Earnings Call Transcript - VEL Q3 2025

Operator, Operator

Good day, and welcome to the Velocity Financial, Inc. Third Quarter 2025 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer. Please go ahead.

Christopher 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 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.

Christopher Farrar, CEO

Thanks, Chris, and I appreciate everyone joining the call today. Our third quarter results were impressive, achieving another record quarter in pretax earnings, which increased by 66.5%. We reported production volumes of $739 million and new applications exceeding $1.4 billion for the quarter. Looking ahead, the markets remain strong, and this momentum has continued into the fourth quarter as we gain market share and broaden our reach. From a credit standpoint, we are maintaining discipline, as shown by the reduction in the weighted average portfolio loan-to-value to 65.5%. Our coupons are on target at 10.5%, which is generating attractive risk-adjusted spreads while stabilizing our strong net interest margin and core pretax return on equity of 24.1%. Our asset managers have been successful in resolving non-performing assets consistently above par, leading to net positive gains. We have ample capital available for properly priced real estate owned and anticipate the real estate markets will perform well within our niche. A notable highlight in Q3 was the closing of our first-ever single counterparty securitization of new production with a top-tier money manager. This strategic partnership enables us to lower transaction costs, execute similarly to our regularly marketed deals, and diversify our long-term funding options. We are proud to collaborate with this esteemed firm and expect further transactions, as demonstrated by a second deal that closed in early October. The fixed income markets are very favorable, and we plan to leverage our opportunities there. I want to commend our exceptional team members who work diligently to achieve these results, and we will continue to strive for shareholder value wherever possible. Moving on, in terms of earnings, net income climbed 60% year-over-year, with core diluted EPS at $0.69 per share. The portfolio net interest margin remained stable at 360 basis points above our target of 3.5%. Regarding production and the loan portfolio, we achieved a record production level of $739 million, reflecting a 32% net increase in the portfolio year-over-year after accounting for prepayments. Nonperforming loans remained stable at 9.8%, down from 10.6% and within our expected range. We recorded positive gains of $2.8 million on resolved non-performing assets, showcasing our team's exceptional efforts. In financing and capital, I mentioned the first-ever single counterparty transaction. A large party approached us a quarter or two ago, expressing interest in establishing a consistent outlet for our products, and we are thrilled with how both transactions have executed. We expect this to provide additional diversification in our funding sources moving forward. In terms of liquidity, we have substantial cash and available borrowings, with over $600 million in warehouse capacity at the end of the quarter, indicating we are in good shape. I want to reiterate our strategy of compounding earnings by reinvesting all profits back into the platform and portfolio. We have achieved remarkable results, and we believe this presents a great opportunity for investors to gain exposure to our earnings and capital compounding. We are very satisfied with our transaction history over the past couple of years and expect this trend to continue. Now, I'll turn it over to Mark.

Mark Szczepaniak, CFO

Thanks, Chris, and good afternoon and evening, everyone. On Page 5, Velocity achieved a new record in loan production for Q3, totaling $739 million, which includes $23.9 million in unfunded loan commitments. This figure reflects our strong demand for our product. In Q3, we surpassed the previous quarter's loan production record of $725 million, originating a total of 1,778 loans. The growth in production during Q3 was supported by a robust weighted average coupon on new held for investment originations at 10.5%, with the last five-quarter average for HFI originations at 10.6%. The quarter also saw tight credit levels, with a weighted average loan-to-value of 62.8%, matching the last five-quarter average. As a result of our strong production, our total loan portfolio grew to just under $6.3 billion in UPB as of September 30, a 7.1% increase from Q2 and a 32% increase year-over-year, even accounting for prepayments. The weighted average coupon for our total portfolio as of September 30 was 9.74%, a rise of 7 basis points from Q2, and 37 basis points year-over-year. The total portfolio's weighted average loan-to-value remained low at 65.5% on September 30. On Page 7, we maintained a strong portfolio NIM at 3.65% in Q3, consistent with our five-quarter average of 3.62%. The portfolio yield for the quarter was 9.54%, with a cost of funds at 6.27%, indicating a healthy spread over several periods. On Page 8, our nonperforming loan rate at the end of Q3 was 9.8%, down 0.5 points from Q2 and 80 basis points year-over-year. Our special servicing department's strong collection efforts have led to favorable resolutions of our nonperforming assets, which include both nonperforming loans and REOs. Page 9 highlights the positive outcomes from our NPA resolution efforts, with Q3 NPA resolution gains totaling $2.8 million, representing 2.6% of the $108 million in UPB resolved, averaging 3.8% quarterly gains over the last five quarters. Turning to Page 10, the top part of the table shows our CECL loan loss reserve at $4.6 million, or 22 basis points, consistent over the last five quarters. This reserve accounts solely for our held for investment amortized cost. The bottom part details our net gain loss from loan charge-offs and REO activities, where we incurred a net loss of $1.6 million primarily due to REO valuations. Page 11 presents our sturdy funding and liquidity position at the end of Q3, with total liquidity just under $144 million, consisting of about $99 million in cash and cash equivalents, along with nearly $45 million in available liquidity on our unfinanced collateral. As of September 30, we have available warehouse line capacity slightly above $600 million, with a maximum capacity of $935 million, a $125 million increase since Q2. This reflects growth from an $810 million maximum capacity at the end of Q2. That concludes my Q3 update. Our debt-equity ratio on a recourse basis remains stable at 1x, consistently between 1.5x and 1x over the last five quarters. Chris, I’ll now turn it back to you for an overview of our outlook and key business drivers.

