Velocity Financial, Inc.

and welcome to the velocity financial Inc third quarter 2025 conference call all participants will be in listen-only mode should you need assistance please signal conference specialists 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 a 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, 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 Farrar, Velocity's President and Chief Executive Officer, and Mark Cepaniak, 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 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 websites. 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 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 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 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. We have 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 transactions 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. With that, I'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 and core diluted EPS of 69 cents a share portfolio NIM was very stable at 360 basis points above our target of three and a half percent moving to production and the loan portfolio I mentioned record level of production of $739 million, 32% net increase in the portfolio year over year after netting out prepayments. In terms of non-performing loans, that portfolio was pretty stable, 9.8% down from 10.6% within our expected range. As I mentioned earlier, continued to see positive gains on resolved NPAs of $2.8 million, and our team did a fantastic job there. Turning to financing and capital, I mentioned that first-ever single county counterparty transaction. We were 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 six hundred million dollars of warehouse capacity at the end of the quarter so all in all shape they're turning to page four want to re-emphasize 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 get exposure to our earnings 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. With that, I'll turn it over to Mark on page five.

Thanks, Chris. Good afternoon and evening, everyone. Page five. 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 held 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 trend. Weight average LTV trend up 62.8%. 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 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 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, I'm sorry, year over year. The total portfolio weighted average loan-to-value remained consistently low at 65.5% as of September 30th. You go to page seven. 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, 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 nine 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 CECL loan loss reserve The bottom part shows a net loan charge-off and gain-loss scenario activity. In terms of the CISO Reserve, on September 30th, it was $4.6 million, or 22 basis points, and that's on our outstanding amortized cost HFI portfolio. And at 22 basis points, in the last five quarters, we've averaged around 20 basis points of CISO Reserve, so not much of a change there. And keep in mind, the CISO Reserve does not include fair value option loans. It's only held for investment amortized cost. The bottom part of that table shows that for Q3, our net gain loss from loan charge loss REO 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 of 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 as 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 1X, which has been between 1.5 and 1X for the last five quarters. So, Chris, with that, I'll turn it back to you to present an overview on our outlook on 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. To ask a question, you may press star then 1 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 then two. At this time, we will pause momentarily to assemble our roster. 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 three. So, tip my hat to you on that for sure. A little concern on not so much REO resolutions, but just in terms of, as you show on page 10, the charge-offs are up. you know, quarter over quarter for sure. And this quarter, I know REO gains can be a little fluky, 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 I guess the number that jumps off the page, because primarily I don't understand it. Chris, if you could help me understand the REO valuations, you know, on a net basis, the negative $6.3 million. Sure. Just explain that if that was a, you know, 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 valuation, then you have to adjust. Just curious why that big number of negative $6.3 million.

You bet. Thanks for the question, Steve. In terms of the REO valuation, 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 gain, I think it is. So there's some noise just in timing issues here. In terms of the REO valuation expense that we recognized That happens after we've taken a loan off the books and put it into REO, and then as it sits on the balance sheet, we adjust to market realities. I would say 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. You have some cases where we actually end up just selling the REO a little less than where we thought we had it marked. 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. Yeah, please. I'm sorry, Steve. This is Mark. If I could just add to what Chris said. It is really a timing item. You know, the main thing to look at is the NPL resolution table, the final resolutions. For example, like that $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%, you know, 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 the loan's at a 65 LTV. So you're going to put the REO in your books at $800,000. So that's what's in that gain on transfer to REO, that top number. Then maybe six months down the road, you get an offer. It's not $800,000. It's $700,000. 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 $800,000 to $700,000. Well, in that period, which might be six months later, eight months later, It looks like a $100,000 REO loss. The 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 at $700,000, you're still going to have an overall gain on resolution. It's just a 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 that took off the books.

Got it. So I think you're telling me you added $4.6 million as a positive number when you took it into REO, and then when you understood the property or developed a marketing plan or looked at offers or something, then you had to just reverse some of that.

That's exactly correct. And that's 6-3. Remember, it's different periods. So the 4-5, that's all new REO data that came on in that key order. 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 six-three of it back, if I'm saying.

Got it, got it. Okay, understood, because 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 valuation adjustment is made. That's correct, Mark. All right, that's helpful. Well, obviously the positives in the report far exceed the negatives, but I just wanted to bring that up. And one final thing, what is your head count currently or at 930, and how has that changed over the last year?

Yeah, so we're at like 347 people at 930, and that's up about 82 heads.

Okay. All right. 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 three or four months.

Okay. Thanks, Steve. Take care. Thanks, Steve.

Stay well.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Chris Farrar for any closing remarks.

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

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