Q2 2025 Velocity Financial Inc Earnings Call
Speaker #3: Good day and welcome to the Velocity Financial second quarter 2025 conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed zero.
Speaker #3: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone.
Speaker #3: To withdraw your question, please press star then two. Please note this event is being recorded. I would now like turn the conference over to Chris Oltmann, Director of Investor Relations.
Speaker #3: Please go head.
Speaker #4: Thanks, Danielle. Hello, everyone, and thank you for joining us today for the discussion of Velocity's second quarter 2025 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Szczepaniak.
Speaker #4: Velocity's Chief Financial Officer. Earlier this afternoon, we released a press release with our second quarter ults. And you can find that press release and an accompanying presentation that we will refer to during this call on our Investor Relations website at www.sellfinance.com.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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.
Speaker #4: 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 vestor Relations website.
Speaker #4: And 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.
Speaker #5: Thanks, Chris. And welcome, everyone, to our second quarter earnings call. After the close today, we reported record quarterly results with net income increasing 76% and new loan production up 72%.
Speaker #5: Versus Q2 24. performing exceptionally well across the board. I believe our people are our most important asset, and they deserve the credit for delivering this outstanding performance.
Speaker #5: We grew revenue by 31 million dollars, managed expenses carefully, and saw pre-tax income Obviously, our business is increase by 14 million dollars. As operating leverage boosted, our core pre-tax return on equity to 24%.
Speaker #5: With respect to our end markets, we saw a pickup in transactions during Q2 and investors are quite active especially within our niche. Year over year, we increased the portfolio by just under 1.4 billion dollars with commercial properties representing approximately 770 million dollars of the increase.
Speaker #5: And residential properties the other 600 million. Our ability to finance abroad range of property types is a unique strength that differentiates us from other mortgage lenders.
Speaker #5: We expect strong growth from each of these categories going forward. In terms of the portfolio, our asset management team did a fantastic job of curing delinquent loans, which drove our NIM expansion.
Speaker #5: And resolved NPAs with significant gains. This team knows our asset class well and they continue to drive exceptional performance. From a capital markets perspective, this is our busiest quarter ever, completing four securitizations issuing just under 1 billion dollars in securities.
Speaker #5: The strong support for our program and robust market conditions are important tailwinds which fuel our growth. As we look forward, the pipeline new loans is very strong and we expect continued growth and originations as we take market share.
Speaker #5: Our team is very proud of the earnings growth and the predictability of our unique business model. And we know that the value proposition for our estors is outstanding.
Speaker #5: That concludes my prepared remarks and will turn to the presentation starting with page three. In terms earnings, as I mentioned, core net income 27 and a half million or 73 cents a share.
Speaker #5: New all-time record for the company. And NIM for the quarter was up to 3.82%, up 47 bips from just last quarter. And the large driver of that was really as I mentioned earlier, the recapture of delinquent interest on non-performing loans.
Speaker #5: So our team did a great job on those recoveries. In terms of the portfolio, I mentioned the record production and saw the portfolio grow by 30.8% on a year over year basis.
Speaker #5: In terms the non-performing loans, those ticked slightly to 10.3%. As we continue to work hard to resolve delinquent borrowers. Most importantly, probably from the portfolio perspective, continued to see very positive gains of 3.6 million dollars on just over 100 million dollars of UPV that was resolved.
Speaker #5: In terms of financing and capital, I mentioned the four securitizations the most significant securitization we did was our MC25-1, and that transaction freed up about 53 and a half million dollars of cash to continue to grow the portfolio.
Speaker #5: So that was really an important transaction for us and Jeff and team did a great job from a capital markets perspective of getting great execution on that transaction.
Speaker #5: That increase in cash obviously drove strong results in our liquidity up to 139 million dollars. So we've got lots of liquidity to continue to fund our growth.
Speaker #5: And plenty of warehouse capacity. Turning to page four, this is a slide that we're ing. Something that we haven't presented before, but we really wanted to highlight the unique business structure, being a C Corp that retains our earnings, which allows us to grow book value and our earnings as we reinvest those earnings back into new assets.
Speaker #5: We've really feel like we're unique and unlike a lot of other mortgage lenders that are out there. You can see that there's a tremendous performance here on all categories with earnings going equity growing and ROE increasing, which is obviously pretty impressive to grow that ROE as much as we did with the equity base, continuing to increase.
