Velocity Financial(VEL) - 2023 Q3 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements (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 $24.3 million in the prior-year period, primarily due to higher net interest income and unrealized gains on fair value instruments. The company adopted fair value option accounting for new loans and certain debt, and began using derivative instruments for cash flow hedging Consolidated Balance Sheets Consolidated Balance Sheet Highlights ($ 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 $3.55 billion at the end of 2022[10] Consolidated Statements of Income Statement of Income Summary ($ 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] - 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] Consolidated Statements of Cash Flows - 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] - 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] Notes to Consolidated Financial Statements - 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][39][40] - 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][51] - 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][107] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 - 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][136] - 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] - 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][142] Portfolio and Asset Quality 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] - 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][174] Results of Operations 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][222][226] - 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][239] - 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][235] Liquidity and Capital Resources - 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] - 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][262] - 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][269] - 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] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Controls and Procedures 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] - No material changes were made to the company's internal control over financial reporting during the third quarter of 2023[278] Part II. Other Information Legal Proceedings 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] Unregistered Sales of Equity Securities and Use of Proceeds 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]