Form 8-K - Current report

Velocity Financial, Inc.

Date: March 8, 2024

/s/ Roland T. Kelly

Roland T. Kelly

Chief Legal Officer and General Counsel

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 7, 2024

Velocity Financial, Inc.

(Exact name of Registrant as Specified in Its Charter)


Delaware	001-39183	46-0659719
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

30699 Russell Ranch Road, Suite 295 Westlake Village, California		91362
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (818) 532-3700

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	VEL	The New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02 Results of Operations and Financial Condition.

On March 7, 2024, we issued a press release announcing financial results for the quarter and year ended December 31, 2023. The press release is attached as Exhibit 99 and is incorporated herein by reference.

The information provided in Item 2.02, including Exhibit 99, is intended to be furnished and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.

Item 9.01 Exhibits.


Exhibit Number		Description

99		Press Release dated March 7, 2024

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit 99

LOGO

Investors and Media:

Chris Oltmann

(818) 532-3708

Velocity Financial, Inc. Reports

Fourth Quarter and Full-Year 2023 Results

Fourth Quarter Highlights:

•

Net income of $17.4 million, up 105.1% from $8.5 million for 4Q22. Diluted EPS of $0.50, up $0.25 from $0.25 per share for 4Q22

•

Core net income⁽¹⁾ of $16.2 million, up 77.2% from $9.1 million for 4Q22. Core diluted EPS⁽¹⁾ of $0.46, up $0.19 from $0.27 per share for 4Q22

•

Loan production of $352.1 million in UPB, a 21.2% increase from 3Q23 and 26.8% from 4Q22

•

Year-to-date 2024 loan production through February 2024 totaled $254.4 million with an 11.1% weighted average coupon (WAC)

•

Nonperforming loans as a percentage of Held for Investment (HFI) loans was 9.7%, a decrease from 10.1% as of September 30, 2023, and an increase from 8.3% as of December 31, 2022

•

Resolutions of nonperforming loans (NPL) and real estate owned (REO) totaled $70.9 million in UPB

•

Realizing gains of $1.5 million or 102.2% of UPB resolved

•

Portfolio net interest margin (NIM) of 3.52%, up 18 bps Q/Q and an increase of 68 bps from 2.84% for 4Q22

•

Completed the VCC 2023-4 securitization totaling $202.9 million of securities issued

•

Liquidity⁽²⁾ of $63.2 million as of December 31, 2023

•

Recourse debt to equity ratio of 1.2 times

•

Book value per common share of $13.49 as of December 31, 2023, an increase from $13.00 as of September 30, 2023

Full-Year 2023 Highlights:

•

Total loan portfolio of $4.1 billion in UPB, an increase of 16.0% from December 31, 2022

•

Loan production volume of $1.1 billion in unpaid principal balance (UPB), a decrease from $1.8 billion for FY 2022

•

Net income of $52.3 million, compared to $32.2 million for FY 2022. Diluted earnings per share (EPS) of $1.52 in 2023, compared to $0.94 per share for FY 2022

⁽¹⁾	Core income and Core EPS are non-GAAP measures that exclude nonrecurring and unusual activities from GAAP net income.

⁽²⁾	Liquidity includes unrestricted cash reserves of $40.7 million and available liquidity in unfinanced loans of $22.5 million.

Fourth Quarter and Full-Year 2023 Results

•

Core Net Income⁽¹⁾totaled $53.4 million in 2023, compared to $42.2 million for FY 2022. Core diluted EPS⁽¹⁾of $1.54, compared to $1.24 per share for FY 2022

•

Net charge-off and gain/(loss) on REO activity for FY 2023 was a gain of $2.0 million, compared to a gain of $5.5 million for FY 2022

•

Portfolio NIM of 3.34%, compared to 3.64% for FY 2022

•

Pretax return on equity of 17.5%, an increase from 12.2% for FY 2022

Westlake Village, CA – March 7, 2024 – Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company), a leader in business purpose loans, reported net income of $52.3 million and core net income of $53.4 million for full-year 2023, compared to net income of $32.2 million and core net income of $42.2 million for the full-year 2022. Earnings and core earnings per diluted share were $1.52 and $1.54, respectively, for the full-year 2023, compared to $0.94 and $1.24 for the full-year 2022.

“I am pleased to announce that Velocity delivered record earnings for the fourth quarter and full year 2023, driven by strategic portfolio growth and proactive asset management.” said Chris Farrar, President and CEO. “While higher interest rates and rising inflation presented significant challenges for the mortgage market last year, our dedicated and experienced team turned these challenges into opportunities and delivered strong financial and operational results. We successfully increased loan production each quarter in 2023, while also increasing mortgage coupons by 86 basis point from the average rate for 4Q22. As a result, our net interest margins increased 68 basis points from 4Q22, and our asset management team continued to enhance shareholder value with positive recovery rates. Recently, we announced a $75 million capital raise we are deploying into accretive investments to fuel additional growth and attain our “5X25” goal of a $5 billion loan portfolio by 2025.”

