Velocity Financial - Earnings Call - Q3 2025

Executive Summary

• Velocity delivered another strong quarter: net income $25.4M and diluted EPS $0.65, with core diluted EPS $0.69; net revenue was $85.8M, up 53.6% y/y, supported by record production and solid portfolio earnings.
• EPS and revenue exceeded Wall Street consensus: EPS $0.65 vs $0.60 (+$0.05), and revenue beat on SPGI’s definition as well; note SPGI revenue taxonomy differs from company “Net revenue” (see Estimates Context).
• Production hit a record $739.0M (including $23.9M unfunded Century construction loan); NPLs improved to 9.8% of UPB (vs 10.3% in Q2), and portfolio NIM was stable at 3.65%.
• Funding diversification advanced via two securitizations, including the first single-counterparty deal ($190.9M) plus VCC 2025-4 ($457.5M); liquidity stood at $143.5M and available warehouse capacity at $600.3M.
• Management tone: confident on continued growth; key call theme was robust demand and market-share gains; notable Q&A focused on REO valuation timing and stable credit reserve/CECL levels.

What Went Well and What Went Wrong

What Went Well

• Record loan production of $739.0M; applications exceeded $1.4B, demonstrating strong demand and Velocity’s share gains.
• Portfolio credit trends improved: NPL ratio decreased to 9.8% (from 10.3% in Q2 and 10.6% y/y); NPA resolutions realized 102.6% of UPB with $2.8M gains.
• Strategic funding progress: first single-counterparty securitization ($190.9M) alongside VCC 2025-4 ($457.5M), reducing transaction costs and diversifying funding sources; “fixed income markets are very supportive”.

Management quote: “We continue to build on our strong momentum in 2025, delivering two record highs for quarterly loan production and pre-tax earnings” — Chris Farrar, CEO.

What Went Wrong

• REO valuation losses weighed on results: net REO loss of $1.6M (vs $1.2M gain in 3Q24), driven by timing and market adjustments on REO marks (management emphasized non-worsening trend).
• Securitization expenses increased to $6.4M (vs $3.2M in 3Q24) due to two deals, while operating expenses rose with higher production-driven comp and servicing costs.
• Portfolio NIM moderating from Q2 peak: 3.65% vs 3.82% in Q2; CFO cited stable spreads with portfolio yield 9.54% and cost of funds 6.27%.

Transcript

Operator (participant)

Good day and welcome to the Velocity Financial Inc third 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 a touch-tone phone. 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 Chris Oltmann, Treasurer. Please go ahead.

Chris Oltmann (Treasurer)

Thanks, Chloe. Hello, everyone, and thank you for joining us today for the discussion of Velocity's third 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 third quarter results. You can find the press release and accompanying presentation that 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 some of the risk 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. I will now turn the call over to Chris Farrar.

Chris Farrar (President and CEO)

Thanks, Chris, and we appreciate everyone joining the call today. Our third quarter results were fantastic as we achieved another record quarter in terms of pre-tax earnings, which were up 66.5%, production volumes of $739 million, and new applications, which exceeded $1.4 billion for the quarter. Looking forward, the markets remained strong, and this momentum has continued into the fourth quarter as we gain market share and expand our reach. From a credit perspective, we remain disciplined, as evidenced by the decline in the weighted average portfolio loan-to-value to 65.5%, and our coupons remain on target at 10.5%, generating attractive risk-adjusted spreads and stabilizing our attractive NIM and core pre-tax ROE of 24.1%. Our asset managers have done a great job of resolving NPAs consistently above par for net positive gains.

Plenty of capital available for REOs that are priced properly and expect the real estate markets to continue to perform well within our niche. The most unique event in Q3 was the closing of our first-ever single counterparty securitization of new production with a top-tier money manager. This strategic partnership allows us to reduce transaction costs, execute at similar levels to our regular widely marketed deals, and diversify our long-term funding options. We're proud to partner with this world-class firm and expect the transactions to continue as evidenced by a second transaction that closed in early October. Obviously, the fixed income markets are very supportive, and we intend to maximize our opportunities there. As usual, I give full credit to our outstanding team members that worked so hard to deliver these results, and we will continue to create shareholder value wherever possible.

With that, I'll turn over to the presentation and begin. Discussing page three. In terms of earnings, obviously a great quarter, net income up 60% year-over-year and core diluted EPS of $0.69 a share. Portfolio NIM was very stable at 360 basis points above our target of 3.5%. Moving to production and the loan portfolio, I mentioned record level of production of 739. 32% net increase in the portfolio year-over-year after netting out prepayments. In terms of non-performing loans. That portfolio was pretty stable, 9.8% down from 10.6% and within our expected range. As I mentioned earlier, we continue to see positive gains on resolved NPAs of $2.8 million, and our team has done a fantastic job there. Turning to financing and capital, I mentioned that first-ever single county counterparty transaction. We were approached.

