Velocity Financial Q3 2025 Earnings Call Summary and Q&A Highlights: Record Loan Production and Strategic Securitization
Earnings Call
Nov 07
[Management View] Velocity Financial reported its highest-ever pretax earnings in Q3 2025, driven by record loan production and accelerated origination activity. Management outlined a new funding strategy by closing a landmark single counterparty securitization, with an additional transaction finalized shortly after quarter-end, broadening long-term capital access. Credit discipline was reflected in stable portfolio LTVs and a sequential reduction in nonperforming loan rates, while net income and portfolio net interest margin both exceeded recent averages despite temporary headwinds from real estate owned asset revaluations.
[Outlook] Chief Executive Officer Christopher D. Farrar emphasized positive momentum into the fourth quarter, pointing to increasing market share, robust credit performance, and healthy fixed income markets. The company reiterated its approach of compounding all earnings back into its lending platform, citing it as a driver of continued performance.
[Financial Performance] - Pretax Earnings: Increased 66.5%, reaching a record high for the company in Q3 2025. - Net Income: Up 60% year over year in Q3 2025 compared to Q3 2024, with core diluted EPS of $0.69 per share. - Loan Production: Achieved $739 million in Q3 2025, including $23.9 million in unfunded commitments, surpassing the previous quarter's record of $725 million. - Loan Originations: 1,778 loans originated in Q3 2025, reflecting continued growth in demand and volume. - New Applications: Exceeded $1.4 billion in Q3 2025, signaling sustained market momentum. - Portfolio Growth: Net increase of 32% in portfolio size year over year as of Sept. 30, 2025, and a 7.1% sequential increase from Q2 2025, net of prepayments. - Total Loan Portfolio: Just under $6.3 billion in unpaid principal balance as of September 30, 2025. - Weighted Average Coupon (New HFI Originations): 10% in Q3; the five-quarter average trend was 10.6%. - Weighted Average Coupon (Portfolio): 9.74% as of September 30, 2025, up seven basis points from Q2 2025 and 37 basis points year over year. - Weighted Average Loan-to-Value: 62.8% for new HFI originations in Q3 and 65.5% for the total portfolio as of September 30, both stable over recent quarters. - Portfolio Net Interest Margin (NIM): 3.65% in Q3 2025, consistent with the five-quarter average of 3.62%. - Portfolio Yield and Cost of Funds: Portfolio yield at 9.54% and cost of funds at 6.27% in Q3 2025, maintaining spreads across periods. - Nonperforming Loan Rate: 9.8% at quarter-end, down 50 basis points sequentially and 80 basis points year over year. - Nonperforming Asset Resolution Gains: $2.8 million gain (2.6% of $108 million resolved) in Q3 2025, with a five-quarter average of 3.8% in NPA resolution gains. - CECL Loan Loss Reserve: $4.6 million, or 22 basis points of the outstanding amortized cost HFI portfolio as of Q3 2025, slightly above the five-quarter average of 20 basis points. - Liquidity and Warehouse Capacity: $144 million in liquidity at quarter-end, comprised of $99 million in cash and $45 million in unfinanced collateral; warehouse line capacity at $600 million, with a $935 million maximum, up $125 million from Q2 2025. - Debt-to-Equity Ratio: Stable between 1x and 1.5x over the last five quarters on a recourse basis. - Securitization Milestone: Closed the first single counterparty securitization of new production with a top-tier money manager in Q3 2025, reducing transaction costs and diversifying funding. A second similar transaction closed in early October 2025. - Headcount: 347 employees as of Sept. 30, 2025, an increase of 82 compared to September 30, 2024.
[Q&A Highlights] Question 1: 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 I tip my hat to you on that for sure. A little concern on not so much OREO resolutions but just in terms of, as you show on page 10, the charge-offs are up quarter over quarter for sure. And this quarter, I know REO gains can be a little fluky, but we went from a nice gain on REO in the 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 on a net basis, the negative $6.3 million. Just explain that if that was a, do you book the REO at where you think it should be or based on your loan balance? Then 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 questions, Steve.
Answer: Sure. In terms of the REO valuation, I'll walk you through the detail. Just from a high level, if you look, you'll see it in our Q that gets filed later today. Year to date, our REO activities are 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 in from off the books and put it into REO. And then as it sits on the balance sheet, we adjust it 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 were going to, where we had it marked. Right. So it can be driven by a number of different things, but I would say, from our perspective, we don't see it as 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.
Mark R. Szczepaniak: And Steve, this is Mark. If I could just add to what Chris said, it is really a timing item. The main thing to look at is the NPL resolution table, the final resolutions. For example, I got $6.3 million. What could happen is 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% LTV, if you have a $500,000 loan, now you're to write off that loan and put the REO in the books for, say, $800,000 because loans at a 65 LTV. You put the REO in your books at $800,000, that's what's in that gain on transfer to REO, that top number, maybe six months down the road, you get an offer it's not $800,000, it's $700,000, and you said, okay, we got an offer for it, that's the new fair value. Going to take the offer. So you write it down from $800,000 to $700,000. Well, that period, which might be six months later, eight months later, looks like a $100,000 REO loss. But in reality, that $700,000 you're writing it down to is still $200,000 more than the $500,000 loan you had. So overall, if you sell it at $700,000, 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 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, they took off the books.
Steven Cole Delaney: 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 the marketing plan or looked at offers or something, then you had to just reverse some of that.
Mark R. Szczepaniak: That's exactly correct. And that $6.3 million, remember, it's different periods. So the $4.5 million, that's all new OREO that came on in that quarter. The $6.3 million is probably something that maybe in those quarters, it went on for $8 million or $9 million, and now we're taking $6.3 million of it back, if I'm saying. Yes.
Steven Cole Delaney: 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 when you understand valuation, it sounds like that can be a little lumpier in terms of when the valuation adjustment is made.
Mark R. Szczepaniak: Okay.
Steven Cole Delaney: All right. That's helpful. Well, obviously, the positives in the report far exceed any negatives, but I just wanted to bring that up. And one final thing, what is your headcount currently or at September 30, and how has that changed over the last year?
Christopher D. Farrar: Yes. So we're at like 347 people at September 30, and that's up about 82 heads.
Steven Cole Delaney: Okay. Alright. Yep. 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.
Christopher D. Farrar: Okay. Thanks, Steve. Take care. Thanks, Steve. Stay well.
[Sentiment Analysis] The tone of the analysts was highly positive, with commendations for the company's consistent performance and record-breaking metrics. Management maintained a confident and optimistic outlook, emphasizing strategic initiatives and robust market conditions.
[Risks and Concerns] Chief Executive Officer Christopher D. Farrar and Chief Financial Officer Mark R. Szczepaniak reported a net loss of $1.6 million from loan charge-offs or OREO activities, primarily due to REO valuation adjustments in Q3. The transcript notes an REO valuation expense of negative $6.3 million for Q3 2025, attributed to lower-than-expected property sale values and deterioration, though management characterizes this as a timing issue rather than a trend.
[Final Takeaway] Velocity Financial's Q3 2025 performance showcased record-breaking pretax earnings and loan production, driven by strategic securitization and disciplined credit management. Despite temporary headwinds from REO valuation adjustments, the company maintained robust metrics across its portfolio, reflecting strong market demand and effective asset resolution strategies. Management's optimistic outlook and strategic initiatives position Velocity Financial for continued growth and enhanced shareholder value in the upcoming quarters.
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