Q3 2025 Velocity Financial Inc Earnings Call
Speaker #3: Good day . And welcome to the Velocity Financial , Inc. . Third quarter 2025 conference call . All participants will be in listen only mode .
Speaker #3: Should you need assistance , please signal a conference specialist by pressing the star key , followed by zero . After presentation , there will be an opportunity to ask questions .
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Speaker #3: Then two . Please note this event is being recorded . I would now like to turn the conference over to Chris Altmann , treasurer .
Speaker #3: Please go ahead .
Speaker #4: Thanks , Chloe . Hello everyone , and thank you for joining us today for the discussion of Velocity's third quarter 2020 results . Joining me today are Christopher Farrar Velocities , President and Chief Executive Officer and Mark Szczepaniak Velocity's Chief Financial Officer .
Speaker #4: 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 .
Speaker #4: I'd like to remind everyone that today's call may
Speaker #4: include forward looking statements , which are uncertain and outside of the company's today'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 shoulders , including the risk factors disclosed in our filings with the Securities and Exchange Commission .
Speaker #4: 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 Investor Relations website .
Speaker #4: 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 .
Speaker #5: Thanks , Chris , and we appreciate everyone joining the call today . Our third quarter results were fantastic as we achieved achieved another record quarter in terms of pre-tax earnings , which were up 66.5% .
Speaker #5: Production volumes of $739 million and new applications , which 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 decline in the weighted average portfolio loan to value to 65.5% , and our coupons remain on target at ten and a half percent , generating attractive risk adjusted spreads and stabilizing our attractive Nim and core pre-tax ROE of 24.1% .
Speaker #5: Our asset managers have done a great job of resolving NPAs consistently , above par for net positive gains . Be plenty of capital available for reos that are priced properly and expect the real estate markets to continue to perform well within our niche .
Speaker #5: Most unique event in Q3 was the closing of our first ever single counterparty securitization of new production , with a top tier money manager .
Speaker #5: 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 .
Speaker #5: We're proud to partner with this world class firm and expect the transaction to transactions to continue , as evidenced by a second transaction that closed in early October .
Speaker #5: 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 work so hard to deliver these results , and we will continue to create shareholder value wherever possible .
Speaker #5: That'll turn over to the presentation and begin discussing page three . In terms of earnings , obviously , a great quarter . Net income up 60% year over year .
Speaker #5: And core diluted EPs of $0.69 a share . Portfolio Nim was very stable at 365 basis points above our target of 3.5% . Moving to production and the loan portfolio .
Speaker #5: I mentioned record level of production of 739 million and a 32% net increase in the portfolio year over year after netting out prepayments .
Speaker #5: In terms of non-performing loans , that that portfolio was pretty stable . 9.8% , down from 10.6 . And within our expected range , as I mentioned earlier , continued to see positive gains on resolved NPAs of $2.8 million .
Speaker #5: And our team is doing a fantastic job there . Turning to financing and capital , I mentioned that first ever single county . Counterparty transaction .
Speaker #5: We were approached a quarter or two ago by a large party , and with the interest of of developing a consistent outlet for our product and very pleased with the way that transaction , both those transactions executed .
Speaker #5: And 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 .
Speaker #5: So, all in all, we're 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.
Speaker #5: 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 the compounding of capital .
Speaker #5: So 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 .
Speaker #6: Thanks , Chris , and good afternoon and evening , everyone . Page five . As Chris mentioned , velocity had a new record for loan production in Q3 .
Speaker #6: The loan production for the quarter was $739 million . That included $23.9 million in unfunded loan commitments . The hundred 39 . Again demonstrates our continued strong demand for our product in Q3 alone , production broke the previous quarter's record of 725 million .
Speaker #6: There were a total of 1778 loans originated in third quarter . The strong production growth in Q3 included the weighted average coupon on new held for investment originations , continuing to come in strong at 10.5% , and the weighted average coupon on our HFC originations for the last five quarter average trend was at 10.6% .
Speaker #6: the 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 30th was 9.74% , which is seven basis points above Q2 and 37 basis points in terms of portfolio yield over Q3 .
