Velocity Financial, Inc. — Q2 2022 Form 10-Q
Business and period. The company originates and manages investor real estate loans, primarily secured by residential rental and commercial properties. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $59.2 million | $45.0 million | $111.3 million | $85.7 million |
| Net interest income | $26.3 million | $20.1 million | $37.7 million | $32.6 million |
| Provision for (reversal of) loan losses | $0.3 million | ($1.0 million) | $1.0 million | ($0.9 million) |
| Income before taxes | $14.8 million | $12.9 million | $18.8 million | $17.5 million |
| Net income | $10.8 million | $9.5 million | $14.0 million | $12.8 million |
| Basic / diluted EPS | $0.33 / $0.31 | $0.29 / $0.28 | $0.42 / $0.40 | $0.40 / $0.38 |
Q2 net interest income related to the loan portfolio was $30.5 million, up 24.9% year over year, reflecting portfolio growth and improved loan recoveries, partly offset by lower loan yield. Q2 operating expenses rose to $14.3 million from $10.7 million, mainly due to compensation, servicing and other operating costs.
- Portfolio and margins: Loan UPB was $3.09 billion at June 30, up from $2.59 billion at December 31, 2021. Q2 portfolio yield was 7.97%; portfolio-related net interest margin was 4.10%, down from 4.83% a year earlier and 4.25% in Q1 2022. Total-company net interest margin was 3.54% in Q2.
- Credit: Nonperforming loans were $252.3 million, or 8.2% of portfolio UPB, versus 10.9% at December 31, 2021 and 15.3% at June 30, 2021. The allowance for credit losses was $4.9 million, about 0.16% of applicable UPB. COVID-forbearance loans totaled $236.3 million UPB; 20.5% were nonperforming/nonaccrual.
- Cash flow and liquidity: For the six months, operating cash flow was $13.1 million, investing cash flow was negative $507.9 million, and financing cash flow was $502.6 million. Cash and cash equivalents were $46.3 million; restricted cash was $9.2 million. Management reported total liquidity of $134.1 million, including $87.8 million of available borrowings against unencumbered loans.
- Debt and capital: At June 30, balance-sheet debt included $2.477 billion of securitizations, $208.4 million of warehouse and repurchase facilities, and $209.2 million of secured corporate financing, net. In March, the company replaced its prior term loan with a five-year, $215 million facility bearing fixed interest at 7.125%, due March 2027. Stockholders’ equity was $355.9 million; total equity was $359.5 million.
- Other metrics: Total assets were $3.33 billion. The portfolio comprised 7,779 loans across 45 states and the District of Columbia, with a weighted-average origination LTV of 68.2%. The company completed three securitizations totaling $682.5 million of investor real estate loans during Q2.
Material changes and management commentary
- Interest income grew with the larger portfolio, while Q2 average loan yield fell to 7.97% from 8.90% a year earlier. Portfolio-related funding costs rose sequentially to 4.34% from 4.00%, contributing to the sequential margin decline.
- Six-month corporate debt interest expense increased year over year, including approximately $12.8 million of one-time prepayment fees and unamortized debt-cost write-offs associated with the March refinancing. Q1 comparisons and returns are therefore affected by this unusual charge.
- The 80%-owned Century Health & Housing Capital acquisition, completed in December 2021, added FHA multifamily and senior-housing lending and servicing operations. Century’s serviced UPB was $505.1 million at June 30, 2022.
- Management used a severe-stress economic scenario in its credit-loss estimate, citing uncertainty related to COVID-19, the Russia-Ukraine war, inflation, supply-chain disruption and recession concerns. Management said lower nonperforming loans reflected loan resolutions and improvement in the U.S. economy.
- The filing provides no specific earnings or growth guidance. Management described securitizations as its primary long-term funding source and said it expects LIBOR-linked facilities to transition to SOFR or a replacement index before June 2023, without expecting a material adverse effect.
Risks, contingencies and controls
Key exposures include borrower credit performance and collateral values; higher interest rates and funding costs; continued access to securitization and warehouse financing; economic and real-estate-market weakness; and refinancing or covenant risk. Warehouse facilities and corporate debt contain covenants; the company reported compliance at June 30, 2022. Failure to comply could permit lenders to terminate facilities or demand repayment. The company also has loan-sale repurchase obligations; the recorded liability was $0.4 million. Management does not expect pending legal matters to materially affect financial condition or results. Disclosure controls were reported effective, and no material change in internal control over financial reporting was reported.
Investor facts to verify
- Track nonperforming and forborne loan balances, resolutions, charge-offs and whether the $4.9 million allowance remains adequate under changing economic assumptions.
- Assess the effect of further rate increases on loan yields, funding costs and portfolio-related net interest margin, including the LIBOR-to-SOFR transition.
- Verify the availability and cost of securitization and warehouse funding, covenant headroom, and the company’s reported $134.1 million of liquidity.
- Separate recurring earnings from the March refinancing charge and evaluate the contribution and performance of the Century business.
- Review the filing’s detailed debt terms, collateral pledges, servicing receivables and loan-sale repurchase estimates for potential liquidity or valuation sensitivity.