Velocity Financial Inc Stock

Hello, and welcome to the Velocity Financial's Toorak Acquisition Conference. [Operator Instructions] I would now like to turn the conference over to Chris Oltmann, Treasurer. You may begin.

Thanks, Sarah. Hello, everyone, and thank you for joining us this morning to discuss Velocity's signing of a definitive agreement to acquire Toorak Capital's operating platform. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer; and Mark Szczepaniak, Velocity's Chief Financial Officer.

Earlier this morning, we released a press release announcing the Toorak acquisition, and you can find that press release and accompanying presentation that will be referred 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 risks and other factors that could affect this transaction, please see the risk factors and other cautionary statements on 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.

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.

Thanks, Chris, and good morning, everyone. Appreciate you taking the time to get the update from us. Very excited to announce today the partnership proposed with Toorak. I think most folks in the market know them quite well. They're really the original pioneers of the BPL fix-and-flip space and the first to get out there with a securitization and very impressive track record in the space. So we're thrilled to announce the transaction today.

Just kind of flipping through some of the highlights here. We'll also be retaining the rights to service about $3 billion worth of assets that are in the existing book right now that will continue to strengthen our strategy to develop a capital-light ROE contribution type business that we add on here. We've had our eye on the BPL space for a very long time and wanted to make sure that we got in with the right partner and the right team. And we think we've done that with John Beacham and his team. They're a very impressive group and well healed in the space. Additionally, John will be joining Velocity as an Executive Vice President and continuing to build out the strengths and abilities of Velocity Financial.

As mentioned on the slides, the transaction is structured as a 100% cash purchase and close is expected to be in the fourth quarter of this year.

In terms of strategic benefits, we think we get real diversification here, not only through geography and different origination channels, but also product-wise. We think it will -- going forward, we think this will increase origination volumes by over 75% and add almost 40% contribution to our servicing portfolio.

Turning to Page 4 on the slides that we prepared. A little bit more on Toorak and their platform for those who aren't quite familiar. Very impressive track record in the space and fantastic credit performance, over $20 billion lifetime fundings, great platform in terms of people as well, approximately 280 people spread across a couple of different regions that we'll outline later in the presentation.

In terms of the business segments, there's merchants, which is primarily the retail channel that is headquartered out of Denver, Colorado. Toorak U.S. and U.K., which is a very important expansion for us into the U.K. It's an area that we've never been before, and we think it's very attractive. We like the economics there and very excited to welcome that team as well.

Turning to Page 5. We'll walk through some of the transaction merits. I mentioned earlier that this significantly increases our scale and broadens our product offerings, entrance into the U.K. market, which is a great expansion for us. Also enjoy the benefits of some tremendous technology that John and team have developed over the years. And we think there are great opportunities for us to leverage some of those products such as Toorak Connect and Merchants Connect as we go forward.

Lastly, as I mentioned earlier, it's very important for us to continue to maintain or improve our ROE. We think this business, as we reconstruct it in terms of strategy, will provide an excellent high ROE, capital-light division.

On Page 6, you can see there's not a lot of overlap here, but combining the businesses give us more diversity and scale. Very important for us to pick up some direct origination capabilities. It's something that we've always wanted to do and very excited to see where we can take both of those channels going forward.

Lastly, turning to Page 7. There are -- within the channels, there is proprietary technology that I mentioned earlier, Toorak Connect, Merchants Connect and some of the U.K. -- sorry, some of the support that's been developed within India as well. And I think all of those things are going to continue to not only power merchants and Toorak, but Velocity as well. We think there are great opportunities and synergies across the platform.

On Page 8, we've got sort of the geographic concentrations, if you will, both in the U.S. and the U.K. And as we go forward, we plan to continue to diversify that expansion throughout the U.S. and potentially other regions of the United Kingdom as well.

Again, just reemphasizing on Page 9, the ROE strategy. Most of our income right now comes from the portfolio and the spread that we earn there. We thought it would be great to combine this capital-light, high ROE business with ours. The asset management is very important to us and continue to expand, hopefully, as we generate more fee income off of that type of business. And we think there are many forward flow partners that are interested in this product, and we think that will diversify our investor base and our ability to generate fee income off the platform.

That concludes our prepared remarks of the presentation, and I'd like to open it up for questions, please.

[Operator Instructions] There are no questions at this time. I'll turn it back to you, Chris, for closing remarks.

Great. Appreciate everybody jumping on with short notice. It's a project that we've been working on for a while and incredibly excited to partner with the Toorak team and really look forward to the many benefits that we see going forward. Thank you all for your time.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Hello, and welcome to the Velocity Financial Second Quarter 2026 Results Call. [Operator Instructions]

I will now turn the conference over to Chris Oltmann, Corporate Treasurer. Please go ahead.

Thanks, JL. Hello, everyone, and thank you for joining us today for the discussion of Velocity's Second 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 issued a press release with our second quarter results, and you can find that 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 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 in 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.

Thank you, and good afternoon, everyone. I appreciate you taking the time to join us today.

I'll start with how the quarter came together and then walk through the highlights. Mark will then walk you through the financials in detail before we open up for questions.

Second quarter was, in many ways, a continuation of the story we've been telling all year. Demand for our products stayed healthy across both the traditional commercial and 1-4 family rental markets. Our portfolio kept compounding and our credit book performed the way we've come to expect from a well-seasoned low LTV loan book.

We delivered core net income of $27.9 million this quarter, with pre-tax income up 3.9% year-over-year to $35.2 million. The modest year-over-year dip in GAAP net income and EPS came almost entirely from a higher effective tax rate, not from any softening in the underlying business. If anything, the underlying business kept getting stronger. Diluted book value per share grew to $18.43, up nearly $2.81 from a year ago, which is really the number that best captures what compounding at Velocity looks like over time.

