Velocity Financial, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Velocity originates and manages business-purpose loans secured by investor-owned residential rental and commercial real estate. It primarily funds its portfolio through warehouse facilities and securitizations. At year-end, total loan UPB was $2.59 billion across 45 states and Washington, D.C.; investor 1–4-unit loans represented about 51% of UPB. In December, Velocity acquired an 80% interest in Century, an FHA multifamily and healthcare lender and Ginnie Mae issuer/servicer.
Financial performance and condition
| Metric | FY2021 / Dec. 31, 2021 | Prior comparable period |
|---|---|---|
| Interest income | $182.0 million | $167.3 million in FY2020 |
| Net interest income | $76.0 million | $67.4 million in FY2020 |
| Income before taxes | $39.8 million | $23.1 million in FY2020 |
| Net income | $29.2 million | $17.8 million in FY2020 |
| Net income allocated to common shareholders; EPS | $20.6 million; $0.90 basic and $0.86 diluted | FY2020: $(31.2) million; $(1.55) basic and diluted, after $49.0 million of deemed preferred dividends |
| Portfolio-related net interest margin | 4.54% | 3.89% in FY2020 |
| Total-company net interest margin | 3.57% | 3.30% in FY2020 |
| Operating cash flow | $57.6 million provided | $54.9 million provided in FY2020 |
| Net change in cash, cash equivalents and restricted cash | $27.3 million increase | $7.3 million decrease in FY2020 |
| Cash and cash equivalents | $36.0 million | $13.3 million at Dec. 31, 2020 |
| Total assets; total equity | $2.81 billion; $344.5 million | $2.10 billion; $219.6 million at Dec. 31, 2020 |
Portfolio yield was 8.56%, compared with 8.19% in FY2020. Operating expenses were $44.7 million, down 2.0%. The loan-loss provision was a $0.3 million reversal, versus $5.1 million of provision in FY2020. Year-end allowance for credit losses was $4.3 million, or 0.17% of held-for-investment UPB excluding fair-value loans.
Reported debt liabilities, net of issuance costs, included $1.912 billion of securitizations, $301.1 million of warehouse and repurchase borrowings, and $162.8 million of secured corporate financing. The corporate term loan had a gross balance of $170.8 million and matures in February 2026. Management reported $47.0 million of liquidity, comprising about $36.0 million unrestricted cash and $11.0 million of available liquidity on unfinanced loans, plus $349.9 million of available warehouse and repurchase capacity.
Changes versus FY2020
- Originations held for investment rose to $1.33 billion from $338.8 million; total originations were up 204.9%, following pandemic-related disruption and a production suspension in 2020.
- Portfolio-related net interest income increased 21.5%, reflecting higher average loan yield and volume, alongside a lower portfolio-related cost of funds (4.71% versus 4.87%).
- Nonperforming loans declined to $273.1 million, or 10.56% of total loans, from $332.8 million, or 17.11%. Management attributed the reduction to loan resolutions and improving economic conditions. The 2021 figure includes $53.8 million of nonaccrual loans in the COVID-19 forbearance program.
- Corporate debt interest expense increased to $20.6 million from $12.0 million, primarily following the February 2021 refinancing and higher corporate borrowing balance.
- Net income improved, while common-shareholder EPS comparisons are affected by the 2020 preferred-stock deemed dividend and 2021 conversion of preferred stock into common shares.
Outlook, risks and unusual items
- Outlook: The filing provides no specific earnings, origination or margin guidance. Management’s strategy emphasizes increasing broker-network penetration, expanding originations, developing products and selectively acquiring loan portfolios or businesses. Management says future results depend on origination growth, loan performance, funding access and cost, and operating efficiency.
- Key risks: COVID-19 and other economic shocks; real estate and capital-market conditions; borrower defaults and foreclosure costs; geographic and property concentration; competition; access to securitizations and warehouse facilities; interest-rate and funding-cost changes; covenant breaches or facility termination; regulatory and licensing requirements; servicing, technology and cybersecurity risks; and the transition away from LIBOR, which management did not expect to materially affect results.
- Acquisition: Velocity paid $12.8 million for 80% of Century on December 28, 2021. Century had $521 million of servicing UPB and originated $158 million of loans in 2021; its full-year pre-tax income was approximately $2.3 million. Acquisition-related direct costs of about $0.8 million were expensed. Century was excluded from the year-end internal-control assessment because it represented less than 1% of consolidated assets.
- Capital and financing events: Velocity completed four securitizations in 2021. It converted all $90 million of Series A preferred stock into 11.7 million common shares in October. Its ATM program permits up to $50 million of gross sales, subject to a 4 million-share cap; 10,727 shares were sold in 2021 for $0.14 million net proceeds. A further $273.6 million securitization closed in February 2022.
- Credit and contingencies: COVID-19 forbearance loans totaled $292.4 million UPB at year-end, of which $59.1 million was nonperforming/nonaccrual. The allowance for loan losses relies on forecast assumptions and was identified as a critical audit matter. The company reported a $141,000 loan repurchase reserve; management did not expect pending or threatened legal matters to have a material effect.
- Shareholder returns and controls: The company had not paid cash dividends and did not intend to do so in the foreseeable future. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the decline in nonperforming loans reflects durable borrower cures and resolutions, and how the remaining forbearance loans perform.
- Whether the $4.3 million allowance adequately reflects lifetime credit risk, collateral values and forecast assumptions, particularly given the critical audit matter.
- Whether high origination growth can be sustained while maintaining underwriting quality, loan yields and the reported net interest margins.
- Funding capacity, securitization execution and warehouse covenant headroom, including the cost and terms of the LIBOR replacement.
- The effects of Century’s integration, future contribution and servicing-rights valuation, along with the dilution from the preferred conversion and potential warrant exercises.