Velocity Financial, Inc. 2026 Q2 Earnings Call

Hello, everyone. 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. 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 would like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. 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. 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. 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.

Thank you. Good afternoon, everyone. I appreciate you taking the time to join us today. I will start with how the quarter came together. 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 have been telling all year. Demand for our products stayed healthy across both the traditional commercial and one-to-four family rental markets. Our portfolio kept compounding and our credit book performed the way we have 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.

A 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 $200.81 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. We resolved $90.5 million of NPLs with net gains of $102.7 and 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 five-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 two securitizations during the quarter, and the fixed income markets remain very supportive, as evidenced by the tightest spreads we've seen in the last three 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 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. Yeah. Oh, go ahead.

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

Okay. Okay, cool. Thanks. On page three, just the highlights for the quarter.

Net income, as I mentioned, $25.2 million up, sorry, 3.2% decrease from the prior year, that was mainly driven by the tax rate that I mentioned. Core net income up 1.4%, portfolio NIM 3.66% above our targeted 3.5%. Down slightly from the 382 in the prior year, that level was elevated due to some cash collections in that prior period. In terms of production, I already hit on the numbers there, I won't reiterate those. Suffice it to say that we're very pleased with the way the business was performing and the production levels that we achieved. As I mentioned, looking forward, the pipeline looks very healthy. We expect those volumes to increase.

On the financing and capital side, I did already mention both the securitizations and the liquidity. Want folks to know that we feel like we're in a really good position to continue growing the portfolio. 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 four, 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 over 1,600 loans funded in the second quarter. 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%. The weighted average coupon on HFI originations for the last five-quarter average trend was at 10.2%. Really holding that 10% WAC level constant over the last five quarters.