Speaker #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 LTV trend of 62.8% .
Speaker #6: As a result of the continued robust growth in production . Take a look at page six . It shows the overall growth in our Q3 for our overall loan portfolio .
Speaker #6: As we retain these loans in our portfolio , our total loan portfolio as of September 30th was just under 6.3 billion . In UPB .
Speaker #6: Q3 . Year over year , the total portfolio weighted average loan to value remained consistently low at 66 65.5% as of September 30th .
Speaker #6: If you go to page seven , we maintained our strong portfolio . Nim at 3.65% in Q3 , and that's consistent with our last five quarter average portfolio Nim of 3.62% .
Speaker #6: On the right side of that page , you can see the breakout of our yield , as well as the cost of funds .
Speaker #6: 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 several periods .
Speaker #6: On page eight , 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 .
Speaker #6: 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 .
Speaker #6: 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 108 million , in UPB resolved , and on a trend basis , we've averaged 3.8% quarterly NPA resolution gains over the last five quarters .
Speaker #6: Turning to page ten . The top part of that table on the right hand side shows our Cecil loan loss reserve . The bottom part shows the net loan charge off and gain loss on REO activity .
Speaker #6: In terms of the Cecil Reserve, it's September 30th. It was $4.6 million, or 22 basis points, and that's on our outstanding amortized cost.
Speaker #6: HFC portfolio . And at 22 basis points is consistent over the last five quarters , we've averaged around 20 basis points of seasonal reserves .
Speaker #6: So not much of a change . There . And keep in mind , the Cecil Reserve does not include H health . I'm sorry .
Speaker #6: Fair value option loans . It's only are held for investment . Amortized cost loans . The bottom part of that table shows that for Q3 , our net gain loss from loan charge offs are activities .
Speaker #6: We had a net loss of 1.6 , mainly as a result of Rio valuations . Page 11 shows our durable funding and liquidity position at the end of Q3 .
Speaker #6: Total liquidity in September 30th was just under $144 million . And that's comprised of about $99 million in our cash and cash equivalents .
Speaker #6: 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 .
Speaker #6: And that's a that's a $125 million increase in maximum line capacity over Q2 . So from 810 maximum capacity at the end of Q2 to 935 , some of our warehouse lines are increasing their capacity .
Speaker #6: And that concludes my Q3 recap . Our debt equity ratio on a recourse basis stays consistently , though , it's at 11X , which has been between 1 and 1 half one x for the last five quarters .
Speaker #6: So Chris , with that I'll turn it back to you to present an overview on our outlook and key business drivers .
Speaker #5: Thanks , Mark . Appreciate it . Just to sum it up , we're very positive about the future . We think markets are healthy .
Speaker #5: Our credits are performing well; 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.
Speaker #5: So with that , I'll open it up for questions .
Speaker #3: 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're 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 to withdraw your question , please press star then two at this time we will pause momentarily to assemble our roster .
Speaker #3: The first question comes from Steve Delaney with citizens . Please go ahead .
Speaker #4: Hello everyone . Thanks for taking my question . Gosh , excellent . Quarter . It sounds repetitive , but you guys put put the numbers up every quarter .
Speaker #4: And just whether it's production gains everything that you've summarized on page three .
Speaker #7: So tip my hat to you on on that for sure . A little concern on not so much Rio resolutions , but just in terms of , as you show on page ten , the .
Speaker #7: Charge offs are up , you know , quarter over quarter for sure . And this quarter I know Rio gains can be a little fluky .
Speaker #7: But you know we went from a nice gain on Rio in the second quarter to a or excuse me last year third quarter to the loss this year .
Speaker #7: 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 the Rio valuations , you know , on a net basis , the negative $6.3 million .
Speaker #7: Just explain that if that was a you know , do you book the Rio at where you think it should be or based on your loan balance ?
Speaker #7: And then as you study the market and get feedback on property valuation , then you have to adjust . Just just curious why that big number of -6.3 million .
Speaker #5: You bet . Thanks . Thanks for the question , Steve .
