Velocity Financial VEL Q4 2025 Earnings Transcript

Image source: The Motley Fool.

DATE

Wednesday, March 11, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Christopher D. Farrar
• Chief Financial Officer — Mark R. Szczepaniak

Need a quote from a Motley Fool analyst? Email pr@fool.com

TAKEAWAYS

• Core Net Income -- $111 million for the year, a 52% increase, setting a company record.
• Pretax Return on Equity (ROE) -- 26%, marking a new high for the company.
• Originations -- $2.7 billion for the year, representing a 49% increase driven by account executive productivity.
• New Securitizations -- Nine completed with $2.6 billion in total new issuance, also a record for the capital markets team.
• Loan Portfolio Growth -- Net growth of 28% to $6.5 billion in unpaid principal balance (UPB) from $5.1 billion the prior year.
• Nonperforming Loan (NPL) Resolutions -- $331 million resolved in the year, producing $30 million in net recoveries.
• NPL Sale Transaction -- Sale of $129 million of NPLs with retention of servicing rights, generating $13.4 million net income and freeing $50 million in working capital.
• Unsecured Debt Issuance -- First-ever $500 million rated, unsecured offering executed at a 9.38% fixed coupon maturing in 2031, improving funding diversification and reducing warehouse line dependence.
• Book Value Increase -- 21% higher at year end, attributed by management to solid earnings and portfolio expansion.
• Net Interest Margin (NIM) -- Reported at 3.6% on an annual basis, with Q4 NIM stable at 3.59%.
• Loan Portfolio Coupon -- Weighted average coupon at year end of 9.7%, up 21 basis points year over year, with new originations in Q4 just above 10%.
• Loan-to-Value (LTV) -- Portfolio LTV steady at 65% at year end; new Q4 originations under 63%.
• Credit Loss Allowances -- CECL reserve at $4.5 million and fair value adjustment of $48.3 million, for a combined 81 basis points against held-for-investment portfolio.
• Nonperforming Loan Rate -- Decreased to 8.5% from 10.7% the prior year, reflecting both NPL sales and internal resolutions.
• Liquidity Position -- $117 million total liquidity, comprising $92 million in cash/cash equivalents and $25 million in unfinanced collateral; $600 million warehouse line availability within a $935 million total.
• Q4 Core Net Income -- $36.3 million, or $0.93 per share, up from $0.60 per share in Q4 2024.
• Q4 Loan Production -- Just under $635 million in UPB, a 12.6% increase year over year.
• REO/Charge-off Activity -- Net charge-off loss of $3.7 million for the full year, attributed to isolated legacy loans now out of the portfolio.
• NPL Resolution Recoveries Q4 -- $7.6 million in total recoveries, or 9.8% of UPB, including net contractual interest.
• 2025 NPL Resolution Recoveries -- $30 million, or 9% over UPB, compared to $22.3 million, or 8.8% over UPB in 2024.
• 2025 Securitizations -- Q4 issuance included $646.3 million through two deals, with a subsequent $355 million issued in February 2026.
• Funding Actions -- Proceeds from unsecured debt were used to retire $215 million of 2027-maturing debt and pay down warehouse lines.
• Loan Count -- Over 6,600 loans originated in 2025, reflecting a broadening borrower base.

SUMMARY

Velocity Financial (NYSE:VEL) significantly expanded both its lending operations and funding flexibility, underscored by substantial growth in total originations, a sharp ROE increase, and a shift toward unsecured funding sources. Management attributed year-end liquidity strength to proceeds from the company’s inaugural unsecured bond offering, providing capacity for additional portfolio expansion and less dependence on secured warehouse financing. The successful sale and retention of servicing rights on a $129 million NPL pool delivered immediate earnings benefits while establishing recurring servicing income and enhancing capital efficiency. New annual disclosures detailed total cash interest collected on NPL resolutions, offering increased transparency regarding future servicing revenue. The call emphasized stable margins, higher book value, and a disciplined risk approach that included a notable reduction in nonperforming loans, positioning the company for sustained capital allocation toward growth.