Credit remains our top priority, and this quarter, we reinforced that discipline. Non-performing loans fell to 9.6% of held-for-investment loans, down from 10.3% a year ago. And we resolved $90.5 million of NPLs with net gains of 102.7% and with total recoveries of 107.7%. Our special servicing team continues to do exactly what we ask of it, resolve assets efficiently while maximizing recovery. We've said before that we optimize for asset valuation, not volume, and that discipline continues to show up in our numbers. Charge-offs this quarter were just $700,000, below our 5-quarter trailing average.

On the origination side, we again grew the portfolio the way we like to grow it deliberately. Total loan production was $672.6 million this quarter, slightly down from $725 million a year ago, but unit production was actually up 3.3%. The dollar decline reflects a lower average loan size, not softer demand. Our total loan portfolio grew to $7 billion in UPB, up 19% year-over-year, with healthy growth across every collateral type we serve.

We stayed active on the funding side as well, completing 2 securitizations during the quarter and the fixed income markets remain very supportive as evidenced by the tightest spreads we've seen in the last 3 years. We ended the period with $240 million of liquidity and $662 million of available warehouse capacity, which gives us real flexibility to keep leaning into origination opportunities without stretching the balance sheet.

As we look back -- sorry, at the back half of 2026, we feel good about where we sit. Credit is performing. Our funding base is diverse and well capitalized, and demand for our products remains strong. The pipeline is robust, and we expect origination volumes to increase for the rest of this year. We remain confident in our ability to keep compounding book value and earnings at the pace our investors have come to expect from us.

With that, I'll turn it over to Mark to take you through the numbers in more detail.

Thanks, Chris.

Mark, I'll hit the first page, and then I'll turn it over to you actually.

Okay.

Okay. Cool. Thanks.

On Page 3, just the highlights for the quarter. NIM income, as I mentioned, $25.2 million, up -- sorry, 3.2% decrease from the prior year, and that was mainly driven by the tax rate that I mentioned. Core net income, up 1.4% and portfolio NIM, 3.66% above our targeted 3.5%, down slightly from the 3.82% in the prior year, but that level was elevated due to some cash collections in that prior period.

In terms of production, I already hit on the numbers there, so I won't reiterate those. And suffice it to say that we're very pleased with the way the business was performing and the production levels that we achieved. And as I mentioned, looking forward, the pipeline looks very healthy. So, we expect those volumes to increase.

On the financing and capital side, I did already mention, both the securitizations and the liquidity and want folks to know that we feel like we're in a really good position to continue growing the portfolio. And I'd highlight that the MC2 securitization that we did continues to help us improve our capital efficiency, unlocking some capital that was tied up in non-performing loans.

With that, I'll turn it over to Mark to take you through the rest.

Thanks, Chris. Good afternoon, everybody. Good evening.

Velocity's second quarter of 2026 continue to reflect, as Chris mentioned, our strong earnings results for the year. Looking at Page 4, our Q2 loan production, as Chris mentioned, was just under $673 million in UPB. That's an increase of about 5.2% over Q1's production of $639 million. There were 1,600 loans -- over 1,600 loans funded in the second quarter, and that's consistent with Q1's unit production.

The production during Q2 included the weighted average coupon on our new held-for-investment originations, continuing to come in strong at about 10%. And the weighted average coupon on HFI originations for the last 5 quarter average trend was at 10.2%. So, really holding that 10% WAC level constant over the last 5 quarters. The growth in originations in Q2 also continued at very tight credit levels, with the weighted average loan-to-value for the quarter at 61.1% and the last 5-quarter average trend for the weighted average loan-to-value at 62.4%. So, this Q2 production grew at a very healthy WAC, low LTV. And so it continues the trend of good borrower demand for our product even during what's been an unstable year-to-date so far, 2026 economic market.

Turning to Page 5. As a result of the continued strong Q2 production, Page 5 shows the growth in the quarter for our overall loan portfolio. Total loan portfolio as of June 30 was about $7 billion in UPB. That's a 2.2% increase from Q1, and over a 19% increase year-over-year compared to the first -- or second quarter '25. The weighted average coupon on our total portfolio as of June 30 was 9.7% on a yield basis, and that was consistent quarter-over-quarter and year-over-year. So, we're holding that 9.7% coupon. And again, that kind of ties to the originations over the last 5 quarters coming in at 10%, very consistent on the WAC and also on the WAC in the portfolio. The metrics show the loan portfolio continues to provide healthy yield at tight credit levels.

Flipping to Page 6. Our Q2 portfolio net interest margin was 366 basis points. That's the 10 basis points increase over Q1 NIM of 356 basis points. Looking to the right at the different components of NIM, our portfolio yield increased by 6 basis points quarter-over-quarter due to the continued loan production at the healthy WACs that we just highlighted.

The higher portfolio yield of 965 basis points reflected in Q2 of '25, that was due to more cash being received during that period on non-performing loans. And cash received on non-performing loans, as we know, can vary quarter-to-quarter based on actual resolution activity and cash received.

Our portfolio cost of funds remained constant quarter-over-quarter and decreased by 15 basis points year-over-year. The year-over-year decrease, again, mainly due to paying down those portfolio warehouse lines back in Q1 of this year, with the proceeds from the unsecured corporate debt issuance that we had in Q1.

Looking at Page 7. Our non-performing loan rate at the end of Q2 was 9.6%, which is a 70 basis point year-over-year decrease. And the decrease is a result of both selling non-performing loans into that 2026 MC2 Trust security and also the continued strong resolution efforts by our special servicing department, which we continue to resolve those NPL resolutions at favorable gains on all of our NPA assets, which are comprised of the NPL loans as well as the REOs.

The table to the right on Page 7 shows our loans held-for-investment portfolio, which include both the amortized cost loan portfolio and the fair value loan portfolio and shows the total year-over-year non-performing loan valuation allowance that we have for non-performing loans. As of June 30, the amortized cost loan portfolio had a $5.1 million CECL loss reserve and the fair value loan portfolio had a $24.3 million valuation adjustment loss allowance for a combined total portfolio valuation loss allowance of 42 basis points.