Fourth Quarter Operating Results


KEY PERFORMANCE INDICATORS
($ in thousands)	4Q 2023			4Q 2022			$ Variance		% Variance
Pretax income	$	22,307		$	11,692		$	10,615		91	%
Net income	$	17,355		$	8,462		$	8,892		105	%
Diluted earnings per share	$	0.50		$	0.25		$	0.25		100	%
Core net income^(a)	$	16,161		$	9,118		$	7,043		77	%
Core diluted earnings per share^(a)	$	0.46		$	0.27		$	0.19		73	%
Pretax return on equity		20.66	%		12.37	%		n.a.		67	%
Core pretax return on equity^(a)		20.84	%		13.61	%		n.a.		53	%
Net interest margin - portfolio		3.52	%		2.84	%		n.a.		24	%
Net interest margin - total company		3.10	%		2.36	%		n.a.		31	%
Average common equity	$	431,891		$	378,007		$	53,884		14	%

^(a)	Core income, core diluted earnings per share and core pretax return on equity are non-GAAP measures. Please see the reconciliation to GAAP net income at the end of this release.

2 | Page

Fourth Quarter and Full-Year 2023 Results

Discussion of results:

•

Net income in 4Q23 was $17.4 million, compared to $8.5 million for 4Q22

•

Driven by FV gains on new production and a 48.9% increase in net interest income

•

Core net income⁽¹⁾ was $16.2 million, compared to $9.1 million for 4Q22

•

4Q23 Core adjustments include a California apportionment tax liability reduction, incentive compensation expenses and costs related to the Company’s employee stock purchase plan (ESPP)

•

Portfolio NIM in 4Q23 was 3.52%, compared to 2.84% for 4Q22, a 24.0% Y/Y increase driven by an increased average portfolio yield from higher loan coupons on recent loan production and growth in NPL resolution gains, partially offset by higher funding costs

•

The GAAP pretax return on equity was 20.7% for 4Q23, compared to 12.37% for 4Q22


TOTAL LOAN PORTFOLIO
($ of UPB in millions)	4Q 2023			4Q 2022			$ Variance		% Variance
*Held for Investment*
Investor 1-4 Rental	$	2,225		$	1,852		$	373		20	%
Mixed Use		475			443			32		7	%
Multi-Family		316			301			15		5	%
Retail		344			305			39		13	%
Warehouse		265			223			42		19	%
All Other		431			388			43		11	%

Total	$	4,056		$	3,512		$	543		15	%

*Held for Sale*
Investor 1-4 Rental	$	17		$	—		$	17		n.m.
Multi-Family		—			—			—		n.m.
Warehouse		—			—			—		n.m.
All Other		—			—			—		n.m.

Total Managed Loan Portfolio UPB	$	4,073		$	3,512		$	560		16	%

*Key loan portfolio metrics:*
Total loan count		10,477			8,893
Weighted average loan to value		67.8	%		68.2	%
Weighted average coupon		8.88	%		7.95	%
Weighted average total portfolio yield		8.70	%		7.51	%
Weighted average portfolio debt cost		5.75	%		5.23	%

n.m. - non meaningful

Discussion of results:

•

Velocity’s total loan portfolio was $4.1 billion in UPB as of December 31, 2023, an increase of 16.0% from $3.5 billion in UPB as of December 31, 2022

•

Primarily driven by 20.2% Y/Y growth in loans collateralized by Investor 1-4 Rental properties and a combined 15.2% Y/Y growth in loans collateralized by Retail and Warehouse properties

•

Loan prepayments totaled $118.0 million, an increase of 13.0% Q/Q and 35.7% Y/Y

3 | Page

Fourth Quarter and Full-Year 2023 Results

•

The UPB of Fair Value (FVO) loans was $1.27 billion, or 31.1% of total HFI loans, as of December 31, 2023, an increase from $268.6 million in UPB and 7.6%, as of December 31, 2022

•

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

•

The weighted average portfolio loan-to-value ratio was 67.8% as of December 31, 2023, down from 68.2% as of December 31, 2022, and consistent with the five-quarter trailing average of 68.8%

•

The weighted average total portfolio yield was 8.70% for 4Q23, an increase of 119 bps from 4Q22, driven by a 93 bps increase in average loan coupons from 4Q22

•

Portfolio-related debt cost for 4Q23 was 5.75%, an increase of 52 bps from 4Q22, driven by higher interest rates on 2023 securitizations and warehouse financing


LOAN PRODUCTION VOLUMES
($ in millions)	4Q 2023		4Q 2022		$ Variance		% Variance
Investor 1-4 Rental	$	183	$	169	$	14		9	%
Traditional Commercial		130		83		47		57	%
Short-term loans		39		26		13		49	%

Total loan production	$	352	$	278	$	74		27	%

Acquisitions	$	—	$	—

n.m. - non meaningful

Discussion of results:

•

Loan production for 4Q23 totaled $352.1 million in UPB, a 26.8% increase from $277.8 million in UPB for 4Q22

•

Driven by continued strong demand for business-purpose loans. On a Q/Q basis, production volume rose 21.2% from 3Q23.

•

The weighted average coupon (WAC) on 4Q23 HFI loan production was 11.2%, an increase of 86 bps from the WAC for 4Q22


HFI PORTFOLIO CREDIT PERFORMANCE INDICATORS
($ in thousands)	4Q 2023			4Q 2022			$ Variance			% Variance
Nonperforming loans^(a)	$	394,562		$	292,789		$	101,773			35	%
Average Nonperforming Loans	$	332,971		$	279,224		$	53,748			19	%
Nonperforming loans % total HFI Loans		9.7	%		8.3	%		n.a.			17	%
Total Charge Offs	$	744		$	—		$	744			n.a.
Charge-offs as a % of Avg. Nonperforming Loans^(b)		0.89	%		0.00	%		n.a.			n.a.
Loan Loss Reserve	$	4,769		$	4,893		$	(124	)		(3	)%

^(a)	Nonperforming/Nonaccrual loans include loans 90+ days past due, loans in foreclosure, bankruptcy and on nonaccrual.