• Management indicated stable net interest margins and positive forecast for continued portfolio growth in 2026, grounded in robust demand and supportive securitization markets.
• The January 2026 corporate rating by Fitch and Moody’s enabled the company to shift toward longer-term, unsecured funding at a fixed 9.38% rate and reduce exposure to potential refinancing risk.
• Expanded financial disclosures highlighted full revenue recognized from NPL resolution activity, including contractual interest not previously detailed, enhancing clarity around realized returns.
• "We are not reaching to hit our targets or our volumes; we are remaining disciplined there," CEO Farrar said, reinforcing the company’s stated credit standards amid expansion.
• The portfolio saw a 39 basis point increase in yield while cost of funds rose just 18 basis points, showing improved spread dynamics.
• Management confirmed that favorable NPL resolution trends and completed charge-off actions reduce the likelihood of similar credit losses recurring in the near term.

INDUSTRY GLOSSARY

• NPL (Nonperforming Loan): A loan on which the borrower is not making scheduled payments, typically over 90 days delinquent, requiring active management or resolution.
• UPB (Unpaid Principal Balance): The total remaining principal amount on outstanding loans, excluding interest or fees.
• CECL (Current Expected Credit Loss): An accounting standard requiring financial institutions to reserve for expected future credit losses across the life of held-for-investment assets.
• REO (Real Estate Owned): Property held on the balance sheet as a result of foreclosure or loan recovery where the company has taken ownership.

Full Conference Call Transcript

Christopher D. Farrar: Thanks, Chris, and I would like to welcome everyone. I appreciate you joining our 2025 year-end earnings call. Pleased to report another incredible year of performance and very proud of what our team accomplished. Through hard work and dedication to our vision, we recognized record levels in originations, portfolio growth, new securitizations, book value, pretax ROE, and earnings. Credit belongs to my amazing team members who are talented and passionate about our mission. I believe they are our greatest asset. From a macro perspective, we see healthy activity in the fixed income markets as our deals are oversubscribed and spreads are tight.

Our pipeline is growing, our end real estate markets are healthy, and we are optimistic about our prospects going forward. In terms of our specific results, core net income increased by 52% to $111,000,000, which also drove a new record level of pretax ROE of 26%. Importantly, we achieved this growth while maintaining our margins and credit discipline. With respect to originations, we increased volume by 49% to a record $2,700,000,000, driven by increases in productivity from our account executives. Increased volume also set a record for our capital markets team with nine new securitizations and $2,600,000,000 in new issuance.

On a net basis, the portfolio grew by 28% versus the prior year, and our asset management team successfully resolved $331,000,000 in NPLs with net recoveries of $30,000,000. At year-end, we entered into a transformative partnership whereby we sold $129,000,000 of NPLs and retained the servicing rights for the entire pool of loans. This transaction drove significant earnings in Q4 but also freed up approximately $50,000,000 in working capital and will drive future earnings from the servicing fees earned. All in all, a great transaction as this team continues to impress and drive meaningful results to the bottom line.

From a liquidity perspective, we have never been stronger, as we issued our first rated unsecured debt offering for $500,000,000 in January, which gives us greater flexibility and makes us less reliant on short-term warehouse lines. This new capital will help us execute our long-term plan of growing book value and maximizing shareholder returns. Looking forward, we have great momentum and are well positioned to continue our growth. That concludes my prepared remarks, and we will turn over to Page three in the earnings presentation. 2025 was really just a fantastic year for us. You can see growth across the board, 26% pretax ROE, grew book value by 21%, and maintained a very healthy NIM at 3.6%.

Turning to Page four, digging into the fourth quarter, you can see core net income of $36,300,000, or $0.93 a share, up from $0.60 a share from Q4 2024. I mentioned that the NIM was very healthy and stable at 3.59%. In terms of production, dollars were $634,000,000 for the quarter, up 12.5% from the prior year. I mentioned the activity in both the portfolio and NPLs. As a result of that NPL sale, NPLs were down to 8.5% at the end of the year. Again, hitting on the asset management team, they continue to do a great job of realizing net gains, and we have expanded our disclosures in this year's 10-Ks and in these earnings materials.

We are reflecting total revenue that we recognize from the NPLs, and that really just shows we have always made those fees and made that income, but it has been difficult to suss out in the financials. So we broke that out and showed the activity from regular accrued interest as well. As you can see for the quarter, that was a total of $7,600,000. So that team continues to do a great job for us. In terms of financing and capital, I mentioned that we have done a number of securitizations in the year.

