Velocity Financial - Earnings Call - Q1 2025

Executive Summary

• Velocity Financial delivered record quarterly loan production ($640.4M UPB), driving net revenue up 27.4% year over year to $69.1M and diluted EPS of $0.51; core diluted EPS was $0.55.
• Sequentially, portfolio NIM fell to 3.35% from 3.70% due to unusually high cash interest on nonperforming loans in Q4; management characterized Q1 NIM as a return to normalized levels.
• S&P Global consensus framed Q1 2025 as a miss versus estimates on EPS ($0.55 actual vs $0.575 estimate) and revenue ($34.8M actual vs $40.4M estimate), while company-reported diluted EPS was $0.51 and net revenue $69.1M (definitions differ).
• Capital markets execution remained strong: one Q1 securitization ($342.8M), two April securitizations ($111.4M RTL and $377.5M long-term), collapse of a re‑REMIC releasing $52.6M of retained securities, and an accretive ATM equity raise ($28.8M net).

What Went Well and What Went Wrong

• What Went Well

  • Record production volume: $640.4M UPB (+13.7% QoQ, +69.1% YoY) with demand across traditional commercial and investor 1‑4 rental; origination WAC 10.5% while maintaining spreads.
  • Resolution performance: $76.4M UPB resolved at 102.4% of UPB, consistent with strong special servicing execution.
  • Capital markets: completed VCC 2025‑1 at 6.7% and priced April deals amid market disruption with better rates; “we continue to see strong support from our investors” (CEO).

• What Went Wrong

  • NIM compression: portfolio NIM decreased 35 bps QoQ to 3.35% as Q4 benefitted from elevated cash interest on NPLs; management expects normalized levels going forward.
  • Operating expense growth: total OpEx rose 36% YoY to $42.2M, driven by production‑related compensation, servicing, and securitization costs.
  • Elevated NPL ratio: NPLs at 10.8% of HFI loans, modestly up from 10.1% YoY, with higher charge‑offs due to one large loss; CECL reserve rate ticked up to 0.22% on macro inputs.

Transcript

Operator (participant)

Good day, and welcome to Velocity Financial Inc.'sFirst Quarter 2025 conference call. All participants will be in 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Oltmann, Treasurer. Please go ahead.

Chris Oltmann (Treasurer)

Thanks, Kaylee. Hello, everyone, and thank you for joining us today for the discussion of Velocity's first quarter 2025 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 results, and you can find the press release and the accompanying presentation we will refer to during this call on our Investor Relations website at www.velfinance.com. 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 the 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. With that, I will now turn the call over to Chris Farrar.

Chris Farrar (President and CEO)

Thanks, Chris, and we appreciate everyone joining our first quarter earnings call. The strong momentum we experienced in 2024 carried into the first quarter of this year as we originated $640 million in new loans, an increase of 69% versus the prior year, which drove a 27% increase in net revenue and a 17% increase in core pre-tax earnings. Our team grew production and remained disciplined by preserving our spreads and credit standards. We continue to see increased demand for all property types, with a more recent tilt toward commercial loans versus the investor one-to-four residential loans and robust margins in both products. Looking forward, our pipeline is strong and growing across the board. With respect to the portfolio, we continue to realize consistent net interest income and healthy cash flows, and our special servicing team is doing a great job of resolving delinquent assets favorably.

Our real estate markets remain healthy, with plenty of dry capital ready to deploy in reasonably priced assets. From a capital markets perspective, we've been very busy this year with four successful debt transactions already completed, and we issued three new securitizations, paid down debt, and collapsed one of our Re-REMICs, and also sold new shares through our ATM program. Despite the recent volatility, we are very encouraged to see healthy investor demand and participation in our offerings. We appreciate all our partners that have supported our platform for so many years. Although the markets are choppy, our team is well prepared to operate in this environment, and we believe we offer a great platform for investors to earn consistent, compelling returns. I want to congratulate all Velocity team members on another fantastic quarter, and as always, we'll continue to work hard to deliver shareholder value.

With that, I'll turn over to today's presentation, starting on slide three. As I mentioned, strong net income, core earnings of $0.55 a share, up from $0.51 a share a year ago, and our second-best quarterly earnings in the company history, just a little bit below what we did in Q4 of last year. Mentioned the production, on a net basis, the portfolio is up 27%, and non-performing loans continue to be relatively stable at 10.8%. Most importantly there, NPA resolutions, again in the quarter of 102.4, above par resolutions continue, which is great. In the financing and capital section, I mentioned the first securitization we completed with a weighted average rate of 6.7%, collapsed the Re-REMIC, which freed up $52.6 million of retained securities that are available to us to do with whatever we want.