^(b)	Reflects the annualized quarter-to-date charge-offs to average nonperforming loans for the period.

n.a.- not applicable

4 | Page

Fourth Quarter and Full-Year 2023 Results

Discussion of results:

•

Nonperforming loans (NPL) totaled $394.6 million in UPB as of December 31, 2023, or 9.7% of loans HFI, compared to $279.2 million and 8.3% as of December 31, 2022

•

NPLs as a percentage of HFI loans decreased 32 bps from 10.1% as of September 30, 2023, driven by portfolio growth and a significant slowdown in the pace of loans transitioning to foreclosure

•

On a year-over-year basis, NPL growth was driven by the older, legacy amortized cost portfolio, and the Company’s collection philosophy that places loans in foreclosure quickly for early delinquencies

•

Charge-offs for 4Q23 totaled $744.0 thousand, compared to no charge-offs for 4Q22

•

The trailing five-quarter charge-off average was $408.0 thousand

•

The loan loss reserve totaled $4.8 million as of December 31, 2023, a 2.5% decrease from $4.9 million as of December 31, 2022

•

Resulting from the continued run-off of the amortized cost HFI loan portfolio

•

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


NET REVENUES
($ in thousands)	4Q 2023			4Q 2022			$ Variance			% Variance
Interest income	$	86,269		$	65,632		$	20,638			31	%
Interest expense - portfolio related		(51,405	)		(40,854	)		(10,551	)		26	%

Net Interest Income - portfolio related		34,864			24,777			10,087			41	%
Interest expense - corporate debt		(4,140	)		(4,139	)		(1	)		0	%
Loan loss provision		(828	)		437			(1,264	)		(290	)%

Net interest income after provision for loan losses	$	29,897		$	21,076		$	8,821			42	%

Gain on disposition of loans		1,482			391			1,091			279	%
Unrealized (loss) gain on fair value loans		39,367			7,795			31,572			405	%
Unrealized gain (loss) on fair value of securitized debt		(24,085	)		—			(24,085	)		n.m.
Unrealized gain/(loss) on mortgage servicing rights		(1,208	)		(630	)		(578	)		92	%
Origination income		3,981			3,521			461			13	%
Bank interest income		1,716			—			1,716			n.m.
Other operating income (expense)		418			(288	)		706			(245	)%

Total Other operating income (expense)	$	21,670		$	10,789		$	10,881			101	%

Net Revenue	$	51,567		$	32,302		$	19,265			60	%

n.m. - non meaningful

Discussion of results:

•

Net Revenue in 4Q23 was $51.6 million, an increase of 59.6% compared to $32.3 million for 4Q22

•

Total net interest income, including corporate debt interest expense and loan loss provision, was $29.9 million for 4Q23, a 41.9% increase from $21.1 million for 4Q22

5 | Page

Fourth Quarter and Full-Year 2023 Results

•

Portfolio net Interest income was $34.9 million for 4Q23, an increase of 40.7% from 4Q22 resulting from the increased size of our portfolio and a 68 bps increase in NIM

•

Total other operating income was $21.7 million for 4Q23 as compared to $10.8 million for 4Q22 driven largely by the FVO gains from 4Q23 loan production

•

Gain on disposition of loans totaled $1.5 million for 4Q23, primarily resulting from loans transferred to REO

•

Net FVO marks on loans and securitized debt were $15.3 million as a result of new 4Q23 loan production and the decrease in Treasury rates during 4Q23

•

Origination income totaled $4.0 million, resulting from fee income realized on loans originated in 4Q23


OPERATING EXPENSES
($ in thousands)	4Q 2023		4Q 2022		$ Variance			% Variance
Compensation and employee benefits	$	15,143	$	11,793	$	3,350			28	%
Origination (income)/expense		173		1,328		(1,156	)		(87	)%
Securitization expenses		2,709		—		2,709			n.m.
Rent and occupancy		551		435		116			27	%
Loan servicing		4,636		3,244		1,392			43	%
Professional fees		1,733		1,091		642			59	%
Real estate owned, net		2,068		552		1,516			275	%
Other expenses		2,248		2,360		(112	)		(5	)%

Total operating expenses	$	29,260	$	20,804	$	8,456			41	%

n.m. - non meaningful

Discussion of results:

•

Operating expenses totaled $29.3 million for 4Q23, an increase of 40.7% from 4Q22, driven by higher compensation expenses from headcount growth and securitization expenses driven by impacts attributable to our fair value accounting election

•

Compensation expense totaled $15.1 million, compared to $11.8 million for 4Q22

•

Compensation growth was driven by hires of sales account executives and operational staff, in addition to commissions paid on higher loan production

•

Securitization expenses totaled $2.7 million, resulting from the issuance of the VCC 2023-4 securitization during the quarter. Securitization issuance costs are now expensed under fair value accounting and were deferred in 4Q22.

