Velocity Financial Inc

Previous wording

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of March 31, 2024, has an average balance of approximately $388.8 thousand. As of March 31, 2024, our loan portfolio totaled $4.3 billion of UPB on properties in 46 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 67.6%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 54.6% of the UPB. For the three months ended March 31, 2024, the annualized yield on our total portfolio was 8.71%.

Current wording

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of June 30, 2024, has an average balance of approximately $387 thousand. As of June 30, 2024, our loan portfolio totaled $4.5 billion of UPB on properties in 45 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 67.4% of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 54.1% of the UPB. For the three months ended June 30, 2024, the annualized yield on our total portfolio was 8.98%.

Previous wording

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, corporate debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed thirty securitized debt transactions, resulting in a total of over $6.6 billion in gross debt proceeds from May 2011 through March 2024. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

Current wording

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, corporate debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed thirty-four securitized debt transactions, resulting in a total of over $7.1 billion in gross debt proceeds from May 2011 through June 30, 2024. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

Previous wording

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitized debt and excludes our corporate debt. For the three months ended March 31, 2024, our annualized portfolio related net interest margin decreased to 3.35% from 3.52% for the quarter ended December 31, 2023. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for loan losses and operating expenses. For the three months ended March 31, 2024, including net income attributable to noncontrolling interest, we generated pre-tax and net income of $23.2 million and $17.3 million, respectively.

Current wording

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitized debt and excludes our corporate debt. For the three months ended June 30, 2024, our annualized portfolio related net interest margin increased to 3.54% compared to the 3.24% for the three months ended June 30, 2023. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for credit losses and operating expenses. For the three and six months ended June 30, 2024, including net income attributable to noncontrolling interest, we generated pre-tax income of $19.9 million and $43.1 million, and net income of $14.7 million and $32.0 million, respectively.

Previous wording

In April 2024, we completed the securitization of $295.1 million of investor real estate loans, as measured by UPB.

Current wording

In June 2024, we completed the securitization of $209.9 million of investor real estate loans, as measured by UPB.

Previous wording

These polices and estimates relate to the allowance for loan losses, fair value option accounting, and deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.

Current wording

These polices and estimates relate to the allowance for credit losses, fair value option accounting, and deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.

Previous wording

Net interest income is the largest contributor to our net income and is monitored on both an absolute basis and relative to provisions for loan losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitized debt. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.

Current wording

Net interest income is the largest contributor to our net income and is monitored on both an absolute basis and relative to provision for credit losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitized debt. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.

Previous wording

Periodic changes in net interest income are primarily driven by: (1) origination volume and changes in average outstanding loan balances and (2) interest rates and changes in interest earned on our portfolio or paid on our debt. Historically, origination volume and portfolio size have been the largest contributors to the growth in our net interest income. We measure net interest income before and after interest expense related to our corporate debt and before and after our provisions for loan losses.

Current wording

Periodic changes in net interest income are primarily driven by: (1) origination volume and changes in average outstanding loan balances and (2) interest rates and changes in interest earned on our portfolio or paid on our debt. Historically, origination volume and portfolio size have been the largest contributors to the growth in our net interest income. We measure net interest income before and after interest expense related to our corporate debt and before and after our provision for credit losses.

Previous wording

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $45.1 million, $42.2 million, and $38.7 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of March 31, 2024, December 31, 2023, and March 31, 2023, respectively.

Current wording

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $40.7 million, $45.1 million, and $43.5 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of June 30, 2024, March 31, 2024, and June 30, 2023, respectively.

Previous wording

For the December 31, 2023 CECL estimate, we considered a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States, the wars between Russia/Ukraine and Israel/Hamas, continued disruption in the supply chain, and concerns of a recession.

Current wording

For the December 31, 2023 current expected credit loss (“CECL”) estimate, we considered a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States, the wars between Russia/Ukraine and Israel/Hamas, continued disruption in the supply chain, and concerns of a recession.

Previous wording

Our allowance for loan losses as of March 31, 2024 was $5.3 million compared to $4.8 million as of December 31, 2023 and $5.0 million as of March 31, 2023. The slight increase in allowance for credit losses from December 31, 2023 and from March 31, 2023 was primarily due to an increase in the individually-assessed component of the reserve. Our overall loan loss reserve for the periods was within our expected range of 0.15% to 0.20% of loans held for investment, excluding FVO loans. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and the Company’s ability to forecast economic events evolves.