We issued 1.6 million common shares, just under $29 million of proceeds, and those shares were accretive to book value. In terms of our liquidity and warehouse capacity, you can see we're in great shape there. On page four, one of the other securitizations we did in early April was backed by our short-term loans, and that was another successful transaction. The third one listed here on this page was the second deal that we did, and I highlight this one for a very important reason. It priced April 8th, and that was in the heart of all of the disruption in the market. As you can see, our weighted average rate actually was 30 basis points better than our first deal in the first part of the year.

Again, although there's all this volatility, we continue to see strong support from our investors, and we're very pleased with the execution we've seen so far this year. On page five, I'll walk you through just the simple adjustments that we make to get to core earnings. Then on the right, we have a bridge showing the buildup in book value. To the far right, we make an adjustment if GAAP allowed us to adjust all of our held-for-cost loans to fair value. We would be reporting an adjusted book value of $18.50 a share. That is reflective of all of the assets that are in place and on the balance sheet at 3/31. You can see we're getting nice growth in book value as we retain our earnings and execute on our strategy.

With that, I'll turn the presentation back over to Mark to continue.

Mark Szczepaniak (CFO)

Thanks, Chris. Good afternoon, everyone. In the first quarter, as Chris mentioned, we saw continued strong production, actually setting a record for the company for a single quarter's production, a production of $640.4 million for the quarter, which is a 13.7% increase from Q4 last year. We had 1,500 loans funded in the first quarter, and that was an increase of almost 18% on a loan-count basis over the previous quarter. The strong production growth during Q1 included the weighted average coupon on new held-for-investment originations continuing to be strong at 10.5%. The weighted average coupon on our held-for-investment originations for the last five quarter average trend was at 10.8%. The growth in originations in Q1 also continued at tight credit levels, with the weighted average loan-to-value for the quarter being just under 63%, 62.6%, and the last five quarter average trend at 63.4%.

The strong Q1 production at a record growth, the healthy WAC, the low LTV, continues to show borrower demand for our product through all different market cycles and environments. We go to page seven. As a result of the continued growth in production, page seven shows the growth in Q1 for our overall loan portfolio at the end of the quarter. Total loan portfolio as of March 31st was just under $5.5 billion in UPB, and that's a 7.8% increase from year-end 2024 and a 27.3% increase year-over-year. This weighted average coupon on our total portfolio at the end of the quarter was just under 9.6% at 9.59%, which is a six basis points increase from the WAC at the end of the year and a 52 basis points increase from the same time first quarter last year.

The total portfolio weighted average loan-to-value remained consistently low at 66.1% at the end of the quarter. Going to page eight, our Q1 portfolio NIM was 3.35%, representing one of our more normalized NIMs compared to Q4 of 2024. Q4 of 2024 was a little bit higher NIM due to cash interest received on non-performing loans. We said the cash that comes in on non-performing loans tends to come in kind of sporadically and lumpy, and that can cause some spikes in the NIM. Our Q1 NIM was consistent on a year-over-year basis. Our portfolio yield for Q1 of this year decreased by 23 basis points quarter-over-quarter, again due to the high cash non-performing loan interest received in Q4, but it increased year-over-year by 40 basis points.

While our cost of funds increased by 9% quarter-over-quarter, it increased by 30 basis points year-ove- year. On page nine, our non-performing loan rate at the end of Q1, as Chris mentioned, was 10.8%. That has been relatively flat. It was 10.7% at the end of 2024, and it has been consistent for the last five quarters at an average of about 10.5%. We continue to see strong collection efforts by our special servicing department that have resulted in favorable gain resolutions of our NPA assets. By NPA assets, I mean our NPL loans as well as the REO assets. The table on page 10 shows the continued positive results of our in-house NPA resolution efforts. Our Q1 NPA resolution gains were $1.9 million, or 2.4% of the $76.4 million in overall UPB resolved.

On a trend basis, we've been averaging about a 3.3 quarterly NPA resolution gain over the last five quarters. Page 11 presents, on the left-hand side, our CECL loan loss reserve, and on the right-hand side, our net loan charge-off and gain loss on REO activity. The CECL reserve at the end of the quarter was $5 million, or 22 basis points of our outstanding amortized cost held-for-investment portfolio. The CECL reserve at the end of Q1 was slightly above our expected normal range of 15 basis points-20 basis points, and that's due to the latest macroeconomic forecast. CECL requires you to do a macroeconomic forecast using a modeling system and the outside model that we use.