•

Loan servicing expense totaled $4.6 million, a 42.9% increase from $3.2 million for 4Q22, driven by the increase in our portfolio balance and nonperforming loans

•

REO expense totaled $2.1 million, an increase from $0.6 million for 4Q22, driven by increased valuation-related expenses

6 | Page

Fourth Quarter and Full-Year 2023 Results


SECURITIZATIONS
($ in thousands)	Securities		Balance at					Balance at
Trusts	Issued		12/31/2023		W.A. Rate			12/31/2022		W.A. Rate
2016-1 Trust		319,809	$	—		0.00	%	$	22,369		8.59	%
2017-2 Trust		245,601		45,869		3.97	%		59,183		3.92	%
2018-1 Trust		176,816		33,505		4.03	%		43,596		4.05	%
2018-2 Trust		307,988		76,871		4.48	%		93,792		4.46	%
2019-1 Trust		235,580		76,391		4.07	%		91,167		4.06	%
2019-2 Trust		207,020		66,340		3.42	%		82,508		3.46	%
2019-3 Trust		154,419		58,089		3.29	%		67,899		3.25	%
2020-1 Trust		248,700		106,976		2.85	%		136,643		2.89	%
2020-2 Trust		96,352		45,180		4.61	%		60,445		4.60	%
2021-1 Trust		251,301		171,748		1.76	%		196,969		1.73	%
2021-2 Trust		194,918		143,797		2.02	%		170,072		2.02	%
2021-3 Trust		204,205		158,043		2.46	%		178,038		2.44	%
2021-4 Trust		319,116		244,919		3.22	%		273,489		3.20	%
2022-1 Trust		273,594		236,358		3.93	%		256,667		3.93	%
2022-2 Trust		241,388		210,217		5.07	%		233,045		5.07	%
2022-MC1 Trust		84,967		31,508		6.90	%		54,528		6.91	%
2022-3 Trust		296,323		257,047		5.70	%		280,066		5.67	%
2022-4 Trust		308,357		274,419		6.24	%		301,856		6.23	%
2022-5 Trust		188,754		162,925		7.06	%		186,577		7.10	%
2023-1 Trust		198,715		177,250		7.02	%
2023-1R Trust		64,833		58,237		7.68	%
2023-2 Trust		202,210		188,805		7.19	%
2023-RTL1 Trust		81,608		81,608		8.24	%
2023-3 Trust		234,741		227,228		7.82	%
2023-4 Trust		202,890		201,813		8.38	%

	$	5,340,205	$	3,335,143		5.22	%	$	2,788,909		4.27	%

Discussion of results

•

The company completed one securitization during 4Q23 totaling $202.9 million of securities issued

•

The weighted average rate on Velocity’s outstanding securitizations was 5.22% as of December 31, 2023, an increase of 94 bps from December 31, 2022

7 | Page

Fourth Quarter and Full-Year 2023 Results


RESOLUTION ACTIVITIES

LONG-TERM LOANS

RESOLUTION ACTIVITY	FOURTH QUARTER 2023					FOURTH QUARTER 2022
($ in thousands)	UPB $		Gain / (Loss) $			UPB $		Gain / (Loss) $
Paid in full	$	22,342	$	826		$	8,188	$	329
Paid current		36,026		206			9,648		21
REO sold (a)		1,588		140			2,404		67

Total resolutions	$	59,956	$	1,172		$	20,240	$	417

Resolutions as a % of nonperforming UPB				102.0	%				102.1	%

SHORT-TERM AND FORBEARANCE LOANS

RESOLUTION ACTIVITY	FOURTH QUARTER 2023					FOURTH QUARTER 2022
($ in thousands)	UPB $		Gain / (Loss) $			UPB $		Gain / (Loss) $
Paid in full	$	2,770	$	37		$	4,092	$	82
Paid current		7,560		13			457		—
REO sold		604		316			529		74

Total resolutions	$	10,934	$	366		$	5,078	$	156

Resolutions as a % of nonperforming UPB				103.3	%				103.1	%

Grand total resolutions	$	70,890	$	1,538		$	25,318	$	572

Grand total resolutions as a % of nonperforming UPB				102.2	%				102.3	%

Discussion of results:

•

NPL resolution totaled $70.9 million in UPB, realizing 102.2% of UPB resolved compared to $25.3 million in UPB and realization of 102.3% of UPB resolved for 4Q22

•

4Q23 NPL resolutions represented 18.3% of nonperforming loan UPB as of September 30, 2023

•

The UPB of loan resolutions in 4Q23 was 41.4% higher than the recent five-quarter resolution average of $50.1 million in UPB

8 | Page

Fourth Quarter and Full-Year 2023 Results

Full-Year 2023 Operating Results


FULL-YEAR OPERATING RESULTS
($ in thousands)	FY 2023			FY 2022			$ Variance			% Variance
Investor 1-4 Rental	$	617		$	994		$	(377	)		(38	)%
Traditional Commercial		381			652			(271	)		(42	)%
Short-term loans		120			116			4			4	%

Total Loan production	$	1,118		$	1,762		$	(644	)		(37	)%

Net Interest Margin - Portfolio		3.34	%		3.64	%		n.a.			(8	)%

Average Nonperforming Loans	$	328,105		$	266,129		$	61,976			23	%

Total Net Interest Income^(a)		105,836			81,996		$	23,840			29.1	%
Total Other Income		65,910			24,320			41,590			171.0	%
Total Expenses		119,472			74,106			45,365			61.2	%

Net Income	$	52,273		$	32,211		$	20,062			62	%

Diluted EPS	$	1.52		$	0.94		$	0.57			61	%

Core Income^(b)	$	53,384		$	42,153		$	11,231			26.6	%

Core Diluted EPS^(b)	$	1.54		$	1.24		$	0.30			24.5	%

Pretax Return on Equity		17.5	%		12.2	%		n.a.			42.8	%

^(a)	After provision for loan losses.

