Velocity Financial's Q3 2025 Earnings Call: Contradictions Emerge on Tech Efficiency, Securitization Strategy, REO Valuation, and Headcount Growth

Date of Call: November 6, 2025

Financials Results

• EPS: $0.69 per diluted share; net income up 60% year-over-year; pretax earnings up 66.5%

Guidance:

• Markets remain strong and momentum continued into Q4, with market share expansion.
• Expect earnings to continue to grow and positive results going forward.
• Credit discipline maintained — weighted average portfolio LTV 65.5% and coupons ~10.5%.
• Portfolio NIM stable and core pretax ROE around 24.1%.
• Diversifying funding via single-counterparty securitizations; ample liquidity and warehouse capacity >$600M.

Business Commentary:

* Record Financial Performance:

- Velocity Financial reported record pretax earnings up 66.5%, with $739 million in production volumes and over $1.4 billion in new applications for Q3 2025.
- The growth was driven by strong demand for their product, disciplined credit practices, and strategic partnerships.

• Loan Portfolio Growth and Stability:
• The total loan portfolio reached just under $6.3 billion in UPB, a 7.1% increase from Q2 and a 32% increase year-over-year, even after netting out prepayments.

• This growth was attributed to tight credit levels and a low weighted average loan-to-value ratio of 65.5%.

• Nonperforming Loan Reduction and Resolution:

• The nonperforming loan rate decreased to 9.8%, down from 10.6% in Q2.

• The reduction was due to strong collection efforts and favorable resolutions, resulting in positive gains of $2.8 million on resolved NPAs.

• Liquidity and Funding Diversification:

• Velocity Financial ended Q3 with $600 million in warehouse capacity and a debt-equity ratio of 1x on a recourse basis.

• The company successfully diversified its funding sources by completing a single counterparty securitization with a top-tier money manager, reducing transaction costs and enhancing long-term funding options.

• Dividend and Investor Returns:

• The company reported a 360 basis points stable portfolio NIM and a core pretax ROE of 24.1%.
• The stable NIM and attractive returns were achieved through disciplined credit and asset management practices, as well as strategic reinvestment of earnings into the platform and portfolio.

Sentiment Analysis:

Overall Tone: Positive

• Management: "record quarter in pretax earnings, up 66.5%" and "net income up 60% year-over-year"; production $739M, new applications >$1.4B; core diluted EPS $0.69; portfolio NIM stable (3.65%); "plenty of capital" and >$600M warehouse capacity — all signal strong operational and capital-market performance.

Q&A:

• Question from Steven Delaney (Citizens JMP Securities, LLC, Research Division): Can you explain the negative $6.3M REO valuation — how are REOs booked and why the large negative number this quarter?
  Response: Timing-driven accounting: loans are transferred to REO at fair value (often above loan balance), then later written down to actual sale offers; the swings reflect timing, not a systemic deterioration—YTD REO resolutions remain net positive.

• Question from Steven Delaney (Citizens JMP Securities, LLC, Research Division): What is your headcount at 9/30 and how has it changed over the last year?
  Response: Headcount was 347 as of 9/30, up approximately 82 employees year-over-year.

Contradiction Point 1

Technology Implementation and Efficiency

It involves differing explanations regarding the impact of technology implementation on company efficiency, which is crucial for understanding operational improvements and cost savings.

What is your headcount as of September 30, and how has it changed year-over-year? - Steven Delaney (Citizens JMP Securities, LLC, Research Division)

2025Q3: At September 30, our headcount was 347 people, which is an increase of 82 positions from the previous year. - Christopher Farrar(CEO)

Chris Farrar, what areas for improvement keep you up at night, and where do you see opportunities to enhance future results? - Steven Delaney (Citizens JMP Securities, LLC, Research Division)

2025Q2: While we're doing exceptionally well, there's still room for improvement. We're focusing on technology to streamline processes and increase efficiency. Implementing new tech has already made post-closing processes 5x more efficient. - Christopher Farrar(CEO)

Contradiction Point 2

Securitization Strategy and Funding Options

It highlights changes in the company's strategy regarding funding sources, which can impact its capital structure and growth potential.

Have you historically relied solely on securitization for long-term financing? Could current private capital markets enable loan sales as an alternative? Would alternative financing sources allow faster growth? - Eric Hagen (BTIG)

2025Q3: We are currently in the process of securitizing $450 million of whole loans at a weighted average interest rate of 7.22%. - Christopher Farrar(CEO)

Historically, you've relied on securitization as your primary long-term financing source. With the current market's influx of private capital, could incorporating loan sales into your routine be an option? Would alternative financing sources enable faster growth? - Eric Hagen (BTIG)

2025Q2: We're receiving reverse inquiries from private credit sources. There may be opportunities to introduce another financing leg. Securitization remains the primary financing source, but we're open to exploring additional options. - Christopher Farrar(CEO)

Contradiction Point 3

REO Valuation and Timing Issue

It involves differing explanations for the REO valuation, impacting understanding of the company's financial performance and risk management.

What caused the $6.3 million net loss from REO valuations in Q3? Is it due to worsening trends or a quarterly timing issue? - Steven Delaney

2025Q3: In terms of the REO valuation, the $6.3 million loss is more of a quarterly timing issue rather than a worsening trend. It reflects adjustments made to align with market realities after taking loans off the books and putting them into REO. - Christopher Farrar(CEO)

How are you resolving NPLs—by repossessing and reselling properties or partnering with non-public distressed debt buyers? - Steve Delaney

2024Q4: It is a timing issue. When a property is foreclosed and becomes REO, it is initially valued at its fair value. If the property later sells for less than initially expected, this leads to a valuation adjustment and can appear as a loss, but it doesn't necessarily mean a net loss on resolution. - Mark Szczepaniak(CFO)

Contradiction Point 4

Headcount and Growth Strategy

It concerns the company's headcount and growth strategy, which are crucial for understanding organizational structure and expansion plans.

What is your current headcount as of September 30, and how has it changed year-over-year? - Steven Delaney

2025Q3: At September 30, our headcount was 347 people, which is an increase of 82 positions from the previous year. - Christopher Farrar(CEO)

Given retained earnings and ATM proceeds, is this sufficient to fund growth? Will larger equity raises be necessary as the company grows? - Steven Laws

2024Q4: We're very focused on growing our headcount. We have increased our headcount by over 36% from the year before. - Chris Farrar(CEO)