Remember, both of those valuation adjustments are required under U.S. GAAP. The unrealized loss valuation adjustment on our non-performing FVO loans under U.S. GAAP represents the market value for which those loans could be sold in a secondary market. However, we do not plan on going out normally in the secondary market and the whole loan market and selling our non-performing loans anywhere at a discount because we've got a history of producing net gains on that product.

Page 8 shows our CECL loan loss reserve activity. The CECL reserve, again, keep in mind, is only applicable to our amortized cost loan portfolio, which is dwindling down as it continues to pay down. It does not include the loans being carried at fair value. The CECL reserve as of the end of the quarter was $5.1 million or 28 basis points of the outstanding amortized cost HFI portfolio.

On Page 9, you see our real estate owned REO activity. The graph to the left shows our ratio of REO assets to total HFI loans, and that ratio has been relatively stable over the last 12 months on a year-to-year basis. In the table to the right, we show all of our REO activity. It's broken out. The top half of the table reflects the gain or loss from recording new REOs in the period, and it segregates that new REO activity between being sourced from our amortized cost loan portfolio and our fair value loan portfolio. And for Q2 of this year, there was a $5.4 million gain on transfers of non-performing loans to new REOs compared to $7.1 million gain year-over-year in the second quarter of '25.

The bottom half -- the second half of that table presents the gain or loss activities on the existing REOs subsequent to the initial recording of the REO, which reflect the lower of cost or LOCOM accounting. In Q2 of '26, there was a $3 million loss on REO activities compared to $1.4 million loss year-over-year in second quarter of '25. So if you take those 2 sections combined, the new REO activity as well as existing REO activity, it presents a holistic picture of our overall REO profit and loss activity for the period, which for second quarter of this year was a net gain of $2.4 million compared to a net gain of $5.7 million for Q2 of '25.

Page 10 shows our non-performing loan resolution activity. For Q2, we resolved almost $91 million in UPB of non-performing loans, and we had total resolution dollars recovered, which includes all the past due net contractual interest of $6.9 million or 7.7% over and above the UPB compared to the resolution of $90 million in UPB of non-performing loans with total resolution dollars recovered of $8.7 million, or 9.7% year-over-year in second quarter '25.

If you want to see what the amount recovered was over and above UPB and contractual interest, meaning by pure gain, there's the net gain column in those tables. Net gain column over and above recovering all UPB and past due contractual interest was for second quarter of this year, $2.5 million or 2.7% compared to a net gain of $2.8 million, or 3.1% year-over-year for second quarter '25.

Then on Page 11 shows our durable funding and liquidity position at the end of the quarter. Total liquidity as of June 30 was $240 million. That's comprised of about $76 million in cash and cash equivalents and another $164 million that we had in available liquidity on unfinanced loan collateral. The available warehouse line capacity at the end of the quarter was just under $662 million with a maximum line capacity of $975 million. So, plenty of available capacity on our existing warehouse lines.

In Q2, as Chris mentioned, we issued 2 securitizations. We issued the 2026-2 security with a little over $398 million in securities issued. And we also did the 2026-MC2 security, which is comprised of non-performing loans where the loans that were sold into the trust, with Velocity retaining a $30 million trust certificate of the CMBS security from that trust. And that MC2 security generated a little over $11 million in net proceeds for us. Our recourse debt-to-equity ratio at the end of the quarter remained low at 1.2x. And our total debt to equity, if you include all the non-recourse securitizations, was at 9.7x at the end of the quarter.

With that, I'll turn it back over to Chris for the Q2 financial recap.

Thank you, Mark.

On Page 12, just an overview of things going forward. We think the market is healthy and doing well. Credit is stable. We like the performance there. Capital markets are very supportive and wide open, which is great for our business. From an earnings perspective, we think we're going to continue to achieve above 3.5% NIM and good growth going forward. So, we like the way things are lining up for the rest of this year and into '27.

So with that, that concludes our prepared remarks. And we'll open it up for questions.

[Operator Instructions] Your first question comes from the line of Chris Muller of Citizens Capital Markets.

Congrats on another really solid quarter here. So, I guess the government insured multi-family originations jumped in the quarter. Can you just refresh my memory on this product? And will we see more of this going forward? Or was 2Q an outlier with that?

Sure. Chris, so that is our Century Health & Housing division that produces HUD multi-family loans. Those are very large in terms of average UPB and tend to be very lumpy. I would say in prior years, with the way the Fed moved rates around, their volumes kind of slowed down for a while. Things have kind of stabilized there and normalized, I would say, in terms of market rate expectations. And so now we're starting to see better traction. And so it was a nice quarter for them, but their pipeline looks very robust and we expect to see levels kind of like this going forward. So, I don't think it's necessarily an outlier. I think it would be something similar to that on a go-forward basis.

Got it. That's helpful. And then the $222 million of loan sales, I assume that's separate from the NPL securitization. And if that's true, can you just give some details on those sales, just what percent of par and anything you could provide would be helpful?

Sure. Mark, do you want to cover those?

Sorry. I had to take my phone off mute. What were the $222 million in loan sales that you're referring to, Chris?

I was looking at the bridge portfolio, I'm trying to see what slide that was, Slide 19.

Loan sales, $222 million. Okay. Got you.

Okay. So, that's part of the actual MC2 securities. Again, as we said, the MC2 security, we actually sold the loans into the trust. So unlike previous REMIC securitizations where when the loans go into the trust, we have a consolidation accounting where the loans stay on our books because we have to consolidate that trust as a VIE as part of Velocity. The MC2 security was structured such a way where we are not the primary beneficiary of that 2026-MC2 trust. So the loans that were transferred to the trust come off our books. They're actually sold into the trust. That's why now we have a -- I mentioned we have a -- we retained a $30 million security at CMBS.

