Velocity Financial, Inc.

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 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 touch-tone phone. 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 Chris Oltman, Director of Investor Relations. Please go ahead.

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 Cepanian, Velocity's Chief Financial Officer. Earlier this afternoon, we released a press release with our second quarter results. 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.zellfinance.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 reconciliations of these non-GAAP measures, you should refer to the earnings materials on our Investor Relations website. 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.

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% versus Q2 24%. Obviously, our business is 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. We grew revenue by $31 million, managed expenses carefully, and saw pre-tax income increase by $14 million. As operating leverage boosted, our core pre-tax return on equity to 24%. 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, with commercial properties representing approximately $770 million of the increase, and residential properties, the other $600 million. Our ability to finance a broad range of property types is a unique strength that differentiates us from other mortgage lenders. 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 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 in securities. The strong support for our program and robust market conditions are important tailwinds which fuel our growth. As we look forward, the pipeline for new loans is very strong, and we expect continued growth and originations as we take market share. 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 investors is outstanding. That concludes my prepared remarks, and we'll turn to the presentation starting with page three. In terms of earnings, as I mentioned, core net income, $27.5 million, or 73 cents a share, new all-time record for the company. And NIM for the quarter was up to 3.82%, up 47 bps 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. 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. In terms of the non-performing loans, those ticked down slightly to 10.3% as we continued to work hard to resolve delinquent borrowers. Most importantly, probably from the portfolio perspective, continued to see very positive gains of $3.6 million on just over $100 million of UPB that was resolved. 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 $53.5 million of cash to continue to grow the portfolio. 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. That increase in cash obviously drove strong results in our liquidity up to $139 million, so we've got lots of liquidity to continue to fund our growth and plenty of warehouse capacity. Turning to page four, this is a new slide that we're presenting, 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. We really feel like we're unique and unlike a lot of other mortgage lenders that are out there. You can see that there's tremendous performance here in all categories with earnings growing, 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. 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 P.E. based on our growth profile and our ability to continue growing not only earnings but the portfolio as well. Turning to the next slide on page five, we've seen 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. 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. And I think from our perspective, from management's perspective, we view this $1,760 a share really as a floor in terms of valuation. 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 and doesn't take into account the value of the platform and any future earnings or growth in the business. As we grow this book value, we expect to reward shareholders, but really feel like this puts a nice floor in terms of valuation. So with that, I'll turn it back over to Mark to continue.

Thanks, Chris. Good afternoon and evening, everyone. In the second quarter, then 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 UPB. 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 from two quarters. 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 10.5%. The weighted average coupon on our HFI originations, if you just look back over the last five-quarter average, has been at 10.7%. And the growth in originations in Q2 continued at tight credit levels, as you can see in the table. The weighted average loan-to-value for the quarter was at 62.7%. And on a five-quarter average trend, 63.2%. So very tight credit levels and good coupons. So the record growth at the healthy WAC and the low LTV continues to demonstrate a consistent trend of borrower demand for Velocity's product, even in the recent current volatile market. On page 7, 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 UPB, and that's 7.5% increase from last quarter, from Q1, and a 30.8, almost a 31% increase year over year. The weighted average coupon on our total portfolio as of June 30th was 9.67%, and that's eight basis points higher from where it was at the end of Q1. 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. Page 8, 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 over quarter due, as Chris mentioned, mainly because of higher cash interest received as a result of the special servicing efforts on our non-performing loans. And also to a secondary degree, we just mentioned that our portfolio WAC at the end of Q2 is eight basis points higher than it was at the end of Q1. So you're getting some big pickup from a slightly increased total weighted average coupon on the portfolio. On the cost of funds side, our cost of funds increased by only one basis point, quarter over quarter, which also contributed to a widening NIM. On page nine, our non-performing loan rate at the end of Q3 was 10.3%. That's down half a point from Q1. Our non-performing loan rate has remained consistent. 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. And if you 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, or 3.5% of about $104 million of NPA UPB resolved. And on a trend basis, we've continued to average that 3.5% quarterly NPA resolution gain over the last five quarters. Turning to page 11, we see our CECL loan loss reserve and also our net loan charge-off and gain loss on RO activity. On the CISO Reserve, as of June 30th, our CISO Reserve is $4.9 million, or 22 basis points, of our outstanding amortized cost held for investment portfolio. And our CISO Reserve has been consistent with our last five-quarter average, running right around 20 basis points. 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. And that's consistent, if we look at the second quarter of 24, it's consistent year over year with a $2 million net gain recognized in Q2 of last year. 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. and comprised of about $80 million in actual cash to cash equivalents and another $59 million in available immediate liquidity on unfinanced loan collateral. 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 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, 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 in additional liquidity. 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. Chris?

