Velocity Financial VEL Q3 2025 Earnings Transcript

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DATE

Thursday, November 6, 2025 at 5 p.m. ET

CALL PARTICIPANTS

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

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RISKS

• Chief Executive Officer Christopher D. Farrar and Chief Financial Officer Mark R. Szczepaniak reported a net loss of $1.6 million from loan charge-offs or OREO activities, primarily due to REO valuation adjustments in Q3.
• The transcript notes an REO valuation expense of negative $6.3 million for Q3 2025, attributed to lower-than-expected property sale values and deterioration, though management characterizes this as a timing issue rather than a trend.

TAKEAWAYS

• Pretax Earnings -- Increased 66.5%, reaching a record high for the company in Q3 2025.
• Net Income -- Up 60% year over year in Q3 2025 compared to Q3 2024, with core diluted EPS of $0.69 per share.
• Loan Production -- Achieved $739 million in Q3 2025, including $23.9 million in unfunded commitments, surpassing the previous quarter's record of $725 million.
• Loan Originations -- 1,778 loans originated in Q3 2025, reflecting continued growth in demand and volume.
• New Applications -- Exceeded $1.4 billion in Q3 2025, signaling sustained market momentum.
• Portfolio Growth -- Net increase of 32% in portfolio size year over year as of Sept. 30, 2025, and a 7.1% sequential increase from Q2 2025, net of prepayments.
• Total Loan Portfolio -- Just under $6.3 billion in unpaid principal balance as of September 30, 2025.
• Weighted Average Coupon (New HFI Originations) -- 10% in Q3; the five-quarter average trend was 10.6%.
• Weighted Average Coupon (Portfolio) -- 9.74% as of September 30, 2025, up seven basis points from Q2 2025 and 37 basis points year over year.
• Weighted Average Loan-to-Value -- 62.8% for new HFI originations in Q3 and 65.5% for the total portfolio as of September 30, both stable over recent quarters.
• Portfolio Net Interest Margin (NIM) -- 3.65% in Q3 2025, consistent with the five-quarter average of 3.62%.
• Portfolio Yield and Cost of Funds -- Portfolio yield at 9.54% and cost of funds at 6.27% in Q3 2025, maintaining spreads across periods.
• Nonperforming Loan Rate -- 9.8% at quarter-end, down 50 basis points sequentially and 80 basis points year over year.
• Nonperforming Asset Resolution Gains -- $2.8 million gain (2.6% of $108 million resolved) in Q3 2025, with a five-quarter average of 3.8% in NPA resolution gains.
• CECL Loan Loss Reserve -- $4.6 million, or 22 basis points of the outstanding amortized cost HFI portfolio as of Q3 2025, slightly above the five-quarter average of 20 basis points.
• Liquidity and Warehouse Capacity -- $144 million in liquidity at quarter-end, comprised of $99 million in cash and $45 million in unfinanced collateral; warehouse line capacity at $600 million, with a $935 million maximum, up $125 million from Q2 2025.
• Debt-to-Equity Ratio -- Stable between 1x and 1.5x over the last five quarters on a recourse basis.
• Securitization Milestone -- Closed the first single counterparty securitization of new production with a top-tier money manager in Q3 2025, reducing transaction costs and diversifying funding. A second similar transaction closed in early October 2025.
• Headcount -- 347 employees as of Sept. 30, 2025, an increase of 82 compared to September 30, 2024.

SUMMARY

Velocity Financial (NYSE:VEL) reported its highest-ever pretax earnings in Q3 2025, driven by record loan production and accelerated origination activity. Management outlined a new funding strategy by closing a landmark single counterparty securitization, with an additional transaction finalized shortly after quarter-end, broadening long-term capital access. Credit discipline was reflected in stable portfolio LTVs and a sequential reduction in nonperforming loan rates, while net income and portfolio net interest margin both exceeded recent averages despite temporary headwinds from real estate owned asset revaluations.

• Chief Executive Officer Christopher D. Farrar emphasized positive momentum into the fourth quarter, pointing to increasing market share, robust credit performance, and healthy fixed income markets.
• Chief Financial Officer Mark R. Szczepaniak explained that REO valuation volatility resulted from "timing" and property-specific factors, confirming that year-to-date REO activities remained in line with prior years.
• The company reiterated its approach of compounding all earnings back into its lending platform, citing it as a driver of continued performance.

INDUSTRY GLOSSARY

• HFI (Held for Investment): Loans retained by the company for long-term income, not intended for immediate sale.
• UPB (Unpaid Principal Balance): The portion of loan principal not yet repaid, used to calculate portfolio size.
• OREO (Other Real Estate Owned): Foreclosed properties held on the company's balance sheet until sold.
• REO (Real Estate Owned): A subset of OREO, referring specifically to real estate acquired via foreclosure.
• CECL (Current Expected Credit Loss): A forward-looking allowance for estimated losses on loans held for investment.
• NIM (Net Interest Margin): The difference between interest income earned on loans and the cost of funds, expressed as a percentage of average interest-earning assets.
• NPL (Nonperforming Loan): Loans where borrowers are not making scheduled payments, considered overdue per company policy.
• NPA (Nonperforming Asset): Sum of nonperforming loans and foreclosed real estate properties on the company's books.

