Velocity Financial, Inc. Q1 FY2025 earnings call

Loan Origination

• Originated $640 million in new loans in Q1 2025, a 69% increase vs prior year, driving 27% net revenue growth and 17% core pretax earnings growth.

Portfolio Performance

• Loan portfolio up 27% net; nonperforming loans stable at 10.8%; NPA resolutions 102.4% above par.

Capital Markets

• Completed four debt transactions, three securitizations; issued 1.6 million common shares generating ~$29 million in proceeds; collapsed re-REMIC freeing up $52.6 million in retained securities.

Liquidity/Warehouse

• In strong shape; pipeline strong across all property types, with recent tilt towards commercial loans.

Velocity Financial originated $640 million in new loans in the first quarter of 2025, a 69% increase versus the prior year. This drove a 27% increase in net revenue and a 17% increase in core pretax earnings. The total loan portfolio as of March 31 was just under $5.5 billion in UPB, a 7.8% increase from year-end 2024 and a 27.3% increase year-over-year. The weighted average coupon of the portfolio was 9.59% at quarter-end. Nonperforming loans were relatively stable at 10.8%, with NPA resolutions at 102.4% above par. In capital markets, the company completed four debt transactions, three securitizations, and issued 1.6 million common shares, generating just under $29 million in proceeds.

Market Outlook

• Real estate markets are functioning well with healthy demand.

Credit Perspective

• Credit resolutions remain positive; tariff talk not expected to materially impact the business.

Capital and Earnings

• Active in capital markets with supportive investor demand; optimistic about earnings for the rest of 2025, expecting portfolio growth towards $10 billion in 5 years.

Market Volatility

• Recent market volatility, but the team is well-prepared to operate in this environment.

Tariff Talk

• Potential impact on business, though currently not expected to materially affect Velocity Financial's operations.

Q: 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?

A: Don, I think that's right. I mean we generally target around 3.5%. So 3.35% to 3.50% right in there is what we would say is pretty normal.

Q: 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?

A: Eric, thanks for the questions there. Yes, in terms of commercial aspect, we just 1.5 years ago, started a small commercial division that focuses just purely in commercial type lending. So it's less, I think, of a demand story and more of us opening up a new channel. Over the years, we've seen it's modulating back and forth between the 1-4 and the small commercial. We're comfortable with both and it 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 that this current pace is sustainable. So I think that's a good run rate, if you want to project out for the rest of the year. And something that would meaningfully drive volumes 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.

Q: 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?

A: Yes. 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.

Q: When you look at gain on the REO sales, does that include the back interest from like the borrower initially defaulted? Or is it just a gain relative to the UPB of your cost basis?

A: You want to take that, Mark? Mark Szczepaniak: Yes. When we look at the gain on the REO, we're showing those resolution tables and all that will just be the gain not only the back interest to keep that kind of REO that back interest has already been taken out of the financials. It's [indiscernible] than reverse, right, so when the loan goes nonperforming, we take all the accrued interest at that point, and we reverse it and back it out. So that interest kind of hits, so to speak, as it has already been taken out. So probably in every quarterly interest. So then we show the REO being disclosed in any gain over and above anything else we already back on.

Q: Congrats to a great start to 2025. Chris, I guess -- Chris O, no, excuse me, Chris Farrar. What is your current total headcount in terms of employees?

A: We're 323.

Q: 323, okay. And how many office locations do you have folks sitting in around the country?

A: So we have 5 office locations. We kind of have a hybrid model. So how many folks are sitting in those office locations is a wildcard, Steve, but...

Q: You can't see who's there anyway.

A: Right.

Q: It'd be kind of a virtual business, I know. But I was trying to get a sense for the footprint. And as you talk with the Board, I mean -- I guess I'm trying to get a picture, Chris, for the 3, 5 years from now. Where do you want the company to be? Other than having been very profitable and everybody done -- has done it. Is there a vision for -- a vision out there for, say, 5 years for where you'd like to take the company?

A: Yes. I mean I think we'd like to see the portfolio at $10 billion in 5 years. So we expect to continue to grow. That will require headcount, and 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 headcount. I mean, you always have to add some headcount, 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我们're making our existing people more productive, which is great because you don't have to hire headcount for that. But you do have to support it on the back end with the credit and support functions. So I would hope that we would add maybe a couple of hundred people over 5 years, but we're going to really try to implement as much technology as we can to minimize that.

Q: Sure. And you do all your servicing in-house, don't you?

A: So we do all of our special servicing in-house. The primary servicing is outsourced to bill collection, the payments, the insurance and 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.