Velocity Financial, Inc.

Good afternoon, everyone, and welcome to the Velocity Financial, Inc. Second Quarter 2020 Earnings Conference Call. All participants are currently in a listen-only mode. Should you need assistance, you may say no to 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 and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Chris Oltmann, Chief Accounting Officer. Sir, please go ahead.

Thank you, Jamie. Hello, everyone, and thank you for participating in Velocity Financial's second quarter 2020 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 second quarter 2020 press release, and the accompanying earnings presentation, which are available on our investor relations 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 material. 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 most recent annual and quarterly reports. 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 will also refer to certain non-GAAP measures on this call. For reconciliations of these non-GAAP measures, you should refer to the press release and earnings presentation on our Investor Relations website. Finally, today's call is being recorded and will be available on the company's website later today. I will now turn the call over to Chris Farrar for opening remarks.

Thanks, Chris. Appreciate it. And thanks everyone for joining us on the call. Hope that everyone is safe and healthy and all of your families are as well. On our last earnings call, I outlined three overriding principles that will guide us through this pandemic. And just as a refresher, one, protect our employees and our shareholders. Two, help our small business owners manage through the crisis. And then three, carefully manage capital and liquidity to ensure long-term success. I'm proud to say that we've been very successful executing on all three of these goals. We are still working remotely and have done our part to protect our employees and our communities where we work and live. In terms of our shareholders, we continue to manage the business and our balance sheet to create long-term value. Secondly, we helped many borrowers bridge the worst of the shutdown by offering forbearance plans to help them manage their cash flow. Lastly, we were able to issue long-term debt for all loans previously pledged to our warehouse lines at very attractive terms, which eliminated the mark-to-market risk that we faced. We're also very proud that we continue to enjoy strong support from our securitization investors through all market cycles. Looking forward, our team is eager to resume lending and our customers are indicating strong demand for our programs, making the final preparations to accept new loan applications and execute our growth plans in the third quarter. I want to thank all our investors, employees, and industry partners for your continued support Together, we will successfully navigate this environment and achieve our vision for the future. With that, we'll turn over to the presentation materials. As Chris mentioned, we've got the earnings deck and I'll start on page three and just kind of kick us off with some of the highlights and then turn it over to Mark to walk through some results and then back to me to close. First topic on page one, we had net income of 2.1 million for the quarter and core EPS of 17 cents a share. We think this reflects the results of a resilient business model in obviously extremely challenging times. Later on, Mark will walk you through the mechanics, but as a result of the pipe transaction, declared a deemed dividend to the preferred common stock, which results in a non-cash adjustment from common equity to temporary equity. Mark will walk you through all the details of that transaction in a bit. In terms of production in the portfolio, continued to see strong resolutions of delinquent loans. We're seeing good recoveries there, even in the The depths of the crisis, so we still see an active market and we're a little bit surprised by how much activity was going on and was obviously a very strange time for everyone. Also, in terms of our forbearance plan, about $331 million of loans were on some type of a forbearance plan at the end of the second quarter. Importantly to us, we've been monitoring how those folks are going to do post-forbearance, and for the month of July, a little over 80% of those folks either made payments or paid their loan in full. So we were very pleased with the performance coming out of the forbearance period, and we think it was really the right thing to do and helped a lot of borrowers get through a tricky time. In terms of net interest margin, it's actually up quarter over quarter. We did see a reduction in the yields from our total portfolio because of non-accrual loans, but there was an offset there from the interest savings on our long-term debt that we paid down with IPO proceeds. So those two essentially washed. In terms of financing and capital, I mentioned that we paid off our warehouse lines, two really good securitizations that we put announcements on earlier. And then you folks all know about the 45 million of convertible preferred stock that was issued as well to strengthen the balance sheet. Turning to page four, this is essentially just a bridge. from core earnings to the GAAP loss per common share. Again, kind of the preferred dividend or deemed dividend, if you will. It was the most material transaction. And I don't think anyone will be surprised by that. That's essentially just a transfer as a result of the dilution. What we did do, just to be real clear, is mark the the convertible preferred stock to its full redemption value. So that's essentially what's driving this quote unquote deemed dividend. The other item on the slide that we mentioned is the COVID-19 reserve. We run a pretty rigorous model. That model came back. We sat down as a team and looked through the results and The new updated forecast is for a more severe economic downturn and for a longer period. I think it goes out a little over two years. So we think we've got a very safe look at where we're going to be in terms of CECL, but that did result in some increased reserve for the quarter. Turning to page five, just again kind of summing up from the business perspective before I hand it over to Mark. I mentioned the two securitizations. We are in negotiations right now with some other counterparties for new warehouse financing that will all be non-mark-to-market. So on a go-forward basis, we want to take that risk out of the business, and we have very good dialogue going right now. I expect to have significant facilities closed here in the third quarter. In terms of production, we spent some of the downtime reworking our IT and some of our processes. We think we've got a better process coming out of this crisis that will be more efficient and a little more streamlined for not only our customers but our internal operations folks as well. are retraining on some of those changes right now and preparing to start accepting applications early September. So very excited to get back into the origination mode again. And then lastly, on forbearances and lost MIT, I did mention how those loans were performing. We stopped offering new forbearance plans at the end of June. We did issue some new forbearance plans early in the third quarter that kind of spilled over. But by and large, we're over that hump on a go-forward basis. Anything that we do should be pretty small and relatively minor in comparison to what we've already done. Very happy to see folks getting back on their feet and resuming their payments. Obviously, we'll see that happen here again in August and September. The pig goes through the snake, if you will, and we should be over the hump with that process. We're looking forward to refocusing on not only managing those folks going forward, but making new loans. So with that, I'll hand it over to Mark to take you through the rest of the deck.