Velocity Financial(VEL) - 2023 Q4 - Annual Results

Financial Highlights Fourth Quarter 2023 Highlights 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] - 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] - 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] Full-Year 2023 Highlights 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 CEO's Perspective 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] - Loan production increased each quarter in 2023, with mortgage coupons rising 86 basis points from the average rate in Q4 2022[6] - 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] Fourth Quarter 2023 Financial Performance Overview of Q4 Operating Results 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] Loan Portfolio Analysis (Q4) 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][16] - 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] Loan Production and Credit Quality (Q4) 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] - 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][20] Revenue and Expense Analysis (Q4) 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] - 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] Securitization and Resolution Activities (Q4) 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] - The weighted average rate on outstanding securitizations increased by 94 basis points year-over-year to 5.22% as of December 31, 2023[27] 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 Overview of FY 2023 Operating Results 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] - 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][36] Credit Performance and REO (FY 2023) 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] Financial Statements and Reconciliations Consolidated Statements of Financial Condition 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 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 | $8,462 | Net Interest Margin Analysis Q4 2023 saw a significant improvement in portfolio-related net interest margin to 3.52%, driven by higher loan yields, while the full-year NIM contracted slightly to 3.34%. Quarterly NIM Analysis | Quarterly NIM Analysis | 4Q 2023 | 4Q 2022 | | :--- | :--- | :--- | | Avg. Loan Portfolio Yield | 8.70% | 7.51% | | Avg. Portfolio Debt Cost | 5.75% | 5.23% | | Net Interest Spread - Portfolio | 2.95% | 2.28% | | Net Interest Margin - Portfolio | 3.52% | 2.84% | Annual NIM Analysis | Annual NIM Analysis | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Avg. Loan Portfolio Yield | 8.34% | 7.77% | | Avg. Portfolio Debt Cost | 5.58% | 4.64% | | Net Interest Spread - Portfolio | 2.76% | 3.13% | | Net Interest Margin - Portfolio | 3.34% | 3.64% | Reconciliation of GAAP to Non-GAAP Measures The company provides a reconciliation from GAAP Net Income to non-GAAP Core Net Income, adjusting for specific items to present a clearer view of operating performance. Core Net Income Reconciliation ($ 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 Conference Call and Company Information 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] - 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] Non-GAAP Measures and Forward-Looking Statements 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][42][45] - 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][49][50]