Full Conference Call Transcript

Christopher D. Farrar: Thanks, Chris, and we appreciate everyone joining the call today. Our third quarter results were fantastic as we've achieved another record quarter in terms of pretax earnings, which were up 66.5%. Production volumes of $739 million and new applications exceeded $1.4 billion for the quarter. Looking forward, the markets remain 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 decrease 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 pretax 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 is available for REOs that are priced properly, and we 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. 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 was up 60% year over year, and core diluted EPS was $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 a record level of production of $739 million, a 32% net increase in the portfolio year over year after netting out prepayments. In terms of nonperforming loans, that portfolio was pretty stable at 9.8%, down from 10.6%, 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 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, and we are very pleased with the way that transaction and both those transactions executed. 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. So all in all, we are in good shape there. Turning to page four, I want to reemphasize 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've had outstanding results, and we think this is a great opportunity for investors to get exposure to our earnings and compounding of capital. So we are 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 R. Szczepaniak: Thanks, Chris. Good afternoon and evening, everyone. Page five, as Chris mentioned, Velocity Financial, Inc. 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, showing strong production growth. In Q3, the weighted average coupon on new held-for-investment originations continued to come in strong at 10%. 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 at 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 overall loan portfolio as we retain these loans in our portfolio. Our total loan portfolio as of September 30 is just under $6.3 billion in UPB, which is a 7.1% increase from Q2. And 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 30 was 9.74%, which is seven basis points above Q2 and 37 basis points in terms of portfolio yield over Q3 year over year. The total portfolio weighted average loan-to-value remained consistently low at 65.5% as of September 30. 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 was at 6.27%.

We've maintained a nice healthy spread over several periods. On page eight, our nonperforming loan rate at the end of Q3 was 9.8%. That's down 50 basis points from Q2 and 80 basis points year over year. We continue to see, as Chris mentioned, strong collection efforts by our special servicing department, which resulted in favorable resolutions of our nonperforming assets, and the NPAs are comprised of our nonperforming 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 a net loan charge-off and gain/loss in OREO activity. In terms of the CECL reserve, as of September 30, it was $4.6 million, or 22 basis points, and that's on our outstanding amortized cost HFI portfolio. That 22 basis points is over the last five quarters, where we've averaged around 20 basis points of CECL reserves. So not much change there. And keep in mind, the CECL reserve does not include fair value option loans; it's only our held-for-investment amortized cost.

The bottom part of that table shows that for Q3, net gain/loss from loan charge-offs or elect activities resulted in 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 30 was just under $144 million, 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 30, our available warehouse line capacity was just a little over $600 million, with a maximum line capacity of $935 million. That's a $125 million increase in maximum line capacity over Q2.

We went from $810 million maximum capacity at the end of Q2 to September, as some of our warehouse lines are increasing their capacity. And that concludes my Q3 recap. The debt-equity ratio on a recourse basis stays consistent, relatively at 1x, just between 1.5x and 1x in the last five quarters. So Chris, with that, I'll turn it back to you to present an overview of our outlook and key business drivers.

Christopher D. Farrar: Thanks, Mark. Appreciate it. Just to sum it up, we're very positive about the future. We think markets are healthy, our credit's performing well, and 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. So with that, I'll open it up for questions.

Operator: We will now begin the question and answer session. The first question comes from Steven Cole Delaney with Citizens. Please go ahead.

Steven Cole Delaney: 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. So I tip my hat to you on that for sure. A little concern on not so much OREO resolutions but just in terms of, as you show on page 10, the charge-offs are up quarter over quarter for sure. And this quarter, I know REO gains can be a little fluky, but we went from a nice gain on REO in the quarter to a, or excuse me, last year third quarter to the loss this year.

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

Christopher D. Farrar: Sure. In terms of the REO valuation, I'll walk you through the detail. Just from a high level, if you look, you'll see it in our Q that gets filed later today. Year to date, our REO activities are basically on top of last year, $3.2 million gain, I think it is. So there's 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 in from off the books and put it into REO. And then as it sits on the balance sheet, we adjust it 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. Right. So 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 R. Szczepaniak: And 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 we first foreclose on a property and set the REO up. The REO has to go up at its fair value. Well, keep in mind, since we've got the loans at basically 63%, 60% LTV, if you have a $500,000 loan, now you're to write off that loan and put the REO in the books for, say, $800,000 because loans at a 65 LTV.

You put the REO in your books at $800,000, that's what's in that gain on transfer to REO, that top number, maybe six months down the road, you get an offer it's not $800,000, it's $700,000, and you said, okay, we got an offer for it, that's the new fair value. Going to take the offer. So you write it down from $800,000 to $700,000. Well, that period, which might be six months later, eight months later, looks like a $100,000 REO loss. But in 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 $700,000, 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 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 wrote, they took off the books.

Steven Cole Delaney: Got it. So 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, then you had to just reverse some of that.

Mark R. Szczepaniak: That's exactly correct. And that $6.3 million, remember, it's different periods. So the $4.5 million, that's all new OREO 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, and now we're taking $6.3 million of it back, if I'm saying. Yes.

Steven Cole Delaney: 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 when you understand valuation, it sounds like that can be a little lumpier in terms of when the valuation adjustment is made.

Mark R. Szczepaniak: Okay.

Steven Cole Delaney: All right. That's helpful. Well, obviously, the positives in the report far exceed any negatives, but I just wanted to bring that up. And one final thing, what is your headcount currently or at September 30, and how has that changed over the last year?

Christopher D. Farrar: Yes. So we're at like 347 people at September 30, and that's up about 82 heads.

Steven Cole Delaney: Okay. Alright. Yep. Very good. Well, 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.

Christopher D. Farrar: Okay. Thanks, Steve. Take care. Thanks, Steve. Stay well.

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

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

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

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