From all our other securitizations, we don't really have a security because the trust consolidates on our books, right? So the loans stay on our books and the certificates that are issued to outside investors just become debt because it all consolidates within Velocity. The MC2 trust does not consolidate on Velocity's books. So the loans that were transferred into it are actually considered sales. They actually came off our books. And because we retained an interest in that trust, we now have a CMBS security. On the balance sheet, you'll see it say retained interest in securitization. So, that's what the loan sales are. It's all part of that MC2 trust.

Yes. And then I would add the Century activity on top of that and that will get you...

Right, right. Because you have about $136 million in the MC2 and you had $80 million or $80-some million on the Century deal as a held-for-sale loan that was sold to Ginnie. Correct.

Your next question comes from the line of Doug Harter of BTIG.

You guys -- I think you mentioned that you expect a little bit faster loan growth in the second half. Wondering if you could size that.

Wondering if we could, what, Doug? I'm sorry. You tailed off.

Size that change in pace of loan growth?

Got it. Size it. Yes. We don't give formal forward guidance, but I can say that July was best month we've had in terms of submissions. So, we've seen volume really pick up just recently in the last 45 days. And that's kind of typical. In terms of seasonality, the second half of the year tends to be really good for us. So, I definitely think we'll beat last year's volumes, but we don't have a formal guidance in terms of how much that looks like or what size that is.

Great. And can you just talk about how you're thinking about capacity to continue to grow the balance sheet? Obviously, you're retaining capital and compounding that way. But how do you think about the ability to kind of be more efficient with the current balance sheet?

Yes. It's something that we keep an eye on, and it's largely driven by how much growth we achieve. The portfolio, obviously, throws off nice cash flows. But to your point, depending on how aggressively we grow, we will need to access more capital potentially and we have a forward plan on that, and we update that regularly. Fortunately, the markets are all open to us right now, both on the equity and debt side. So, I would think as we grow and as we move forward, we will either tap equity or debt markets depending on where we are and where the best execution is. We won't get much more than 10x leverage. We are a levered finance company, but don't want to really exceed that. So, that will probably be somewhat of a governor in terms of whether we raise equity or debt.

With no further questions, that concludes our conference call. Thank you for your participation. You may now disconnect.

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.

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.

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.

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?

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 Instructions] And our first question here will come from Chris Muller with Citizens.

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?

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.

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?

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.

This concludes our question-and-answer session. I'd like to turn the conference back over to Chris Farrar for any closing remarks.

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.

Thank you, everybody. Have a nice evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Good day, and welcome to the Velocity Financial Inc. Fourth Quarter 2025 Conference Call. [Operator Instructions]

Please note, today's event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer. Please go ahead.

Thanks, Rocco. Hello, everyone, and thank you for joining us today for the discussion of Velocity's fourth quarter and full year 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 our 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 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 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 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.

Thanks, Chris, and I'd like to welcome everyone. Appreciate you joining our 2025 year-end earnings call. Pleased to report another incredible year of performance and very proud of what our team accomplished. -- hard work and dedication to our vision. We recognized record levels in originations, portfolio growth, new securitizations, book value, pretax ROE and earnings. Credit belongs to my amazing team members who are talented and passionate about our mission. I believe they are our greatest asset.

From a macro perspective, we see healthy activity in the fixed income markets as our deals are oversubscribed and spreads are tight. Our pipeline is growing and real estate markets are healthy, and we're optimistic about our prospects going forward. In terms of our specific results, core net income increased by 52% to $111 million. which also drove a new record level of pretax ROE of 26%. Importantly, we achieved this growth while maintaining our margins and credit discipline.

With respect to originations, we increased volume by 49% to a record $2.7 billion, driven by increases in productivity from our account executives. Increased volume also set a record for our capital markets team with 9 new securitizations and $2.6 billion in new issuance. On a net basis, the portfolio grew by 28% versus the prior year, and our asset management team successfully resolved $331 million in NPLs with net recoveries of $30 million.

At year-end, we entered into a transformative partnership whereby we sold $129 million of NPLs and retain the servicing rights for the entire pool of loans. This transaction drove significant earnings in Q4, but also freed up approximately $50 million in working capital and will drive future earnings from the servicing fees earned.

All in all, a great transaction as this team continues to impress and drive meaningful results to the bottom line. From a liquidity perspective, we've never been stronger as we issued our first rated unsecured debt offering for $500 million in January, which gives us greater flexibility and makes us less reliant on short-term warehouse lines. This new capital will help us execute our long-term plan of growing book value and maximizing shareholder returns.

Looking forward, we have great momentum and are well positioned to continue our growth. That concludes my prepared remarks, and we'll turn over to Page 3 in the earnings presentation. Summing up 25 was really just a fantastic year for us. You can see growth across the board, 26% pretax ROE grew book value by 21% and maintained a very healthy NIM at 3.6%.

Turning to Page 4. Digging into the fourth quarter. You can see core net income of $36.3 million or $0.93 a share. up from $0.60 a share from Q4 '24. I mentioned that the NIM was very healthy and stable at 3.59%. And in terms of production, $634 million for the quarter, up 12.5% from the prior year and mentioned the activity both the portfolio and NPLs. As a result of that NPL sale, NPLs were down to 8.5% at the end of the year.

Again, hitting on the asset management team. They continue to do a great job of realizing net gains, and we've expanded our disclosures in this year's 10-K and in the earnings materials, we're reflecting total revenue that we recognize from the NPLs. And that really just -- we've always made those fees and made that income, but it's been difficult to suss out in the financials.

So we broke that out and showed the activity from regular accrued interest as well. As you could see, for the quarter, that was a total of $7.6 million. So that team continues to do a great net for us. In terms of financing and capital, I mentioned that we've done a number of securitizations in the year. We did do our second private securitization where we had 1 investor taking down the entire transaction. And we like that execution and think it's a great diversification as we move forward. mentioned the strong liquidity position, $92 million in unrestricted cash and plenty of warehouse capacity.

As I mentioned in my opening remarks, we're really proud of the NPL transaction that we were able to close in the fourth quarter, recognizing $13.4 million of net income as a result of that sale and releasing about $50 million of working capital to fund future production.