Speaker #5: So we're very pleased with those results and based on all these things, we really feel like there's a tremendous value in the shares and that we trade in our view at a very low PE based on our growth profile and our ability to continue growing not only earnings but the portfolio as well.
Speaker #5: Turning to the next slide, on page five, I'm seeing this one before again, continuing to highlight how our strategy builds book value as we retain those earnings and put them back into the business for future growth.
Speaker #5: All the way to the far right is our adjusted book value, which represents the total value we think of our assets if we were allowed to mark everything to fair value.
Speaker #5: And I think, you ow, from our perspective, from a management's perspective, we view this 1760 a share really as a floor in terms of valuation.
Speaker #5: We feel like that's the minimum that our company should ever trade for because that's really the NPV of what's on the balance sheet as of today.
Speaker #5: And it esn't take into account the the value the platform and any future earnings or growth in the business. So as we grow this book value, we expect to reward shareholders, but really feel like this puts a nice floor in terms of valuation.
Speaker #5: So with that, I'll turn it back over to Mark to continue.
Speaker #6: Thanks, Chris. Good afternoon and evening, everyone. In the second quarter, again, we saw record production and continued strong earnings growth. If we take a look at the slide on page six, Q2 had record loan production of just over 725 million in UPV.
Speaker #6: That was a 13.3% increase from Q1, which was our previous record production, was Q1 of 640.4 million. So we've had two record productions in a row in two quarters.
Speaker #6: In Q2, there were over 1,600 loans funded. The strong production growth in Q2 included the weighted average coupon on new held for investment originations continuing to come in strong at 10 and a half cent.
Speaker #6: The weighted average coupon on our HFI originations, if you just ok back over the last five quarter average, has been at 10.7%. And the growth in originations in Q2 continued a tight credit levels, as you can see in the table.
Speaker #6: The weighted average loan-to-value for the quarter was at 62.7%. And on a five quarter average trend, 53.2%. So very tight credit levels, and good coupons.
Speaker #6: So the record growth at the healthy whack and the low LTV continues to demonstrate a consistent trend of borrower demand for Velocity's product even in the recent current volatile market.
Speaker #6: On page seven, as a result of the continued growth in production, we see a growth in Q2 for our overall loan portfolio. Our total portfolio as of June 30th was at 5.9 billion in UPV and 7.5% increase from last quarter from Q1 and a 30.8, almost a 31% increase year over year.
Speaker #6: The weighted average coupon on our total portfolio as of June 30 was 9.67%, which is eight basis points higher than where it was at the end of Q1.
Speaker #6: It's 42 basis points higher on a weighted average coupon basis compared to the second quarter of '24. So year over year. And the total portfolio weighted average loan-to-value remained consistently low at 65.8% as of June 30th.
Speaker #6: Page eight, our Q2 NIM was at 3.82%. That's a 47 basis points increase over Q1. The NIM, if you look at the components of NIM, our portfolio yield increased by 54 basis points quarter quarter due, as Chris mentioned, mainly because of higher cash interest received as a result of the special servicing efforts on a non-performing loans.
Speaker #6: And also to a secondary degree, we just mentioned that our portfolio whack at the end of Q2 was eight basis points higher than it was at the end of Q1.
Speaker #6: So ou're getting some pickup from a slightly increased total weighted average coupon on the portfolio. On the cost-to-fund side, our cost-to-funds increased by only one basis point quarter quarter, which also contributed to a widening NIM.
Speaker #6: On page nine, our non-performing loan rate at end of Q3 was 10.3%. That's down half a point from Q1. Our non-performing loan rate has remained consistent.
Speaker #6: If you look at the last five quarter end, it's been at 10.6%. We continue to see the strong collection efforts by special servicing that have resulted in favorable gain resolutions of all of our non-performing assets, which are comprised of both non-performing loans and REOs.
Speaker #6: And if ou look at the table on page 10, it shows these positive results of our in-house special servicing NPA resolution efforts. For Q2, our non-performing asset resolution gains were 3.6 million dollars.
Speaker #6: Or three and a half percent of about 104 million dollars of NPA UPV resolved. And on a trend basis, we've continued to average that three and a f percent quarterly NPA resolution gain over the last five quarters.
Speaker #6: Turning to page 11, we see our CISO loan loss reserve. And also our net loan charge-off and gain loss on REO activity. On the CISO reserve, as of June 30th, our CISO erve is 4.9 million.