A quarter or two ago by a large party with the interest of developing a consistent outlet for our product. I am very pleased with the way that both those transactions executed, and we expect it to be an additional diversification of our funding sources going forward. In terms of liquidity, we have plenty of cash and available borrowings, and you can see over $600 million of warehouse capacity at the end of the quarter. All in all, good shape there. Turning to page four, I want to re-emphasize our strategy of compounding earnings by taking all of our earnings and investing them back into the platform and the portfolio. As you can see, we have had outstanding results, and we think this is a great opportunity for investors to get exposure to our earnings and the compounding of capital. I am very pleased with.

How we've transacted over the last couple of years and expect this to continue going forward. With that, I'll turn it over to Mark on page five.

Mark Szczepaniak (CFO)

Thanks, Chris. Good afternoon and evening, everyone. Page five, as Chris mentioned, Velocity had a new record for loan production in Q3. The loan production for the quarter was $739 million. That included $23.9 million in unfunded loan commitments. The $739 million, again, demonstrates our continued strong demand for our product. In Q3, the loan production broke the previous quarter's record of $725 million. There were a total of 1,778 loans originated in the third quarter. The strong production growth in Q3 included the weighted average coupon on new held-for-investment originations continuing to come in strong at 10.5%. The weighted average coupon on our HFI originations for the last five quarter average trend was at 10.6%.

The growth in originations in Q3 was also very tight credit levels, with the weighted average loan-to-value for the quarter being at 62.8%, which is right on top of the last five quarter average weighted average LTV trend of 62.8%. As a result of the continued robust growth in production, take a look at page six. It shows the overall growth in our Q3 for our overall loan portfolio as we retain these loans in our portfolio. Our total loan portfolio as of September 30th was just under $6.3 billion in UPB. That's a 7.1% increase from Q2. I think, as Chris mentioned, a 32% increase year-over-year, even netting out prepayments. The weighted average coupon on our total portfolio as of September 30th was 9.74%, which is seven basis points above Q2 and 37 basis points in terms of portfolio yield over Q3.

I'm sorry, year-over-year. The total portfolio weighted average loan-to-value remained consistently low at 65.5% as of September 30th. If you go to page seven, we maintained a strong portfolio NIM at 3.65% in Q3, and that's consistent with our last five quarter average portfolio NIM of 3.62%. On the right side of that page, you can see the breakout of our yield as well as the cost of funds. Our portfolio yield for the quarter was at 9.54% and the cost of funds at 6.27%. We've maintained a nice healthy spread over several periods. On page eight, our non-performing loan rate at the end of Q3 was 9.8%. That's down half a point from Q2 and 80 basis points year-over-year.

We continue to see, as Chris mentioned, strong collection efforts by our special servicing department that resulted in favorable resolutions of our non-performing assets and the NPAs that are comprised of our non-performing loans as well as REOs. Page nine shows the continued positive results of our NPA resolution efforts. Our Q3 NPA resolution gains totaled $2.8 million, or 2.6% of the $108 million in UPB resolved. On a trend basis, we've averaged 3.8% quarterly NPA resolution gains over the last five quarters. Turning to page 10, the top part of that table on the right-hand side shows our CECL loan loss reserve. The bottom part shows net loan charge-off and gain-loss and REO activity. In terms of the CECL reserve, as of September 30th, it was $4.6 million, or 22 basis points, and that's on our outstanding amortized cost HFI portfolio.

That 22 basis points is consistent over the last five quarters. We have averaged around 20 basis points of CECL reserve, so not much to change there. Keep in mind the CECL reserve does not include fair value option loans. It is only our held-for-investment amortized cost. The bottom part of that table shows that for Q3, our net gain-loss and loan charge-off REO activities, we had a net loss of $1.6 million, mainly as a result of REO valuations. Page 11 shows our durable funding and liquidity position at the end of Q3. Total liquidity as of September 30th was just under $144 million. That is comprised of about $99 million in our cash and cash equivalents and almost another $45 million in available liquidity on our unfinanced collateral.

As of September 30th, our available warehouse line capacity was just a little over $600 million, with a maximum line capacity of $935 million. That is a $125 million increase in maximum line capacity over Q2. We went from $810 million maximum capacity at the end of Q2 to $935 million as some of our warehouse lines are increasing their capacity. That concludes my Q3 recap. Our debt equity ratio on a recourse basis stays consistently low. It is at 1x, which has been between 1.5x and 1x for the last five quarters. Chris, with that, I will turn it back to you to present an overview on our outlook and key business drivers.

Chris Farrar (President and CEO)

Thanks, Mark. Appreciate it. Just to sum it up, we were very positive about the future. We think markets are healthy. Our credit's performing well. The capital markets are extremely robust, especially on the fixed income side. We believe that our earnings are going to continue to grow and expect positive results going forward. With that, I'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're 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 then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Steve Delaney with Citizens. Please go ahead.