With that, I'll turn it over to Mark for Page 5.

Thanks, Chris. Hi everyone. Another year is in the books for velocity. And as Chris had mentioned, velocity is really ending the year strong. We go to Page 5 and look at our loan production. Total loan production for the fourth quarter was just under $635 million in UPB. As Chris mentioned, it's 12.6% year-over-year increase from about $563 million in Q4 2024.

The strong production growth during 2025 included the weighted average coupon, a new Q4 held for investment originations continuing to come in strong at just a little over 10%. Originations in Q4 also continued at tight credit levels, resulting in a weighted average loan to value for the quarter of just under 63%. 2025 total year loan production was $2.7 billion in UPB, and that was almost a 47.5% year-over-year increase over the $1.9 billion in production for 2024. Over 6,600 loans were originated during 2025.

The strong 25 production was a result of continued organic growth of our borrower base and strong demand for our product. As a result of the continued strong growth in production, if you look at Page 6, it shows the year-over-year growth in our overall loan portfolio. The total loan portfolio as of the end of the year for '25 was $6.5 billion in UPB which is a 28.4% increase over the $5.1 billion as of December 31, 2024.

The weighted average coupon on our total portfolio at the end of the year was 9.7%. And as Chris mentioned, a 21 basis point year-over-year increase. The total portfolio weighted average loan-to-value remained consistently low at 65% as of December 31, 25, and the average loan balance remained consistent at about $390,000.

On Page 7, it shows our recent quarterly portfolio net interest margin. You can see Q4 '24, Q3 of '25 and Q4 '25, very, very consistent net interest margins. It's not on the slide, but on an annual basis, our portfolio-related net interest margin was 3.61%, which is about a 1.4% increase over our 2024 net interest margin of 3.56% in for the year, our portfolio yield increased 39 basis points year-over-year, while our portfolio cost of funds increased year-over-year by only 18 basis points.

The portfolio yield increase was mainly driven by strong loan production during the year, and higher loan coupons and the increase in the portfolio of cost of funds was mainly due to an increase in the securitization market yields.

On Page 8, our nonperforming loan rate at the end of 2025 was 8.5% compared to 10.7% at the end of '24. And the decrease, as Chris mentioned, was a combination of the sale of $129 million in UPB of NPL loans sold during Q4 as well as a combination of continued strong resolutions during the entire year by our special servicing department.

The table to the right of the page shows our loans held for investment portfolio, including both our amortized cost and fair value loans and shows the total year-over-year net nonperforming loan valuation allowance we have for our nonperforming loans. As of December 31, '25, the amortized cost loan portfolio had a $4.5 million CECL reserve and the fair value portfolio had a $48.3 million valuation adjustment allowance for a combined valuation allowance on the entire loans held for investment portfolio of about 81 basis points.

Both of these valuation adjustments are required under U.S. GAAP. The unrealized valuation adjustment on our nonperforming fair value loans represents the value for which the loans under U.S. GAAP could be sold out in the secondary market. However, we do not plan on selling NPL loans since our in-house special servicing department has a history of producing net gains and very successful resolutions on these loans.

Turning to Page 9. Yes, it just shows our CECL loan loss reserve we said it was at $4.5 million for the end of the year or 22 basis points of our outstanding amortized cost held for investment portfolio and the CECL loan loss reserve does not include the loans being carried at very fair value just on the previous page.

For 2025, our net gain loss from loan charge-offs and REO-related activities at the bottom of that table is a net loss of $3.7 million, mainly as a result of a couple of large legacy loan charge-offs. The smaller loans -- we wanted to clean those up. We don't have those type of loans in our portfolio anymore.

So that loss is well above our historical loss experience. We do not foresee these types of losses going forward because of the continued favorable resolutions, our nonperforming loans and that significant loss allowance adjustment that you saw in the previous page for the fair value loans. Page 10 presents the enhanced disclosure that Chris was mentioning on our nonperforming loan resolution activity.

So the first set of 3, 4 columns there is what we've always shown in the past, we could go up to the net gain or loss on NPL loan resolution, which brings in the amount of default interest and prepayment fee income over and above contractual principal and interest. But what we haven't really shown was what was -- what's the contractual interest that we go back and pull in.

Under GAAP, you have to reverse that out when a loan goes nonperforming, -- so once we resolve the loan, we're collecting all of that contractual interest in cash. So we wanted to bring that in to show the total amount of revenue that we bring in when we resolve these loans.

So in this table, we added columns for net accrued interest and total recovered revenue at the far right. We felt it was important to add the amount of contractual interest net of any advanced write-offs that is also collected on resolutions for the efforts of our special servicing team. For 2025 Q4, NPL resolution total dollars recovered, including net contractual interest was $7.6 million or 9.8% over the UPB compared to $7.5 million or 10.8% over UPB for the fourth quarter of '24.

Now if you look at the full year '25 on this table, if you look at the full year '25, the total amount recovered on the resolutions or NPL loans was $30 million or 9% of UPB compared to $22.3 million total recovered in 2024 or 8.8% over UPB.

Page 11 shows our durable funding and liquidity position at the end of the year. Total liquidity as of December 31 was just under $117 million, comprised of about $92 million in cash and cash equivalents and another $25 million in available liquidity and unfinanced collateral.

In addition, our available warehouse line capacity at December 31 was just under $600 million. with a maximum line capacity of $935 million. So plenty of capacity and available capacity in the warehouse lines. In Q4, we issued 2 securitizations, 2025 DP2 and 2025-5 with a total of $646.3 million in securities issued.

As Chris mentioned, in January of 26, we completed a public rating process for Veloce Financial Inc. It's our first time a corporate rating. We are rated by both Fitch and Moody's. And we issued our -- we issued $500 million in unsecured debt. That's a 5-year term debt fixed rate at 9.5% interest due in 2031. The proceeds of $500 million debt were used to pay off $215 million corporate securitized debt that was set to mature in 2027.

