UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Identification No.) Registrant's telephone number, including area code: (818) 532-3700 Securities registered pursuant to Section 12(b) of the Act: | | Trading | | | --- | --- | --- | | Title ...

Production Volume Continues Strong Growth Trend $116.3 $163.1 $154.3 $183.2 $167.1 $79.7 $73.5 $97.5 $130.3 $166.6 $20.9 $22.1 $38.8 $38.6 $45.0 $217.0 $258.6 $290.6 $352.1 $378.7 1Q23 2Q23 3Q23 4Q23 1Q24 Investor 1-4 Rental Traditional Commercial Short-term Loan Products ($ of UPB in millions) Loan Portfolio $265.0 $276.3 $390.8 1Q23 4Q23 1Q24 Investor 1-4 Rental Mixed Use Multifamily – Driven by growth in loans collateralized by Inv. 1-4 Rental and "Other" Commercial properties | --- | --- | --- | --- | | ...

Loan Originations and Portfolio - The company originated 2,955 loans totaling $1.1 billion for investment in 2023, compared to 4,135 loans totaling $1.7 billion in 2022[45]. - The company funded 2,930 loans sourced by 1,046 different mortgage brokers in 2023, representing a small portion of the approximately 885,933 state-licensed mortgage originators in the U.S.[41]. - The primary product, a 30-year fixed-rate amortizing term loan, comprised 90.0% of loan originations in 2023, reflecting strong market demand[42]. - Total loans increased to $4,072.9 million in 2023 from $3,512.5 million in 2022, representing a growth of 16.0%[120]. - Total loan originations for 2023 were $1,117.8 million, a decrease of $644.0 million or 36.6% from $1,761.9 million in 2022[125]. - The company originated 2,965 loans in 2023, a decrease from 4,135 loans in 2022[125]. Loan Portfolio Performance - As of December 31, 2023, the company's portfolio of loans held for investment totaled $4.1 billion in unpaid principal balance, with an average loan balance of approximately $389,000[45]. - The weighted average loan-to-value (LTV) ratio at origination for loans held for investment was 67.7%, with borrower equity providing significant protection against credit losses[47]. - The loan portfolio totaled $4.1 billion with an average loan balance of approximately $389,000 and a weighted average loan-to-value ratio of 67.8%[79]. - Nonperforming loans increased to $394.6 million, accounting for 9.69% of total loans in 2023, up from 8.34% in 2022[120]. - As of December 31, 2023, nonperforming loans totaled $394.6 million, representing 9.7% of the held for investment loan portfolio, an increase from $292.8 million (8.3%) in 2022[134]. - The allowance for loan losses decreased to $4.8 million in 2023 from $4.9 million in 2022[128]. - The allowance for loan losses is maintained at a level deemed adequate by management to provide for expected losses in the portfolio at the balance sheet date[99]. Financial Performance - The company generated pre-tax income of $71.1 million and net income of $52.3 million for the year ended December 31, 2023[81]. - Net income rose to $52,293,000 in 2023, up from $32,519,000 in 2022, marking a growth of 60.9%[162]. - Earnings per common share increased to $1.60 for 2023, up from $0.99 in 2022[182]. - Interest income increased by $70.4 million, or 29.3%, to $310.8 million for the year ended December 31, 2023, compared to $240.3 million for 2022[184]. - Net interest income after provision for loan losses increased by 29.1% over the prior year, driven by higher net interest income[189]. - The company grew its portfolio-related net interest income by $11.7 million or 10.4%, from $112.6 million in 2022 to $124.3 million in 2023, primarily due to new loan originations[112]. Securitization Activities - The company executed 31 securitizations of investor real estate loans, issuing $6.4 billion in principal amount of securities from 2011 to 2023[30]. - In August 2023, the company completed its first securitization collateralized by its short-term loan product, issuing $81.6 million in securities[51]. - In January 2024, the company completed the securitization of $221.1 million of investor real estate loans and issued $75 million principal amount of five-year Senior Secured Notes at an interest rate of 9.875%[88]. Operating Expenses and Management - Total operating expenses increased by 62.9%, or $38.9 million, to $100.6 million during the year ended December 31, 2023, from $61.8 million in 2022[195]. - Compensation and employee benefits increased from $30.5 million in 2022 to $48.3 million in 2023, a rise of 58.7% driven by fair value option accounting on new loan originations[197]. - Origination expenses decreased significantly from $4.0 million in 2022 to $0.5 million in 2023, a reduction of 87.0% due to improved cost management[198]. - Loan servicing expenses rose from $12.3 million in 2022 to $17.6 million in 2023, an increase of 43.4% due to a larger loan portfolio[200]. Market Conditions and Competitive Landscape - The investor real estate loan market is highly competitive, impacting the company's profitability and growth, with competitors potentially offering more favorable rates and terms[114]. - The company anticipates that future performance will depend on growing origination/acquisition volume, leveraging its existing broker network while expanding with new brokers[112]. Debt and Interest Management - The company entered into a five-year $215.0 million syndicated corporate debt agreement in March 2022, bearing interest at a fixed rate of 7.125%[51]. - Corporate debt interest expense decreased to $16,556,000 in 2023 from $29,472,000 in 2022, indicating improved cost management[167]. - Total debt increased to $3,556,411,000 in 2023 from $2,956,801,000 in 2022, reflecting a growth of 20.3%[159]. - Cost of funds for the portfolio increased to 5.58% in 2023 from 4.64% in 2022, indicating rising borrowing costs[154]. Employee and Organizational Growth - As of December 31, 2023, the company had a total of 253 employees, reflecting a 30% increase from the prior year[58].