Speaker #6: Or 22 basis points. Of our outstanding amortized costs held for investment portfolio. And our CISO reserve has been consistent with our last five quarter average running right around 20 basis points.
Speaker #6: Keep in mind the CISO loan loss reserve does not include loans carried at fair value. It's only the loans carried at amortized cost. And also for Q2, our net gain loss from loan charge-offs netted with REO-related activities recognized a net gain of 2 million dollars.
Speaker #6: And that's consistent if we look at the second quarter of '24. It's consistent year over year with a 2 million dollar net gain recognized in Q2 of last year.
Speaker #6: Page 12 shows our durable funding. And liquidity position at the end of Q2. Our total liquidity. At the end of June was 139.2 million.
Speaker #6: And comprised of about 80 million dollars in actual cash to cash equivalents and another 59 million in available immediate liquidity on unfinanced loan collateral.
Speaker #6: As of June 30th, our warehouse line capacity was 476 million almost 477 million. On a maximum line capacity of 810. So again, plenty of capacity on our warehouse line.
Speaker #6: And plenty of liquidity at the end of the quarter. As Chris mentioned earlier, in Q2, we did issue four securitizations. Including our second securitization ever collateralized by our short-term loan product.
Speaker #6: Which leveraged new short-term collateral and re-leveraged existing short-term collateral from collapsing our 2023 short-term securitization. And as Chris mentioned, we also collapsed and refinanced our 2022 mixed collateral securitization with a new 2025 mixed collateral securitization that generated over 50 million dollars in additional liquidity.
Speaker #6: That concludes my 2025 Q2 financial recap of a very, very strong quarter for the company. I'd now like to turn the presentation back to Chris for his overview of Velocity's 25 Outlook on our key business drivers.
Speaker #6: Chris?
Speaker #5: Thanks, Mark. Yeah, I mean, you see from the points here on this slide that we feel really good about the future and about our growth prospects.
Speaker #5: Markets are healthy. Both on the end user side and the capital markets side. So we're very bullish on the momentum we have and expect it to continue in the next year or two.
Speaker #5: So with that, that concludes all of our prepared remarks and we will open it up for questions, please.
Speaker #3: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone.
Speaker #3: If you are 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 withdraw your question, please press star two.
Speaker #3: The first question comes from Don Fendetti from Wells Fargo. Please go ahead.
Speaker #7: Hi, good ing. I was wondering if you can k a little bit about NIM going into Q3. If you think you can maintain this level or if there's some pull forward in Q2.
Speaker #7: And then if you can talk a ittle bit about the loan rowth expectations for H2.
Speaker #5: Sure. Hi, Don. So yeah, I think our target NIM is three and a half percent. I think Q1 was a ittle light. Q2 was obviously very strong.
Speaker #5: We're trying to target three and a f percent on a consistent basis. As Mark mentioned, resolving delinquent assets, because they do go on a non-accrual status, they tend be very lumpy.
Speaker #5: So you know timing when that asset will cure is a ittle tricky. So there's some volatility around NIM depending on when we actually collect.
Speaker #5: We do ultimately believe we're going to collect it almost all the time. It's just a question of timing and when. So you know if you average out the first two quarters, you're like 3.6, I ink, on NIM.
Speaker #5: And we think 's very sustainable going forward.
Speaker #7: Got it. And in terms of the pace of loan growth, the next quarter or two?
Speaker #5: Yeah. I think we still expect to grow. You know what we've seen historically is you kind of in a step function. You know it doesn't go up continuously every month.
Speaker #5: You sort of get to a new level, digest that level, and then take another step up. So you ow I don't have a forecast for you on the actual rate of growth, but we do expect to grow going forward.
Speaker #7: Thank ou.
Speaker #5: Sure.
Speaker #3: The next question comes from Steve Delaney from Citizens JMP. Please go ahead.
Speaker #8: Good afternoon.
Speaker #7: Thanks. Good afternoon, everyone. Congrats on a great quarter. Really remarkable with the numbers, the NIM and the ROE. I guess, Chris Farrar, when you look at where you are, pretty darn good.
Speaker #7: Where are the opportunities? Are there opportunities from improvement or is this sort of the range at which you would consider to be optimal and optimal high performance?
Speaker #7: Or are there any things that you know, you wake at night thinking, "Gosh, if I could just get this number a little bit better," to how you look at the results and and and the future?
Speaker #7: Look.