Speaker #7: Sure .
Speaker #5: In terms of I of the Rio valuation , I'll walk you through the detail . But just from a from a high level , if you look , you'll see it in our Q that gets filed later today , year to date .
Speaker #5: Or activities is basically on top of last year . $3.2 million gain . I think it is . So there's some there's some noise that just in timing issues here in terms of the Rio valuation expense that we recognized , that happens after we've taken a loan in from off the books and put it into Rio .
Speaker #5: And then it's as it sits on the on the balance sheet . We adjust , you know , 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 , maybe worse than what we thought when we originally foreclosed .
Speaker #5: You have some cases where we actually end up just selling the Rio a little less than where we thought we were gonna , we had it marked .
Speaker #5: . So it can be driven by a number of different things , but I would say from our perspective , we don't we don't see it as like a , a worsening trend and much more of just kind of a , a quarterly timing issue .
Speaker #5: I expect that number. You'll see it kind of go up and down quarter by quarter.
Speaker #6: Okay . And Steve ,
Speaker #7: Yes ,
Speaker #6: I'm sorry Steve , this is Mark . If I could just add to Chris said it is really a timing item . You know , the main thing to look at is , is the NPL resolution table .
Speaker #6: The that final resolutions , for example , like that 6.3 million . What could happen is when we first foreclose on a property and set the Rio up , the rail has to go up at its fair value .
Speaker #6: We'll keep in mind since we've got the loans that basically 63 , 60% , you know , LTV , if you have a $500,000 loan , now you're going to you're going to write off that loan and put the rail on the books for , say , 800,000 , because the loans at 65 LTV .
Speaker #6: So , so you can put the on your books at 800,000 . So that's what's in that gain on transfer to Rio . That top number .
Speaker #6: Then maybe you know , six months down the road you get an offer . It's not 800,000 . It's seven . And you said , okay , we're going to an offer for it .
Speaker #6: 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 six months later , eight months later , it looks like $100,000 .
Speaker #6: Rio loss. But in reality, that's $700,000. You're writing it down to is still $200,000 more than the $500,000 loan that you had.
Speaker #6: So overall , if you sell it , that 700 , you're still going to have an overall gain on resolution . It's just a timing of when you first put the Rio on , and then maybe you write it down because you're going to decide to take less to sell it .
Speaker #6: But but what you're selling it for is still more than the loan that you wrote . They took off the books .
Speaker #7: Got it . So I think you're telling me , you know , you added , you added 4.6 million as a positive number when you took it into Rio , and then when you you understood the property or developed the marketing plan or looked at offers or something , then you had to just reverse some of that .
Speaker #6: That's exactly correct . And that's six , three . Remember , it's different periods . So the 4 or 5 , that's all new area that came on in that quarter .
Speaker #6: The 6.3 is probably something that maybe in those quarters it went on for 8 or 9 million positive . And now we're taking 6.3 of it back .
Speaker #6: As I'm saying . But yeah . .
Speaker #7: Got it , got it . Okay . Understood . Because you have the gain . It's more of an accounting gain when you take it into Rio .
Speaker #7: The first time . But then when you understand valuation , it sounds like that can be a little lumpier in terms of when valuation adjustment is made .
Speaker #7: That's correct . All right . All right . That's helpful . Well , obviously the the positives in the report are far exceed any the negatives .
Speaker #7: But I just I just wanted to bring that up . And one final thing . What is your headcount currently . Or at 930 .
Speaker #7: And how has that changed over the last year .
Speaker #5: Yeah . So we're at like 347 people at 930 . And that's up about 82 heads .
Speaker #7: Okay . All right .
Speaker #8: Yep .
Speaker #7: Very good . Well that's all I have for this evening . Congrats on a on another great quarter . And I guess we'll do this again in 3 or 4 months okay .
Speaker #5: Thanks , Steve .
Speaker #6: Take care .
Speaker #9: Thanks .
Speaker #7: Stay well .
Speaker #3: 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 .
Speaker #5: Great. Thanks, everybody, for joining. We’ll speak to you in a few months.