Steve Delaney (Senior Equity Analyst)

Hello everyone. Thanks for taking my question. Gosh, excellent quarter. It sounds repetitive, but you guys put the numbers up every quarter and just whether it's production, gains, everything that you've summarized on page three. I tip my hat to you on that for sure. A little concern, not so much REO resolutions, but just in terms of, as you show on page 10, the charge-offs are up quarter-over-quarter for sure. This quarter, I know REO gains can be a little fluky, but we went from a nice gain on REO in the second quarter to a—oh, excuse me, last year third quarter to the loss this year. I guess the number that jumps off the page, because primarily I don't understand it, Chris, if you could help me understand the REO valuations. On a net basis, the -$6.3 million.

Just to explain that, if that was a—do you book the REO at where you think it should be or based on your loan balance? And then as you study the market and get feedback on property valuation, then you have to adjust. Just curious why that big number of -$6.3 million.

Chris Farrar (President and CEO)

You bet. Thanks for the question, Steve. In terms of the REO valuation, I'll walk you through the detail, but just from a high level, if you look, you'll see an RQ that gets filed later today. Year to date, our REO activity is basically on top of last year's $3.2 million gain, I think it is. There is some noise just in timing issues here. In terms of the REO valuation expense that we recognized, that happens after we've taken a loan off the books and put it into REO. As it sits on the balance sheet, we adjust to market realities. I would say in this $6.3 million, you've got some cases where maybe the property has deteriorated, maybe worse than what we thought when we originally foreclosed. You have some cases where.

We actually end up just selling the REO a little less than where we thought we were going to, where we had it marked. It can be driven by a number of different things, but I would say from our perspective, we don't see it as a worsening trend and much more of just kind of a quarterly timing issue. I expect that number, you'll see it kind of go up and down quarter by quarter.

Mark Szczepaniak (CFO)

Okay. Steve, this is—yeah, please. I'm sorry, Steve. This is Mark. If I could just add to what Chris said, it is really a timing item. The main thing to look at is the NPL resolution table, the final resolutions. For example, like that $6.3 million, what could happen is when we first foreclose on a property and set the REO up, the REO has to go up at its fair value. Keep in mind, since we've got the loans at basically 63%, 60% LTV, if you have a $500,000 loan, now you're going to write off that loan and put the REO in the books for, say, $800,000 because the loan's at a 65% LTV. You're going to put the REO on your books at $800,000. That's what's in that gain-on-transfer to REO, that top number.

Maybe six, seven months down the road, you get an offer. It's not $800,000, it's $700,000. You say, "Okay, we're going to add an offer for it. That's the new fair value. We're going to take the offer." You write it down from $800,000 to $700,000. In that period, which might be six months later, eight months later, it looks like a $100,000 REO loss. In reality, that $700,000 you're writing it down to is still $200,000 more than the $500,000 loan that you had. Overall, if you sell it for that $700,000, you're still going to have an overall gain on resolution. It's just the timing of when you first put the REO on and then maybe you write it down because you're going to decide to take less to sell it.

What you're selling it for is still more than the loan that they took off the books.

Steve Delaney (Senior Equity Analyst)

Got it. I think you're telling me you added $4.6 million as a positive number when you took it into REO, and then when you understood the property or developed the marketing plan or looked at offers or something, you had to just reverse some of that.

Mark Szczepaniak (CFO)

That's exactly correct. That's 6.3. Remember, it's different periods. The 4.5, that's all new REO that came on in that quarter. The 6.3 is probably something that maybe in those quarters, it went on for $8 million or $9 million positive, and now we're taking 6.3 of it back, that's what I'm saying. Yeah.

Steve Delaney (Senior Equity Analyst)

Got it. Got it. Okay. Understood. Because you have the gain. It's more of an accounting gain when you take it into REO the first time. Once you understand valuation, it sounds like that can be a little lumpier in terms of when the valuation adjustment is made.

Mark Szczepaniak (CFO)

That's correct.

Steve Delaney (Senior Equity Analyst)

Okay. All right. That's helpful. Obviously, the positives in the report far exceed the negatives, but I just wanted to bring that up. One final thing. What is your headcount currently or at 9/30, and how has that changed over the last year?

Chris Farrar (President and CEO)

Yeah. So we're at like 347 people at 9/30, and that's up about 82 heads.

Steve Delaney (Senior Equity Analyst)

Okay. All right. Very good. That's all I have for this evening. Congrats on another great quarter, and I guess we'll do this again in three or four months.

Chris Farrar (President and CEO)

Okay. Thanks, Steve. Take care.

Mark Szczepaniak (CFO)

Thanks, Steve.

Steve Delaney (Senior Equity Analyst)

Stay well.