Given all of the kind of uncertainty and the movement around in Q1 in the markets, it just had a little bit more of a severe step on the macroeconomic forecast, but it's only 2 basis points. Instead of 20 basis points at year-end, it's 22 basis points. The CECL loan loss reserve, remember, does not include our loans being carried at fair value, just amortized cost. The table to the right of this page shows our net gain loss from both loan charge-offs and REO-related activities during the quarter. For Q1, the gain on REO activities offset the net loan charge-offs. Page 12 shows our durable funding and liquidity position at the end of the quarter. Total liquidity as of March 31st was $75.6 million.

That's comprised of $51.7 million in cash and cash equivalents and another $23.9 million in available liquidity on our unfinanced collateral. In addition, the available warehouse line capacity at the end of the quarter was $238 million, with a maximum line capacity of $810 million. As Chris mentioned previously, in Q1, we issued our first securitization of 2025 with $342.8 million in securities issued. Subsequent to first quarter, in April, we issued our second long-term securitization, 2025-2, and we also issued a short-term securitization, 2025-RTL1, which is the securitization of our short-term loans. Remember, the very first short-term securitization we ever did was in 2023. In 2025, we simultaneously collapsed the 2023-RTL1 short-term securitization and issued the 2025-RTL1 securitization.

The RTL1 securitization, if I only want to add about that, includes $59 million in UPB from the old 2023 securitization that was freed up when it was collapsed and enrolled into the RTL1 for 2025. That concludes my first quarter financial recap. I'll turn the presentation back to Chris now for an overview of our 2025 outlook.

Chris Farrar (President and CEO)

Thank you, Mark. I think from a market perspective, you can see that we're seeing very strong, healthy demand. Real estate markets are functioning well, so we feel good there. From a credit perspective, still seeing very good positive resolutions. I think it remains to be seen what happens with all of the tariff talk and those types of things, but from our perspective, we don't think it's going to have an impact on our business materially. In terms of capital, we've been very active there, and the markets are supportive of us. In terms of earnings, we feel very good about the future and the rest of this year, and I'm excited to continue on our path. That concludes our prepared remarks, and we'll open it up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti (Managing Director)

Hi, good evening. Just wanted to clarify, it sounds like the NIM is more normalized now, so would you think Q2 would be sort of in the same zip code as Q1?

Chris Farrar (President and CEO)

Yeah, hi, Don. I think that's right. I mean, we generally target around 3.5%, so 335 basis points-350 basis points right in there is what we would say is pretty normal.

Don Fandetti (Managing Director)

Got it. Also, on new origination yields, they've been steady, ticked down a little bit. Are you thinking that we hold in this range as we go through 2025?

Chris Farrar (President and CEO)

Yeah, I think that's right. We took coupons down a little bit to reflect the underlying reduction in our cost to borrow. So maintaining our spread, that's what drove the coupon down. I think it all depends on where sort of three to four-year treasury, we price off of three to four-year interpolated rates. Wherever those rates go, we'll price our spread accordingly. I think our expectation is that they should be fairly stable with the possibility, I guess, of going down later in the year if the Fed continues to cut, which remains to be seen.

Don Fandetti (Managing Director)

Great. Thank you.

Chris Farrar (President and CEO)

Sure.

Operator (participant)

The next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, thanks. Good afternoon. You noted some more commercial demand, I think, in your opening remarks. We know that transaction volume for the market is down, right? Are you guys seeing more demand because borrowers are being shut out of other channels? On maybe a related note, is there a level that you expect for overall origination volume through, call it the end of the year? At this point, what would maybe catalyze your origination volume to be meaningfully higher than whatever you are currently projecting?

Chris Farrar (President and CEO)

Hi, Eric. Thanks for the questions there. Yeah. In terms of the commercial aspect, we just a year and a half ago started a small commercial division that focuses just purely in commercial-type lending. I think the vast driver there has just been their ramp-up and their growth in production. It's less, I think, of a demand story and more of us opening up a new channel. That channel focuses almost exclusively on owner-occupied commercial real estate. I think that's the driver there. Over the years, we've seen it modulate back and forth between the one to four and the small commercial. We're comfortable with both, and there's sort of ebbs and flows, but this one is more tied to our direct effort.

In terms of run-rate production, I think we think this current pace is sustainable, so I think that's a good run-rate if you want to project out for the rest of the year. Something that would meaningfully drive volume significantly higher, I think it would only be probably just a very large drop in rates back to kind of like what we saw during the COVID levels. I do not expect that, and I do not think that is in the cards, but if it were to happen, that would probably be the single largest boost we could get.

Don Fandetti (Managing Director)

Okay. That's good color. I appreciate that. Can you say what you did with the capital that you raised? Was it to delever a little bit? When you come in to maybe raise additional capital from here, is there an expectation for what you plan to maybe do with that capital?