Financial Data and Key Metrics Changes - The company reported a core net income increase of 77% year-over-year, marking a record quarter and the best year in its history [32][38] - The total loan portfolio reached $4.1 billion, a 5% increase from Q3 and a 16% increase year-over-year [11][12] - The net interest margin (NIM) increased by 18 basis points from Q3 and 68 basis points year-over-year, reflecting strong growth in originations and improved portfolio yield [13][36] Business Line Data and Key Metrics Changes - Loan production for Q4 was over $352 million, a 21% increase from $290 million in Q3 and a nearly 27% increase year-over-year [9][10] - The weighted average coupon for new originations remained constant at 11% throughout the year, with a weighted average loan-to-value (LTV) ratio of 65% in the last six months of 2023 [10][12] Market Data and Key Metrics Changes - The company noted that banks continue to be constrained in extending credit, which has allowed it to grow its portfolio with compelling risk-adjusted spreads [33][36] - The securitization market showed improvement, benefiting from lower base rates and tighter spreads, leading to a significant decrease in the cost of funds [35][36] Company Strategy and Development Direction - The company aims to grow its portfolio to at least $5 billion by 2025, focusing on delivering value to customers and shareholders [37][23] - The management emphasized the importance of maintaining credit discipline while pursuing growth opportunities [49][50] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the market position, expecting strong demand and favorable asset resolutions in 2024 [22][23] - The company highlighted the ongoing stress in some segments of the larger commercial real estate markets but noted healthy demand in its niche [33][36] Other Important Information - The company completed a securitization deal in Q4 and issued $75 million of senior secured notes to support growth [20][21] - The nonperforming loan (NPL) rate decreased to 9.7% from 10.1% at the end of Q3, reflecting successful collection efforts [14][15] Q&A Session Summary Question: Outlook for production and funding in 2024 - Management indicated that production is expected to grow, with a mix of 1 to 4 family loans dominating, and they plan to securitize every 2 to 3 months [25][45] Question: Thoughts on the Century acquisition and fee income - Management expects significant fee income from the Century acquisition in the second half of the year, with a pipeline nearly 4 times larger than last year [26] Question: Risk management perspective on loan growth - Management emphasized the importance of maintaining credit discipline and not sacrificing margins for volume [48][49] Question: Expectations for quarterly production numbers - Management did not provide exact guidance but expected growth throughout the year, consistent with previous trends [51] Question: Capital growth support from recent fundraising - The recent capital raise provides a long runway for growth ambitions, with retained earnings also fueling expansion [52] Question: Success in asset resolution and delinquency management - Management attributed success to disciplined underwriting and a talented asset management team, with favorable resolution times varying by state [69][70]

[Financial Highlights](index=1&type=section&id=Financial%20Highlights) [Fourth Quarter 2023 Highlights](index=1&type=section&id=Fourth%20Quarter%202023%20Highlights) Velocity Financial reported strong Q4 2023 profitability with net income more than doubling, diluted EPS doubling, and robust loan production growth. | Metric | 4Q 2023 | 4Q 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $17.4 million | $8.5 million | +105.1% | | Diluted EPS | $0.50 | $0.25 | +100.0% | | Core Net Income | $16.2 million | $9.1 million | +77.2% | | Core Diluted EPS | $0.46 | $0.27 | +70.4% | | Loan Production (UPB) | $352.1 million | $277.8 million (est.) | +26.8% | | Portfolio NIM | 3.52% | 2.84% | +68 bps | - Nonperforming loans (NPLs) as a percentage of Held for Investment (HFI) loans decreased to **9.7%** from 10.1% in Q3 2023, but increased from 8.3% in Q4 2022[4](index=4&type=chunk) - The company resolved **$70.9 million** in UPB of nonperforming loans and real estate owned (REO), realizing gains of **102.2%** of the UPB resolved[4](index=4&type=chunk) - Book value per common share increased to **$13.49** as of December 31, 2023, up from $13.00 at the end of the previous quarter[4](index=4&type=chunk) [Full-Year 2023 Highlights](index=1&type=section&id=Full-Year%202023%20Highlights) Velocity Financial achieved record full-year earnings in 2023 with net income rising to $52.3 million and total loan portfolio growth, despite a decrease in loan production volume. | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $52.3 million | $32.2 million | +62.4% | | Diluted EPS | $1.52 | $0.94 | +61.7% | | Core Net Income | $53.4 million | $42.2 million | +26.5% | | Core Diluted EPS | $1.54 | $1.24 | +24.2% | | Loan Production (UPB) | $1.1 billion | $1.8 billion | -38.9% | | Total Loan Portfolio (UPB) | $4.1 billion | $3.5 billion (est.) | +16.0% | [Management Commentary](index=2&type=section&id=Management%20Commentary) [CEO's Perspective](index=2&type=section&id=CEO%27s%20Perspective) CEO Chris Farrar highlighted record earnings driven by strategic portfolio growth and proactive asset management, with a focus on achieving a $5 billion loan portfolio by 2025. - Management credits record earnings to strategic portfolio growth and proactive asset management, turning market challenges into opportunities[6](index=6&type=chunk) - Loan production increased each quarter in 2023, with mortgage coupons rising **86 basis points** from the average rate in Q4 2022[6](index=6&type=chunk) - The company is focused on its "**5X25**" goal, aiming for a **$5 billion** loan portfolio by 2025, supported by a recent **$75 million** capital raise[6](index=6&type=chunk) [Fourth Quarter 2023 Financial Performance](index=2&type=section&id=Fourth%20Quarter%202023%20Financial%20Performance) [Overview of Q4 Operating Results](index=2&type=section&id=Overview%20of%20Q4%20Operating%20Results) Velocity Financial's Q4 2023 net income surged 105% year-over-year to $17.4 million, driven by fair value gains and expanded net interest margin. | Key Performance Indicators ($ in thousands) | 4Q 2023 | 4Q 2022 | % Variance | | :--- | :--- | :--- | :--- | | Pretax income | $22,307 | $11,692 | 91% | | Net income | $17,355 | $8,462 | 105% | | Diluted earnings per share | $0.50 | $0.25 | 100% | | Core net income | $16,161 | $9,118 | 77% | | Portfolio Net interest margin | 3.52% | 2.84% | 24% | - The strong performance was primarily driven by fair value gains on new loan production and a **48.9%** increase in net interest income[12](index=12&type=chunk) [Loan Portfolio Analysis (Q4)](index=3&type=section&id=Loan%20Portfolio%20Analysis%20%28Q4%29) As of December 31, 2023, the total loan portfolio grew 16.0% year-over-year to $4.1 billion, with stable credit quality and an increased weighted average coupon. | Total Loan Portfolio ($ of UPB in millions) | 4Q 2023 | 4Q 2022 | % Variance | | :--- | :--- | :--- | :--- | | Investor 1-4 Rental | $2,225 | $1,852 | 20% | | Traditional Commercial (Combined) | $1,395 | $1,271 | 10% | | Total Held for Investment | $4,056 | $3,512 | 15% | | Total Managed Loan Portfolio UPB | $4,073 | $3,512 | 16% | - The weighted average coupon on the total portfolio increased to **8.88%** from 7.95% in Q4 2022, driving the total portfolio yield up to **8.70%** from 7.51%[11](index=11&type=chunk)[16](index=16&type=chunk) - The weighted average portfolio loan-to-value ratio was **67.8%**, slightly down from 68.2% in the prior year, indicating consistent credit standards[16](index=16&type=chunk) [Loan Production and Credit Quality (Q4)](index=4&type=section&id=Loan%20Production%20and%20Credit%20Quality%20%28Q4%29) Q4 2023 loan production increased by 26.8% year-over-year to $352.1 million, with a strong weighted average coupon on new loans and a sequential decrease in nonperforming loans. | Loan Production Volumes ($ in millions) | 4Q 2023 | 4Q 2022 | % Variance | | :--- | :--- | :--- | :--- | | Investor 1-4 Rental | $183 | $169 | 9% | | Traditional Commercial | $130 | $83 | 57% | | Short-term loans | $39 | $26 | 49% | | Total loan production | $352 | $278 | 27% | - The weighted average coupon (WAC) on Q4 2023 HFI loan production was **11.2%**, an increase of **86 basis points** from Q4 2022[17](index=17&type=chunk) - Nonperforming loans (NPLs) were **9.7%** of total HFI loans, down from 10.1% in Q3 2023 but up from 8.3% in Q4 2022, with sequential improvement driven by portfolio growth and a slowdown in loans transitioning to foreclosure[15](index=15&type=chunk)[20](index=20&type=chunk) [Revenue and Expense Analysis (Q4)](index=5&type=section&id=Revenue%20and%20Expense%20Analysis%20%28Q4%29) Net