Thanks, Mark. Yeah, you know, you can see from the points here on the slide that we feel really good about the future and about our growth prospects. Markets are healthy, both on the end user side and the capital market side, so We're very bullish on the momentum that we have and expect it to continue in the next year or two. So with that, that concludes all of our prepared remarks, and we will open it up for questions, please.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. 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 to withdraw your question, please press star 2. The first question comes from Don Fandetti from Wells Fargo. Please go ahead.

Hi, good evening. I was wondering if you can talk a little bit about NEM going into Q3, if you think you can maintain this level or if there's some pull forward in Q2. And then if you can talk a little bit about the loan growth expectations for Sure.

Hi, Don. So yeah, I think our target NIM is 3.5%. I think Q1 was a little light. Q2 was obviously very strong. We're trying to target 3.5% on a consistent basis. As Mark mentioned, resolving delinquent assets, because they do go on a non-accrual status, they tend to be very lumpy. So timing when that asset will cure is a little tricky. So there's some volatility around NIM depending on when we actually collect. We do ultimately believe we're going to collect it almost all the time. It's just a question of timing and when. So if you average out the first two quarters, you're like 3.6, I think, on NIM. And we think that's very sustainable going forward. on it in terms of the pace of loan growth the next quarter or two? Yeah, I think we still expect to grow. You know, what we've seen historically is you kind of go in a step function. You know, it doesn't go up continuously every month. You sort of get to a new level, digest that level, and then take another step up. So, you know, I don't have a a forecast for you on the actual rate of growth, but we do expect to grow going forward. Thank you. Sure.

The next question comes from Steve Delaney from Citizens JMP. Please go ahead.

Good afternoon, everyone. Congrats on a great quarter. Really remarkable with the numbers, the NIM and the ROE. I guess, Chris, for our You know, when you look at where you are, pretty darn good. 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? Or are there any things that, you know, you lay awake at night thinking, gosh, if I could just get this number a little bit better. Yeah, sure. You look at the results and the future.

Yeah, thanks. I appreciate it, Steve. Yeah, you know, it's funny. I remember a long time ago going to an AYSO game and this soccer coach told all the parents, the worst thing you can do is watch your kid's best game and then go out every week and expect your kid to perform at that level. So I get your point. But I do think this is – I don't think it's the high point for us. We're doing exceptionally well. That's true. We did see that big pickup in the NIM and some of those things are timing issues. I still feel like we have room to improve. The biggest areas that we're working on and just staying focused in our knitting is technology. We're undertaking a program right now over the next 12 to 18 months where we're breaking down our entire process and looking where we can apply technology to improve processes and make make our team more productive so i don't think we're at peak performance i think we're a 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 we just recently rolled out some technology in our post-closing department where that makes our people probably five times more productive than they were, you know, with the old process. So those won't be massive gains every quarter, but over the next year and a half, we think we can drive some more performance and some more efficiency out of the business.

Got it. Yeah, I think everyone would like to have better technology or at least keep up. Yeah. Geography, you guys are out 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? How far can you reach? And I'm just curious if you can touch the Southeast or possibly touch the Florida market with your existing setup and structure.

Yeah, good question. we like to concentrate on the major MSAs we have loans in 48 states so we have we have deep reach across the country 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 so they do a fantastic job for us and you know you tend to see the portfolio kind of barbelled between the coasts and then some of the southern states, so kind of a smile, if you will. So I think we'll stay with that footprint largely, and we think there's plenty of runway to expand there.

Thanks for the comments, Chris, and great quarter.

Thank you, Steve.

As a reminder, if you have a question, please press star 1. The next question comes from Tim Chang from BTIG, please go ahead.

Hey, this is Eric Hagan, BTIG. You know, you guys have historically leaned into securitization as basically the only source of, you know, longer-term financing. But with all this private capital that's being raised right now in the market, I mean, do you think there could be an opportunity to incorporate loan sales into the routine? And would alternative financing sources maybe allow you guys to grow more quickly?

Yeah. Hi, Eric. Good question. We are getting reverse inquiries from some of these private credit sources, and I do think there's some opportunities for us to put financing in place to grow the portfolio. We have looked at whole loans in the past. I don't expect that that'll be a big source for us, but I do think that maybe there's some private structures that might work that could help us expand, you know, another leg of the stool, if you will.

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 is less applicable maybe to the strategy, but 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 the context behind prepayment activity?

Yeah, good question. So 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. So We've always kind of positioned the firm as a medium-term lender that, you know, the borrower has some immediate need for capital and they utilize our capital for, you know, call it one to five years depending on their situation, and then they tend to move on. So it's pretty typical for our business. As you know, we collect prepayment penalty fees in those cases to maintain our yield. We're indifferent if they do choose to leave. It's largely driven by their unique circumstance and their situation and whether or not they're refinancing or selling the property.

Got it. That's helpful. Thank you, guys. Sure.

This concludes our question and answer session, and the conference has now been concluded. Thank you for attending today's presentation. You may now disconnect.