Current wording

Our allowance for credit losses as of June 30, 2024 was $5.2 million compared to $4.6 million as of June 30, 2023. The increase in allowance for credit losses from June 30, 2023 was primarily due to an increase in the individually-assessed component of the reserve. Our overall credit loss reserve for the periods was within our expected range of 0.15% to 0.20% of loans held for investment, excluding FVO loans. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and the Company’s ability to forecast economic events evolves.

Previous wording

To estimate the allowance for loan losses in our portfolio of loans held for investment carried at amortized cost, we follow a detailed internal review process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.

Current wording

To estimate the allowance for credit losses in our portfolio of loans held for investment carried at amortized cost, we follow a detailed internal review process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.

Previous wording

The following table illustrates the activity in our allowance for loan losses over the periods indicated:

Current wording

The following table illustrates the activity in our allowance for credit losses over the periods indicated:

Previous wording

Balance includes $164.1 million UPB of loans held for investment as of March 31, 2024, $174.6 million as of December 31, 2023, and $195.1 million as of March 31, 2023 in our COVID-19 forbearance program.

Current wording

Balance includes $158.5 million UPB of loans held for investment as of June 30, 2024, $165.1 million as of March 31, 2024, and $181.9 million as of June 30, 2023 in our COVID-19 forbearance program.

Previous wording

Other than loans in the COVID-19 forbearance program, loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $432.6 million, or 10.1% of our held for investment loan portfolio as of March 31, 2024, compared to $394.6 million, or 9.7% as of December 31, 2023, and $309.9 million, or 8.7% of the held for investment loan portfolio as of March 31, 2023. The increase in total nonperforming loans as of March 31, 2024 compared to December 31, 2023 and March 31, 2023 is due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.

Current wording

Other than loans in the COVID-19 forbearance program, loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $470.6 million, or 10.5% of our held for investment loan portfolio as of June 30, 2024, compared to $432.6 million, or 10.1% as of March 31, 2024, and $371.2 million, or 10.0% of the held for investment loan portfolio as of June 30, 2023.The increase in total nonperforming loans as of June 30, 2024 compared to March 31, 2024 and June 30, 2023 is due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.

Previous wording

Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $49.5 million of long-term and short-term non-performing loans during the quarter ended March 31, 2024, which was lower compared to $68.7 million during the quarter ended December 31, 2023 and higher compared to $36.9 million during the quarter ended March 31, 2023. From these resolution activities, including the REO resolutions, we realized net gains of $1.3 million, $1.5 million, and $1.3 million during the quarters ended March 31, 2024, December 31, 2023, and March 31, 2023, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual principal and interest due on loans.

Current wording

Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $68.6 million of long-term and short-term non-performing loans for the quarter ended June 30, 2024, which was higher, compared to $49.5 million and $43.6 million for the quarters ended March 31, 2024 and June 30, 2023, respectively. From these resolution activities, including the REO resolutions, we realized net gains of $1.0 million, $1.3 million, and $1.5 million for the quarters ended June 30, 2024, March 31, 2024, and June 30, 2023, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual principal and interest due on loans.

Previous wording

The table below includes resolutions for our long-term nonperforming loans and REO's.

Current wording

The table below includes resolutions for our long-term nonperforming loans and REO's for the periods indicated:

Previous wording

The table below includes resolutions for our short-term nonperforming loans and REO's, and also includes loans that were granted a COVID-19 forbearance in 2020. The short-term loans, or loans with a maturity of two-year or less, do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans.

Current wording

The short-term loans, or loans with a maturity of two-year or less, do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans. The table below includes resolutions for our short-term nonperforming loans and REO's, and also includes loans that were granted a COVID-19 forbearance in 2020:

Previous wording

REO includes real estate we acquire through foreclosure or by deed-in-lieu of foreclosure. REO assets are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure. Adjustments that reduce the carrying value of the loan to the fair value of the real estate at the time of foreclosure are recognized as charge-offs in the allowance for loans losses. Positive adjustments at the time of foreclosure are recognized in other operating income. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments, included in "real estate owned, net" in the consolidated statements of income.