We did do our second private securitization where we had one investor taking down the entire transaction, and we like that execution and think it is a great diversification as we move forward. I mentioned the strong liquidity position, $92,000,000 in unrestricted cash and plenty of warehouse capacity. As I mentioned in my opening remarks, we are really proud of the NPL transaction we were able to close in the fourth quarter, recognizing $13,400,000 of net income as a result of that sale and releasing about $50,000,000 of working capital to fund future production. With that, I will turn it over to Mark for Page five.

Mark R. Szczepaniak: Thanks, Chris. Hi, everyone. Another year is in the books for Velocity Financial, Inc., and as Chris had mentioned, Velocity Financial, Inc. is really ending the year strong. If we go to Page five and look at our loan production, total loan production for the fourth quarter was just under $635,000,000 in UPB. As Chris mentioned, that is a 12.6% year-over-year increase from about $563,000,000 in Q4 2024. The strong production growth in 2025 included the weighted average coupon on new Q4 held-for-investment originations continuing to come in strong at just a little over 10%. Originations in Q4 also continued at tight credit levels, resulting in a weighted average loan-to-value for the quarter just under 63%.

2025 total year loan production is $2,700,000,000 in UPB. That was almost a 47.5% year-over-year increase over the $1,900,000,000 in production for 2024. Over 6,600 loans were originated during 2025. The strong 2025 production was a result of continued organic growth of our borrower base and strong demand for our product. As a result of the continued strong growth in production, if you look at Page six, it shows the year-over-year growth in our overall loan portfolio. The total loan portfolio as of the end of the year for 2025 was $6,500,000,000 in UPB, which is a 28.4% increase over the $5,100,000,000 as of 12/31/2024.

The weighted average coupon on our total portfolio at the end of the year was 9.7%, as Chris mentioned, a 21 basis point year-over-year increase. The total portfolio weighted average loan-to-value remained consistently low at 65% as of 12/31/2025, and the average loan balance remained consistent at about $390,000. On Page seven, it shows our recent quarterly portfolio net interest margin. You can see 2024 and 2025 have very, very consistent net interest margins. It is not on the slide, but on an annual basis, our portfolio-related net interest margin was 3.61%, about a 1.4% increase over our 2024 net interest margin of 3.56%.

For the year, our portfolio yield increased 39 basis points year over year, while our portfolio cost of funds increased year over year by only 18 basis points. The portfolio yield increase is mainly driven by strong loan production during the year and higher loan coupons, and the increase in the portfolio cost of funds is mainly due to an increase in the securitization market yields.

On Page eight, our nonperforming loan rate at the end of 2025 was 8.5% compared to 10.7% at the end of 2024, and the decrease, as Chris mentioned, was a combination of the sale of $129,000,000 in UPB of NPL loans sold during Q4 as well as a combination of continued strong resolutions during the entire year by our special servicing department. The table to the right of the page shows our loans held-for-investment portfolio, including both our amortized cost and fair value loans, and shows the total year-over-year net nonperforming loan valuation allowance we have for our nonperforming loans.

As of 12/31/2025, the amortized cost loan portfolio had a $4,500,000 CECL reserve and the fair value portfolio had a $48,300,000 valuation adjustment allowance for a combined valuation allowance on the entire loans held-for-investment portfolio of about 81 basis points. Both of these valuation adjustments are required under U.S. GAAP. The unrealized valuation adjustment on our nonperforming fair value loans represents the value for which the loans, under U.S. GAAP, could be sold out in the secondary market. However, we do not plan on selling NPL loans since our in-house special servicing department has a history of producing net gains and very successful resolutions on these loans.

Turning to Page nine, it shows our CECL loan loss reserve, which we said was at $4,500,000 for the end of the year, or 22 basis points of our outstanding amortized cost held-for-investment portfolio, and the CECL loan loss reserve does not include the loans being carried at fair value. For 2025, our net gain/loss from loan charge-offs and REO-related activities at the bottom of that table is a net loss of $3,700,000, mainly as a result of a couple of large legacy loan charge-offs. These were smaller loans; we wanted to clean those up. We do not have those types of loans in our portfolio anymore, so that loss is well above our historical loss experience.

We do not foresee these types of losses going forward because of the continued favorable resolutions of our nonperforming loans and that significant loss allowance adjustment that you saw on the previous page for the fair value loans. Page 10 presents the enhanced disclosure that Chris was mentioning on our nonperforming loan resolution activity. So the first set of four columns there is what we have always shown in the past. We go up to the net gain or loss on NPL loan resolution, which brings in the amount of default interest and prepayment fee income over and above contractual principal and interest.

