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Transcript Summary

Velocity Financial (VEL) delivered a strong Q1 2026, highlighted by a 30% year-over-year increase in core net income and a total loan portfolio reaching $6.8 billion. The company maintained a stable Net Interest Margin (NIM) of 3.56%, supported by a weighted average coupon of 10.1% on new originations. A significant milestone was the issuance of $500 million in unsecured corporate debt, which enhanced liquidity and reduced warehouse debt dependency. Credit quality remained a primary focus, with new originations averaging a 62.5% LTV and nonperforming loan (NPL) rates decreasing to 10.1%. Velocity's in-house special servicing department continued to drive value, achieving a 102.3% recovery rate on NPL resolutions. Management expressed confidence in sustaining high-teen ROEs throughout the year, citing disciplined pricing and a robust pipeline for the second half of 2026. With $329 million in total liquidity and a recourse debt-to-equity ratio of 1.0x, the company is well-positioned for future growth. The outlook for the remainder of the year remains positive, with expectations for accelerated origination volumes and continued capital compounding.

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Velocity Financial, Inc.: Securitization Shell Game Amid Rising Non-Performing Loans

Full Earnings Call Transcript — Q1 • 2026-05-07

Operator: Good day, and welcome to the Velocity Financial First Quarter of 2026 Results Conference Call. Please note that today's event is being recorded. [Operator Instructions] I would now like to turn the call over to the Treasurer, Chris Oltmann. Please go ahead.
Christopher Oltmann: Thanks, Joe. Hello, everyone, and thank you for joining us today for the discussion of Velocity's first 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 first quarter results, and you can find the press release and accompanying presentation that we will refer to during this call on our Investor Relations website at www.velfinance.com. I'd like to remind everybody 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.
Christopher Farrar: Thank you, Chris, and good evening, everyone. We appreciate you taking the time to join us today. First off, I want to apologize to everyone on our last call. We had technical difficulties, and we've been assured that by our vendor that won't happen again. So hopefully, things go well here for us. I'll start off with a few words on the environment then walk through our Q1 performance. Mark will take you and through the rest of the financials in detail before we open up for questions. The first quarter of 2026 was obviously volatile from a macro perspective, but quite steady in our corner of the world. Our end real estate markets are functioning well, our pipeline is growing and our fixed income markets are well bid. In our view, making low LTV loans secured by real estate is a smart way to generate healthy risk-adjusted returns and our Q1 results speak to the durability of what we've built at Velocity. In the first quarter, we delivered results that were in line with our expectations and importantly, consistent with the trajectory we laid out at the start of the year. Portfolio growth was measured and deliberate, NPL recoveries remained strong, and we continue to generate reliable net interest income from a well-seasoned book. Our story is about consistently compounding our capital. And in this environment, I believe consistency is exactly what our investors, our borrowers and our originator partners need to see from us. Credit is always a top priority, and this quarter reinforced that discipline. Our nonperforming loan resolutions were very consistent with positive gains and significant interest income recognition. Our dedicated special servicing team continues to resolve assets efficiently while maximizing recovery rates. I said before that we optimize for asset valuation and that disciplined approach to valuation has served us well through several cycles now. And Q1 was no exception as evidenced by the weighted average LTV on new loan originations of 64.9%. On the origination side, we were intentional. We did not chase volume for its own sake. We originated loans that met our return threshold in markets where we have depth of knowledge through originator relationships we trust. The result was a portfolio that grew nicely quarter-over-quarter with yields that remain attractive relative to our cost of funds. The most significant activity in the quarter was our first ever issuance of $500 million of unsecured corporate debt rated by Moody's and Fitch. The investor demand was broad and the deal was oversubscribed and comprised of high-quality, sophisticated investors that we are proud to call partners. This capital positions us well for future growth and strengthens our financial flexibility as we dramatically reduced our reliance on shorter term warehouse debt. As we look to the rest of 2026, we feel well positioned. Our balance sheet is clean, our funding is stable and we see a pipeline of origination opportunity that should translate into meaningful volume growth in the second half of the year. We remain confident in our ability to deliver on the objectives that we set at the beginning of the year. With that, I'll turn to the earnings presentation materials, starting on Page 3. As I mentioned in my remarks, a pretty stable, straightforward quarter, very simple. Core net income, up 30% over the prior year's quarter. NIM was very healthy and on target at just over 3.5%. Mentioned that the portfolio grew nicely, up 25% year-over-year. Continue to see positive gains on the NPL resolutions, again 102.3% and expanded our disclosures here to show the other recovered revenue on those NPLs of $4.6 million. In financing and capital, as I mentioned, the securitization markets are very healthy, and we've got another deal on the market that will price this week. Those markets are very supportive. In terms of capital and liquidity, we've never been in a stronger position. For us, it's a much larger amount of liquidity coming off that unsecured corporate debt issuance and really gives us, as I mentioned, the strength and the flexibility to navigate whatever market comes our way. So with that, I'll turn it over to Mark.