Current wording

REO includes real estate we acquire through foreclosure or by deed-in-lieu of foreclosure. REO assets are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure. Adjustments that reduce the carrying value of the loan to the fair value of the real estate at the time of foreclosure are recognized as charge-offs in the allowance for credit losses. Positive adjustments at the time of foreclosure are recognized in other operating income. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments, included in “real estate owned, net” in the consolidated statements of income.

Previous wording

Our actual charge-offs have been minimal as a percentage of nonperforming loans held for investment. The valuation impact to our P&L from loans becoming REO or in REO is a combination of 1) loan charge-offs, 2) gain on transfer to REO included in "gain on disposition of loans" in the consolidated statements of income, 3) net gain/(loss) on sale of REO, and 4) net valuation adjustments on REO. The table below shows our actual charge-offs; gain on transfer of nonperforming loans to REO; gain on disposition of REO; and net valuation adjustments on REO; for the periods indicated.

Current wording

Our actual charge-offs have been minimal as a percentage of nonperforming loans held for investment. The valuation impact to our earnings from loans becoming REO or in REO is a combination of 1) loan charge-offs, 2) gain on transfer to REO included in “gain on disposition of loans” in the consolidated statements of income, 3) net gain or loss on sale of REO, and 4) net valuation adjustments on REO. The table below shows our actual charge-offs; gain on transfer of nonperforming loans to REO; gain on disposition of REO; and net valuation adjustments on REO; for the periods indicated:

Previous wording

As of March 31, 2024, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 54.6% of the UPB. Mixed used properties represented 11.5% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.6% in California, 17.8% in New York, 13.2% in Florida, and 7.4% in New Jersey.

Current wording

As of June 30, 2024, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 54.1% of the UPB. Mixed used properties represented 11.4% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.3% in California, 17.2% in New York, 13.3% in Florida, 7.4% in New Jersey, and 5.1% in Texas.

Previous wording

Our portfolio related cost of funds increased to 5.93% for the three months ended March 31, 2024 from 5.75% for the three months ended December 31, 2023 and increased from 5.33% for the three months ended March 31, 2023 as a result of rising interest rates.

Current wording

Our portfolio related cost of funds increased to 6.01% for the three months ended June 30, 2024 from 5.93% for the prior quarter and increased from 5.58% for the three months ended June 30, 2023.

Previous wording

Over the periods shown below, our portfolio related net interest margin decreased to 3.35% for the three months ended March 31, 2024 compared to the 3.52% for the three months ended December 31, 2023, and increased from 3.23% for the three months ended March 31, 2023. The decrease from December 31, 2023 was primarily due to an increase in corporate debt interest expense from the $75.0 million notes (the 2024 Term Loan) the Company issued in February of 2024. The increase from March 31, 2023 was primarily due to higher average yield on our loan portfolio.

Current wording

Over the periods shown below, our portfolio related net interest margin increased to 3.54% for the three months ended June 30, 2024 from 3.35% and 3.24% for the three months ended March 31, 2024 and June 30, 2023, respectively. The increase was primarily due to higher average yield on our loan portfolio.

Previous wording

Our total company net interest margin of 2.83% for the three months ended March 31, 2024 decreased compared to 3.10% for the three months ended December 31, 2023, and increased from 2.76% for the three months ended March 31, 2023. The decrease in total company net interest margin during the three months ended March 31, 2024 from the three months ended December 31, 2023 was primarily due to higher corporate debt interest expense. The increase from the three months ended March 31, 2023 was primarily due to higher average yield on our loan portfolio, offset by the higher corporate debt interest expense.

Current wording

Our total company net interest margin of 2.98% for the three months ended June 30, 2024 increased from 2.83% for the prior quarter, and increased from 2.78% for the three months ended June 30, 2023. The increase in total company net interest margin during the three months ended June 30, 2024 was primarily due to higher average yield on our loan portfolio.

Previous wording

Our annualized charge-off rate over average loans held for investment carried at amortized cost for the three months ended March 31, 2024 decreased to 0.07% as compared to 0.10% for the three months ended December 31, 2023 and was relatively flat as compared to 0.06% for the three months ended March 31, 2023. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarters. We do not record charge-offs on FVO loans which are carried at estimated fair value. We do not record charge-offs on our loans held for sale which are carried either at fair value, or at the lower of cost or estimated fair value.