revenue for Q4 2023 grew 59.6% year-over-year to $51.6 million, driven by increased net interest income and fair value gains, while operating expenses rose 40.7%. | Financial Item ($ in thousands) | 4Q 2023 | 4Q 2022 | % Variance | | :--- | :--- | :--- | :--- | | Net Interest Income - portfolio related | $34,864 | $24,777 | 41% | | Total Other operating income | $21,670 | $10,789 | 101% | | Net Revenue | $51,567 | $32,302 | 60% | | Total operating expenses | $29,260 | $20,804 | 41% | - The increase in other operating income was largely driven by net fair value marks on loans and securitized debt of **$15.3 million**, resulting from new production and a decrease in Treasury rates[24](index=24&type=chunk) - Operating expenses rose due to higher compensation from sales and operational hires, increased loan servicing costs from portfolio growth, and **$2.7 million** in securitization expenses that are now expensed as incurred[25](index=25&type=chunk) [Securitization and Resolution Activities (Q4)](index=7&type=section&id=Securitization%20and%20Resolution%20Activities%20%28Q4%29) Velocity completed one securitization of $202.9 million in Q4 2023, while demonstrating strong asset management by resolving $70.9 million in nonperforming loans and REO with significant gains. - The company completed one securitization in Q4 2023, issuing **$202.9 million** of securities[27](index=27&type=chunk) - The weighted average rate on outstanding securitizations increased by **94 basis points** year-over-year to **5.22%** as of December 31, 2023[27](index=27&type=chunk) Resolution Activity | Resolution Activity | 4Q 2023 | 4Q 2022 | | :--- | :--- | :--- | | Total Resolutions (UPB) | $70.9 million | $25.3 million | | Realization (% of UPB) | 102.2% | 102.3% | [Full-Year 2023 Financial Performance](index=9&type=section&id=Full-Year%202023%20Financial%20Performance) [Overview of FY 2023 Operating Results](index=9&type=section&id=Overview%20of%20FY%202023%20Operating%20Results) For FY 2023, Velocity Financial's net income increased 62% to $52.3 million, driven by higher net interest and other income, despite a decrease in loan production and a contracted net interest margin. | Full-Year Operating Results ($ in thousands) | FY 2023 | FY 2022 | % Variance | | :--- | :--- | :--- | :--- | | Total Loan production | $1,118,000 | $1,762,000 | (37)% | | Net Interest Margin - Portfolio | 3.34% | 3.64% | (8)% | | Net Income | $52,273 | $32,211 | 62% | | Diluted EPS | $1.52 | $0.94 | 61% | | Core Income | $53,384 | $42,153 | 26.6% | | Core Diluted EPS | $1.54 | $1.24 | 24.5% | - The decrease in loan production was attributed to the higher interest rate environment prevalent throughout most of FY 2023[34](index=34&type=chunk) - The decline in Net Interest Margin (NIM) was driven by higher securitization and warehouse financing costs, partially offset by a higher WAC on new loans (**11.1%** in 2023 vs **8.0%** in 2022)[34](index=34&type=chunk)[36](index=36&type=chunk) [Credit Performance and REO (FY 2023)](index=9&type=section&id=Credit%20Performance%20and%20REO%20%28FY%202023%29) In FY 2023, average nonperforming loans increased to $328.1 million, maintaining stability as a percentage of the HFI portfolio, while net gains from charge-off and REO activity decreased. Charge-Offs, Gain/(Loss) on REO ($ in thousands) | Charge-Offs, Gain/(Loss) on REO ($ in thousands) | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Average nonperforming loans | $328,105 | $266,129 | | Charge-offs | $(2,039) | $(521) | | Total gain/(loss) on REO | $2,038 | $5,462 | - Average NPLs as a percentage of average loans HFI were **8.7%** for FY 2023, consistent with 8.6% for FY 2022[36](index=36&type=chunk) [Financial Statements and Reconciliations](index=14&type=section&id=Financial%20Statements%20and%20Reconciliations) [Consolidated Statements of Financial Condition](index=14&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) As of December 31, 2023, Velocity's total assets grew to $4.40 billion, driven by a 17% increase in the net loan portfolio, with total equity rising to $436.9 million. Balance Sheet ($ in thousands) | Balance Sheet ($ in thousands) | 12/31/2023 | 12/31/2022 | | :--- | :--- | :--- | | Total loans, net | $4,151,785 | $3,548,485 | | Total Assets | $4,404,573 | $3,748,975 | | Total Liabilities | $3,967,700 | $3,368,475 | | Total equity | $436,873 | $380,500 | | Book value per share | $13.49 | $11.89 | [Consolidated Statements of Income](index=15&type=section&id=Consolidated%20Statements%20of%20Income) For FY 2023, total interest income increased to $310.8 million, driving net revenue to $171.7 million and net income to $52.3 million, despite higher operating expenses. Income Statement (Years, $ in thousands) | Income Statement (Years, $ in thousands) | 12/31/2023 | 12/31/2022 | | :--- | :--- | :--- | | Net interest income after provision | $105,836 | $81,996 | | Total other operating income | $65,910 | $24,320 | | Net revenue | $171,745 | $106,316 | | Total operating expenses | $100,618 | $61,764 | | Net income attributable to Velocity | $52,273 | $32,211 | Income Statement (Quarters, $ in thousands) | Income Statement (Quarters, $ in thousands) | 4Q 2023 | 4Q 2022 | | :--- | :--- | :--- | | Net revenue | $51,567 | $32,495 | | Total operating expenses | $29,260 | $20,804 | | Net income attributable to Velocity | $17,355 | $8,462 | [Net Interest Margin Analysis](index=17&type=section&id=Net%20Interest%20Margin%20Analysis) Q4 2023 saw a significant improvement in portfolio-related net interest margin to 3.52%, driven by higher loan yields, while the full-year NIM contracted slightly to 3.34%. Quarterly NIM Analysis | Quarterly NIM Analysis | 4Q 2023 | 4Q 2022 | | :--- | :--- | :--- | | Avg. Loan Portfolio Yield | 8.70% | 7.51% | | Avg. Portfolio Debt Cost | 5.75% | 5.23% | | Net Interest Spread - Portfolio | 2.95% | 2.28% | | Net Interest Margin - Portfolio | 3.52% | 2.84% | Annual NIM Analysis | Annual NIM Analysis | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Avg. Loan Portfolio Yield | 8.34% | 7.77% | | Avg. Portfolio Debt Cost | 5.58% | 4.64% | | Net Interest Spread - Portfolio | 2.76% | 3.13% | | Net Interest Margin - Portfolio | 3.34% | 3.64% | [Reconciliation of GAAP to Non-GAAP Measures](index=18&type=section&id=Reconciliation%20of%20GAAP%20to%20Non-GAAP%20Measures) The company provides a reconciliation from GAAP Net Income to non-GAAP Core Net Income, adjusting for specific items to present a clearer view of operating performance. Core Net Income Reconciliation ($ in thousands) | Core Net Income Reconciliation ($ in thousands) | 4Q 2023 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Net Income (GAAP) | $17,355 | $52,273 | $32,211 | | Tax liability reduction | $(1,866) | $(1,866) | — | | Equity award & ESPP costs | $673 | $2,977 | $656 | | Corporate debt refinancing costs | — | — | $9,286 | | Core Net Income (Non-GAAP) | $16,161 | $53,384 | $42,153 | [Supplementary Information](index=11&type=section&id=Supplementary%20Information) [Conference Call and Company Information](index=11&type=section&id=Conference%20Call%20and%20Company%20Information) Velocity Financial held a conference call on March 7, 2024, to discuss financial results, highlighting its business model as a vertically integrated real estate finance firm. - A conference call and webcast were held on March 7, 2024, to review financial results[37](index=37&type=chunk) - Velocity Financial is a vertically integrated real estate finance company that originates and manages business purpose loans secured by 1-4 unit residential rental and small commercial properties[40](index=40&type=chunk) [Non-GAAP Measures and Forward-Looking Statements](index=11&type=section&id=Non-GAAP%20Measures%20and%20Forward-Looking%20Statements) The report utilizes non-GAAP financial measures for performance evaluation and includes forward-looking statements subject to various risks and uncertainties. - The company uses non-GAAP measures like core net income and core diluted EPS to exclude non-recurring expenses and better evaluate operating performance[41](index=41&type=chunk)[42](index=42&type=chunk)[45](index=45&type=chunk) - The report contains forward-looking statements that are not guarantees of future results and are subject to risks and uncertainties, including economic conditions, regulatory changes, and market conditions[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk)

Velocity Financial, Inc. (NYSE:VEL) Q3 2023 Earnings Conference Call November 2, 2023 5:00 PM ET Company Participants Chris Oltmann - Treasurer Chris Farrar - President and CEO Mark Szczepaniak - Chief Financial Officer Conference Call Participants Stephen Laws - Raymond James Sarah Barcomb - BTIG Steve Delaney - JMP Securities Operator Good day and welcome to the Velocity Financial Q3 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is be ...

