Good day, and welcome to the Velocity Financial Inc. Second Quarter 2022 Conference Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer and Director of Investor Relations. Please go ahead.

Thanks, Andrew. Hello, everyone, and thank you for joining us today for the discussion of Velocity Financial's second quarter 2022 results. 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 2022 press release and the accompanying presentation, which are available now 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 materially. For a 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. 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.

Thanks, Chris, and welcome everybody to our second quarter earnings call. Before we dive in, I want to recognize our CFO, Mark Szczepaniak, recent award from the Los Angeles Times as CFO of the year. Anyone who's worked with Mark knows he's a true leader and a genuinely great person, his commitment and work ethic permeates our culture and we're very fortunate to have Mark on our team. So congratulations, Mark, on a well-deserved award. In terms of our results, we reported another outstanding quarter in an obviously uncertain time. Our unique portfolio approach continues to generate stable earnings with limited volatility. Originations moderated this quarter as our recent coupons increased to the mid-8% range. And fortunately, we're continuing to see healthy loan submissions at those levels. We're currently in the market with our fifth securitization of the year, and we're pleased with the strong support we've seen from our investor base. For seasoned loans, our delinquency continues to normalize and our special servicing team consistently delivers impressive results. We're beginning to see a cool down in the real estate market, which we think is healthy, and there are still plenty of loan opportunities for us to invest in. Due to the recent market volatility, we're also being shown some interesting opportunities to acquire good assets from distressed operators. We intend to capitalize on those situations as they develop in the second half of this year. From a liquidity perspective, we're in the strongest position we've had in many years. Due to our stable portfolio earnings, we can be patient in deploying our capital and will manage our liquidity carefully as the market evolves over the next six to 12 months. Despite the recent headwinds, we are very confident in our ability to grow and deliver strong returns for our…

Thanks, Chris. Good afternoon, good evening, everyone, and thank you, Chris, for the kind words. Of course, I had to pay him enough to say all those things, but that's a different story. On Slide 5, for loan production. As Chris mentioned, we have very strong loan production for the first half of this year, a little over $1 billion compared to about $489 million for the six months of 2021, which is a 110% increase in production. We only had $1.3 billion fundings for all 12 months last year. So, we're at $1 billion for six months, we're still seeing very strong demand for our product. We have $445 million funded in Q2. As we've seen a little bit we've been raising our WACs on our loans, our new loan applications to kind of keep up with the interest rates that we're seeing on the finance side to maintain that spread. You see that in just a moment. So, even after raising our WACs and actually our Q2 production, new originations on Q2, our weighted average coupons were up 145 basis points from the new originations that we had in Q1. So, we've been aggressively raising the rates and still seeing good, strong production coming in, in Q2 and again in the first six months of the year. So, very happy to see that. On slide six, the production comes in strong, the loan portfolio is growing accordingly. We're putting most of that into our portfolio, our in-place portfolio with our lot spread. Our total loan portfolio at the end of June was $3.1 billion, that's up 7% from $2.9 billion as of the end of Q1 and up 49% year-over-year compared to June of last year. Again, just showing the very, very strong demand for our product. And…

Thanks, Mark. Appreciate it. On slide 12, we've shown this slide a few quarters in a row now, so I won't spend a tremendous amount of time on it. But want to make the point that most of our peers mark their balance sheet to fair value. And if we believe, if we were to do something like that, we'd see a much higher mark than we -- than you see just looking at the face of the financial statements, and that's largely driven by the locked-in spread and embedded gain in the portfolio. So we think from a value perspective, we're undervalued based on where our stock is trading today. And I want to try to highlight that we think there's a lot of future value that's yet to be realized. 13, just kind of talking about the outlook. We mentioned that we are seeing good demand from a credit perspective, we feel very, very safe there. And there's been a lot in the press about what's going to happen and what may happen. But so far, we think things are good and we expect it to continue that way. We do plan to do two more securitizations this year and I think from an earnings perspective, we just want to continue to focus on managing the portfolio, providing that stable spread and looking for any opportunities to grow, both organically and strategically. So with that, we'll turn it back over to Andrew, we can see if there are any questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Arren Cyganovich with Citi. Please, go ahead.

Thank you. On the production side, obviously, a solid quarter, a little bit lower. And it sounds like you were able to pass through some of the increase which -- in price, which slowed down the production. What level of production are you expecting in the second half of the year relative to -- I guess, maybe you talk about how the cadence happened throughout the quarter?

Yes. Hi, Arren, good question. I mean, I think the right guidance is kind of with the second quarter level. We feel good that we're going to be able to deliver that for the next few quarters. So I think that's a good run rate.

Okay. That's good. And then on the securitizations that you did recently, how have those been pricing relative to some of your earlier securitization?

Yes. So they're definitely pricing a lot wider than certainly 2021. 2021 was a banner year for us, and we were getting some incredible pricing there. So -- and I would say, their pricing a little wider than even before 2021. So margins aren't as strong on the most recent deals as probably they have been historically. But I think on a go-forward basis, we feel like we've caught the pipeline up now and I think will be there. Obviously, it depends a lot on where the market goes from here, but we're feeling like we're back-end line from a spread perspective now.

And that would be kind of around that 4% type of NIM? That's the expectation?

Yes. That's right.

Okay. Great. Thanks a lot.

You’re welcome.

[Operator Instructions] The next question comes from Steve DeLaney with JMP Securities. Please go ahead.

Thanks. Hey, guys, congrats on a really strong quarter, and obviously a very challenging market. And Mark, congrats to you from another a former public company CFO. It's a tight stuff work, so great job.

Thank you.

Chris, you talked about the stress situations, seeing some things out there. Boy, we have seen some shops shut down. And just this morning, I saw a mortgage REIT write-off over $20 million of a pref equity investment in an originator who had ceased operations. So we know those kind of things are out there. Just curious, as you look at those opportunities, is it a matter of just looking at loan collateral that may be sitting on warehouse somewhere or is there any interest in infrastructure and any product expansion opportunities? Thanks.

Sure. Thanks, Steve. Appreciate it. Yes. So we've seen both asset opportunities and strategic opportunities, and so nothing huge yet, but I feel like it's the beginning of probably a larger opportunity set. On the asset side, yes, I think, you're largely seeing assets that are probably home either on a warehouse line or maybe have some scratch and dent characteristic or something like that, where we would obviously look to pick those up at a discount. And then I think strategically, we've seen a couple of platforms we've looked at nothing compelling yet. And we haven't seen anything in terms of new products, but we're open to that. And so my gut tells me over the next six months, we may see something like that.

Okay. Yes. Okay. Well, that's -- the last year or so, it's been just a matter of your own -- keeping things straight in your own kitchen, right, but you guys have really gotten yourselves squared away and you've got a strong position to take advantage. Just curious where you're pricing today, I mean, I assume, we're probably up to something near an eight handle and how the demand is looking at that type of a coupon?

Yes. So we're -- the more recent production is kind of 8.5% to 9-ish coupon? And yes. And the -- just in the last few weeks, submissions have been very strong. So I think there's -- what I call kind of the sensitivity period where customers and client borrowers are kind of adjusting to things? And there's like a whole back or a lull, if you will, and then people start to realize this is the new reality and they transact. So -- there was a little bit of an adjustment period there for sure, but very pleased to see how strong submissions have been.

Great. Thank you both for the comments. Appreciate it.

Thank you, Steve.

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

I just want to say thanks again for everybody for participating and all of your support, and we're grateful for the years of support that we've seen from everyone. So that will conclude our call. Thank you.

Thank you.

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