Velocity Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 3, 2022. Dollar amounts below are in millions unless noted. Velocity originates and manages investor real estate loans, primarily secured by residential rental and commercial properties. It also owns an 80% interest in Century, an FHA multifamily and senior-housing lender and servicer.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $63.4 | $46.9 | $174.7 | $132.6 |
| Net interest income | $24.8 | $22.1 | $62.5 | $54.7 |
| Provision for loan losses | $0.6 | $0.2 | $1.6 | $(0.7) reversal |
| Net income | $10.3 | $8.0 | $24.3 | $20.9 |
| Diluted EPS | $0.29 | $0.23 | $0.70 | $0.62 |
- Q3 portfolio-related net interest margin was 3.59%, down from 4.97% a year earlier and 4.10% in Q2 2022. Total-company margin was 3.09%, versus 4.13% and 3.54%, respectively. Management attributed the declines primarily to higher funding costs and lower loan yields amid rising rates. Q3 portfolio yield was 7.88%, versus 8.77% a year earlier.
- At September 30, total assets were $3,647.4, including net loans of $3,463.1, up from $2,812.5 and $2,616.8, respectively, at December 31, 2021. Equity was $370.7.
- Debt on the balance sheet comprised $2,651.9 of securitizations, $340.1 of warehouse and repurchase facilities, and $209.5 of secured corporate financing. The new $215.0 five-year term loan carries a fixed 7.125% rate and matures in March 2027; it refinanced the prior term loan.
- Cash and cash equivalents were $26.4, with restricted cash of $14.5. Management reported total liquidity plus available warehouse capacity of $495.0, including $409.0 of available warehouse capacity and $59.6 of availability against unencumbered loans.
- For the first nine months, operating cash flow was $8.7, investing cash flow was $(819.1), and financing cash flow was $803.7; cash, cash equivalents and restricted cash decreased by $6.7 to $40.9.
Changes versus comparable periods
- Q3 interest income increased $16.5 year over year, principally reflecting a larger portfolio; the increase was partly offset by lower portfolio yield. Portfolio-related interest expense rose $14.2, reflecting larger average debt and higher costs.
- Q3 net income increased to $10.3 from $8.0. For the first nine months, net income increased to $24.3 from $20.9, while diluted EPS rose to $0.70 from $0.62.
- Loan originations were $457.3 in Q3, up 32.4% from $340.7 a year earlier. The September 30 portfolio had $3.4 billion UPB, versus $2.3 billion a year earlier; weighted-average LTV at origination was 68.7%.
- Nonperforming loans were $253.3, or 7.38% of the portfolio, compared with $273.1 (10.56%) at December 31, 2021 and $288.4 (12.70%) a year earlier. The allowance for credit losses was $5.3, or 0.16% of relevant loan UPB, versus $4.3 at year-end 2021.
- Nine-month corporate-debt interest expense included $7.7 of debt-cost write-off and $5.1 of prepayment penalties related to the March refinancing. The resulting increase in corporate-debt expense affected year-to-date comparisons.
Outlook, risks and notable items
- The filing provides no numerical earnings or origination guidance. Management cited inflation, possible recession, Russia/Ukraine-related disruption, lingering COVID-19 effects, property-market conditions, competition, and the availability and cost of financing as risks to performance.
- For its credit-loss estimate, management used a severe-stress scenario with a six-quarter forecast period and four-quarter reversion, citing macroeconomic uncertainty. COVID-19 forbearance loans totaled $217.5 UPB; 80.5% were performing/accruing and 19.5% nonperforming/nonaccrual at quarter-end.
- Management expected LIBOR-linked facilities and debt to transition to SOFR or a replacement index before June 2023 and did not expect the transition to materially affect funding costs or results. The company reported compliance with debt covenants.
- On October 7, 2022, the company completed a $254.2 securitization of investor real estate loans, to be accounted for as secured borrowings in Q4. No shares were sold under the ATM equity program during the quarter or nine-month period.
- Management said pending legal matters were not expected to have a material effect. Disclosure controls were reported effective; the filing notes no material change in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan-yield and funding-cost trends continue to compress net interest margins, and the effect of any further rate increases.
- Portfolio credit performance, including nonperforming loans, COVID-19 forbearance outcomes, collateral values, and adequacy of the allowance under stressed conditions.
- Liquidity and refinancing capacity, warehouse availability and covenants, securitization access, and the LIBOR-to-SOFR transition.
- The impact of the March 2022 refinancing charges and Century’s contribution to earnings, servicing assets, and noncontrolling interests.
- Potential exposure from loan-sale repurchase representations and warranties; the recorded repurchase liability was $0.158 at September 30, 2022.