VEL

Velocity Financial, Inc. (VEL) - Q2 2024 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2024. Velocity Financial, Inc. is a vertically integrated real estate finance company that originates and manages investor loans secured by 1-4 unit residential rental and commercial properties. The company funds its portfolio primarily through securitized debt, warehouse facilities, and corporate debt. As of June 30, 2024, the company held a loan portfolio with an Unpaid Principal Balance (UPB) of approximately $4.48 billion across 45 states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Interest income increased by 30.5% year-over-year (Q2 2024 vs. Q2 2023), driven by a larger loan portfolio and higher average yields (8.98% in Q2 2024 vs. 8.24% in Q2 2023).
• Profitability: Net income attributable to Velocity Financial, Inc. rose 21.3% year-over-year to $14.8 million. This was supported by a $9.1 million increase in portfolio-related net interest income.
• Operating Expenses: Total operating expenses increased to $34.9 million in Q2 2024 from $22.2 million in Q2 2023. The increase was primarily due to higher compensation and employee benefits ($16.6M vs. $10.7M) and increased securitization expenses ($6.2M vs. $2.7M) due to two securitizations in Q2 2024.
• Other Operating Income: Significant volatility in fair value adjustments impacted results. Unrealized gains on fair value loans were $17.1 million in Q2 2024 compared to $2.4 million in Q2 2023. Conversely, unrealized losses on fair value securitized debt were $4.6 million in Q2 2024, compared to a gain of $5.6 million in Q2 2023.
• Debt Levels: Total securitized debt increased to $3.77 billion (including fair value adjustments) from $3.34 billion at year-end 2023. Corporate debt increased due to a new $75 million term loan issued in February 2024.

Guidance, Outlook, and Risks

• Outlook: Management continues to monitor macroeconomic conditions, including inflation, geopolitical conflicts (Russia/Ukraine, Israel-Gaza), and potential recession risks. The company expects to continue using securitized debt as a primary long-term financing source.
• Asset Quality: Nonperforming loans (NPLs) increased to 10.5% of the total portfolio ($470.6 million) as of June 30, 2024, up from 10.0% in Q2 2023. This increase is attributed to portfolio growth and a strategic decision to move loans into foreclosure earlier in the delinquency process. The allowance for credit losses was $5.2 million (0.20% of loans held for investment excluding fair value option loans).
• Liquidity: Total liquidity plus available warehouse capacity was $730.2 million as of June 30, 2024. The company remains in compliance with all financial covenants.
• Risks: Key risks include interest rate volatility, credit performance of the loan portfolio, and the availability and cost of funding. The company utilizes derivative instruments (interest rate swaps) to hedge interest rate risk on forecasted debt issuances.

Investor Verification Checklist

• Nonperforming Loan Trends: Verify the trajectory of the 10.5% NPL ratio and the effectiveness of resolution strategies (REO sales and loan payoffs) in reducing this balance.
• Fair Value Volatility: Assess the impact of unrealized gains/losses on fair value loans and securitized debt on net income, as these can cause significant earnings volatility unrelated to core operations.
• Cost of Funds: Monitor the cost of funds, which rose to 6.18% (total company) in Q2 2024, and its impact on net interest margins in a higher-rate environment.
• Securitization Activity: Confirm the company's ability to continue executing securitizations to fund growth and manage warehouse facility balances.
• COVID-19 Forbearance: Review the status of the $158.5 million in loans under the COVID-19 forbearance program, noting that 25.7% of these are currently nonperforming/nonaccrual.