Velocity Financial (NYSE:VEL) Q3 2026 Earnings Call

0:00 Thank you for standing by. At this time, I would like to welcome you to the Velocity Financial Third Quarter 2026 Results Conference.

0:10 Good afternoon, and thank you for joining us today for the discussion of Velocity's Third Quarter 2026 Results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Szczepaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released a press release with our third quarter results, and you can find the press release and the accompanying presentation that we will refer to during this call on our investor relations website at www.bellfinance.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 risk 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.

1:08 Please also note that the content of this conference call contains time-sensitive information that is only accurate 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. 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.

1:42 Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. I'll cover the highlights of the quarter and give you an update on the TORAC acquisition. Mark will then walk through the financials in more detail before we open it up for questions. The third quarter was one of the best in Velocity's history. We originated a record $911 million in loans and core diluted EPS of 76 cents was the second highest quarterly results we've ever reported. The growth was broad-based and came at a time when many mortgage lenders are seeing lower production volumes, especially in the residential consumer segment. As we mentioned on prior calls, our expansion plans would deliver higher production results in the second half of this year, and I'm pleased to report record levels of new applications heading into the fourth quarter.

2:33 Our unique niche has historically done well in rising rate environments, as our brokers work to replace lost revenue from decreased consumer mortgage originations. Congratulations to all my team members for an incredible execution in what can only be described as a turbulent environment. I also want to recognize Century Health and Housing Capital for a great quarter. Uninsured multifamily production reached 154.9 million, up from 86.3 million last quarter and just under 26 million a year ago. Those loans are sold to third-party investors, and we earn origination fees, keep the servicing, and adding fee income without adding to our balance sheet.

3:22 We're also holding the line on credit quality and pricing. Held for investment production, carried a 10.1% weighted average coupon and 61.7% LTV, well within our historical underwriting and support of of our NIM targets of above 3.5%. We completed two securitizations in the quarter, and both were met with solid investor demand. After quarter end, we issued our largest securitization in history, backed by just under $500 million in new production. We were very pleased with the robust demand from investors, as evidenced by our overall credit pricing spreads. Now an update on TORAC. The transaction remains on track to close in the fourth quarter, subject to customary closing conditions. Strategically, TORAC significantly grows our production and diversifies us in three ways.

4:21 By product, short-duration lending goes from 6% of our mix to over 40%, balancing our long-term duration book. By channel, merchants gives us direct retail origination for the first time. projected to be about 17% of combined volume. And by geography, Turok UK gives us immediate presence in the UK market with more than 30 origination partners. The entire Turok team is professional, seasoned, and talented. We're very optimistic about our teams integrating well together. Looking ahead, we expect to continue to grow our portfolio by serving a large customer base and new market segments. We expect demand for small balance investor properties to remain resilient and credit performance to stay consistent.

5:13 We're well positioned to drive future gains. And as always, we will remain focused on maximizing shareholder value each and every day. Now we'll turn to the earnings materials. Starting on page three of the presentation, we'll give you some of the financial highlights Again, very strong net income and pre-tax return on equity. Core net income up 10% year over year. And again, portfolio NIM well above that 3.5 target that we set. And further confirming our strategy, you can see by retaining our earnings, and what's the high ROE, we continue to grow book value per share up just around 18% year over year. On page four, some of the highlights of what took place in the third quarter. As I mentioned, our second highest ever quarterly results, great NIM performance, two securitizations for $516 million, record loan production, as I mentioned, and an interesting stat here, you can see we've had a 30% CAGR over the last five years in terms of our portfolio growth.

6:35 So we continue to expand this niche and execute on our growth strategies. And then lastly, from capital and liquidity perspective, we've got plenty of warehouse financing in place as well as liquidity for any future originations. Turning to page five, Taking a look at the total portfolio, you can see year over year, our HFI portfolio is up 18%, loan production up 25% year over year, and we continue to favorably resolve our non-performing loans as we've done so historically. Paradoxically, these actually turn into profit center for us, and we can see we continue to recognize very nice gains as our asset management team does an excellent job of resolving delinquent borrowers.

7:31 With that, I'll turn it over to Mark for the next page six.

7:36 Thanks, Chris. Good afternoon and good evening, everyone. Lost City's third quarter of 2026 continued to reflect strong earnings results in a rising rate environment. We look at page six. Our Q3 loan production, as Chris mentioned, was $911.3 million in UPV. That's an increase of over 35% from Q2's production of just under $673 million. There were just under 2,000 loans funded in the third quarter. who mentioned a record quarter. Our core traditional commercial plus investor one to four production increased 30% quarter over quarter. And our government insured multifamily production under our century subsidiary increased 79.6% quarter over quarter.