But what we had not really shown was what is the contractual interest that we go back and pull in. Under GAAP, you have to reverse that out when a loan goes nonperforming. Once we resolve the loan, we are collecting all of that contractual interest in cash. We wanted to bring that in to show the total amount of revenue that we bring in when we resolve these loans. So in this table, we have added columns for net accrued interest and total recovered on the far right. We felt it was important to add the amount of contractual interest, net of any advance write-offs, that is also collected on resolutions for the efforts of our special servicing team.

For 2025 Q4, NPL resolution total dollars recovered, including net contractual interest, was $7,600,000, or 9.8% over the UPB, compared to $7,500,000, or 10.8% over UPB, for 2024. Now if you look at the full year 2025 on this table, the total amount recovered on the resolutions of NPL loans was $30,000,000, or 9% of UPB, compared to $22,300,000 total recovered in 2024, or 8.8% over UPB. Page 11 shows our durable funding and liquidity position at the end of the year. Total liquidity as of December 31 was just under $117,000,000, comprised of about $92,000,000 in cash and cash equivalents and another $25,000,000 in available liquidity in unfinanced collateral.

In addition, our available warehouse line capacity at December 31 was just under $600,000,000, with a maximum line capacity of $935,000,000. So there is plenty of capacity and available capacity on the warehouse lines. In Q4, we issued two securitizations, 2025-P2 and 2025-5, with a total of $646,300,000 in securities issued. As Chris mentioned, in January 2026, we completed a public rating process for Velocity Financial, Inc.—it is our first time getting a corporate rating. We were rated by both Fitch and Moody's, and we issued $500,000,000 in unsecured debt. That is a five-year term debt, fixed rate at 9.38% interest, due in 2031.

The proceeds of the $500,000,000 debt were used to pay off $215,000,000 of corporate securitized debt that was set to mature in 2027, so we paid that off, and the balance of it was to pay down, as Chris mentioned, our shorter-term warehouse lines. And then in February, we issued the first 2026 debt, 2026-1, with $355,000,000 in securities issued. That concludes my 2025 financial recap. Chris, I would like to now give the presentation back to you for an overview of Velocity Financial, Inc.'s 2026 outlook and key business drivers.

Christopher D. Farrar: Thanks, Mark. On Page 12, our markets are very healthy. We like the backdrop there. Credit is stable. We are not reaching to hit our targets or our volumes; we are remaining disciplined there. Capital markets are great. The securitization market in particular is very robust, and we have a deep bench of investors supporting us there. Then I think from an earnings perspective, we think NIMs should remain where they are, and we think we can continue growing the portfolios. We are very positive about the future in 2026. So with that, we will conclude our presentation and open it up for questions.

Operator: Thank you. We will now begin the question and answer session. Today's first question comes from Steven Cole Delaney at Citizens Capital Markets. Please go ahead.

Steven Cole Delaney: Good afternoon, everyone, and congratulations on an excellent year. We do appreciate Mark's comments on Page nine about the REO, and we may want to follow up with you on that. But, obviously, an outstanding performance. Chris, I am curious, looking ahead, one of the things, if you think about the broader financial markets—and let us talk about the rates market—God, I do not know how many times you turn on CNBC and they were talking the Fed and yada. We do not know what the Fed will do. But the futures market, as of a week ago when we updated our internal rate forecast, is showing somewhere between two and three 25 basis point cuts in 2026.

Now who knows what we get? And more importantly, the ten-year is really being kind of cranky at 4.20%, and that is, what, 50, 60 basis points off the recent twelve-month lows. I guess what I am trying to say is you have performed the way you did in terms of origination volume, and your clients are obviously finding deals, and they can afford the current rates. Let us just say if we get some short-term rate relief, and if the ten-year were to come down 50 basis points or whatever, how impactful is that to the demand from your borrowing universe for additional loans? I am just curious what the mindset is.

And I am curious if you have any material floating-rate loan concentration in your portfolio where, if we did get a break in the five- to ten-year range, is there the possibility of showing somebody some kind of a mini-perm type of a loan structure vis-à-vis just a SOFR-type floater? Thank you for commenting on that, if you would.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.