Good afternoon and welcome to the Velocity Financial First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Chris Oltmann, Treasurer and Director of Investor Relations. Please go ahead.

Thanks, [Danielle]. Hello, everyone, and thank you for joining us today for the discussion of Velocity's first quarter 2023 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 first quarter 2023 results and our press release and the 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 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. 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, I would like to welcome everyone to our first quarter earnings call. Earlier today as Chris mentioned, we reported another strong quarter as we continue to grow in a disciplined and profitable way. Our successful matched funding strategy of locking in fixed rate spreads has held up very well considering the rapid rise in rates. As you're all keenly aware, there's been a tremendous amount of volatility in the regional banks, many of whom were essentially borrowing short and lending long. Continue to see these competitors tighten credit or step away entirely from the market, which is naturally led to an increase in lending opportunities for us. We believe the same will continue to play out for the remainder of the year and we're seeing better borrowers and higher quality assets as a result of this banking stress. In terms of our portfolio, we continue to see expected levels of performance and first quarter resolutions rebounded to a more typical rate, which contributed to a 49 basis point portfolio yield increase from Q4, '22. Perhaps more importantly, we've constructed our portfolio in such a way as to avoid the most problematic commercial real estate assets. Over 15% of our loans are secured by single family rental properties, and 75% of the portfolio has a residential component. On the small commercial segment of our business, the properties backing our loans tend to be small neighborhood serving assets that are usually in very high demand. We do not have exposure to large office buildings where other lenders are starting to see significant realized losses. As we look forward, we believe we're well-positioned to succeed in a variety of potential outcomes as we experienced a slowing economy. With respect to growth, we were very conservative with new originations in the first…

Thanks, Chris. And hi, everybody. Slide 6 looks on our loan production. As we had mentioned, we have strategically decided to pull back a little bit on loan production towards the end of Q4 and also beginning of first quarter of this year as a result of some of the volatility that we saw in the markets at that time. And we've since then, begun to pick up our originations. So we'll continue to do that going forward this year. We are low production during Q1, $217 million in UPV. I think a key takeaway there is that $217 million in new originations, the weighted average coupon in most new originations was 11.1%. So we had continuously during the second half of last year and as the first quarter this year continued raising our note rates on our loans. And in response to all the Fed rates last year and recent one this year. So we've continued to raise the interest rates on the loans, as Chris mentioned, still have very good strong demand and application pipeline activity from our borrowers. And again, 11% weighted average whack first quarter origination this year. If you compare that to the first quarter of last year, originations, those went off in a whack of 6.3% give you kind of an idea of the strong increase in a coupon that we've put out on our portfolio. On page 7, what's that done for the overall portfolio the overall portfolio at the end of Q1 ended up about $3.6 billion in UPV as a 25% year-over-year growth from the end of Q1 of '22. And that growth was driven pretty evenly by strong demand and investor one to four and multifamily properties. The weighted average coupon of the entire portfolio at the end of Q1…

Great, thank you Mark, appreciate it. In terms of market, certainly seeing the pressures from higher rates and lower transactions as I mentioned, but still seeing functioning markets. And we're able to liquidate assets when we do end up with REO. So that seems to be stable there. Obviously, there's a lot of cross currents in the market and we'll see how things go. From a credit perspective we're being more cautious and choosey with our lending. And I think that's paying off and will continue to monitor on a market-by-market basis. Some of these markets are seeing prices come down other markets are actually still seeing gains. So we're monitoring geographic location in the portfolio. In terms of capital, I mentioned, the successful transactions that we have and that really put us creates a lot of capital going forward for us to be in a good strong liquidity position. And then in terms of earnings, we're just going to continue to stick to our knitting and originate assets with good healthy spreads and that will contribute to earnings growth going forward. So that wraps up our prepared remarks and presentation. We can open it up for questions.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Steve Delaney from JMP Securities. Please go ahead. Sorry about that. The next question comes from Stephen Laws of Raymond James. Please go ahead.

Hi, good afternoon, Chris and Mark. First, let's start very solid numbers really want to applaud you guys. And I look at the UPV recoveries or nonaccrual rates, things are really holding in there in a volatile environment where we're to do [indiscernible] can say that about their portfolios. And so looking at that, and the action you're going to take to free up the liquidity with a REMIC. How do you think about opportunities today? I know the whack was 11.1 I mean, can that be increased additionally, in this environment when banks and others have pulled back? And how do you think about returns on new money you're putting to work today?

