Velocity Financial, Inc.

Good day and welcome to the Velocity Financial Inc. First Quarter 2025 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Oldman, Treasurer. Please go ahead.

Thanks, Kaylee. Hello everyone and thank you for joining us today for the discussion of Velocity's First Quarter 2025 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Supaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our first quarter results and you could find the press release and the accompanying presentation we will refer to during this call on our Invest Relations website at .velfinance.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 discussion of the results, please see the risk factors and other cautionary statements made in our communications with shareholders. Including the risk factors disclosed in our findings of 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 reconciliations of these non-GAAP measures, you should refer to the earnings materials on our Invest Relations website. Finally, today's call is being requested and 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.

Thanks, Chris, and we appreciate everyone joining our first quarter earnings call. The strong momentum we experienced in 2024 carried into the first quarter of this year as we originated $640 million in new loans, an increase of 69% versus the prior year which drove a 27% increase in net revenue and a 17% increase in core pre-tax earnings. Our team grew production and remained disciplined by preserving our spreads and credit standards. We continue to see increased demand for all property types with a more recent tilt towards commercial loans versus the investor one to four residential loans and robust margins in both products. Looking forward, our pipeline is strong and growing across the board. With respect to the portfolio, we continue to realize consistent net interest income and healthy cash flows and our special servicing team is doing a great job of resolving delinquent assets favorably. Our real estate markets remain healthy with plenty of dry capital ready to deploy in reasonably priced assets. From a capital markets perspective, we've been very busy this year with four successful debt transactions already completed and we issued three new securitizations, paid down debt and collapsed one of our re-remix and also sold new shares through our ATM program. Despite the recent volatility, we are very encouraged to see healthy investor demand and participation in our offerings. We appreciate all our partners that have supported our platform for so many years. Although the markets are choppy, our team is well prepared to operate in this environment and we believe we offer a great platform for investors to earn consistent, compelling returns. I wanna congratulate all Velocity team members on another fantastic quarter and as always, we'll continue to work hard to deliver shareholder value. With that, I'll turn over to today's presentation starting on slide three. As I mentioned, strong net income, core earnings of 55 cents a share up from 51 cents a share a year ago and our second best quarterly earnings in the company history, just a little bit below what we did in Q4 of last year. Mentioned the production on a net basis, the portfolio is up 27% and non-performing loans continue to be relatively stable at 10.8%. Most importantly there, NPA resolutions, again in the quarter of 102.4, above par resolutions continue, which is great. In the financing and capital section, I mentioned the first securitization we completed with a weighted average rate of 6.7%, collapsed the RE-REMEC, which freed up $52.6 million of retained securities that are available to us to do with whatever we want. We issued 1.6 million common shares, just under $29 million of proceeds and those shares were accretive to book value. In terms of our liquidity and warehouse capacity, you can see we're in great shape there. On page four, one of the other securitizations we did in early April was our short-term, backed by our short-term loans and that was another successful transaction. And the third one listed here on this page was the second deal that we did and I highlight this one for a very important reason, it priced April 8th and that was in the heart of all of the, disruption in the market. And as you can see, our weighted average rate actually was 30 bips better than our first deal in the first part of the year. So again, although there's all this volatility, we continue to see strong support from our investors and we're very pleased with the execution we've seen so far this year. On page five, walk you through just the simple adjustments that we make to get to core earnings. And then on the right, we have a bridge showing the buildup in book value. And to the far right, we make an adjustment if GAP allowed us to adjust all of our held for cost loans to fair value, we would be reporting an adjusted book value of $18.50 a share. That is reflective of all of the assets that are in place and on the balance sheet at 331. So you can see we're getting nice growth in book value as we retain our earnings and execute on our strategy. And with that, I'll turn the presentation back over to Mark to continue.