Mark Szczepaniak: Thanks, Chris, and good evening, everyone. As Chris mentioned, the first quarter of '26 can kind of continue the consistent production that we saw during 2025. On Page 4 of the presentation, our Q1 loan production was just a little over $639 million in UPB. That's consistent with just under $635 million for Q4 of '25. In Q1 of '26, there were over 1,600 loans funded. The production during Q1 included the weighted average coupon on new held for investment originations continuing to come in strong at 10.1%, and the weighted average coupon on our held-for-investment originations for the last 5 quarter average trend has been at 10.3%. This growth in originations in Q1 also continued at tight credit levels with the weighted average loan-to-value for the quarter at 62.5% and on a 5-quarter average trend basis at 62.7%, so consistently tight credit levels. So strong Q1 production growth, the healthy WAC and the low LTV demonstrates a consistent trend, as Chris mentioned, of borrower demand for our product even through these recent challenging economic markets. If we go to Page 5. As a result of the strong Q1 production, Page 5 shows the growth in our overall loan portfolio at the end of Q1. The total loan portfolio as of March 31 was $6.8 billion in UPB, and that's a 5.3% increase from Q4 and a 25.6% increase in the portfolio year-over-year compared to Q1 of '25. The weighted average coupon on our loan portfolio as of March 31 was 9.75%, which is almost flat to Q4 '25 and a 16 basis point year-over-year increase compared to Q1 of '25. The total portfolio weighted average loan-to-value decreased to just under 65% as of March 31, and the loan portfolio continues to provide a healthy yield at these tight credit levels. Moving to Page 6. Our first quarter net interest margin was 3.56%. That's consistent with Q4's net interest margin of 3.59%. Kind of looking at the individual components over to the right of our net interest margin, our portfolio yield increased by 12 basis points year-over-year due to continued loan production at those healthy WACs. The higher portfolio yield in Q4 '25 was due to more cash being received during that period on our nonperforming loans. As we said, some of that cash in nonperforming loans kind of comes in lumpy time over time. So it was a little bit elevated in Q4. Our portfolio cost of funds decreased by 14 basis points, both quarter-over-quarter and year-over-year compared to Q1 '26. And that's mainly due to paying down the portfolio warehouse lines in Q1 with proceeds from the unsecured corporate debt issuance that Chris had mentioned. On Page 7, our nonperforming loan rate at the end of Q1 -- it's in the left table -- was 10.1%. That's a 70 basis point year-over-year decrease compared to Q1 of '25. We continue to see strong collection efforts by our special servicing department that have resulted in favorable gain resolutions of our nonperforming assets, which are comprised of both the nonperforming loans as well as the REOs. The table to the right shows our loans held for investment portfolio, including both our amortized cost loans and our fair value loans, and it shows the total year-over-year nonperforming loan valuation allowance we have for our nonperforming loans. As of March 31, '26, the amortized cost loan portfolio had a $4.9 million CECL loss reserve and the fair value loan portfolio had a $52.2 million valuation adjustment loss allowance for a combined valuation loss allowance of 83 basis points on the entire HFI portfolio. Both these valuation adjustments are required under U.S. GAAP. The unrealized loss valuation adjustment on our nonperforming fair value loans represents what could be achieved for those loans transacted between a willing buyer and a willing seller in the secondary market. However, we do not plan on selling these NPL loans since our in-house special servicing department has a history of producing net gains on the resolutions of these nonperforming assets. And again, that 83 basis points of total loss allowance on our entire HFI portfolio, our actual historical trends on losses has been nowhere near that 83 basis points. It's been fractions of that. On Page 8. Page 8 just shows the CECL loan loss reserve activity. The CECL reserve, remember, is only applicable on the amortized cost loan portfolio, which is continuing to pay down as all our new loans are fair value. So it does not include the fair value portfolio. And again, that CECL reserve at the end of the quarter was $4.9 million or 25 basis points of our outstanding amortized cost portfolio. So it's been very consistent. Moving to Page 10 on the real estate owned, it's -- I'm sorry, Page 9, we go to Page 9. Get my pages straight here. Page 9 shows the real estate owned activity. And the left-hand side just shows the percentage of our real estate assets to the total HFI portfolio. And you can see year-over-year, it's been very, very consistent. You're talking about basis point movement from 1.5% to 1.9%. On the right-hand side, it's an expanded disclosure that we have on total gain or loss on REO activity. And what we've done on this page is we've actually broken out the gain or loss activity on new REOs compared to the gain or loss on existing REOs. So the top half of the table shows the gain or loss from recording new REOs in that period, and it segregates that REO activity between being sourced from either the amortized cost or the fair value loan portfolios. As you can see in Q1 of '26, there was a total $6.8 million gain on transfers of nonperforming loans to new REOs in the quarter compared to $4.4 million gain year-over-year in Q1 '25. The second half of that table shows the gain or loss on activities on existing REOs