Investor 1-4 Mixed-Use Multi-Family Commercial > 3Q23 Results Presentation November 2, 2023 Forward-looking statements Some of the statements contained in this presentation may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, positioning, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-loo ...

[Part I. Financial Information](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Consolidated Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(Unaudited)) The company's total assets increased to $4.12 billion as of September 30, 2023, from $3.75 billion at year-end 2022, driven by growth in the loan portfolio. Net income for the nine months ended September 30, 2023, was $35.1 million, a significant increase from $24.3 million in the prior-year period, primarily due to higher net interest income and unrealized gains on fair value instruments. The company adopted fair value option accounting for new loans and certain debt, and began using derivative instruments for cash flow hedging [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights ($ in thousands) | Account | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $29,393 | $45,248 | | Total loans, net | $3,917,366 | $3,548,485 | | Real estate owned, net | $29,299 | $13,325 | | **Total Assets** | **$4,117,308** | **$3,748,975** | | **Liabilities** | | | | Securitized debt, net | $2,504,334 | $2,736,290 | | Securitized debt, at fair value | $669,139 | $— | | Warehouse and repurchase facilities, net | $215,176 | $330,814 | | **Total Liabilities** | **$3,697,292** | **$3,368,475** | | **Total Equity** | **$420,016** | **$380,500** | - Total loans, net, increased by approximately **10.4%** to **$3.92 billion** as of September 30, 2023, from **$3.55 billion** at the end of 2022[10](index=10&type=chunk) [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Statement of Income Summary ($ in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $27,367 | $24,847 | $77,027 | $62,509 | | Total Other Operating Income | $17,360 | $3,027 | $44,239 | $12,900 | | Total Operating Expenses | $27,334 | $13,245 | $71,359 | $40,960 | | Net Income | $12,169 | $10,290 | $35,126 | $24,292 | | Diluted EPS | $0.35 | $0.29 | $1.02 | $0.70 | - Net income for Q3 2023 was **$12.2 million**, an **18.3%** increase from **$10.3 million** in Q3 2022. For the nine months ended September 30, 2023, net income rose **44.6%** to **$35.1 million** from **$24.3 million** in the prior-year period[17](index=17&type=chunk) - The significant increase in other operating income is primarily due to a **$9.7 million** unrealized gain on fair value securitized debt in Q3 2023, which was not present in 2022[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) - For the nine months ended September 30, 2023, the company experienced a net decrease in cash, cash equivalents, and restricted cash of **$15.0 million**[23](index=23&type=chunk) - Key cash flow activities for the first nine months of 2023 include: - **Operating:** Net cash provided was **$22.7 million** - **Investing:** Net cash used was **$360.8 million**, primarily for the origination of loans held for investment (**$728.2 million**), partially offset by payoffs (**$334.2 million**) - **Financing:** Net cash provided was **$323.2 million**, driven by proceeds from securitized debt (**$774.3 million**) and warehouse advances (**$753.3 million**), offset by repayments[23](index=23&type=chunk) [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) - Significant accounting policy changes include the election of the fair value option (FVO) for securitized debt issued after January 1, 2023, and the adoption of hedge accounting for derivative instruments starting in Q3 2023[35](index=35&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) - As of September 30, 2023, the company's COVID-19 forbearance program had an ending unpaid principal balance (UPB) of **$177.0 million**, of which **76.7%** were performing/accruing[49](index=49&type=chunk)[51](index=51&type=chunk) - The company began using forward starting interest rate swaps as cash flow hedges in Q3 2023 to manage interest rate risk on future debt issuances. As of September 30, 2023, derivative assets were valued at **$1.26 million**[106](index=106&type=chunk)[107](index=107&type=chunk) - The company is the sole beneficial interest holder of twenty-three securitization trusts, which are consolidated as variable interest entities (VIEs). These transactions are accounted for as secured borrowings[73](index=73&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The company's loan portfolio grew to $3.9 billion in UPB as of Q3 2023. Loan originations were $290.6 million in Q3 2023, a decrease from the prior year due to rising interest rates and strategic caution. Net interest margin remained relatively stable QoQ but decreased YoY due to higher funding costs. The adoption of fair value option (FVO) accounting for new loans and certain debt significantly impacted reported income, increasing both other operating income and operating expenses. Nonperforming loans increased to 10.1% of the portfolio, but the company continues to resolve these assets with net gains [Business Overview and Recent Developments](index=36&type=section&id=Business%20Overview%20and%20Recent%20Developments) - Velocity Financial is a vertically integrated real estate finance company that