8:24 The production during Q3 included the weighted average coupon on new health for investment originations continuing to be strong at 10.1%. and the growth in the originations in Q3 also continued at very tight credit levels with the weighted average loan-to-value for the quarter at 61.7%. This Q3 production growth at a healthy WAC and a low LTV continues a trend of good borrower demand for a product even in a rising rate environment. As a result of the continued strong Q3 production, page 7 shows the growth in the quarter for our overall loan portfolio. The total loan portfolio as of September 30th was $7.5 billion in UPV. That's a 6.8% increase from Q2 and an 18.8% increase year-over-year. The mix of our products in this portfolio has remained relatively consistent year-over-year.

9:20 On page 8, our Q3 portfolio net interest margin was 3.78%. That's 12 basis points increase over our Q9 NIMH. of 3.66. Our portfolio yield increased by 12 basis points quarter over quarter due to continued loan production at the healthy weighted average coupons that we just highlighted on the previous page. The higher portfolio yield of 954 in Q3 of 25 last year was due to more cash being received during that period on non-performing loans. Cash received on non-performing loans can vary quarter to quarter based on resolution activity. Looking at the cost of funds, our portfolio of cost of funds decreased by five basis points per quarter and decreased by 13 basis points year over year, mainly due to the lower cost of more recently issued securitized debt.

10:14 On page 9, our non-performing loan rates at the end of Q3 was 10.1%, about a 30 basis point year-over-year increase. As shown to the right of the page, the continued strong collection efforts by our Special Servicing Department resulted in resolution gains in Q3 2026 of 2.7 million or 103% of UPP result. These resolution gains are over and above the collection of all past due contractual interest. Turning to page 10, this shows the total amount recovered on our non-performing loan resolutions during the quarter. The total amount recovered includes the gain on NPL resolutions discussed on the previous page, plus all the past due contractual interest recovered. The total amount recovered on NPL resolutions for Q3 was $7.4 million, or 108.2% of the UPV results.

11:14 On page 11, you see our real estate owned activity. The graph to the left shows our ratio of REO assets to total health investment loans, and the ratio has been relatively stable year over year. In the table to the right, we show our REO activity. The top half of the table reflects gain or loss from recording new REOs in the period and segregates that new REO activity between being sourced from the amortized cost loan portfolio and the fair value loan portfolio. For Q3, there was a $4.8 million gain on transfers of non-performing loans to new REOs compared to $7.8 million gain year-over-year in Q3 of 25. The second or bottom half of the table presents the gain or loss activities on existing REOs after the initial recording of the REO, reflecting the lower of cost on market valuation accounting. For Q3 of 26, there was an 8.8 million loss in REO activities compared to a 6.2 million loss year-over-year in Q3 of 25. These two sections combined present a holistic picture of our overall REO profit and loss activity for the period, which for Q3 of 26, was in that loss of about $4 million compared to a net gain of about $1.6 million in Q3 of last year. And as we stated in the past, overall, over time, we tend to break even in our activity.

12:38 We have quarters where we have an overall net gain, and we have some quarters that involve a net loss, so we tend to break even over time. Page 12 presents our CESA loan loss reserve activity. The CESA reserve is only applicable to our amortized cost loan portfolio. It does not include the loans being carried at fair value. The CESA reserve as of September 30th was $5.3 million, which is about 30 basis points of the outstanding amortized cost health investment portfolio. The charge-offs for Q3 were only $330,000, and that's almost a 52% decrease year-over-year. Remember, the amortized cost loan portfolio continues to pay down given our fair value option election on all new production beginning in Q4 of 21.

13:25 Page 3 shows our liquidity position at the end of Q3. Total liquidity as of September 30th was $193.4 million. That's comprised of $86.8 million in cash and cash equivalents and another $106.6 million in available liquidity on our unfinanced collateral. Our available warehouse line capacity as of September 30th was 425.4 million with a maximum line capacity of 975 million. So plenty of available capacity on our warehouse lines. In Q3, we did issue two securitizations. We issued VCC 2026-P2 and VCC 2026-3 that totaled $516 million in securities issued. Page 14 reflects the breakout of our type of financing for the last five quarters.

14:19 Our recourse debt-to-equity ratio at the end of Q3 remained very low at 1.5 times, and our total debt-to-equity ratio, which includes our non-recourse securizations, was 9.6 times as of September 30th. With that, that concludes my 2026 Q3 financial recap. I'll now turn the presentation back over to Chris Farrar for a little more detail on the Turok acquisition as well as Velocity's outlook on our key business drivers. Chris?