So we paid that off and the balance of it was to pay down, as Chris mentioned, our shorter-term warehouse lines. And then in February of this year, we issued the first securitization, 2061 with $355 million in securities issued. That concludes my 2025 financial recap Chris, like to now give the presentation back to you for an overview of Velocity's '26 outlook and key business drivers.

Thanks, Mark. On Page 12, our markets are very healthy. We like the backdrop there. Credit is stable. We aren't reaching to hit our targets or our volumes. So we're remaining disciplined there. Capital markets are great securitization market, in particular, is very robust, and we've got a deep bench of investors supporting us there.

And then I think from an earnings perspective, we think NIMs should remain where they are, and we think we can continue growing the portfolio. We're very positive about the future in '26. So with that, we'll conclude our presentation and open it up for questions.

[Operator Instructions]

Today's first question comes from Steve Delaney at Citizens Capital Markets.

Congratulations on an excellent year. We do appreciate Mark's comments on Page 9 about the REO, and we may want to follow up with you on that but obviously an outstanding performance. Chris, I'm curious, looking ahead, one of the things, if you think about the broader financial markets, and let's talk about the rates market.

Got, I don't know how many times you turn on CNBC, and they were talking about the Fed and Yadda, -- we don't know what the Fed will do. But the futures market as of a week ago when we updated our internal rate forecast, we show in futures is showing somewhere between 2 and 325 basis points cuts in 2026.

Now who knows what we get and more importantly, the 10 years really being kind of cranky at 420, and that's, what, 50, 60 basis points off the recent 12-month lows. I guess what I'm trying to say is you have performed the way you did in terms of origination volume and your clients are obviously finding deals and they can afford the current rates. But just if we get some short-term rate relief and if the tenure were to come down 50 basis points or whatever. How impactful is that to the demand from your borrowing universe for additional loans -- and just curious what the mindset is, and I'm curious if you have any material floating rate loan concentration in your portfolio, where if we did get a break in the 5- to 10-year range, is there a possibility of showing somebody some kind of a mini perm type of a loan structure vis-a-vis just a SOFR tight floater. Thank you for commenting on that, if you would.

Yes, sure. Yes. Thanks, Steve. I think in terms of the rate drop, probably marginally helpful to us in that it is going to lower our cost of funds and probably make our offering more attractive than it otherwise would be. But I don't see it as a huge driver of our growth. Most of the folks that come to us have some type of a need, and they're less rate sensitive and more transaction sensitive. So it's not something we spend a lot of time on.

For example, I think our rate sheet moved one time in all of '25. So as you know, conforming lenders or consumer lenders are changing daily, and we changed once through the whole year. So probably not that impactful to us, but helpful. And then in terms of the second one, we do have a small portion of our portfolio, the older legacy stuff that was floating rate, but it was all floored at the start rate. So rates can really only go up, not down. So I don't think there's much of an opportunity there and/or impact to us. So probably nothing material there.

Well, appreciate the comments and all the best.

Moderator?

I think we may have lost our moderator.

He's the only one that knows if there are any other questions.

We'll give another minute to see if he pops back on. Otherwise, we'll conclude.

Those still on the line, if you have questions in the queue, we can't see those questions have to be

Our next question is going to come from Bose George of KBW.

So maybe we'll go to the next question.

And are you able to take the question from Bose George of KBW. Sorry for the downtime there. You are able to hear me?

Yes.

Our next question will come from Don Fandetti of Wells Fargo.

I was wondering if you could just give an update on the competitive dynamic of your lending markets. I know it's been very fragmented. I just want to check in and see if there have been any changes on that front. And then secondarily, obviously, private credit markets have been under pressure. Do you think there's any sort of indirect impact to your business through securitization markets or whatever? I know you've had pretty successful debt capital raising recently, but I just wanted to just check that box.

Yes. Don, thanks for the questions. In terms of competition, I would say we're kind of business as usual, not seeing anything really different or new there. So no real pressure there and no need to react to that. And then on the second question, I think probably maybe slightly a net positive for us, the disruption in private credit. I think we've had a number of reverse inquiries of folks that are calling us saying, could we buy your product? Could we structure something? Could we buy whole loans? Could we do something unique. So -- and I think that's because there's demand for like that secured real estate type back lending as opposed to some of the other private credit alternatives. So I would say maybe a slight positive for us, but I haven't seen any degradation or impact to us in a negative way.

Our next question is from Bose George of KBW. receiving audio from your line. would Okay.

And we do have a question with Eric Hagen from BTIG.

Am I coming through? Can you hear me? Yes.

Okay. Great. A couple of questions here. I mean have you fully deployed the $500 million of proceeds from the debt raise? And as it relates to that, I mean, how do you guys decide on the amount of cash and liquidity that you have available at any given time? Like is there a rule of thumb for like the minimum amount of liquidity or cash that you would hold at a given time?

Yes. Thanks, Eric. So yes, we fully deployed all the capital. We were able to basically pay down our entire warehouse balance immediately at the close. So it might be a very small drag on Q1, just because of all the friction with the transaction. But other than that, we were able to zero out our warehouse lines, which was great.

And then minimum cash, we like to make sure we have at least $30 million to $50 million of cash available at all times just for safety or whatever. But right now, we -- right after the transaction closed, we had $320 million of unpledged loans that we owned for cash. So it really gives us a lot of flexibility and access to capital whenever we need it.

That's great. That's really helpful. I think I want to follow up on one of the last questions around competition. I mean there's lots of speculation that capital rules are going to get adjusted for banks and that it could result in more activity from banks and mortgage lending. I mean do you not see that as being a potential catalyst for more competition?

Yes. Generally, I'd say our borrowers are coming to us because they don't want to deal with a bank or can't deal with the bank. So I don't think that -- I mean, competition is always competition. So at the margin, could it take a little bit? Maybe, but I wouldn't -- it's not something that we're worried about or concerned about in any way.

Got it. One more for me, if you don't mind. I mean, can you compare the spreads and the returns that you expect in the single-family versus small balance commercial segment going forward?