Thanks Chris, good afternoon everyone. In the first quarter, as Chris mentioned, we saw continued strong production, actually setting a record for the company for a single quarters production, production of 640.4 million for the quarter, which is a .7% increase from Q4. Last year, we had 1500 loans funded in the first quarter and that was an increase of almost 18% on a loan count basis over the previous quarter. The strong production growth during Q1 included the weighted average coupon on new held for investment originations, continuing to be strong at 10.5%. And the weighted average coupon on our held for investment originations for the last five quarter average trend was at 10.8%. The growth originations in Q1 also continue to tie credit levels, the weighted average loan to value for the quarter being just under 63, .6% and the last five quarter average trend at 63.4. So the strong Q1 production at a record growth, the healthy whack of the low LTV continues to show borrowed demand for our product through all different market cycles and environments. We go to page seven, this resulted in the continued growth in production. Page seven shows a growth in Q1 for our overall loan portfolio at the end of the quarter. Total loan portfolio as of March 31st was just under $5.5 billion in UPV and that's a .8% increase from year end 2024 and a 27.3 increase year over year. This weighted average coupon on our total portfolio at the end of the quarter was just under 9.6 at 9.59%, which is six basis points increase from the whack at the end of the year and 52 basis points increase from the same time first quarter last year. The total portfolio weighted average loan to value remained consistently low at .1% at the end of the quarter. Going to page eight, our Q1 portfolio NIM was 3.35%, representing one of our, so our more normalized NIM as compared to Q4 of 2024. Q4 of 2024 was a little bit higher NIM due to cash interest received on non-performing loans. So the cash that comes in on non-performing loans tends to come in conspiratically and lumpy and that can cause some spikes in the NIM. Our Q1 NIM was consistent on a year over year basis. Our portfolio yield for Q1 of this year decreased by 23 basis points quarter over quarter. Again, due to the high cash non-performing loan interest received in Q4, but it increased year over year by 40 basis points. Our cost of funds increased by nine quarter over quarter and increased by 30 basis points year over year. On page nine, our non-performing loan rate at the end of Q1, as Chris mentioned, was .8% and that's been relatively flat. It was 10.7 at the end of 2024 and it's been consistent for the last five quarters with an average of about 10.5%. We continue to see strong collection efforts by our special servicing department that resulted in favorable gain resolutions of our NPA assets. My NPA assets include our NPL loans as well as the REO assets. The table on page 10 shows the continued positive results of our in-house NPA resolution efforts. Our Q1 NPA resolution gains were $1.9 million or .4% of the 76.4 million in overall UPB result. And on a trend basis, we've been averaging about a 3.3 quarterly NPA resolution gain over the last five quarters. Page 11 presents on the left-hand side our CISO loan loss reserve and on the right-hand side, our net loan charge off gain loss and REO activity. The CISO reserve at the end of the quarter was 5 million or 22 basis points of our outstanding amortized cost for investment portfolio. The CISO reserve at the end of Q1 was slightly above our expected normal range of 15 to 20 basis points and that's due to the latest macroeconomic forecast. CISO requires you to do a macroeconomic forecast using a modeling system and the outside model that we use given all of the uncertainty and the movement around in Q1 in the markets. It just had a little bit more severe step on the macroeconomic forecast. It's only two basis points. So it's 20 basis points at year end, it's 22 basis points. The CISO loan loss reserve, remember, does not include our loans being carried at fair value, just amortized cost. And then the table to the right of this page shows our net gain loss from both loan charge loss and REO-related activities during the quarter. And for Q1, we gain on REO activities offset the net loan charge loss. Stage 12 shows our durable funding and liquidity position at the end of the quarter. Total liquidity as of March 31st was 75.6 million. Nets comprised of 51.7 million in cash to cash equivalents and another 23.9 million in available liquidity on our unfinanced collateral. In addition, the available warehouse line capacity at the end of the quarter was 238 million with a maximum line capacity of 810 million. As Chris mentioned previously in Q1, we issued our first securitization of 2025 with 342.8 million insecurities issued. And then subsequent to first quarter, in April we issued our second long-term securitization, 2025-2, and we also issued a short-term securitization, 2025 RTL-1 is the securitization of our short-term loans. And that number, the very first short-term securitization we ever did was in 2023. So in 2025, we simultaneously collapsed the 2023 RTL-1 short-term securitization and issued the 2025 RTL-1 securitization. And the RTL-1 securitization, I only want to add about that, includes $59 million in UPB from the old 2023 securitization that was freed up when it was collapsed and then rolled into the RTL-1 for 2025. That concludes my first quarter financial recap. I want to turn the presentation back to Chris Knopper, overview of our 25 outlook.

Thank you, Mark. I think from a market perspective, you can see that we're seeing very strong, healthy demand. Real estate markets are functioning well, so we feel good there. Our credit perspective, still seeing very good positive resolutions. I think it remains to be seen what happens with all of the tariff talk and those types of things, but from our perspective, we don't think it's going to have an impact on our business materially. In terms of capital, we've been very active there and markets are supportive of us. And in terms of earnings, we feel very good about the future and the rest of this year. And I'm excited to continue on our path. So with that, that concludes our prepared remarks, and we'll open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. 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 and then two. Our first question comes from Don Fanditi with Wells Fargo. Please go ahead.

Hi, good evening. Just wanted to clarify, it sounds like the NIM is more normalized now. So would you think Q2 would be sort of in the same zip code as Q1?

Yeah, hi, Don. I think that's right. I mean, we generally target around 3.5%. So 335 to 350 right in there is what we would say is pretty normal.

Got it. And then also on new origination yields, they've been steady, picked down a little bit. Are you thinking that we hold in this range as we go through 2025?

Yeah, I think that's right. We took coupons down a little bit to reflect the underlying reduction in our costs to borrow. So maintaining our spread, that's what drove the coupon down. But I think it all depends on where sort of three to four year treasury, we price off of three to four year interpolated rates. So wherever those rates go, we'll price our spread accordingly. But I think our expectation is that they should be fairly stable with the possibility, I guess, of going down later in the year if the Fed continues to cut, which remains to be seen.

Great, thank you.

And the next question comes from Eric Hagen with BTIG. Please go ahead.