subsequent to the initial recording of the REO in future periods or subsequent periods, reflecting our lower of cost or market accounting. For Q1 of '26, it was a $3.3 million loss on REO activities compared to $1.8 million in Q1. And if you take those 2 sections combined, that presents a holistic picture of our overall REO P&L activity for the period, which for Q1 of '26 was a net gain of $3.5 million compared to a net gain of $2.7 million for Q1 of '25. I think to keep in mind there is the REOs in that bottom half are not the same REOs. The REOs in the top half are new REOs that have come on. The bottom half is the activities of REOs that we've had on the books for a while are now making adjustments to based on requirements of GAAP under lower of cost or market accounting. That kind of gives you the full picture of all the REO activity. On Page 10. Page 10 shows our nonperforming loan resolutions. Chris mentioned, continued very, very strong resolutions of our nonperforming assets. In Q1 of '26, we resolved a little over $70 million in UPB of nonperforming loans and had total resolution dollars recovered, including the past due net contractual interest of $4.6 million or 6.5% over the UPB principal of the loans. And that's compared to $68 million in UPB of loans resolved in Q1 of '25 with $5.2 million in total recovered revenue or 7.6% over. And if you want to know just the gain based on the default interest and prepayment fees, that's still there, and that would be in the column that just says gains. So for the first quarter of '26, the total gains on just on default interest and prepayment would be $1.6 million of that $4.6 million, with the difference being all the collection of that past due accrued interest. Turning to Page 11 on the durable funding and liquidity. Our position at the end of the first quarter, total liquidity as of March 31 was $329 million. That's comprised of $87 million in cash and cash equivalents, and almost another $242 million in available liquidity on unfinanced collateral. The available warehouse line capacity at the end of the quarter was $835.6 million with a maximum line capacity of $935 million. During Q1, as Chris mentioned, we issued our first publicly rated unsecured debt deal, a $500 million deal. We used the proceeds to pay off our 2022 corporate secured note of $215 million. So we paid off the secured note of $215 million that was issued in '22. And then we also paid down a number of our warehouse lines with those proceeds. Also in Q1, we issued the first regular securitization of the year, 2026-1. That had a little over $335 million in securities issued. And we issued another private security 2026-P1 and that had about $178 million in securities issued. And then looking at the bottom table, our recourse debt-to-equity ratio at the end of Q1 remained very low at 1.0x. And our total debt-to-equity ratio, which includes all the nonrecourse securitizations that we do, was at 9.6x as of the end of the quarter. That kind of wraps up my Q1 '26 financial recap. And with that, I'll turn the presentation back over to Chris for an overview of Velocity's outlook on key business drivers this year. Chris?
Christopher Farrar: Thanks, Mark. On Page 12, we think the markets are healthy and continue to see strong demand. Credit remains very stable for us and where we expect it to be. In terms of capital, I mentioned that all capital markets are healthy and functioning well. So we're in really good shape there. And from an earnings perspective, we continue to expect a 3.5% NIM and the portfolio to continue to grow this year as we see origination volumes pick up in the latter half of the year. That concludes our prepared remarks, and we can open it up for questions.
Operator: [Operator Instructions] And our first question here will come from Chris Muller with Citizens.
Christopher Muller: So originations feel like they've been on a pretty steady pace here for, I guess, the last year, 1.5 years or so. Do you guys expect origination volumes in 2026 to continue on a similar path to what we saw last year with a pickup later in the year?
Christopher Farrar: Yes. Yes, we do. I think we felt like -- we felt a little bit of a slowdown kind of the end of the year and the beginning of this year. I think that was more seasonal in nature. Maybe it was the market, I'm not sure, but we've already seen kind of new origination volumes starting to pick up a little bit. And we think similar to last year, kind of Q2, Q3, those volumes will accelerate.
Christopher Muller: Got it. And then you guys are generating some really impressive ROEs. Do you think that that can hold in the high teens? It seems like a bunch of the inputs are suggesting that it can hold there, at least in the near term. So how are you guys thinking about ROEs going forward?
Christopher Farrar: Yes, we expect them to hold in there. As I mentioned, we're very disciplined on margin. The margin is probably the most important thing to us. We treat our capital as precious and we need to make sure we earn those returns. So we don't have to chase volume because we have this in-place portfolio. We're far more focused on maintaining margin, which obviously translates into ROE. So yes is the short answer.
Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to Chris Farrar for any closing remarks.
Christopher Farrar: Great. Thanks, everyone, who joined us today. We appreciate your continued interest in Velocity. As always, the Investor Relations team is available for follow-up conversations, and we look forward to speaking with many of you over the coming weeks. Have a great evening.
Mark Szczepaniak: Thank you, everybody. Have a nice evening.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.