Yes, yes. So we do get a wider spread on the commercial assets than we do from the single family, and we think that's the appropriate risk adjustment -- we are probably 125 basis points wider on the commercial versus the single family, and we think that sort of puts us in an agnostic position, whether we lend single-family or commercial. I think that's the appropriate risk adjustment.

And at this time, I am not showing any further questions in the question queue. I'd like to turn the conference back over to management for any closing remarks.

Yes. I just want to say thanks to everyone for joining the call. We appreciate your support, and we'll be speaking soon as Q1 comes up here fairly shortly. Thanks so much.

Thanks, everybody, for your participation.

And thank you all. The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Good day, and welcome to the Velocity Financial, Inc. Third Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer. Please go ahead.

Thanks, Chloe. Hello, everyone, and thank you for joining us today for the discussion of Velocity's Third Quarter 2025 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 our third quarter results. 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 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 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. 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.

Thanks, Chris, and we appreciate everyone joining the call today. Our third quarter results were fantastic as we've achieved another record quarter in terms of pretax earnings, which were up 66.5%, production volumes of $739 million and new applications, which exceeded $1.4 billion for the quarter.

Looking forward, the markets remain strong, and this momentum has continued into the fourth quarter as we gain market share and expand our reach. From a credit perspective, we remain disciplined as evidenced by the decline in the weighted average portfolio loan-to-value to 65.5% and our coupons remain on target at 10.5% generating attractive risk-adjusted spreads and stabilizing our attractive NIM and core pretax ROE of 24.1%.

Our asset managers have done a great job of resolving NPAs consistently above par for net positive gains. Plenty of capital available for REOs that are priced properly and expect the real estate markets to continue to perform well within our niche. Most unique event in Q3 was the closing of our first ever single counterparty securitization of new production with a top-tier money manager. This strategic partnership allows us to reduce transaction costs, execute at similar levels to our regular, widely marketed deals and diversify our long-term funding options. We're proud to partner with this world-class firm and expect the transactions to continue as evidenced by a second transaction that closed in early October.

Obviously, the fixed income markets are very supportive, and we intend to maximize our opportunities there. As usual, I give full credit to our outstanding team members that work so hard to deliver these results, and we will continue to create shareholder value wherever possible.

With that, I'll turn over to the presentation and begin discussing Page 3. In terms of earnings, obviously, a great quarter, net income up 60% year-over-year and core diluted EPS of $0.69 a share. Portfolio NIM was very stable at 360 basis points above our target of 3.5%.

Moving to Production and the Loan Portfolio. I mentioned record level of production of $739 million, 32% net increase in the portfolio year-over-year after netting out prepayments.

In terms of nonperforming loans, that portfolio was pretty stable, 9.8%, down from 10.6% and within our expected range. As I mentioned earlier, we continue to see positive gains on resolved NPAs of $2.8 million, and our team has done a fantastic job there.

Turning to financing and capital. I mentioned that first ever single counterparty transaction. We were approached a quarter or 2 ago by a large party and with the interest of developing a consistent outlet for our product and very pleased with the way that transaction -- both those transactions executed. And we expect it to be an additional diversification of our funding sources going forward.

In terms of liquidity, we have plenty of cash and available borrowings, and you can see over $600 million of warehouse capacity at the end of the quarter. So all in all, in shape there.

Turning to Page 4. I want to reemphasize our strategy of compounding earnings by taking all of our earnings and investing them back into the platform and the portfolio. As you can see, we've had outstanding results, and we think this is a great opportunity for investors to get exposure to our earnings and the compounding of capital. So very pleased with how we've transacted over the last couple of years and expect this to continue going forward.

With that, I'll turn it over to Mark on Page 5.

Thanks, Chris, and good afternoon and evening, everyone. On Page 5. As Chris mentioned, Velocity had a new record for loan production in Q3. The loan production for the quarter was $739 million. That included $23.9 million in unfunded loan commitments. The $739 million again demonstrates our continued strong demand for our product. In Q3, the loan production broke the previous quarter's record of $725 million. There were a total of 1,778 loans originated in the third quarter. The strong production growth in Q3 included the weighted average coupon on new held for investment originations continuing to come in strong at 10.5% and the weighted average coupon on our HFI originations for the last 5-quarter average trend was at 10.6%. The growth in originations in Q3 was also very tight credit levels with the weighted average loan-to-value for the quarter being at 62.8%, which is right on top of the last 5-quarter average weighted average LTV trend of 62.8%.

As a result of the continued robust growth in production, take a look at Page 6. It shows the overall growth in our Q3 for our overall loan portfolio as we retain these loans in our portfolio. Our total loan portfolio as of September 30 was just under $6.3 billion in UPB. That's a 7.1% increase from Q2. And I think as Chris mentioned, a 32% increase year-over-year, even netting out prepayments. The weighted average coupon on our total portfolio as of September 30 was 9.74%, which is 7 basis points above Q2 and 37 basis points in terms of portfolio yield over Q3 -- I'm sorry, year-over-year. The total portfolio weighted average loan-to-value remained consistently low at 65.5% as of September 30.

If you go to Page 7, we maintained a strong portfolio NIM at 3.65% in Q3, and that's consistent with our last 5-quarter average portfolio NIM of 3.62%. On the right side of that page, you can see the breakout of our yield as well as the cost of funds. Our portfolio yield for the quarter was at 9.54% and the cost of funds at 6.27%. We've maintained a nice healthy spread over several periods.

On Page 8, our nonperforming loan rate at the end of Q3 was 9.8%. That's down 0.5 point from Q2 and 80 basis points year-over-year. We continue to see, as Chris mentioned, the strong collection efforts by our special servicing department that have resulted in favorable resolutions of our nonperforming assets and the NPAs are comprised of our nonperforming loans as well as REOs.

Page 9 shows the continued positive results of our NPA resolution efforts. Our Q3 NPA resolution gains totaled $2.8 million or 2.6% of the $108 million in UPB resolved. And on a trend basis, we've averaged 3.8% quarterly NPA resolution gains over the last 5 quarters.