Current wording

Our annualized charge-off rate over average loans held for investment carried at amortized cost for the three months ended June 30, 2024 decreased to 0.04% as compared to 0.07% and 0.09% for the three months ended March 31, 2024 and June 30, 2023, respectively. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarters. We do not record charge-offs on FVO loans which are carried at estimated fair value. We do not record charge-offs on our loans held for sale which are carried either at fair value, or at the lower of cost or estimated fair value.

Previous wording

Pre-tax return on equity and return on equity reflect income before income taxes and net income including income attributable to noncontrolling interest, respectively, as a percentage of the monthly average total stockholders’ equity including noncontrolling interest over the specified period. Pre-tax return on equity and return on equity remained the same during the quarter ended March 31, 2024 compared to the quarter ended December 31, 2023, and higher compared to the quarter ended March 31, 2023 due to the increase in income before income taxes and net income.

Current wording

Pre-tax return on equity and return on equity reflect income before income taxes and net income including income attributable to noncontrolling interest, respectively, as a percentage of the monthly average total stockholders’ equity including noncontrolling interest over the specified period. Pre-tax return on equity and return on equity decreased during the quarter ended June 30, 2024 compared to the quarter ended March 31, 2024 due to the decrease in income before income taxes and net income. Pre-tax return on equity and return on equity remained consistent compared to the quarter ended June 30, 2023.

Previous wording

Interest income on loans held for investment is comprised of interest income on loans and prepayment fees less the amortization of deferred net costs related to the origination of loans. Interest income on loans held for sale is comprised of interest income earned on loans prior to their sale. The net fees and costs associated with loans held for sale carried at the lower of cost or fair value, are deferred as part of the carrying value of the loan and recognized as a gain or loss on the sale of the loan. The fees and costs associated with loans held for sale carried at fair value are recognized and expensed as incurred.

Current wording

Interest income on loans held for investment is comprised of interest income on loans and prepayment fees less the amortization of deferred net costs related to the origination of loans. Interest income on loans held for sale is comprised of interest income earned on loans prior to their sale. The net fees and costs associated with loans held for sale carried at the lower of cost or fair value, are deferred as part of the carrying value of the loan and recognized as a gain or loss on the sale of the loan. The fees and costs associated with loans carried at fair value are recognized and expensed as incurred.

Previous wording

Portfolio related interest expense is incurred on the debt we incur to fund our loan origination and portfolio activities and consists of our warehouse facilities and securitized debt. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our securitized debt and warehouse liabilities.

Current wording

Portfolio related interest expense is incurred on the debt obtained to fund our loan origination and portfolio activities and consists of our warehouse facilities and securitized debt. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt when the debt is carried at amortized cost, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our securitized debt and warehouse liabilities.

Previous wording

Effective January 1, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replacing the incurred loss accounting approach with the current expected credit loss (CECL) approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loans position as of the balance sheet date, and assumptions from us. We do not record provision for loan losses on loans held for sale, or loans carried at fair value.

Current wording

Effective January 1, 2020, we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replacing the incurred loss accounting approach with the CECL approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loans position as of the balance sheet date, and assumptions from us. We do not record provision for credit losses on loans held for sale, or loans carried at fair value.

Previous wording

Origination Fee Income. Fee income related to our loan origination activities.

Current wording

Origination Income. Fee income related to our loan origination activities.

Previous wording

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $34.9 million from $28.5 million for the three months ended March 31, 2024 and 2023.

Current wording

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $38.6 million from $29.4 million for the three months ended June 30, 2024 and 2023, respectively. Our portfolio related net interest income increased to $73.4 million for the six months ended June 30, 2024 from $57.9 million for the six months ended June 30, 2023.

Previous wording

Interest Income. Interest income increased by $20.0 million to $90.5 million for the three months ended March 31, 2024, compared to $70.5 million for the three months ended March 31, 2023. The increase was primarily attributable to higher portfolio balances and an increase in the average loan yield, which increased from 8.00% for the three months ended March 31, 2023 to 8.71% for the three months ended March 31, 2024.

Current wording

Interest Income. Interest income increased by $22.9 million to $97.8 million for the three months ended June 30, 2024, compared to $74.9 million for the three months ended June 30, 2023, primarily attributable to higher portfolio balances and higher average loan yield. For the three months ended June 30, 2024, the average loan yield was 8.98% compared to 8.24% for the three months ended June 30, 2023. Interest income increased by $42.9 million to $188.3 million for the six months ended June 30, 2024, compared to $145.4 million for the six months ended June 30, 2023. The increase in interest income for the six months ended June 30, 2024 was primarily attributable to higher portfolio balances due to loan originations and higher average loan yield.

