Velocity Financial, Inc.

Good afternoon and welcome to the Velocity Financial second quarter 2023 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal 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, then one on your touchtone phone. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Altman, Treasurer. Please go ahead.

Thanks, Danielle. Hello, everyone, and thank you for joining us today for the discussion of Velocity's second quarter 2023 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Sapaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our second quarter 2023 results and the press release and accompanying presentation are available on our Investor Relations website. 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. 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 SEC filings. 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. 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. And finally, today's call is being recorded and will be available on the company's website later today. And with that, I will now turn the call over to Chris Farrar.

Thank you, Chris, and we appreciate everyone joining the call today. We're pleased to report another excellent quarter and thank all of our team members who worked so hard to support our mission. Our continued growth in earnings and book value are a result of a sound strategy and attention to detail from everyone at the firm. Our origination pipeline is very healthy, and we continue to be choosy with credit as we've seen increased demand with banks tightening their lending activities. This pullback has allowed us to create attractive risk-adjusted yields for new portfolio loans. We recognized a 19% increase in originations versus the prior quarter while holding expenses flat, which obviously improves our operating margins. With respect to credit performance, we continue to profitably resolve delinquent loans and recognize overall gains from recognizing default interest. Our delinquency rates increased this quarter and we expect the net resolutions of these assets to continue to drive future gains similar to our long-term history as the real estate market remains stable in terms of valuation. Our special servicing team continues to sell REOs at a healthy pace and the markets are liquid when priced reasonably. Frost has come off some of the overheated markets as Fed policies cooled the rapid price appreciation we were experiencing. which we view as a long term positive for our business. Capital markets are improving as we see spreads starting to tighten and better investor participation in the new issue market due to limited supply and the potential of a terminal rate from the Fed. Our financing relationships and capital sources are strong as we continue to grow earnings and work to improve our return on equity. In short, our business is performing very well, and the team is passionate about growing our assets, our people, and our opportunities. As always, we appreciate all shareholders and will work to deliver value every day. I'll turn over to the presentation now and walk folks through a couple of slides and then hand it over to Mark. On page three, from an earnings perspective, really nice growth in earnings per share, great quarter for us. I mentioned the net revenue growth earlier, up 6.8% quarter over quarter with flat operating expenses. That's, you know, a testament to our operating team and doing a great job of growing volume and controlling costs to improve margins. Overall portfolio yield increased up 24 bps year over year, as a result of putting on these new loans at much higher coupons. Obviously, we've got a large fixed rate component there, so to move that coupon up that much speaks to the volume that we've been doing at these much higher levels. In terms of production, I mentioned $258 million for the quarter up from the previous quarter, down significantly from last year. But as you can see from the earnings, you know, Earnings are not driven by current month or current quarter production, so we're very comfortable with the levels that we're at right now, and we're more focused on allocating capital with attractive returns as opposed to just doing volume. Portfolio is growing nicely from the net growth of the originations, and in terms of credit performance, the NPLs, For the quarter, moved up to 10% from 8.2% in the previous quarter. There are really three things going on there. One, the portfolio seasoning, and just as a reminder, last year we did $1.7 billion in originations, and delinquency tends to peak 24 to 36 months after originating a new loan. So as the portfolio seasons, we'll see some of that delinquency come on. Two, we're quick to put borrowers in foreclosure. Many lenders will work with a borrower when they're delinquent or delayed in making payments. If borrowers will communicate with us, we're often open to doing that, and if there's a viable plan to work them out. But if not, we're very quick to put someone into foreclosure, especially if they're not communicating with us. just to make sure we get a resolution and we protect the equity that we have ahead of our loan. And then thirdly, the NPLs come on a lot faster than they come off. So, you know, if we move quickly to pop them into foreclosure, it might take several months for something to resolve. So there's kind of a lag effect there. Most importantly, you know, we continue to see the positive gains over and above contractual principal and interest and we continually monitor our portfolio and look at delinquent assets and based on everything we've seen and reviewed, we don't expect our results to be any different than what we've historically seen. In terms of financing capital, had a really nice transaction earlier in the quarter where we did a re-remix of several of our retained interests from previous deals. This was a great transaction for us because it continues to down the theme of non-mark-to-market financing. where virtually almost all of our financing now in the book is non-mark-to-market. Investment banks offer us repo facilities on those securities, but they come with mark-to-market risk, so we think this is a more elegant solution to control risk, and it was a great transaction for us. And then I guess I would just say in terms of liquidity, $72 million, so we're in real good shape there with all of our financing counterparties and have plenty of capital to grow. Turning to page four, very straightforward and simple, nice earnings growth, adding to book value as we've kind of always said is our strategy. And you can see we ticked up to $1,257 on a GAAP basis, so continuing to just focus on growing earnings and growing book value. On page five, we think that we've created a lot more value than what the GAAP book value would indicate, and this is a buildup of not only the inherent value in the platform, but also what we think is created in the future value of the business and a potential premium if someone were to be interested in acquiring the business. Suffice it to say, we think the economic value of the company is much higher than the book value on a GAAP basis. So with that, I'll turn it over to Mark on page six.