Good day and welcome to the Velocity Financial Inc. Q3 2020 Earnings Call. All participants are currently in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. I would like now to turn the conference call over to Chris Oltmann, Chief Accounting Officer. Please go ahead.

Thank you, Matt. Hello everyone and thank you for participating in Velocity Financial third 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 third quarter 2020 press release and the accompanying earnings presentation, which are available on our Investor Relations' website. I'd 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 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 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. And thank you all for joining us today. We had a great quarter and I’m excited to host the call today. On our last earnings call, I outlined our plans to restart originations in the third quarter, and I'm very excited to report that we are completely operational. Our new applications have returned to pre-COVID levels and the pipeline is expanding rapidly. The silver lining of our production pause was a chance to work on the nice to have projects that are often tough to accomplish when a company is growing. We use the downtime to reevaluate our entire production platform and we made significant improvements to our process as well as our technology. These improvements will make us more efficient and more customer friendly going forward. We also restructured job functions and responsibilities, which resulted in a reduction of force at the end of September. All these decisions are never easy. Our team is convinced they were necessary and beneficial to our future growth. In terms of the portfolio, we saw a stabilization of the non-performing loans and our asset managers continued to do an excellent job of resolving delinquent loans. We continued to see strong recovery rates and the real estate markets are performing better than many had predicted. Additionally, it's important to note that we saw provision expense return to a normalized level in Q3 as the economy is performing above the adverse levels that we were assuming in our CECL model. Looking forward, our team is working hard to create new relationships on the liability side of the balance sheet to eliminate mark-to-market risk and explore other debt structures to finance our growth during the fourth quarter and well into ‘21. With regard to our people, most of us continue to work remotely, but…

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Stephen Laws with Raymond James. Please go ahead.

Chris. I guess, first, let me talk about I think 53 million of production in October. Is that kind of a good run rate as we think about November and December or is there seasonality or how do you think about that ramping? And kind of coupled with that, it seems like the focus recently it's been exclusively one to four rental, is that likely to continue for the foreseeable future? How do you think about the mix of the new loan production?

Sure. So I think, it takes some time for applications to build and for your pipeline to build. So, I don't think the $63 million is the run rate, we do expect that to increase over the quarter. And there's a little bit of seasonality in Q1 kind of January-February. So, it could maybe level off or pull back a little in that Q1. But we think, by the time we get to Q2, we'll be back to some more normalized levels that we were pre-COVID. And then, in terms of the second part of your question, we tightened up on some of our small commercial guidelines, and intentionally wanted to have a little bit less exposure there just in light of obviously, all of the things going on in the economy. So yes, I think on a go forward basis, we would expect a higher level of the one to four production than the small commercial little bit to new rate, but I think it's going to be weighted a little more towards the one to four.

Great, appreciate the color on that. And kind of a follow up, given the trends we're seeing coming, coming out of COVID with migration shifts of you about half the portfolio is New York and California, have you seen a change in demand as of where the loan applications are coming from? Or have you seen anything interesting that that just shift the geographic concentration of the loan demands?

Yes, not yet. Not yet. It's probably too new to rate still in the large MSA. As you know, we'd like to stay in the more liquid markets. So I would expect our originations to continue there. A lot of what we do is out in the suburbs, and has always been there. So we're seeing a lot of demand there, but I don't think there's anything material yet we would highlight.

And then Mark, can you give us what goes into the other income line, $1.3 million for the quarter, nice pick up. It's been a little bit up and down this year. So you can give us an idea of what is in that line item? And how do we think about that, as we model forward.

Yes, what's in the other income line? Hi, Steve, what's in other income warning for Q3 as we talked about, we move the HFS loans about $214 million with UPB held for sale loans are held for sale category up and held for investment, because those loans were pledged in their securitization we did in July. So what is Plexus accusation we're not able to sell it, we have to hold it. So GAAP requires you to move it up. So those loans are when they were held for sale held for sale loan, you find lower cost of market accounting. So we had a really built up over time ever since those lows on the books and of last year, January, February of this year, we're still doing originations, we've built up a valuation allowance of about $1.3 million. That goes into other income as an expense as we are but I probably can't fix it. When you're building up an allowance for a lower foster market valuation HFS loan it's a contra other income. So we built up a $1.3 million kind of write off to other income over time and we're seeing this allowance account. Once we move those loans up into health reinvestment you have to reverse out that allowance that you had put in other income so we actually took a look a positive 1.3. It's the reversal of that 1.3 a while as we built up for a positive 1.3. It's kind of a non recurring big hit to other income because we reversed out for HFS allowance. And when you move those loans up into HFI, now's as an HFI loan, they still have an allowance as well, but that's called loan officer. So that's why you see different provision of about a 1.06 provision expense, but about 1.2 was that of 1.6 million is that 1.3 million and other income and 1.2 million are nothing to provision expenses just to re-class from other income, up into provision. So, most all that 1.3 million that you see is just that one time reversal from the HFS, or other income is normally service.

