Velocity Financial Inc (VEL) 2025 Q3 法說會逐字稿

Good day and welcome to the Velocity Financial Inc. third quarter 2025 conference call. (Operator Instructions)

I would now like to turn the conference over to Chris Oltman, treasurer. Please go ahead.

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 Ferrar, 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.vellfinance.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 reconciliation of these non-GAAP measures, you should refer to the earnings materials on our investoral 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 Ferrar.

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 transaction 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.

That I'll turn over to the presentation and begin discussing page 3. 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 getting 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, continue to see positive gains on resolved NPAs of $2.8 million and our team fantastic job there.

Turning to financing and capital, I mentioned that first ever single county counterparty transaction. We're approached a quarter or two ago by a large party and with the interest of developing a consistent outlet for our product and very pleased with the way that transaction, both those transactions executed and we expect it to be an additional diversification of our funding sources going forward.

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 in shape there.

Turning to page 4, 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 that exposure to our earnings and the and the compounding of capital, so very pleased with how we've transacted over the last couple of years and expect this to continue going forward.

That I'll turn it over to Mark on page 5.

Thanks, Chris, and good afternoon and evening, everyone. Page 5, 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 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 health for investment originations continuing to come in strong at 10.5%. And 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 LTB trend of 62.8%.

As a result of the continued robust growth in production, take a look at page 6. 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 is just under $6.3 billion in UPV. That's a 7.1% increase from Q2, and as Chris mentioned, a 32% increase year over year, even netting out prepayments.

The way the average coupon on our total portfolio as of September 30th was 9.74%, which is 7 basis points above Q2 and 37 basis points in terms of portfolio yield over Q2 year over year.

The total portfolio weight average loan to value remained consistently low at 65.5% as of September 30th.

You go to page 7, 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're going to 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 8, 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, a strong collection efforts by our special servicing department that resulted in favorable resolutions of our non-performing assets, and the NPAs are comprised of our non-performing loans as well as REOs.

Page 9 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, and 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 Cecil loan loss reserve, and the bottom part shows the net loan charge off and gain loss scenario activity. In terms of the CESI reserve, on September 30th, it was $4.6 million or 22 basis points, and that's on our outstanding amortized cost HFI portfolio. And that 22 basis points is consistent over the last five quarters, we've averaged around 20 basis points of CECL reserves, so not much of a change there. And keep in mind the CECL reserve does not include health, I'm sorry, fair value option loans. It's only are held for investment amortized costs.

The bottom part of that table shows that for Q3, our net gain loss from loan charge-offs RLA activities, we had a net loss of 1.6, mainly as a result of REO valuations.

Page 11 shows our durable funding and liquidity position at the end of Q3. Total liquidity on September 30th was just under $144 million. That's 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 and that's a $125 million increase in maximum line capacity over Q2. So we went from 810 maximum capacity at the end of Q2 to 935. Some of our warehouse lines are increasing their capacity.

And that concludes my Q3 recap our debt equity ratio on a recourse basis stays consistently low. It's at 11x, which has been between 1.5, 1X in the last five quarters.

So Chris, with that, I'll turn it back to you to present an overview on our outlook and key business drivers.

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. The 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.

We will now begin the question-and-answer session. (Operator Instructions)

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

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 3, so tip my hat to you on that for sure. A little concerned on Not so much REO resolutions, but just in terms of, as you show on page 10.

The charge off or up, quarter over quarter for sure, and this quarter REO gains can be a little flukey, but you know we went from a nice gain on REO, in the second quarter to a, or excuse me, last year, third quarter to the loss this year, and 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, you, 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 evaluation, then you have to adjust, just curious why that big number of $6.3 million.

You bet. Thanks for the question, Steve. In terms of the REO evaluation, I'll walk you through the detail, but just from a high level, if you look, you'll see it in our queue that gets filed later today. Year-to-date our REO activities is basically on top of last year, $3.2 million dollar gain,

So there's some noise just in timing issues here in terms of the REO evaluation expense that we recognize. That happens after we've taken a loan in from off the books and put it into REO and then it's as it sits on the on the balance sheet we adjust, market to market realities.

I would say in this in this $6.3 million you've got some cases where maybe the property has deteriorated to 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, so it can be driven by a number of different things, but I would say from our perspective we don't see it as like 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.

Okay, and Steve, this is, yes, please, I'm sorry, Steve, this is Mark. If I could just add to like Chris said, it is really a timing item, the main thing to look at is the NPL resolution table, the res the final resolutions, for example, like at $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.

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 going to write off that loan and put the REO in the books for say 800,000 because you know the loans at a 65 LTV so loans, 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 7.

And you say, okay, we've got an offer for it. That's the new fair value. We're going to take the offer. So you write it down from 8 to 7. Well, in that period, which might be 6 months later, 8 months later, it 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 that you had.

So overall, if you sell it to that $7000 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. But what you're selling it for is still more than the loan that you wrote, they took off the books.

Got it. So you're telling me, you added, 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 you reverse some of that.

That exactly correct. And that 6-3, remember, its different periods, so the 45, that's all new eel that came on in that quarter. The 6.3 is probably something that maybe in those quarters it went on for $8million or $9 million positive, and now we're taking 6.3 of it back if I'm saying, but yes.

Got it. Got it. Okay, understood, because what 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 the evaluation adjustment is made.

That's correct. All right, that's helpful. Well, obviously the positives in the report far exceed any of the negatives, but I just wanted to bring that up. And one final thing, what is your head count currently, or at 9:30, and how has that changed over the last year?

Yes, so we're at like 347 people at 9:30 and that's up about 82 heads.

Okay. Alright. 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 3 or 4 months.

Okay, thanks, Steve. Take care.

Thanks.

Stay well.

Again, if you have a question, please press star then one.

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

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

The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.