Velocity Financial, Inc. Reports Second Quarter 2023 Results

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company), a leader in business purpose loans, reported net income of $12.2 million and core net income of $12.9 million for 2Q23, compared to net income of $10.6 million and core net income of $10.6 million in 2Q22. Earnings and core earnings per diluted share were $0.36 and $0.38, respectively, for 2Q23, compared to $0.31 and $0.31, for 2Q22.

“Velocity once again delivered strong quarterly earnings driven by 20% year-over-year portfolio growth,” said Chris Farrar, President and CEO. “Our second quarter results included solid portfolio net interest income and strong growth in other operating income driven by fair value gains and fees from loan production activity. Production volumes rebounded in the second quarter as forecast, increasing 19% quarter-over-quarter, with a weighted average coupon of 11%. We have been successful in mitigating much of the impact of higher rates by increasing loan coupons and volume simultaneously this quarter, which is a testament to the strong demand for investor properties and the skill of our loan origination team.”

⁽¹⁾ Core income and Core EPS are a non-GAAP measures that exclude nonrecurring and unusual activities from GAAP net income.
⁽²⁾ Liquidity includes unrestricted cash reserves of $34.0 million and available liquidity in unfinanced loans of $38.0 million.

Discussion of results:

• Net income in 2Q23 was $12.2 million, compared to $10.6 million for 2Q22
  • Driven by continued strong portfolio growth, NPL resolution activity and higher other operating income, partially offset by securitization costs and higher operating expenses

• Core net income⁽¹⁾ was $12.9 million, compared to $10.6 million for 2Q22

  • Core adjustments included equity incentive compensation expenses and costs related to the Company’s employee stock purchase plan (ESPP)

• Portfolio NIMin 2Q23 was 3.24%, compared to 4.10% for 2Q22, resulting from increased funding costs, partially offset by rising portfolio yields from higher loan coupons on recent loan production
• The GAAP pretax return on equity was 16.8% for 2Q23, compared to 16.6% for 2Q22

Discussion of results:

• Velocity’s total loan portfolio was $3.7 billion in UPB as of June 30, 2023, an increase of 20.4% from $3.1 billion in UPB as of June 30, 2022

  • Primarily driven by 32.9% Y/Y growth in loans collateralized by Investor 1-4 Rental properties and secondarily 10.4% Y/Y growth in Mixed Use properties

  • Approximately 75% of the loans in Velocity’s HFI portfolio are collateralized by properties that have a housing component (Investor 1-4 Rental, Multifamily and Mixed Use)

  • Loan prepayments totaled $105.8 million, a 21.6% Q/Q increase, and a 26.1% Y/Y decrease

• The UPB of Fair Value (FVO) loans was $688.1 million in UPB, or 18.5% of total HFI loans, as of June 30, 2023, an increase from $1.3 million in UPB, or 0.05% as of June 30, 2022

  • The company elected fair value accounting treatment for new HFI loan originations effective October 1, 2022

• The weighted average portfolio loan-to-value ratio was 68.2% as of June 30, 2023, unchanged from 68.2% as of June 30, 2022, and consistent with the five-quarter trailing average of 68.3%
• The weighted average total portfolio yield was 8.24% for 2Q23, an increase of 27 bps from 2Q22, driven by higher loan coupons on YTD 2023 loan production
• Portfolio-related debt cost for 2Q23 was 5.58%, an increase of 124 bps from 2Q22, driven by higher interest rates on securitization and warehouse financing

Discussion of results:

• Loan production in 2Q23 totaled $258.6 million in UPB, a 41.9% decrease from $445.4 million in UPB in 2Q22

  • Management’s decision to reduce production, along with higher interest rates, decreased volume from year-ago levels. On a Q/Q basis, production volume rose 19.2% from 1Q23.

• The weighted average coupon (WAC) on 2Q23 HFI loan production was 11.0%, an increase of 325 bps from 2Q22

Discussion of results:

• Nonperforming loans (NPL) totaled $371.2 million in UPB as of June 30, 2023, or 10.0% of loans HFI, compared to $252.3 million and 8.2%, respectively, as of June 30, 2022

  • NPL growth is driven by portfolio seasoning of prior year’s originations and an aggressive collection philosophy that places loans in foreclosure quickly for early delinquencies

• Charge-offs in 2Q23 totaled $716.6 thousand, compared to $37.8 thousand in 2Q22

  • The trailing five-quarter charge-off average was $279.6 thousand

• The loan loss reserve totaled $4.6 million as of June 30, 2023, a 5.7% decrease from $4.9 million as of June 30, 2022

  • Resulting from the run-off of the amortized cost HFI loan portfolio and a modestly improved macroeconomic outlook.

  • Loans carried at fair value are not subject to a CECL reserve