All right, appreciate the color there.

And then in one other thing, one other thing I'll point out just in the presentation materials, the last slide, Slide 16 has a breakout that walks you through that whole entry so that kind of delineates it.

So there it is. I paused on 15 on my geographic question, so I haven't suffered, he points out. Lastly, and I'll drop off. But can you talk about financing costs went up due to where the markets were in June and July. It's good to get those deals done. Can you talk about I know it's early for your target and 1Q securitization, but maybe, where do you see the market today? What type of I don't know if it's a margin you're thinking about or how you, one answer towards outlook for financing costs, but kind of how does a securitization market look today versus what you were able to execute in June or July?

Yes. So, in talking to our investment bankers, we think it's significantly improved from that timeframe. We've got some pretty good data points to show that. I think in terms of where our spreads will be, we think they will be at least at where they were kind of pre-COVID. So, spread, and what I mean by spread is, I think, our interest earning spread. In other words, the difference between the loan yield and our debt cost. So, I think the result of the Fed intervention, we believe will be able to be back to pre-COVID levels on a margin basis.

Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Yes. Can you talk a little bit about where yields are on new originations versus pre-COVID? And also, can you reconcile the share count of diluted shares, in terms of the press and warrants in there and will -- are they all in there, having gone through all the numbers in detail?

Sure. Hi, Don. I'll take the first part, and I'll let Mark, cover the second one. On the first part, we're seeing coupons, about 75 basis points lower than where we were pre-COVID. But we think on the debt side, it's probably lower than that. So again, from a spread perspective, we think will be at least that our normal spreads, if not wider, going forward.

Hey, Dan, this is Mark. In terms of the shares, we look like on a fully diluted basis. There's a little over 20 million common shares outstanding for Q3 on a fully diluted basis. That goes up to a little over 32 million shares because you have to take your average stock price for the quarter, average price was about $4.40. So all the convertible preferred fall into the diluted category, which is like 11.7 million shares at $3.85 strike price. So that's below the $4.40. So that goes into the diluted. And then if you recall, there were -- the warrants were issued back in two tiers, two different strike prices, a $2.96 strike price and a $4.94. Obviously, the $2.96 strike price will be considered dilutive because it's under the $4.40 average Velocity price. But the second tier the $4.90, the $4.91 strike price would not be dilutive because it’s still more than the $4.40 average. So, what’s causing the extra $12 minute dilution is assuming that the preferred convertible converts and also the first tier of the warrants.

Our next question comes from Steve Delaney with JMP Securities. Please go ahead.

Thanks. Hello, everyone. A couple of mine have been taken. But Chris, I was wondering, if you could just provide after the September reduction in force, if you could provide your current fulltime headcount today, versus where you stood at pre-COVID?

Yes, we're reduced by 60 in terms of FTE.

Okay, approximately, how many does that put you with -- I don't have all figure.

I think we're 180-182.

Yes. Okay. All right, all right. Okay. Very good. And then, following up on Don's question on the coupons, I was going to ask the same thing. And if you're down 75, I'm looking at my rate sheet looks like the 10 years, probably down about 100. And credit spreads could be anywhere. But it sounds like maybe you're able to get a slightly higher coupon relative to the 10 year today than maybe you did late last year, early this year. Does that I don't even know even think about it versus the 10 year because you what really matters is the MDS credit spread. But the 10 years, I'll measure everything off the 10 year because, it's easy to find. You just look at your screen.

Yes. Yes. No, I think you're thinking about it the right way. And the other thing that doesn't immediately jump through is that we've reduced loan to values. So effectively, we're getting a higher coupon for a lower loan to value loan. So, when you put those two together, yes, we're effectively getting at least the same spread, but probably a little bit wider than where we were pre-COVID.

Better risk adjusted, anyway. And what are you generally quoting on LTV today? What do you - what are you trying to come in?

I mean, we've reduced all of our commercial LTV by 5%.

So small balance.

Yes. It's a smaller percentage of the production. So overall, I don't think you'll see as big of a notch down in terms of weighted average LTV, because we're more skewed to the one to four for those of assets where risk adjusted.

Got it. Thank you for the comments.

Absolutely, thank you.

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

I just want to say thanks to everybody for joining the call. We appreciate your support and interest, and we're available, if you have a further follow up. Thank you.

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