^(b)	Core income is a non-GAAP measure. Please see the reconciliation to GAAP net income at the end of this release.

n.a.- not applicable


CHARGE-OFFS, GAIN/(LOSS) ON REO	Year Ended
($ in thousands)	FY 2023			FY 2022			$ Variance			% Variance
Average nonperforming loans for the period^(a)	$	328,105		$	266,129		$	61,976			23	%
Charge-offs		(2,039	)		(521	)	$	(1,518	)		291	%
Charge-offs / Average nonperforming loans for the period⁽¹⁾		-0.62	%		-0.20	%	$	(0	)		217	%
Gain on transfer of REO		7,412			3,408		$	4,004			117	%
Gain on sale of REO		568			2,939		$	(2,371	)		(81	)%
REO valuations, net		(3,903	)		(364	)	$	(3,539	)		972	%

Total gain/(loss) on REO	$	2,038		$	5,462		$	(3,424	)		(63	)%

^(a)	Reflects the monthly average of nonperforming loans held for investment during the period.

Discussion of results:

•

Loan production in FY 2023 totaled $1.1 billion in UPB, a 36.5% decrease from $1.8 billion in UPB for 2022

•

Driven by higher interest rates throughout most of FY 2023

•

Net interest margin (NIM) was 3.34% for FY 2023, a 30 bps decrease from 3.64% for FY 2022

•

Driven by higher securitization and warehouse financing costs

9 | Page

Fourth Quarter and Full-Year 2023 Results

•

Partially offset by a higher weighted average coupon on FY 2023 loan production of 11.1% compared to 8.0% for FY 2022

•

Average NPLs were $328.1 million for FY 2023, an increase of 23.3% from the FY 2022 average of $266.1 million

•

Average NPLs as a percentage of average loans HFI were 8.7% for FY 2023, compared to 8.6% for FY 2022

•

Net charge-off and gain/(loss) on REO activity for FY 2023 was a gain of $2.0 million, compared to a gain of $5.5 million for FY 2022

•

Net income totaled $52.3 million for FY 2023, a 62.3% increase from $32.2 million for FY 2022

•

Net interest income (after corporate interest expense and provision for loan losses) totaled $105.8 million, a 29.1% increase from $82.0 million in FY 2022, driven by HFI portfolio growth and higher coupons on FY 2023 loan production

•

Other income totaled $65.9 million, a 171.0% increase from $24.3 million in FY 2022, driven by the net impact of the Company’s fair value accounting election for loan production originated after October 1, 2022, and unrealized fair value losses on securitized debt

•

Expenses totaled $119.5 million, a 61.2% increase from $74.1 million in FY 2022, driven by an increase in compensation expense related to the Company’s fair value accounting election and securitization costs resulting from the issuance of six VCC securitizations in 2023. Under fair value accounting, securitization costs are expensed as incurred, whereas previously, they were deferred and amortized over the life of the securitization.

•

Core net income⁽¹⁾ totaled $53.4 million, a 26.6% increase from $42.2 million for FY 2022

•

Core income adjustments totaled $1.1 million, compared to $9.9 million for FY 2022

•

Core diluted EPS was $1.54 per share, a 24.5% increase from $1.24 per share for FY 2022

•

Pretax return on equity was 17.5%, a 42.8% increase from 12.2% for FY 2022

10 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity’s executive management team will host a conference call and webcast to review 4Q23 and Full-Year 2023 financial results on March 7^th, 2024, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time.

Webcast Information

The conference call will be webcast live in listen-only mode and can be accessed through the Events and Presentations section of the Velocity Financial Investor Relations website https://www.velfinance.com/events-and-presentations. To listen to the webcast, please visit Velocity’s website at least 15 minutes before the call to register, download, and install any needed software. An audio replay of the call will also be available on Velocity’s website following the completion of the conference call.

Conference Call Information

To participate by phone, please dial-in 15 minutes before the start time to allow for wait times to access the conference call. The live conference call will be accessible by dialing 1-833-316-0544 in the U.S. and Canada and 1-412-317-5725 for international callers. Callers should ask to join the Velocity Financial, Inc. conference call.

A replay of the call will be available through midnight on March 14, 2024, and can be accessed by dialing 1-877-344-7529 in the U.S. and 855-669-9658 in Canada or 1-412-317-0088 internationally. The passcode for the replay is #7107943. The replay will also be available on the Investor Relations section of the Company’s website under “Events and Presentations.”

About Velocity Financial, Inc.

Based in Westlake Village, California, Velocity is a vertically integrated real estate finance company that primarily originates and manages business purpose loans secured by 1-4-unit residential rental and small commercial properties. Velocity originates loans nationwide across an extensive network of independent mortgage brokers built and refined over 19 years.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles (GAAP), the Company uses non-GAAP core net income and core diluted EPS, which are non-GAAP financial measures.

Non-GAAP core net income and non-GAAP core diluted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per diluted share, adjusted to eliminate the effect of certain costs incurred from activities that are not normal recurring operating expenses, such as COVID-stressed charges and recoveries of loan loss provision, nonrecurring debt amortization, the impact of operational measures taken to address the COVID-19 pandemic and workforce reduction costs, and costs associated with acquisitions. To calculate non-GAAP core diluted EPS, we use the weighted-average number of shares of common stock outstanding that is used to calculate net income per diluted share under GAAP.

