Velocity Financial (VEL) Q3 2026 Earnings Call Transcript

DATE

Wednesday, Nov. 4, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Chris Farrar
• Chief Financial Officer - Mark Szczepaniak

TAKEAWAYS

• Loan Production -- $911.3 million, representing a 35% increase compared to the second quarter of 2026.
• Core Diluted EPS -- $0.76, driven by record production and maintaining the second-highest quarterly result in company history.
• Century Health & Housing Capital Production -- $154.9 million, increasing from $86.3 million in the previous quarter and $26 million in the prior year period.
• Held-for-Investment WAC -- 10.1% on new originations, supporting the company target for net interest margins above 3.5%.
• Weighted Average LTV -- 61.7% for the third quarter, reflecting what management described as a commitment to tight credit levels.
• Total Loan Portfolio -- $7.5 billion in unpaid principal balance, growing 6.8% from the previous quarter and 18.8% year over year.
• Portfolio NIM -- 3.78%, an increase of 12 basis points over the 3.66% reported in the second quarter.
• Portfolio Cost of Funds -- decreased 5 basis points sequentially and 13 basis points year over year, due to the lower cost of recently issued securitized debt.
• Nonperforming Loan Rate -- 10.1%, representing a 30 basis point increase year over year.
• Nonperforming Loan Resolution Gains -- $2.7 million, or 103% of the unpaid principal balance resolved, reflecting effective collection efforts.
• Total NPL Recovery -- $7.4 million, representing 108.2% of the unpaid principal balance resolved when including recovered past due contractual interest.
• REO Net Activity -- a net loss of $4 million, compared to a net gain of $1.6 million in the third quarter of 2025, driven by valuation accounting on existing assets.
• CECL Loan Loss Reserve -- $5.3 million, representing 30 basis points of the outstanding amortized cost held-for-investment portfolio.
• Quarterly Charge-offs -- $330,000, representing a 52% decrease year over year.
• Total Liquidity -- $193.4 million, comprised of $86.8 million in cash and $106.6 million in available liquidity on unfinanced collateral.
• Warehouse Capacity -- $425.4 million available, out of a maximum line capacity of $975 million.
• Q3 Securitizations -- $516 million across two transactions, VCC 2026-P2 and VCC 2026-3.
• October Securitization -- $500 million, which management identified as the largest issuance in company history.
• Total Debt-to-Equity Ratio -- 9.6x, while the recourse debt-to-equity ratio remained at 1.5x as of Sept. 30, 2026.

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RISKS

• Farrar stated, "I think if rates really started taking off and going much, much higher, then that probably could be a headwind once you probably start I would guess somewhere north of an 11% WAC, I would think it probably starts to be somewhat limiting," indicating a potential upper bound for borrower demand in the current rising rate environment.

SUMMARY

Velocity Financial, Inc. (NYSE:VEL) reported record quarterly loan originations and expansion of its total loan portfolio to $7.5 billion. Management reported that the company's specific market niche continues to see increased demand in rising rate environments as independent mortgage brokers transition away from consumer mortgage originations. The company expects the pending Toorak acquisition to close by the end of 2026, which is projected to diversify the product mix toward short-duration lending and provide an immediate presence in the U.K. market. Velocity maintained net interest margins above its 3.5% target while executing its largest-ever securitization in October.

• The Toorak acquisition is expected to shift short-duration lending from 6% to over 40% of the combined product mix, balancing the company's long-term duration book.
• Farrar noted the acquisition will introduce a direct retail origination channel, which is projected to account for approximately 17% of combined volume.
• Management stated that Toorak U.K. will provide an immediate presence in the U.K. market through a network of more than 30 origination partners.
• The company plans to sell a $3 billion portion of Toorak's existing book to a third-party investor while retaining management and fee collection rights.
• Farrar indicated that credit pricing spreads for the company's last four securitizations remained consistent between 185 to 205 basis points.