Sure, good questions. Yes, I think we feel like we're where we want to be in terms of spread; could we go higher, probably. But if there is an upper limit, where you start to get into private money funds, that would be competitive with us. So if you look at the current spread, and where we're executing, on our last 2x, two securitizations we're seeing ROEs well north of 25%. And so we think that's c very healthy level and NIMS are 4% or more, we think that's where we want to be and hits our target. So I don't think we'll probably raise it much more from here. I mean, obviously we're going to have to monitor the Treasury market, and we'll see, but.

Sure, and I do agree with your point, though, like the less competitive environment does lie and be more selective as well, another credit side, and, from a growth out, look, or maybe origination. So the balance the year you mentioned you purposely pulled back some in Q1, kind of how should we think about a monthly or quarterly run rate number as we move forward?

Yes, I think the good I think 250 is a good number going forward. I think we'll see a slow steady climb this year, barring any, craziness, but I think 250 is a good number for you to use and for us to offer out.

Right. And then lastly, on the financing side, if I understand it correctly, the RE remix were some security issue would retain that you were able to put into a new deal. Assume out of more recent deals. Can you talk about some of the legacy transactions that may be amortized down sequentially and get more expensive? Any opportunities there to call those or look to do some type of securitization or collapse there?

Yes. , yes, absolutely. So we've transitioned almost all of our deals over to the sequential pay structure. So there are there are two more deals left where we could do that. A 2016 deal that is sequential. That's pretty expensive. It's very small balance, I think it's under or under $30 million. And then we also have our mixed collateral deal. It was really a deal that financed a bunch of nonperforming assets. We've got a big chunk of capital there once that pays off, but it's probably got another 12 to 18 months before that pays off. So that will free up some future capital. Those notes are not callable. So we need to get full pay down there before we can access that capital.

Got it. Great. Appreciate the comments this evening.

Thank you, Steven.

[Operator Instructions] The next question comes from Steve Delaney of JMP Securities.

Hello, everyone, I apologize for disconnecting myself. I don't know whether it's this market or it's just old age kicking in. But I managed to find my way back. You're stuck with me. I thought you got thrown off your horse? That could have been but it's hard, hard to take a call with a cell phone on a horse. But I have done that before. The seriously. Great presentation to kick this off. I was intrigued by your comment about the former bank customers. Obviously unfortunate what we're going through. Yes, it's hard to believe that in this day and time we have major financial institutions with asset liability management failures, but it's the crazy world. These borrowers – the you're talking to does it go beyond the three brand name companies that have failed at this point? Are you seeing it kind of broadly across the country?

Yes. Yes. The short answer there is yes. Definitely seeing most banks if not all, pull in their horns and just be more cautious for sure.

And specifically on real estate, you think?

Yes, Yes. And we're seeing a higher quality of borrower than we were used to coming to us that, quite frankly, six, nine months ago, definitely would have probably ended up at the bank.

Yes, that's don't wish anything we need financial system stability. So absolutely, we're not going to root for problems anywhere else, because that comes back to haunt us. All of us pay the price. But it is a competitive world. And it sounds like the little guy he's going to have some better opportunities, it would appear, we're seeing it on the bridge, the commercial mortgage REIT bridge lenders too on the calls this week, they were all talking about lots of demand, very, the competition is not among the banks anyways, not what it was even month or two ago. So we'll be interesting to see that going forward. Let's think about, you've got 11.1% whack on your new originations. If the Fed the Feds sort of trying to tell us they're done and whatever let's just say we have lower rates and 2024. And that could be what I mean, at the long end, it can be 100, maybe or maybe a little more dependent on the tone of the economy. What I'm sensing about where you are, is your opportunity, what between the banks and the potential for rate relief. Your opportunity set is only going to grow and I'm just curious, like, I think there's a, one of the kind of charming things about Velocity is it's not so big and ugly that it's, you really can manage your business, right. And you're not just given up quality to get big. But it strikes me that there is like over the next two years, there is a growth aspect to where you sit today.

Yes. No I think that's right, Steve, we appreciate it. It's, we've been doing this 19 years. So we've seen all different kinds of market conditions. And I think we kind of took our medicine last year when rates were rising so fast, a lot of the banks, their deposits lag, and so they think they, they had to face the music later than we did. So yes, we feel like we put ourselves in a good position to really grow from here, selectively, and thoughtfully, but definitely see an opportunity here. And it's showing up in the inquiries in the demand side, we get a lot of requests for financing. So you're right, I think if rates were to tick down, that would only probably help us even more.

Well, congrats on a great start to 2023. And we're looking forward to doing this again in a few months.

Great. Thank you Stephen.

Nice job. Thank you.

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

No further remarks. Thank you all for joining and we'll be in touch next quarter. So thank you.

Thank you, everybody.

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