14:49 Thanks, Mark. Appreciate that. Turning to page 15 in the presentation, we can tell everyone that the Turok acquisition remains on track and we expect it to close by the end of the year. As we outlined Earlier in the announcement, we expect to, after closing, expect to have about $10 billion of assets under management. $3 billion of existing book will be sold to a third-party investor, and TORAC will still manage that portfolio and collect fees off of that portfolio, as well as start to originate new business and earn revenue. the respective income and fees associated with those new loans going forward.

15:37 As mentioned before, we do expect this acquisition to be accretive to our 2027 GAAP earnings, and we're very excited about adding this new product mix to our lineup. Turning to page 16, give a little bit of detail here about What the prior year's productions look like and what we can kind of expect going forward. As you can see, combined in fiscal 25, we've had about $4.8 billion in total production. And we outline on the right-hand side some of the important drivers of this transaction and what we expect to get out of it. Not only are we going to see the increase in volume, but also expect to and some real nice capital light fee income from the servicing portfolio and have the flexibility to sell both whole loans and potentially securitize this product depending on best execution.

16:41 Turning to page 17, in terms of our outlook, we're very bullish on the remainder of the year and next year as well. We think the markets are healthy in our niche and we see tremendous demand still as we Move forward, as I mentioned, with the rise in interest rates, we're seeing a nice pickup in our business and it's given us a little bit of a tailwind, which is great. In terms of credit, expect the portfolio to continue to perform pretty consistent with what we've seen in the last few years. And we're also completely expecting to recognize the gains from resolving non-performing loans as we historically have.

17:26 In terms of the capital markets, I mentioned that we closed the largest securitization ever in October, which I think was a tremendous achievement, shows the strength of our platform and the history of our track record of great execution, even in choppy markets with interest rates going up. And we're very pleased with being able to do that deal and get such good pricing on that transaction. So we expect the capital markets to continue to be supportive and we're very confident in our 3.5% or more NIM going forward. That concludes our presentation and we'll open up the call now for any questions.

18:13 If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. And your first question comes from the line of Chris Muller with Citizens Capital Market. Please go ahead.

18:32 Hey, guys. Thanks for taking the question. And I probably say this every quarter, but congrats on another really solid quarter here. So I guess a few years back, I remember you guys talking about coupons hitting a ceiling and rates are now moving higher again. So I guess how much higher can you guys push pricing before borrowers start pushing back in this cycle?

18:56 Hi, Chris. It's Chris. I'll take that one. Appreciate you joining the call.

19:00 Yeah, there's definitely an upper bound.

19:03 I don't think we're there yet. We did raise rates a little bit near the end of Q3 just to stay in line with treasuries and to maintain our spread.

19:19 So I think it's still a ways higher

19:23 I think if rates really started taking off and going much, much higher, then that probably could be a headwind once these probably start. I would guess somewhere north of like an 11% whack, I would think it probably starts to be somewhat limiting.

19:43 Got it. That's helpful. And then you guys have had a lot of success on resolving MPLs over the years. Can that translate to the BPL side of things, too, or is it just a different animal over there?

19:56 Well, I think, I mean, I think we certainly, there's some great things that we've learned and some, you know, tools that we employ that we can carry over for sure. The RTL is, you know, different in many ways, and, you know, TORAC is very good at doing what they do, and their credit Thank you, Chris. Your next question comes from the line of Doug Harter with BTIG.

20:52 Please go ahead.

20:55 Thanks. You guys highlighted the, you know, some of the securitization activity that you were able to execute in 3Q and so far in 4Q. Can you just talk about kind of how spreads have trended over, kind of over those three deals that you did?

21:15 Yeah, sure. Hi Doug, it's Chris again. So I did before the call, I had our capital markets team pull our last four deals and our spreads all in combined, so all the tranches were very tight, basically 185 bps to 205 in the last four deals. In terms of spreads, we've been extremely consistent, which we think is great. And, you know, the underlying base rates have gone up somewhat, but, you know, even based on new production, our spreads are on track to give us the right NIM.

22:01 And so I think we're in good shape there.

22:08 Great. Appreciate that. And then how do you think about kind of with higher rates, kind of GTIs or kind of ability for debt service coverage ratios, which is probably the better metric for borrowers to continue to be able to kind of cover debt service?

22:38 Yeah, it's a good question. I think, you know, for us, for the vast majority of the portfolio, it's not a huge driver just because our loan balances are so small. So, you know, I think of an average $400,000 loan, half a percent move in the rates is not that dramatic in terms of absolute dollars. Some of the larger properties that we do probably more impactful, but that's a small part of our business, so it's not something that we really worry about.

23:16 Got it. Thank you. Sure. There are no further questions at this time. I'll now turn the call back over to Christopher Farrar, CEO, for closing remarks.

23:29 Thank you all for joining the call. We appreciate your time and look forward to speaking to you after the new year. Hope everyone has a great holiday season. Thank you. Thank you, everybody. Happy holidays. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.