11 | Page

Fourth Quarter and Full-Year 2023 Results

We have included non-GAAP core net income and non-GAAP core diluted EPS because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe that non-GAAP core net income and non-GAAP core diluted EPS provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain items that we expect to be nonrecurring.

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

For more information on Core Income, please refer to the section of this press release below titled “Adjusted Financial Metric Reconciliation to GAAP Net Income” at the end of this press release.

Forward-Looking Statements

Some of the statements contained in this press release may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to anticipated results, expectations, projections, plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” ”position,” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions.

The forward-looking statements contained in this press release reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. While forward-looking statements reflect our good faith projections, assumptions, and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes, except as required by applicable law. Factors that could cause our results to differ materially include, but are not limited to, (1) the continued course and severity of the COVID-19 pandemic and its direct and indirect impacts, (2) general economic

12 | Page

Fourth Quarter and Full-Year 2023 Results

and real estate market conditions, including the risk of recession (3) regulatory and/or legislative changes, (4) our customers’ continued interest in loans and doing business with us, (5) market conditions and investor interest in our future securitizations, (6) the continued conflict in Ukraine and (7) changes in federal government fiscal and monetary policies.

Additional information relating to these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements can be found in the section titled ‘‘Risk Factors” in our Form 10-Q filed with the SEC on May 14, 2020, as well as other cautionary statements we make in our current and periodic filings with the SEC. Such filings are available publicly on our Investor Relations web page at www.velfinance.com.

13 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity Financial, Inc.

Consolidated Statements of Financial Condition


	Quarter Ended
	12/31/2023			9/30/2023			6/30/2023			3/31/2023			12/31/2022
	Audited			Unaudited			Unaudited			Unaudited			Audited
(In thousands)
Assets
Cash and cash equivalents	$	40,566		$	29,393		$	33,987		$	39,397		$	45,248
Restricted cash		21,361			17,703			16,786			16,636			16,808
Loans held for sale, at fair value		17,590			19,536			—			18,081			—
Loans held for investment, at fair value		1,306,072			951,990			705,330			450,732			276,095
Loans held for investment		2,828,123			2,945,840			3,057,940			3,169,280			3,272,390

Total loans, net		4,151,785			3,917,366			3,763,270			3,638,093			3,548,485
Accrued interest receivables		27,028			24,756			22,602			20,931			20,463
Receivables due from servicers		85,077			70,139			63,896			64,133			65,644
Other receivables		8,763			236			1,306			2,188			1,075
Real estate owned, net		44,268			29,299			20,388			21,778			13,325
Property and equipment, net		2,785			2,861			3,023			3,209			3,356
Deferred tax asset		2,339			705			1,878			2,543			5,033
Mortgage Servicing Rights, at fair value		8,578			9,786			9,445			9,143			9,238
Derivative assets		—			1,261			—			—			—
Goodwill		6,775			6,775			6,775			6,775			6,775
Other assets		5,248			7,028			7,789			12,268			13,525

Total Assets	$	4,404,573		$	4,117,308		$	3,951,145		$	3,837,094		$	3,748,975

Liabilities and members’ equity
Accounts payable and accrued expenses	$	121,969		$	97,869		$	95,344		$	84,976		$	91,525
Secured financing, net		211,083			210,774			210,464			210,155			209,846
Securitized debt, net		2,418,811			2,504,334			2,622,547			2,657,469			2,736,290
Securitized debt, at fair value		877,417			669,139			381,799			194,941			—
Warehouse & repurchase facilities		334,755			215,176			235,749			298,313			330,814
Derivative liability		3,665			—			—			—			—

Total Liabilities		3,967,700			3,697,292			3,545,903			3,445,854			3,368,475
Stockholders’ Equity
Stockholders’ equity		433,444			416,398			401,707			387,624			376,811
Noncontrolling interest in subsidiary		3,429			3,618			3,535			3,616			3,689

Total equity		436,873			420,016			405,242			391,240			380,500

Total Liabilities and members’ equity	$	4,404,573		$	4,117,308		$	3,951,145		$	3,837,094		$	3,748,975

Book value per share	$	13.49		$	13.00		$	12.57		$	12.18		$	11.89

Shares outstanding		32,395	⁽¹⁾		32,314	⁽²⁾		32,239	⁽³⁾		32,112	⁽⁴⁾		31,996	⁽⁵⁾

⁽¹⁾	Based on 32,395,423 common shares outstanding as of December 31, 2023, and excludes unvested shares of common stock authorized for incentive compensation totaling 470,413.

⁽²⁾	Based on 32,313,744 common shares outstanding as of September 30, 2023, and excludes unvested shares of common stock authorized for incentive compensation totaling 589,634.

⁽³⁾	Based on 32,238,715 common shares outstanding as of June 30, 2023, and excludes unvested shares of common stock authorized for incentive compensation totaling 502,913.

⁽⁴⁾	Based on 32,111,906 common shares outstanding as of March 31, 2023, and excludes unvested shares of common stock authorized for incentive compensation totaling 490,526.

⁽⁵⁾	Based on 31,955,730 common shares outstanding as of December 31, 2022, and excludes unvested shares of common stock authorized for incentive compensation totaling 494,139.

14 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity Financial, Inc.