Chris Farrar (President and CEO)

Yeah. We just used it to continue to make more loans. I think any capital that we do raise will be solely for the purpose of growing the portfolio. We take, as you know, all of our earnings and retain them and put them back in. That marginal return on capital is very attractive, and we're seeing very high ROEs there. We think the smartest thing to do is allocate capital back to new assets. We have a number of levers we can pull there, and we'll just continue to support the growth.

Don Fandetti (Managing Director)

Yep. That's good to hear. Sorry if this is a naive question, but when you book a gain on the REO sales, does that include the back interest from the point the borrower initially defaulted, or is it just a gain relative to the UPB of your cost basis?

Chris Farrar (President and CEO)

Take that, Mark.

Mark Szczepaniak (CFO)

Yeah. Yeah, Eric, when we look at the gain on the REO, we're showing those resolution tables and all, that would just be the gain, not counting the back interest. Because by the time it's an REO, that back interest has already been taken out of the financials. It's already been reversed, right? When a loan goes non-performing, we take all the accrued interest to that point, and we've reversed it, backed it out. That interest kind of hit, so to speak, has already been taken out. We'd have never recorded the interest. We show the REO being disposed. It's any gain over and above anything else that we've already backed out.

Chris Farrar (President and CEO)

Yeah. I would add the same thing happens on the gain on transfer when that loan first transfers to REO. Same concept.

Mark Szczepaniak (CFO)

Right. Right. That is a loan stops being a loan. That previous interest on that loan that never was received has already been backed out, and it is reflected in the financials by reducing earnings.

Don Fandetti (Managing Director)

Gotcha. Okay. Really helpful. Thank you, guys. Thank you, Eric.

Operator (participant)

The next question comes from Steve Delaney with Citizens JMP. Please go ahead.

Steve Delaney (Managing Director)

Thanks. Hello, everyone. Congrats to a great start to 2025. Chris, I guess Chris O—no, excuse me. Chris Farrar. What is your current total headcount in terms of employees at the company?

Chris Farrar (President and CEO)

Yeah. We're at 323.

Steve Delaney (Managing Director)

Okay. How many office locations do you have folks sitting in around the country?

Chris Farrar (President and CEO)

We have five office locations. We kind of have a hybrid model. How many folks are sitting in those office locations is a wild card, Steve, but.

Steve Delaney (Managing Director)

You can't see who's there anyway, can you?

Chris Farrar (President and CEO)

Right.

Steve Delaney (Managing Director)

It'd be kind of a virtual business, I know. I was trying to get a sense for the footprint. As you think about growth versus execution, I mean, you're executing—you're knocking the ball in the park, I mean, in terms of the start to 2

As you talk with the board, I mean, I guess I'm trying to get a picture, Chris, for three, five years from now. Where do you want the company to be other than having been very profitable and everybody has done well?

Chris Farrar (President and CEO)

Yeah. Yeah.

Steve Delaney (Managing Director)

Is there a vision out there for, say, five years for where you'd like to take the company?

Chris Farrar (President and CEO)

Yeah. I mean, I think we'd like to see the portfolio at $10 billion in five years. We expect to continue to grow. That will require headcount. We are generally concentrated sort of East Coast and West Coast, probably add—we might potentially add some space in the Midwest or Texas area, something like that, maybe. We're trying to use a lot of technology to scale the business without adding too much headcount. You always have to add some headcount, but we've been very successful. If you look at our sort of average balance funded per loan officer or account executive, that balance is going up. We're making our existing people more productive, which is great because you don't have to hire headcount for that, but you do have to support it on the back end with the credit and support functions.

I would hope that we'd add maybe a couple hundred people over five years, but we're going to really try to implement as much technology as we can to minimize that.

Steve Delaney (Managing Director)

Sure. You do all your servicing in-house, don't you?

Chris Farrar (President and CEO)

We do all of our special servicing in-house.

Steve Delaney (Managing Director)

I see.

Chris Farrar (President and CEO)

The primary servicing is outsourced to bill collection, the payments, the insurance, the administration, all of that is outsourced. We just manage delinquent assets because we own that risk, and we think we're the best people to resolve those risks.

Steve Delaney (Managing Director)

Great. Look, thanks for those comments. I just wanted to get kind of a picture of what the company looks like, the [audio distortion]

I appreciate it, Chris. Thanks.

Chris Farrar (President and CEO)

Yeah. Thank you, Steve. Take care.

Operator (participant)

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

Chris Farrar (President and CEO)

Thanks again, everyone, for joining the call, and we appreciate your support. We'll talk to you again after the second quarter. Thank you.

Operator (participant)

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