Velocity Financial, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparative results are for 2021. Velocity originates and manages business-purpose loans secured by investor-owned residential rental and commercial properties. It also owns 80% of Century, a government-insured multifamily and healthcare lender and servicer.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Interest income | $240.3 million | $182.0 million |
| Portfolio-related net interest income | $112.6 million | $96.6 million |
| Net interest income, after corporate debt interest | $83.1 million | $76.0 million |
| Net income | $32.5 million | $29.2 million |
| Net income attributable to Velocity | $32.2 million | $29.2 million |
| Diluted earnings per share | $0.94 | $0.86 |
| Operating cash flow | $48.7 million | $57.6 million |
- Interest income increased 32.1%, primarily as average loans grew 45.4% to $3.1 billion. Portfolio yield declined to 7.77% from 8.56%, while portfolio-related cost of funds eased to 4.64% from 4.71%.
- Portfolio-related net interest margin fell to 3.64% from 4.54%; total-company net interest margin declined to 2.69% from 3.57%. The filing attributes lower portfolio yield principally to less recovery of delinquent and default interest than in 2021.
- Operating expenses rose 33.6% to $59.7 million, including higher compensation and servicing costs. Other operating income rose to $22.2 million from $8.2 million, including $8.3 million of unrealized gains on fair-value loans and $2.1 million on mortgage servicing rights.
- At year-end, total assets were $3.75 billion, total liabilities $3.37 billion, and equity $380.5 million. Cash and cash equivalents were $45.2 million, with an additional $16.8 million of restricted cash.
- Net cash used in investing was $908.2 million, principally reflecting loan originations; financing activities provided $874.0 million. Cash, cash equivalents and restricted cash increased $14.5 million for the year.
Portfolio, credit, debt and liquidity
- Held-for-investment loans totaled $3.51 billion UPB across 8,893 loans. Weighted-average origination LTV was 68.2%; investor 1–4 unit loans represented 52.7% of UPB. California, New York and Florida together accounted for 56.0% of UPB.
- Nonperforming loans were $292.8 million, or 8.34% of portfolio UPB, versus $273.1 million, or 10.56%, a year earlier. The lower percentage reflects portfolio growth; nonperforming balances increased in dollars. The allowance for loan losses was $4.9 million, and 2022 charge-offs were $0.5 million.
- COVID-19 forbearance loans were $201.0 million UPB at year-end; $39.6 million of those loans were included in nonperforming loans. Management cited loan resolutions and economic recovery as factors in the improvement in the nonperforming percentage.
- Year-end liquidity, including available warehouse capacity and borrowing against unencumbered loans, was reported at $559.3 million: $45.2 million cash, $14.0 million available against unencumbered loans, and $500.1 million available warehouse capacity.
- Net balance-sheet debt included $2.74 billion of securitizations, $330.8 million of warehouse and repurchase facilities, and $209.8 million of secured corporate financing. The $215 million corporate term loan bears fixed interest of 7.125% and matures March 15, 2027. The company reported compliance with debt covenants at year-end.
Material changes, outlook and notable items
- Originations increased 32.8% to $1.76 billion. The company completed six investor-loan securitizations during 2022 and reported 25 securitizations since 2011. A further $240.3 million UPB securitization closed in January 2023.
- In March 2022, Velocity replaced its $175 million floating-rate 2021 term loan with a $215 million fixed-rate term loan. The early repayment and refinancing generated one-time debt issuance write-off and prepayment costs; reported 2022 corporate-debt interest expense was $29.5 million.
- Beginning October 1, 2022, newly originated loans were accounted for under the fair value option rather than amortized cost with a CECL reserve. Fair values rely on Level 3 models and unobservable assumptions, and valuation changes flow through earnings. The auditor identified loan-loss forecasts and fair-value assumptions as critical audit matters.
- Management gave no specific numerical earnings or origination guidance. It described 2023 performance as dependent on macroeconomic conditions, real-estate and funding markets, and loan demand; it cited possible recession, commercial-real-estate and corporate-debt-market stress, COVID-19 effects, and geopolitical uncertainty.
- Other material risks include borrower repayment and collateral values, foreclosures and liquidation timing, access to securitization and warehouse funding, interest-rate exposure, geographic and property-type concentration, competition, servicing, and regulatory or licensing requirements. Certain warehouse facilities were scheduled to mature or renew during 2023. Management expected the LIBOR-to-SOFR transition to have no material adverse effect.
- The company has not paid common-stock dividends and does not expect to do so for the foreseeable future. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified. Management said pending or threatened legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether portfolio and total-company margins stabilize after the substantial 2022 compression, especially as funding costs and loan yields change.
- The performance, delinquencies, recoveries and collateral values of nonperforming and forbearance loans, including how the portfolio evolves as it grows.
- The assumptions and sensitivity behind fair-value loan gains, mortgage-servicing-rights valuations, and the CECL allowance; assess how much reported earnings depends on estimates and nonrecurring items.
- Availability, cost and renewal terms of warehouse funding and securitizations, including near-term facility maturities and covenant headroom.
- Concentration exposure in California, New York and Florida and in investor 1–4 unit properties; also review the $188.4 million UPB of held-for-sale loans sold to an affiliate in 2022.