Hey, thanks, good afternoon. You noted some more commercial demand, I think, in your opening remarks. We know that transaction volume for the market is down, right? So are you guys seeing more demand because borrowers are being shut out of other channels? And on maybe like a related note, is there a level that you expect for overall origination volume through, call it the end of the year? And then maybe like at this point, what would maybe catalyze your origination volume to be meaningfully higher than whatever you're currently projecting?

Hi, Eric, thanks for the questions there. Yeah, in terms of the commercial aspect, we, just a year and a half ago, started a small commercial division that focuses just purely in commercial type lending. And so I think the vast driver there has just been their ramp up and their growth in production. So it's less, I think, of a demand story and more of us opening up a new channel. That channel focuses almost exclusively on owner-occupied commercial real estate. And so I think that's the driver there. Over the years, we've seen it modulate back and forth between the one to four and the small commercial. We're comfortable with both and there's sort of ebbs and flows, but this one is more tied to our direct effort. In terms of run rate production, I think we think this current pace is sustainable. So I think that's a good run rate if you wanna project out for the rest of the year. And something that would meaningfully drive volume significantly higher, I think it would only be probably just a very large drop in rates back to kind of like what we saw during the COVID levels. I don't expect that and I don't think that is in the cards, but if it were to happen, that would probably be the single largest boost we could get.

Okay, that's a good color, I appreciate that. Can you say what you did with the capital that you raised? Like was it to delever a little bit? And then when you come in to maybe raise additional capital from here, is there an expectation for what you plan to maybe do with that capital?

Yeah, so we just used it to continue to make more loans. I think any capital that we do raise will be solely for the purpose of growing the portfolio. We take, as you know, all of our earnings and retain them and put them back in. So that marginal return on capital is very attractive and we're seeing very high ROEs there. So we think the smartest thing to do is allocate capital back to new assets and we have a number of levers we can pull there and we'll just continue to support the growth.

Yep, that's good to hear. Sorry if this is a naive question, but when you book a gain on the REO sales, does that include the back interest from the point the borrower initially defaulted or is it just a gain relative to the UPB of your cost basis? I'll take that Mark.

Yeah, Eric, when we look at the gain on the REO and we're showing those resolution tables and all, that would just be the gain not counting the back interest because by the time it's an REO, that back interest has already been taken out of the financials, it's already been reversed, right? So the loan goes non-performing, we take all the accrued interest to that point and we've reversed it, backed it out, so that interest kind of hits, so to speak, and it has already been taken out, so we'd have never recorded the interest. So then we show the REO being disposed, is any gain over and above anything else that we've already backed out?

Yeah, and I would add the same thing happens on the gain on transfer, when that loan first transfers to REO, same concept.

Once the loan stops being a loan, that previous interest on that loan that never was received has already been backed out and reflected in the financials by reducing earnings.

Got you, okay, really helpful, thank you guys. Thank you, Eric.

And the next question comes from Steve Delaney with Citizens TMP, please go ahead.

Thanks, hello everyone, congrats to a great start to 2025. Chris, I guess, Chris O., no, excuse me, Chris F., Chris F. What is your current total head count in terms of employees? Yeah, we're at

323.

323, okay, and how many office locations do you have folks sitting in around the country?

So we have five office locations. We kind of have a hybrid model, so how many folks are sitting in those office locations is a wild card, Steve, but.

You can't see who's there anyway, can you?

Right.

It'd be kind of a virtual business, I know, but I was trying to get a sense for the footprint. As you think about growth versus execution, you're executing, you're knocking the ball to the park, I mean, in terms of the start to 2025. Thank you. So as you talk with the board, I mean, I guess I'm trying to get a picture, Chris, for three, five years from now. Where do you want the company to be, other than having been very profitable and everybody has done well? Yeah, yeah. Is there a vision for, a vision out there for, say, five years for where you'd like to take the company?

Yeah, I mean, I think we'd like to see the portfolio at $10 billion in five years. So we expect to continue to grow. That will require head count. We are generally concentrated sort of East Coast and West Coast, probably add, maybe we might potentially add some space in the Midwest or Texas area, something like that, maybe. Trying to use a lot of technology to scale the business without adding too much head count. You always have to add some head count, but we've been very successful if you look at our sort of average balance funded per loan officer or account executive. That balance is going up, so we're making our existing people more productive, which is great, because you don't have to hire head count for that. But you do have to support it on the back end with the credit and support function. So, you know, I would hope that we would add maybe a couple hundred people over five years,

but we're

going to really try to implement as much technology as we can to minimize that.

Sure, and you do all your servicing in-house, don't you?

So we do all of our special servicing in-house. The primary servicing is outsourced, the bill collection, the payments, the insurance, the administration, all of that is outsourced. We just manage delinquent assets because we own that risk, and we think we're the best people to resolve those risks.

Well, thanks for those comments. I just wanted to get kind of a picture to what the company looks like, you know, the bones, and where you plan to go with that. I appreciate it, Chris, thanks.

Yeah, thank you, Steve, take care.

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

Thanks again, everyone, for joining the call, and we appreciate your support. We'll talk to you again after the second quarter. Thank you.

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