Christopher Farrar, CEO

Thanks, Mark. Appreciate it. Just to sum it up, we're very positive about the future. We think markets are healthy. Our credit is performing well. Our capital markets are extremely robust, especially on the fixed income side. And we believe that our earnings are going to continue to grow and expect positive results going forward. So with that, I'll open it up for questions.

Operator, Operator

The first question comes from Steve Delaney with Citizens.

Steven Delaney, Analyst

Excellent quarter. It may sound repetitive, but you consistently deliver strong numbers each quarter, whether it's production gains or the other points you've highlighted. I commend you for that. However, I have some concerns—not so much about REO resolutions, but regarding the charge-offs, which you noted have increased quarter-over-quarter. This quarter showed a significant shift from a gain in REO during the second quarter of last year to a loss this year. I'm particularly curious about the REO valuations on a net basis, specifically the negative $6.3 million. Can you explain whether that figure reflects where you believe the REO should be valued or if it's based on your loan balance? Additionally, do you adjust it based on market research and property valuation feedback? I'm just trying to understand the reasoning behind that substantial negative number.

Christopher Farrar, CEO

Thank you for your question, Steve. Regarding REO valuation, I'll provide some details. At a high level, our year-to-date REO activity is essentially on par with last year, showing a gain of approximately $3.2 million. There are some timing issues contributing to the fluctuations. When we recognize the REO valuation expense, it occurs after we have transferred a loan off our books and into REO, and then we adjust its value on the balance sheet to reflect market conditions. In the case of the negative $6.3 million, there are instances where properties have deteriorated more than we initially anticipated at the time of foreclosure, and there are situations where we sell the REO for less than our original valuation. Various factors can cause these variations. However, we do not view this as a worsening trend but rather as a quarterly timing issue. I anticipate that this figure will fluctuate from quarter to quarter.

Mark Szczepaniak, CFO

And 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, I got $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. We'll 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 the loan and put the REO on the books for, say, $800,000 because the loans at 65% LTV. So you put the REO on your books at $800,000. So that's what's in that gain on transfer to REO, that top number. Then maybe 6 months down the road, you get an offer, it's not $800,000, it's $700,000. And you say, okay, we got an offer for it. That's the new fair value. We're going to take the offer. So you write it down from $800,000 to $700,000. Well, in that period, which might be 6 months later, 8 months later, it looks like a $100,000 REO loss. The reality that $700,000 you're writing it down to is still $200,000 more than the $500,000 loan you had. So overall, if you sell it at that $700,000, you're still going to have an overall gain on resolution. It's just a 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. But what you're selling it for is still more than the loan that you took off the books.

Steven Delaney, Analyst

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

Mark Szczepaniak, CFO

That's exactly correct. And that $6.3 million, remember, it's different periods. So the $4.5 million, that's all new REO that came on in that quarter. The $6.3 million 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 million of it back, if I'm saying.

Steven Delaney, 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. But then once you understand valuation, it sounds like that can be a little lumpier in terms of when that valuation adjustment is made.

Mark Szczepaniak, CFO

That's correct.

Steven Delaney, Analyst

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

Christopher Farrar, CEO

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

Steven Delaney, Analyst

Okay. Congrats on another great quarter and I guess we'll do this again in 3 or 4 months.

Christopher Farrar, CEO

Thanks, Steve.

Operator, Operator

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

Christopher Farrar, CEO

Great. Thanks, everybody, for joining, and we'll speak to you in a few months.

Operator, Operator

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