Velocity Financial, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; financial statements are unaudited. Velocity originates and manages investor real estate loans, primarily secured by residential rental and small commercial properties, and earns most revenue from loan interest. Its $2.1 billion loan portfolio spans 45 states and the District of Columbia. Investor 1–4 unit loans comprised about half of portfolio UPB; weighted-average LTV at origination was 66.7%.
Financial results and liquidity
Amounts below are in millions except per-share data. Q2 and first-half results are compared with the corresponding 2020 periods.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $45.0 | $39.8 | $85.7 | $84.4 |
| Net interest income | $20.1 | $16.7 | $32.6 | $32.1 |
| Provision (reversal) for loan losses | $(1.0) | $1.8 | $(0.9) | $3.1 |
| Other operating income (loss) | $2.4 | $(1.3) | $5.2 | $0.3 |
| Operating expenses | $10.7 | $10.9 | $21.3 | $23.0 |
| Net income | $9.5 | $2.1 | $12.8 | $4.7 |
| Basic / diluted EPS | $0.29 / $0.28 | $(2.33) / $(2.33) | $0.40 / $0.38 | $(2.20) / $(2.20) |
- Q2 portfolio yield was 8.90%, versus 7.59% a year earlier. Portfolio-related net interest margin improved to 4.83% from 3.54%; total-company margin was 3.98% versus 3.18%. Management attributed the improvement chiefly to collections of interest, including default interest, on resolved nonperforming loans and fewer nonaccruals.
- At June 30, total assets were $2.27 billion; cash and cash equivalents were $27.7 million and restricted cash $7.9 million. Total debt carrying value was about $1.87 billion: $1.56 billion securitizations, $164.1 million secured corporate financing and $151.9 million warehouse/repurchase facilities. Stockholders’ equity was $233.5 million, alongside $90.0 million of preferred stock classified as mezzanine equity.
- First-half operating cash flow was $20.9 million, investing cash outflow $139.6 million and financing cash inflow $134.1 million. Cash, cash equivalents and restricted cash increased $15.4 million to $35.7 million. Investing outflow chiefly reflected $496.5 million of loan originations, partly offset by loan repayments and $274.0 million of proceeds from loan sales.
- In February, the company issued a $175 million five-year term loan at one-month LIBOR plus 8.00% (1.00% floor), used partly to repay its prior $78 million term loan. The new loan’s June balance was $173.0 million. Warehouse and term-loan covenants were reported in compliance.
Material changes versus the prior comparable period
- Q2 net income rose to $9.5 million from $2.1 million, supported by higher interest income and loan-disposition gains, a $1.0 million loan-loss reversal rather than a $1.8 million provision, and lower operating expenses. First-half net income increased to $12.8 million from $4.7 million.
- Q2 interest income increased by $5.2 million year over year, despite lower average loans, as portfolio yield rose. Portfolio-related interest expense fell $0.6 million, primarily with lower average debt. Corporate-debt interest expense increased $2.4 million in Q2 as the balance increased.
- Reported common EPS comparisons are affected by the 2020 preferred-stock deemed dividend of $49.0 million. In 2021, participating preferred and restricted-stock securities were allocated undistributed earnings; diluted weighted-average shares were about 34.0 million versus 20.1 million basic shares.
- Loan originations resumed after the COVID-related suspension in 2020. Q2 2021 originations were $256.5 million, up 10.1% from Q1 2021; there were no Q2 2020 originations.
Outlook, management commentary, risks and unusual items
- No formal financial guidance was provided. Management intends to grow the loan portfolio, continue using securitizations as its primary long-term funding source, and use other facilities where needed. It said the duration and financial effects of COVID-19, including the Delta variant and vaccine effectiveness, remained uncertain.
- Credit indicators were mixed: nonperforming loans were $315.5 million, or 15.3% of portfolio UPB, down from 16.8% at March 31, 2021 but up from 14.6% at June 30, 2020. COVID-forbearance loans totaled $342.4 million UPB; 73.6% were performing/accruing and 26.4% nonperforming/nonaccrual, compared with 83.6% and 16.4%, respectively, at year-end 2020.
- The allowance for credit losses was $4.0 million, or 0.19% of relevant UPB, down from $5.8 million at year-end 2020. Management cited economic improvement and used a COVID adverse stress forecast scenario; assumptions may change as conditions evolve. Q2 charge-offs were $0.9 million.
- Risks include dependence on securitization and warehouse funding, financing costs and covenant requirements, borrower defaults and collateral values, competition, and macroeconomic and pandemic uncertainty. Loans are geographically concentrated in New York (23.0%), California (22.2%) and Florida (13.3%). The 2013 repurchase facility had a September 29, 2021 maturity. A new $100 million term repurchase facility was signed July 29, after quarter-end.
- The 2021 term loan bears a high stated spread over LIBOR and is secured by substantially all eligible company assets. The preferred stock has a $90 million maximum redemption value and holder redemption rights subject to debt restrictions; its liquidation preference can rise to $3,000 per share. These terms could affect future liquidity and common-stock dilution.
- The company recognized $5.2 million of first-half gains on loan dispositions. First-half corporate-debt interest expense included a $2.9 million debt-issuance-cost write-off and $1.6 million prepayment fee related to refinancing. Management reported disclosure controls were effective. An IPO-related class action was dismissed in January 2021; management said pending proceedings were not expected to have a material effect. Risk factors were omitted under reduced smaller-reporting-company disclosure requirements.
Important facts for investors to verify
- Whether nonperforming and forbearance loans continue to resolve, and whether the allowance remains adequate as pandemic and property-market assumptions change.
- Upcoming maturities, available warehouse capacity, borrowing costs and compliance with financing covenants, particularly the 2013 facility maturity and the new term-loan terms.
- Cash available for operations and loan growth after originations, debt service and collateral-related funding needs.
- Preferred-stock redemption, liquidation and conversion provisions, warrant dilution, and the resulting effects on common shareholders and future liquidity.