Consolidated Statements of Income (Quarters)


	Quarter Ended
($ in thousands)	12/31/2023			9/30/2023			6/30/2023		3/31/2023			12/31/2022
($ in thousands)	Unaudited			Unaudited			Unaudited		Unaudited			Unaudited
Revenues
Interest income	$	86,269		$	79,088		$	74,897	$	70,521		$	65,632
Interest expense - portfolio related		51,405			47,583			45,451		42,029			40,854

Net interest income - portfolio related		34,864			31,505			29,446		28,492			24,778
Interest expense - corporate debt		4,140			4,138			4,139		4,139			4,139

Net interest income		30,724			27,367			25,307		24,353			20,639
Provision for loan losses		828			154			298		636			(437	)

Net interest income after provision for loan losses		29,897			27,213			25,009		23,717			21,076
Other operating income
Gain on disposition of loans		1,482			3,606			1,237		1,913			391
Unrealized gain (loss) on fair value loans		39,367			(1,284	)		2,413		7,354			7,795
Unrealized gain (loss) on fair value securitized debt		(24,085	)		9,692			5,560		(170	)		—
Origination income		3,981			3,323			2,735		2,411			3,521
Bank interest income		1,716			1,342			1,188		948			—
Other income (expense)		418			340			601		482			(288	)

Total other operating income		21,670			17,360			14,036		12,842			11,419

Net revenue		51,567			44,573			39,046		36,560			32,495

Operating expenses
Compensation and employee benefits		15,143			12,523			10,670		10,008			11,793
Origination expenses		173			273			123		(50	)		1,328
Securitizations expenses		2,709			4,930			2,699		2,584			—
Rent and occupancy		551			472			458		446			435
Loan servicing		4,636			4,901			4,267		3,828			3,244
Professional fees		1,733			854			1,056		955			1,091
Real estate owned, net		2,068			1,239			1,018		1,829			552
Other operating expenses		2,248			2,142			1,931		2,202			2,360

Total operating expenses		29,260			27,334			22,222		21,802			20,804

Income before income taxes		22,307			17,239			16,824		14,757			11,692
Income tax expense		5,141			5,070			4,602		4,021			3,465

Net income		17,166			12,169			12,222		10,736			8,227

Net income attributable to noncontrolling interest		(189	)		83			39		87			(235	)

Net income attributable to Velocity Financial, Inc.		17,355			12,086			12,183		10,649			8,462

Less undistributed earnings attributable to participating securities		225			183			185		160			127

Net earnings attributable to common shareholders	$	17,130		$	11,903		$	11,998	$	10,489		$	8,335

Basic earnings (loss) per share	$	0.53		$	0.37		$	0.37	$	0.33		$	0.26

Diluted earnings (loss) per common share	$	0.50		$	0.35		$	0.36	$	0.31		$	0.25

Basic weighted average common shares outstanding		32,326			32,275			32,122		32,098			31,923

Diluted weighted average common shares outstanding		34,991			34,731			34,140		34,052			34,063

15 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity Financial, Inc.

Consolidated Statements of Income (Years)


	Year Ended
($ in thousands)	12/31/2023			12/31/2022
($ in thousands)	Audited			Audited
Revenues
Interest income	$	310,776		$	240,343
Interest expense - portfolio related		186,468			127,723

Net interest income - portfolio related		124,308			112,620
Interest expense - corporate debt		16,556			29,472

Net interest income		107,750			83,148
Provision for loan losses		1,915			1,152

Net interest income after provision for loan losses		105,836			81,996
Other operating income
Gain on disposition of loans		8,238			7,107
Unrealized gain (loss) on fair value loans		47,850			8,265
Unrealized gain (loss) on fair value securitized debt		(9,002	)		—
Origination income		12,450			5,225
Bank interest income		5,194			—
Other income (expense)		1,840			1,637

Total other operating income		65,910			24,320

Net revenue		171,745			106,316

Operating expenses
Compensation and employee benefits		48,344			30,458
Origination expenses		518			3,985
Securitizations expenses		12,923			—
Rent and occupancy		1,927			1,748
Loan servicing		17,631			12,298
Professional fees		4,599			4,179
Real estate owned, net		6,153			(70	)
Other operating expenses		8,524			9,166

Total operating expenses		100,618			61,764

Income before income taxes		71,127			44,553
Income tax expense		18,834			12,033

Net income		52,293			32,519

Net income attributable to noncontrolling interest		19			308

Net income attributable to Velocity Financial, Inc.		52,273			32,211

Less undistributed earnings attributable to participating securities		753			491

Net earnings attributable to common shareholders	$	51,520		$	31,720

Basic earnings (loss) per share	$	1.60		$	0.99

Diluted earnings (loss) per common share	$	1.52		$	0.94

Basic weighted average common shares outstanding		32,206			31,913

Diluted weighted average common shares outstanding		34,484			34,131

16 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity Financial, Inc.

