compared to the same period last year [9] - The company is considering a share buyback program due to capital accretion and stock price levels [13][51] Q&A Session Summary Question: Impact of securitization on net interest margin - Management confirmed that the securitization will primarily impact the margin, providing a five basis point benefit for the next quarter [23] Question: Loan growth confidence amid macro uncertainty - Management indicated that the loan growth in April was primarily due to fundings on revolving lines rather than new deals, and expressed optimism about the pipeline [25][26] Question: Fee income increase drivers - The increase in fee income was attributed to the treasury management division, which has seen significant growth in recent years [32][33] Question: Expectations for non-interest expenses - Management expects non-interest expenses to remain flat in the second quarter, around $28 million [36] Question: Outlook on loan production yields and margin - Management anticipates a stable margin around 3.75% to 3.8%, with the potential for improvement depending on interest rate movements [40][42] Question: Consideration of share buybacks - Management is seriously considering a buyback program due to attractive stock levels and capital accretion [51][52]

Financial Data and Key Metrics Changes - For Q1 2025, the company reported net income and adjusted net income of $26 million, with reported earnings per diluted share at $1.52 and $1.53 on an adjusted basis [5][19] - The adjusted net interest margin (NIM) on a tax-equivalent basis increased by one basis point compared to the previous quarter, while the core operating margin performance overcame four basis points of dilution from expired interest rate caps [5][21] - Non-interest income for the first quarter was $17 million, including $7 million generated from capital markets revenue [7][22] - The effective tax rate for the quarter was 1%, down from 9% in the prior quarter, primarily due to tax benefits from equity compensation and new state tax credit investments [33][34] Business Line Data and Key Metrics Changes - The wealth management business generated $5 million in revenue for Q1 2025, reflecting a 14% annualized increase from the prior quarter [8][23] - Total loans held for investment grew by $39 million or 2% annualized, with annualized loan growth at 4% when adjusting for the runoff of M2 equipment finance loans [26][27] - Non-interest expenses decreased by $7 million or 13% to $47 million, well below the guidance range of $52 million to $55 million [9][24] Market Data and Key Metrics Changes - Total core deposit growth was robust at 20% annualized, reflecting success in expanding market share with both new and existing clients [7][28] - The company experienced strong deposit betas, actively managing deposit costs as the Federal Reserve began reducing interest rates [21][96] Company Strategy and Development Direction - The company intends to continue utilizing securitizations to provide flexibility, enhance liquidity, and manage growth as it approaches $10 billion in assets [6][13] - The focus remains on the growth potential of the wealth management business, driven by strategic investments in Southwest Missouri and Central Iowa markets [8][24] - The company is committed to maintaining strong liquidity and building capital, with a focus on increasing regulatory capital ratios [14][32] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term resiliency of markets and the financial health of clients, despite macroeconomic uncertainties [11][16] - The company is closely monitoring key industries within its loan portfolio and adapting to changing economic conditions [10][31] - Management indicated that loan growth guidance for Q2 2025 is projected at an annualized rate of 4% to 6%, reflecting current economic uncertainties [6][38] Other Important Information - The company reported a decrease in total criticized loan balances by 28 basis points from the prior quarter, marking the lowest criticized ratio in five years [9][29] - The tangible common equity to tangible assets ratio increased by 15 basis points to 9.7% at quarter end, driven by strong earnings [32] Q&A Session Summary Question: Loan growth outlook and uncertainties - Management acknowledged that first quarter loan growth was modest due to elevated payoffs from clients selling properties or businesses, and revised guidance reflects economic uncertainties [38] Question: Provision for credit losses - Management indicated that a lower provision for credit losses is likely if loan growth remains muted [41] Question: Margin and fixed-rate loans repricing - Management confirmed continued success in rolling up rates on new fundings, with a weighted average rate of 7.21% for the quarter [42] Question: Non-interest income expectations - Management expects non-interest income to grow at 6% or better, with strong performance in wealth management contributing significantly [50] Question: Capital markets revenue outlook - Management expressed confidence in improved capital markets performance in the coming quarters, driven by a return to normalcy in project activity [54] Question: Securitization plans - Management indicated that timing for the next securitization will depend on the pace of growth in the LITECH business, with plans for a larger securitization in the $350 million range [78][102] Question: Credit quality and tariff exposure - Management conducted a credit analysis of commercial borrowers and identified minimal high-risk exposure related to tariffs, with most clients having shifted imports away from China [90][92]