originates and manages investor loans secured by 1-4 unit residential rental and commercial properties. As of September 30, 2023, its loan portfolio totaled **$3.9 billion** in unpaid principal balance (UPB)[134](index=134&type=chunk)[136](index=136&type=chunk) - In Q3 2023, the company completed two securitizations totaling **$316.3 million**, including its first securitization of short-term mortgage loans (VCC 2023-RTL1)[143](index=143&type=chunk) - The company began applying fair value option (FVO) accounting to all originated mortgage loans starting October 1, 2022, and to securitized debt on a case-by-case basis from January 1, 2023. This change means a CECL loan loss reserve is not recorded on these FVO loans[141](index=141&type=chunk)[142](index=142&type=chunk) [Portfolio and Asset Quality](index=39&type=section&id=Portfolio%20and%20Asset%20Quality) Key Portfolio Statistics | Metric | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Total loans (UPB, $ in thousands) | $3,876,726 | $3,432,540 | | Loan count | 9,953 | 8,476 | | Weighted average LTV | 68.0% | 68.7% | | Weighted average coupon | 8.6% | 7.7% | | Nonperforming loans (% of total) | 10.0% | 7.4% | Loan Originations (Q3 2023 vs Q3 2022) | Period | Loan Balance ($ in thousands) | Weighted Average Coupon | Weighted Average LTV | | :--- | :--- | :--- | :--- | | Q3 2023 | $290,581 | 11.04% | 65.3% | | Q3 2022 | $457,272 | 8.58% | 66.8% | - Nonperforming loans increased to **10.1%** (**$387.7 million**) of the portfolio as of September 30, 2023, up from **7.4%** (**$253.3 million**) a year prior[176](index=176&type=chunk) - The allowance for loan losses decreased to **$4.7 million** as of September 30, 2023, from **$5.3 million** a year earlier, primarily due to loan payoffs and the shift to FVO accounting for new originations, which do not require a CECL reserve[172](index=172&type=chunk)[174](index=174&type=chunk) [Results of Operations](index=44&type=section&id=Results%20of%20Operations) Key Performance Metrics (Annualized) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Portfolio yield | 8.38% | 7.88% | | Cost of funds — portfolio related | 5.63% | 4.81% | | Net interest margin — portfolio related | 3.34% | 3.59% | | Pre-tax return on equity | 16.82% | 15.26% | | Return on equity | 11.87% | 11.18% | - Net interest income for Q3 2023 increased to **$27.4 million** from **$24.8 million** in Q3 2022. The growth was driven by a larger average loan balance, which offset the negative impact of a higher cost of funds[221](index=221&type=chunk)[222](index=222&type=chunk)[226](index=226&type=chunk) - Operating expenses rose to **$27.3 million** in Q3 2023 from **$13.2 million** in Q3 2022. The increase was mainly due to higher compensation and securitization costs, as expenses for FVO loans and FVO debt are recognized immediately rather than being deferred[237](index=237&type=chunk)[239](index=239&type=chunk) - Other operating income surged to **$17.4 million** in Q3 2023 from **$3.0 million** in Q3 2022, primarily due to unrealized gains on fair value securitized debt (**$9.7 million**) and higher origination income, both resulting from the adoption of FVO accounting[234](index=234&type=chunk)[235](index=235&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) - As of September 30, 2023, total liquidity plus available warehouse capacity was **$654.0 million**, consisting of **$29.4 million** in cash, **$30.9 million** in available borrowings for unencumbered loans, and **$593.6 million** in available warehouse capacity[252](index=252&type=chunk) - The company's primary funding sources are warehouse repurchase facilities, securitized debt, corporate debt, and equity. From May 2011 through September 2023, the company has completed thirty securitizations, issuing **$6.2 billion** in securities[251](index=251&type=chunk)[262](index=262&type=chunk) - The company has a five-year **$215.0 million** syndicated corporate term loan with a fixed rate of **7.125%**, maturing in March 2027[266](index=266&type=chunk)[269](index=269&type=chunk) - The company maintains an at-the-market (ATM) equity offering program. During Q3 2023, **27,529** shares were sold for net proceeds of **$327.2 thousand**[267](index=267&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=61&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate volatility, which affects both income from assets and expenses on liabilities. To manage this risk, the company utilizes financial instruments, specifically forward starting payer interest rate swaps. As of September 30, 2023, it had swaps with a notional amount of $155.0 million to hedge against changes in the SOFR benchmark for a forecasted debt issuance - The company's main market risk is interest rate volatility, which impacts net interest income and the fair value of its assets and liabilities[275](index=275&type=chunk) - To mitigate interest rate risk, the company uses derivative instruments. As of September 30, 2023, it held forward starting payer interest rate swaps with a total notional value of **$155.0 million** to hedge cash flows on a forecasted debt issuance[275](index=275&type=chunk) [Controls and Procedures](index=61&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of September 30, 2023. They concluded that these controls were effective at a reasonable assurance level. There were no material