Speaker #5: Yeah, thanks. I appreciate it. Appreciate , Steve. Yeah, I you ow it's funny. I I remember a long time ago to go into an AYSO game in this soccer coach told told all the parents the worst thing you can do is watch your kids' best game and then go out every week and expect your kid to perform at that level.
Speaker #5: So yeah, I get your point. But I do think I do think this is this is I don't think it's the high point for us.
Speaker #5: It's we're doing exceptionally well. That's true. we did see you know kind of that big pickup in the NIM and some of those things.
Speaker #5: So some of those things are timing issues. But I still feel like we have we have room to improve. And the biggest areas that we're working on and just staying focused in our knitting is technology.
Speaker #5: We're undertaking a program right now over the next call it 12 to 18 months where we're breaking down our entire process and looking where we can apply technology to improve processes and make our team more productive.
Speaker #5: So I don't think we're at peak performance. I think we're at very strong performance. But I think it's sustainable going forward. And I do think we could improve on the efficiency side of the business as a very small example.
Speaker #5: We just recently rolled out some technology in our post-closing department that makes our people probably five times more productive than they were you know with the old process.
Speaker #5: So those won't be those won't massive gains every quarter, but over the next year and a half, we think we can we can drive some more performance and some more efficiency out of the business.
Speaker #8: Got it. Yeah, I think everyone likes to have better technology, or at least keep up.
Speaker #5: Yeah.
Speaker #8: Geography, you guys, you're on the West Coast. And it's a big country. Do you in your current markets you're operating in, maybe describe you know concentration, West Coast, how broad is your origination platform?
Speaker #8: How far can you reach? And I'm just curious if you're can touch the Southeast or possibly touch the Florida market with your existing setup and structure.
Speaker #5: Yeah. Good question. So we like to concentrate on the major MSAs. We have loans in 48 states. So we have we have deep reach across the country.
Speaker #5: And we like the diversity in the portfolio. You mentioned Florida. We do have an office in Miami and they're one of our highest producing offices per per capita.
Speaker #5: So they do a fantastic job for us. And you know, you tend to see the portfolio kind of barbelled between the coasts and and then some of the southern states.
Speaker #5: So kind of the smile, if you will. So I think I ink we'll stay with that footprint largely. And we think there's plenty of runway to to expand there.
Speaker #8: Thanks for the comments, Chris. And great quarter.
Speaker #5: Thank you, Steve.
Speaker #3: As a reminder, if you have questions, please press star one. The next question comes from Tim Chang from BTIG. Please go head.
Speaker #9: Hey, this is Eric Hagen, BTIG. You know, you guys have historically leaned into securitization as basically the only source of, you know, longer-term financing.
Speaker #9: but with all this private capital that's being raised right now in the market, I mean, do ou think there could be an opportunity to incorporate loan sales into the routine?
Speaker #9: and would alternative financing sources maybe allow you guys to grow more quickly?
Speaker #5: Yeah, hi, Eric. Good question. we are getting reverse inquiries from some of these private credit sources. And, I do think there's some some opportunities for us to, put financing in place to to, to grow the portfolio.
Speaker #5: I we have looked at whole loans in the past. I don't expect that that'll be a big source for us.
Speaker #5: but I do think that maybe there's there's some private structures that that might work that could help us expand, you know, another leg of the stool, if you will.
Speaker #9: Okay, that's interesting. Thank you. you know, we're looking at the prepayment rate and how it increased quarter over quarter. And I realize these are longer duration assets to begin with and a prepayment rate and kind of a, ou know, is less applicable maybe to the strategy.
Speaker #9: But, you know, what's driving that? I imagine it's not really an interest rate incentive because the coupons don't really move around a lot. So what's what's the context behind, you know, prepayment activity?
Speaker #5: Yeah, good question. so we've we've studied that in the past. And, we found roughly about half the time folks are selling the property and about half the time they're refinancing somewhere else.
Speaker #5: So, we've always kind of positioned the firm as a as a medium-term lender that, you know, the borrower has some immediate need capital. And they utilize our capital for, you know, call it one to five years depending on their situation.
Speaker #5: And then and then they tend to move on. So, it's it's pretty typical for our business. As you know, we collect prepayment penalty fees.
Speaker #5: in those cases to to maintain our yield. So, we're indifferent if if they do choose to to leave. and it's largely driven by their unique circumstance and their situation and, you know, whether or not they're they're refinancing or selling the property.
Speaker #9: Got it. That's helpful. Thank you, guys.
Speaker #5: Sure.