Previous wording

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to a change in rate for the three months ended March 31, 2024 and 2023, and for the three months ended March 31, 2024 and December 31, 2023, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance (i.e., $634.4 million) by the previous period’s average yield (i.e., 8.00%). The effect of rate changes is calculated by multiplying the change in average yield (i.e., 0.70%) by the current period’s average loan balance (i.e., $4.2 billion).

Current wording

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to a change in rate for the three and six months ended June 30, 2024 and 2023, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance of $0.7 billion by the previous period’s average yield of 8.24%. The effect of rate changes is calculated by multiplying the change in average yield of 0.74% by the current period’s average loan balance of $4.4 billion.

Previous wording

Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased from $42.0 million for the three months ended March 31, 2023 to $55.7 million for the three months ended March 31, 2024, primarily attributable to a higher loan portfolio being financed and increased interest rates.

Current wording

Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased to $59.2 million for the three months ended June 30, 2024 from $45.5 million for the three months ended June 30, 2023, and increased to $114.9 million for the six months ended June 30, 2024 from $87.5 million for the six months ended June 30, 2023, primarily attributable to a higher loan portfolio being financed and increased interest rates.

Previous wording

The following tables present the information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three months ended March 31, 2024 and 2023, and for the three months ended March 31, 2024 and December 31, 2023, respectively.

Current wording

The following tables present the information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three and six months ended June 30, 2024 and 2023, respectively.

Previous wording

Net Interest Income After Provision for Loan Losses

Current wording

Net Interest Income After Provision for Credit Losses

Previous wording

Interest Expense — Corporate Debt. Corporate debt interest expense increased to $5.4 million for the three months ended March 31, 2024, compared to $4.1 million for the three months ended March 31, 2023, primarily due to the issuance of $75.0 million of additional secured debt in February 2024.

Current wording

Interest Expense — Corporate Debt. Corporate debt interest expense increased to $6.2 million for the three months ended June 30, 2024, compared to $4.1 million for the three months ended June 30, 2023, and increased to $11.5 million for the six months ended June 30, 2024, compared to $8.3 million for the six months ended June 30, 2023, primarily due to the issuance of $75.0 million of additional secured debt in February 2024.

Previous wording

Provision for Loan Losses. Our provision for loan losses increased to $1.0 million for the three months ended March 31, 2024 compared to $0.6 million for the three months ended March 31, 2023, primarily due to an increase in reserves for nonperforming loans.

Current wording

Provision for Credit Losses. Our provision for credit losses remained relatively consistent at $0.2 million for the three months ended June 30, 2024 compared to $0.3 million for the three months ended June 30, 2023, and increased to $1.2 million for the six months ended June 30, 2024 from $0.9 million for the six months ended June 30, 2023. The increase is primarily due to the decrease in the valuation of underlying collateral for nonperforming loans.

Previous wording

The $12.9 million increase in total other operating income during the three months ended March 31, 2024 was mainly due to the unrealized gains from new originations.

Current wording

The $8.5 million and $21.5 million increases in total other operating income for the three and six months ended June 30, 2024, respectively, were mainly due to the unrealized gains from new originations.

Previous wording

Operating expenses are presented in the following table. Changes in operating expenses comparing to the same period prior year are discussed below.

Current wording

Operating expenses are presented in the following table. Changes in operating expenses comparing to the same periods prior year are discussed below.

Previous wording

Compensation and Employee Benefits. Compensation and employee benefits increased by $5.3 million to $15.4 million for the three months ended March 31, 2024 compared to $10.0 million for the three months ended March 31, 2023. The increase was mainly driven by the increase in headcount and higher commissions expense over the last twelve months.

Current wording

Compensation and Employee Benefits. Compensation and employee benefits increased by $5.9 million to $16.6 million for the three months ended June 30, 2024 compared to $10.7 million for the three months ended June 30, 2023, and increased by $11.2 million to $31.9 million for the six months ended June 30, 2024 compared to $20.7 million for the six months ended June 30, 2023. The increase was mainly driven by the increase in headcount and higher commissions expense over the last twelve months.