Turning to Page 10. The top part of the table on the right-hand side shows our CECL loan loss reserve. The bottom part shows the net loan charge-off and gain loss on REO activity. In terms of the CECL reserve at September 30 was $4.6 million, or 22 basis points, and that's on our outstanding amortized cost HFI portfolio. And that 22 basis points is consistent over the last 5 quarters, we've averaged around 20 basis points of CECL reserves. So not much of a change there. And keep in mind, the CECL reserve does not include held -- I'm sorry, fair value option loans. It's only our held for investment amortized cost.

The bottom part of that table shows that for Q3, our net gain loss from loan charge-offs and REO activities. We had a net loss of $1.6 million, mainly as a result of REO valuations.

Page 11 shows our durable funding and liquidity position at the end of Q3. Total liquidity at September 30 was just under $144 million, and that's comprised of about $99 million in our cash and cash equivalents and almost another $45 million in available liquidity on our unfinanced collateral. As of September 30, our available warehouse line capacity is just a little over $600 million with a maximum line capacity of $935 million. And that's a $125 million increase in max line capacity over Q2. So we went from $810 million maximum capacity at the end of Q2 to $935 million and some of our warehouse lines are increasing their capacity. That concludes my Q3. Our debt-equity ratio on a recourse basis stays consistent though it's at 1x, has been between 1.5x, 1x for the last 5 quarters.

So Chris, with that, I'll turn it back to you to present an overview on our outlook and key business drivers.

Thanks, Mark. Appreciate it. Just to sum it up, we're very positive about the future. We think markets are healthy. Our credit is performing well. Our capital markets are extremely robust, especially on the fixed income side. And we believe that our earnings are going to continue to grow and expect positive results going forward. So with that, I'll open it up for questions.

[Operator Instructions] The first question comes from Steve Delaney with Citizens.

Gosh, excellent quarter. It sounds repetitive, but you guys put the numbers up every quarter and just whether it's production gains, everything that you've summarized on Page 3. So tip my hat to you on that for sure. A little concern on not so much REO resolutions, but just in terms of, as you show on Page 10, the charge-offs are up quarter-over-quarter for sure. And this quarter, I know REO gains can be a little fluky, but we went from a nice gain on REO in the second quarter to -- or excuse me, last year third quarter to the loss this year. And I guess the number that jumps off the page because primarily, I don't understand it. Chris, if you could help me understand the REO valuations on a net basis, the negative $6.3 million. Just explain that if that was a -- do you book the REO at where you think it should be or based on your loan balance? And then as you study the market and get feedback on property valuation, then you have to adjust. Just curious why that big number of negative $6.3 million.

Thanks for the question, Steve. In terms of the REO valuation, I'll walk you through the detail. But just from a high level, if you look, you'll see it in our Q that gets filed later today, year-to-date, our REO activity is basically on top of last year, $3.2 million gain, I think it is. So there's some noise just in timing issues here.

In terms of the REO valuation expense that we recognize, that happens after we've taken a loan from -- off the books and put it into REO. And then it's -- as it sits on the balance sheet, we adjust market to market realities. I would say in this $6.3 million, you've got some cases where maybe the property has deteriorated, maybe worse than what we thought when we originally foreclosed. You have some cases where we actually end up just selling the REO a little less than where we thought we were going to -- where we had it marked. So it can be driven by a number of different things. But I would say, from our perspective, we don't see it as like a worsening trend and much more of just kind of a quarterly timing issue. I expect that number, you'll see it kind of go up and down quarter-by-quarter.

And I'm sorry, Steve, this is Mark. If I could just add to what Chris said, it is really a timing item. The main thing to look at is the NPL resolution table, the final resolutions. For example, I got $6.3 million. What could happen is when we first foreclose on a property and set the REO up, the REO has to go up at its fair value. We'll keep in mind, since we've got the loans at basically 63%, 60% LTV, if you have a $500,000 loan, now you're going to write off the loan and put the REO on the books for, say, $800,000 because the loans at 65% LTV. So you put the REO on your books at $800,000. So that's what's in that gain on transfer to REO, that top number.

Then maybe 6 months down the road, you get an offer, it's not $800,000, it's $700,000. And you say, okay, we got an offer for it. That's the new fair value. We're going to take the offer. So you write it down from $800,000 to $700,000. Well, in that period, which might be 6 months later, 8 months later, it looks like a $100,000 REO loss. The reality that $700,000 you're writing it down to is still $200,000 more than the $500,000 loan you had. So overall, if you sell it at that $700,000, you're still going to have an overall gain on resolution. It's just a timing of when you first put the REO on and then maybe you write it down because you're going to decide to take less to sell it. But what you're selling it for is still more than the loan that you took off the books.

Got it. So I think you're telling me -- you added $4.6 million as a positive number when you took it into REO. And then when you understood the property or developed the marketing plan or looked at offers or something, then you had to just -- you reverse some of that.

That's exactly correct. And that $6.3 million, remember, it's different periods. So the $4.5 million, that's all new REO that came on in that quarter. The $6.3 million is probably something that maybe in those quarters, it went on for $8 million or $9 million positive, and now we're taking $6.3 million of it back, if I'm saying.

Got it. Got it. Okay. Understood because you have the gain, it's more of an accounting gain when you take it into REO the first time. But then once you understand valuation, it sounds like that can be a little lumpier in terms of when that valuation adjustment is made.

That's correct.

All right. That's helpful. Well, obviously, the positives in the report far exceed the negatives, but I just wanted to bring that up. And one final thing. What is your headcount currently or at 9/30? And how has that changed over the last year?

Yes. So we're at like 347 people at 9/30, and that's up about 82 heads.

Okay. Congrats on another great quarter and I guess we'll do this again in 3 or 4 months.

Thanks, Steve.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Chris Farrar for any closing remarks.

Great. Thanks, everybody, for joining, and we'll speak to you in a few months.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.