Net Interest Margin – Portfolio Related and Total Company

(Unaudited)

Quarters:


	Quarter Ended December 31, 2023							Quarter Ended September 30, 2023							Quarter Ended December 31, 2022
*($ in thousands)*	Average Balance		Interest Income / Expense		Average Yield / Rate⁽¹⁾			Average Balance		Interest Income / Expense		Average Yield / Rate⁽¹⁾			Average Balance		Interest Income / Expense		Average Yield / Rate⁽¹⁾
Loan portfolio:
Loans held for sale	$	14,918						$	3,170						$	64,699
Loans held for investment		3,949,642							3,770,460							3,430,296

Total loans	$	3,964,560	$	86,268		8.70	%	$	3,773,631	$	79,088		8.38	%	$	3,494,995	$	65,632		7.51	%

Debt:
Warehouse and repurchase facilities	$	255,266		6,040		9.46	%	$	192,855		4,943		10.25	%	$	286,094		5,776		8.08	%
Securitizations		3,320,467		45,365		5.46	%		3,186,756		42,640		5.35	%		2,838,315		35,078		4.94	%

Total debt - portfolio related		3,575,733		51,405		5.75	%		3,379,610		47,583		5.63	%		3,124,409		40,854		5.23	%
Corporate debt		215,000		4,138		7.70	%		215,000		4,138		7.70	%		215,000		4,139		7.70	%

Total debt	$	3,790,733	$	55,543		5.86	%	$	3,594,610	$	51,721		5.76	%	$	3,339,409	$	44,993		5.39	%

Net interest spread - portfolio related ⁽²⁾						2.95	%						2.75	%						2.28	%
Net interest margin - portfolio related						3.52	%						3.34	%						2.84	%
Net interest spread - total company ⁽³⁾						2.84	%						2.63	%						2.11	%
Net interest margin - total company						3.10	%						2.90	%						2.36	%

⁽¹⁾	Annualized.

⁽²⁾	Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

⁽³⁾	Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

Years:


	Year Ended December 31, 2023							Year Ended December 31, 2022							Year Ended December 31, 2021
*($ in thousands)*	Average Balance		Interest Income / Expense		Average Yield / Rate			Average Balance		Interest Income / Expense		Average Yield / Rate			Average Balance		Interest Income / Expense		Average Yield / Rate
Loan portfolio:
Loans held for sale	$	8,615						$	49,194						$	15,794
Loans held for investment		3,716,582							3,043,003							2,110,053

Total loans	$	3,725,197	$	310,775		8.34	%	$	3,092,198	$	240,343		7.77	%	$	2,125,847	$	181,968		8.56	%

Debt:
Warehouse and repurchase facilities	$	227,911		21,726		9.53	%	$	292,490		17,454		5.97	%	$	183,663		9,706		5.28	%
Securitizations		3,113,500		164,742		5.29	%		2,458,332		110,269		4.49	%		1,630,385		75,680		4.64	%

Total debt - portfolio related		3,341,411		186,468		5.58	%		2,750,822		127,723		4.64	%		1,814,048		85,386		4.71	%
Corporate debt		215,000		16,556		7.70	%		205,979		29,472		14.31	%		154,890		20,609		13.31	%

Total debt	$	3,556,411	$	203,024		5.71	%	$	2,956,801	$	157,195		5.32	%	$	1,968,938	$	105,995		5.38	%

Net interest spread - portfolio related⁽¹⁾						2.76	%						3.13	%						3.85	%
Net interest margin - portfolio related						3.34	%						3.64	%						4.54	%
Net interest spread - total company⁽²⁾						2.63	%						2.46	%						3.18	%
Net interest margin - total company						2.89	%						2.69	%						3.57	%

⁽¹⁾	Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

⁽²⁾	Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

17 | Page

Fourth Quarter and Full-Year 2023 Results

Velocity Financial, Inc.

Adjusted Financial Metric Reconciliation to GAAP Net Income

(Unaudited)

Quarters:


Core Net Income
	Quarter Ended
($ in thousands)	12/31/2023			9/30/2023		6/30/2023		3/31/2023		12/31/2022
Net Income	$	17,355		$	12,086	$	12,183	$	10,649	$	8,462
Tax liability reduction		(1,866	)		—		—		—		—
Equity award & ESPP costs		673			832		745		728		656

Core Net Income	$	16,161		$	12,918	$	12,928	$	11,376	$	9,118

Diluted weighted average common shares outstanding		34,991			34,731		34,140		34,052		34,063
Core diluted earnings per share	$	0.46		$	0.37	$	0.38	$	0.33	$	0.27

Years:


Core Net Income
	Year Ended
($ in thousands)	12/31/2023			12/31/2022
Net Income	$	52,273		$	32,211
Corporate debt refinancing costs		—			9,286
Tax liability reduction		(1,866	)		—
Equity award & ESPP costs		2,977			656

Core Net Income	$	53,384		$	42,153

Diluted weighted average common shares outstanding	$	34,484		$	34,131
Core diluted earnings per share	$	1.54		$	1.24

18 | Page

Document and Entity Information	Mar. 07, 2024
Cover [Abstract]
Amendment Flag	false
Entity Central Index Key	0001692376
Document Type	8-K
Document Period End Date	Mar. 07, 2024
Entity Registrant Name	Velocity Financial, Inc.
Entity Incorporation State Country Code	DE
Entity File Number	001-39183
Entity Tax Identification Number	46-0659719
Entity Address, Address Line One	30699 Russell Ranch Road
Entity Address, Address Line Two	Suite 295
Entity Address, City or Town	Westlake Village
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	91362
City Area Code	(818)
Local Phone Number	532-3700
Written Communications	false
Soliciting Material	false
Pre Commencement Tender Offer	false
Pre Commencement Issuer Tender Offer	false
Security 12b Title	Common stock, par value $0.01 per share
Trading Symbol	VEL
Security Exchange Name	NYSE
Entity Emerging Growth Company	false