changes to the company's internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[277](index=277&type=chunk) - No material changes were made to the company's internal control over financial reporting during the third quarter of 2023[278](index=278&type=chunk) [Part II. Other Information](index=62&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=62&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings in the ordinary course of business. Management does not believe that the final outcome of any currently pending matters will have a material adverse effect on the company's financial condition or results of operations - The company is party to various legal proceedings in the normal course of business but does not expect them to have a material adverse effect on its financial condition or operations[280](index=280&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the three months ended September 30, 2023, Velocity Financial, Inc. did not make any purchases of its own common stock - The company made no purchases of its common stock during the three months ended September 30, 2023[282](index=282&type=chunk)

Financial Data and Key Metrics Changes - The company reported a 19% increase in originations compared to the previous quarter, with net revenue growth of 6.8% quarter-over-quarter while holding operating expenses flat [7][12] - Earnings per share showed significant growth, with book value increasing to $12.57 on a GAAP basis [19] - The overall portfolio yield increased by 24 basis points year-over-year, reflecting higher coupon rates on new loans [13] Business Line Data and Key Metrics Changes - Total loan production for Q2 was approximately $258 million, a 19.2% increase from $217 million in Q1 [21] - The weighted average coupon for Q2 production was 11%, marking a 3.25% year-over-year increase [21] - The total loan portfolio as of June 30 was $3.7 billion, a 3.4% increase from Q1 and a 20% increase from Q4 of the previous year [22] Market Data and Key Metrics Changes - The non-performing loan (NPL) rate increased to 10% from 8.2% in the previous quarter, attributed to portfolio seasoning [15][24] - The company resolved over $50 million in non-performing UPB for a net gain of $1.5 million, maintaining a three-point gain on NPL resolutions [26] Company Strategy and Development Direction - The company is focused on growing assets and improving return on equity while maintaining a healthy origination pipeline [10][11] - Management emphasized the importance of creating attractive risk-adjusted deals as banks tighten lending activities, allowing the company to capture more opportunities [7][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the stability of the real estate market and anticipated continued positive resolutions in credit performance [33] - The company expects to grow earnings and maintain strong demand for its products, projecting an end-of-year origination volume around $1 billion [45] Other Important Information - The company has a total liquidity of $72 million, with $34 million in cash and cash equivalents, and $38 million in available liquidity on unfinanced finance loan collateral [30] - The CECL loan loss reserve stood at $4.6 million, consistent with previous quarters [27] Q&A Session Summary Question: Can you speak about the execution of securitization 2023-2 compared to 2023-1? - Management noted that while demand was not as strong as in 2023-1 due to tightening conditions, the execution was still oversubscribed and successful [35] Question: How is the competitive landscape from banks affecting your underwriting standards? - Management indicated that banks remain cautious, providing opportunities for the company to improve underwriting standards and capture business that may have previously gone to banks [42][43] Question: What is the outlook for origination volumes in the second half of the year? - Management projected that the current run rate is sustainable, expecting to end the year around $1 billion in origination volume [45]

Earnings - Net income was $122 million, with diluted earnings per share (EPS) of $036, compared to $106 million and $031 per share for 2Q22[6] - Core net income reached $129 million, with core diluted EPS of $038, compared to $106 million and $031 per share for 2Q22[7] - Net revenue grew by 68% Q/Q, while operating expense growth was essentially flat Q/Q[9] - The W A portfolio yield reached 824% for 2Q23, a 24 bps increase from 797% for 2Q22[10] Production & Loan Portfolio - Loan production in 2Q23 totaled $2586 million in UPB, a decrease of 419% from $4454 million in UPB for 2Q22[11] - The total loan portfolio was $37 billion in UPB as of June 30, 2023, an increase of 204% from June 30, 2022[13] - NPLs were 100% of Held for Investment (HFI) as of June 30, 2023, up from 82% as of June 30, 2022 Realized 30% gains on NPL UPB resolved in 2Q23[14] Financing & Capital - The company completed the VCC 2023-1R (Re-REMIC) securitization totaling $648 million of non –mark to market securities issued, resulting in $480 million in additional liquidity[15] - The company completed the VCC 2023-2 securitization totaling $2022 million of securities issued, comprised of long-term business-purpose loans[17] - Liquidity was $720 million as of June 30, 2023[18] - Total available warehouse line capacity was $5730 million as of June 30, 2023[19]