INDUSTRY GLOSSARY

• UPB: Unpaid Principal Balance, the portion of a loan at a certain point in time that has not yet been remitted to the lender.
• NIM: Net Interest Margin, a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders.
• WAC: Weighted Average Coupon, the weighted-average gross interest rate of the pool of mortgages that underlie a mortgage-backed security.
• LTV: Loan-to-Value, a high-level assessment of lending risk that compares the amount of a loan to the value of the asset being purchased.
• CECL: Current Expected Credit Losses, an accounting standard for estimating allowances for credit losses.
• REO: Real Estate Owned, a term used to describe a class of property owned by a lender after an unsuccessful sale at a foreclosure auction.
• HFI: Held-for-Investment, loans that a company has the intent and ability to hold for the foreseeable future or until maturity.
• BPL: Business Purpose Loan, a loan made for business or commercial purposes rather than personal or consumer use.
• RTL: Residential Transitional Loan, short-term financing typically used for the purchase and renovation of residential investment properties.

Full Conference Call Transcript

Operator: Thank you for standing by. At this time, I would like to welcome you to the Velocity Financial third quarter 2026 results conference.

Chris Oltmann: 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.velfinance.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 a 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. 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 call. For reconciliations of these non-GAAP measures, you should refer to the earnings materials on our investor relations website. Finally, today's call is being recorded and will be available on the company's website later today.

With that, I will now turn the call over to Chris Farrar.

Chris Farrar: 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 Toorak 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 $0.76 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. 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 & Housing Capital for a great quarter. Government-insured 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. We are 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 supportive 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 Toorak.

The transaction remains on track to close in the fourth quarter, subject to customary closing conditions. Strategically, Toorak significantly grows our production and diversifies us in three ways. 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. By geography, Toorak U.K. gives us immediate presence in the U.K. market with more than 30 origination partners. The entire Toorak team is professional, seasoned, and talented. We are 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. We are well-positioned to drive future gains, and as always, we will remain focused on maximizing shareholder value each and every day. Now we will turn to the earnings materials. Starting on page three of the presentation, we will 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. Again, portfolio NIM well above that 3.5% target that we set.

Further confirming our strategy, you can see by retaining our earnings and with 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 have had a 30% CAGR over the last five years in terms of our portfolio growth. So we continue to expand this niche and execute on our growth strategies.

Lastly, from a capital and liquidity perspective, we have 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. 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've continued to recognize very nice gains as our asset management team does an excellent job of resolving delinquent borrowers. With that, I'll turn it over to Mark for the next page six.

Mark Szczepaniak: Thanks, Chris. Good afternoon and good evening, everyone. Velocity'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 UPB. 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. We mentioned a record quarter. Our core Traditional Commercial plus Investor 1-4 production increased 30% quarter-over-quarter, and our Government-insured multifamily production under our Century subsidiary increased 79.6% quarter-over-quarter.

The production during Q3 included the weighted average coupon on new held 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 and a healthy WAC and a low LTV continues a trend of good borrower demand for our product, even in a rising rate environment. As a result of the continued strong Q3 production, page seven shows the growth in the quarter for our overall loan portfolio. The total loan portfolio as of September 30th was $7.5 billion in UPB. 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. On page eight, our Q3 portfolio net interest margin was 3.78%. That's 12 basis points increase over our Q2 NIM of 3.66%. Our portfolio yield increased by 12 basis points quarter-over-quarter due to the continued loan production at the healthy weighted average coupons that we just highlighted on the previous page. The higher portfolio yield of 9.54% in Q3 of 2025 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 cost of funds decreased by 5 basis points quarter-over-quarter and decreased by 13 basis points year-over-year, mainly due to the lower cost of more recently issued securitized debt. On page nine, 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 UPB resolved. 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 UPB resolved. On page 11, you see our REO activity. The graph to the left shows our ratio of REO assets to total held for 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 2025. 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 or market valuation accounting. For Q3 of 2026, there was $8.8 million loss on REO activities compared to a $6.2 million loss year-over-year in Q3 of 2025.

These two sections combined present a holistic picture of our overall REO profit and loss activity for the period, which for Q3 of 2026 was a net loss of about $4 million compared to a net gain of about $1.6 million in Q3 of last year. As we stated in the past, overall, over time, we tend to break even in our REO activity. We have quarters where we have an overall net gain, and we have some quarters with overall net loss, so we tend to break even over time. Page 12 presents our CECL loan loss reserve activity.

The CECL reserve is only applicable to our amortized cost loan portfolio and does not include the loans being carried at fair value. The CECL reserve as of September 30th was $5.3 million, which is about 30 basis points of the outstanding amortized cost held for 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 2021. Page 13 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. Our recourse debt-to-equity ratio at the end of Q3 remained very low at 1.5x, and our total debt-to-equity ratio, which includes our non-recourse securitizations, was 9.6x as of September 30th.

With 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 Toorak acquisition, as well as Velocity Financial's outlook on our key business drivers. Chris?

Chris Farrar: Thanks, Mark. Appreciate that. Turning to page 15 in the presentation, we can tell everyone that the Toorak 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 Toorak will still manage that portfolio and collect fees off of that portfolio, as well as start to originate new business and earn the respective income and fees associated with those new loans going forward.

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 looked like and what we can kind of expect going forward. As you can see, combined in fiscal 2025, we'd 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 add 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. 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. In terms of the capital markets, I mentioned that we closed the largest securitization ever in October, which I think was a tremendous achievement. It 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 are very pleased with being able to do that deal and get such good pricing on that transaction.

We expect the capital markets to continue to be supportive, and we are very confident in our 3.5% or more NIM going forward. That concludes our presentation, and we will open up the call now for any questions.

Operator: 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. Your first question comes from the line of Chris Muller with Citizens Capital Markets. Please go ahead.

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

Chris Farrar: Hi, Chris. It is Chris. I will take that one. Appreciate you joining the call. Yeah, there is definitely an upper bound. I don't think we are 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. I think it is still a ways higher. I think if rates really started taking off and going much, much higher, then that probably could be a headwind once you probably start I would guess somewhere north of an 11% WAC, I would think it probably starts to be somewhat limiting.

Chris Muller: Got it. That is helpful. You guys have had a lot of success on resolving NPLs over the years. Can that translate to the BPL side of things too, or is it just a different animal over there?

Chris Farrar: Well, I think we certainly, there is some great things that we have learned and some tools that we employ that we can carry over for sure. The RTL is different in many ways, and Toorak is very good at doing what they do, and their credit metrics, especially in the more recent vintages, the last two years have been outstanding, probably better than ours. We are going to share best practices across both platforms, and I think hopefully together each side gets a little stronger, but very confident in their ability to favorably resolve assets as well.

Chris Muller: Got it. Well, appreciate you guys taking the questions, and congrats again on a nice quarter.

Chris Farrar: Thanks, Chris. Take care.

Mark Szczepaniak: Chris.

Operator: Your next question comes from the line of Doug Harter with BTIG. Please go ahead.

Doug Harter: Thanks. You guys highlighted 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 those three deals that you did?

Chris Farrar: Yeah, sure. Hi, Doug. It's Chris again. I did before the call, I had our capital markets team pull our last four deals, and our spreads all in combined for all the tranches were very tight, basically 185 basis points to 205 basis points in the last four deals. In terms of spreads, we've been extremely consistent, which we think is great. The underlying base rates have gone up somewhat, but even based on new production, our spreads are on track to give us the right NIM, and I think we're in good shape there.

Doug Harter: Great. Appreciate that. How do you think about, kind of with higher rates, kind of DTIs or kind of ability for debt service coverage ratios, which probably the better metric for borrowers to continue to be able to kind of cover debt service?

Chris Farrar: Yeah, that's a good question. I think, for us, for the vast majority of the portfolio, it's not a huge driver just because our loan balances are so small. 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, it'll probably be more impactful, but that's a small part of our business, so it's not something that we really worry about.

Doug Harter: Got it. Thank you.

Chris Farrar: Sure.

Operator: There are no further questions at this time. I'll now turn the call back over to Chris Farrar, CEO, for closing remarks.

Chris Farrar: 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.

Mark Szczepaniak: Thank you, everybody. Happy holidays.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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