Velocity Financial, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. Velocity originates and manages business-purpose loans secured by residential rental and small commercial properties.
Financial and operating results
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $167.3 million | $157.5 million |
| Net interest income | $67.4 million | $59.0 million |
| Provision for loan losses | $5.1 million | $1.1 million |
| Operating expenses | $45.6 million | $35.1 million |
| Income before income taxes | $23.1 million | $25.4 million |
| Net income | $17.8 million | $17.3 million |
| Net loss allocated to common shareholders | $(31.2) million | Not applicable |
| Basic and diluted loss per common share | $(1.55) | Not applicable |
| Cash from operating activities | $54.9 million | $(105.3) million |
| Cash from investing activities | $87.7 million | $(305.9) million |
| Cash from financing activities | $(149.9) million | $422.1 million |
Portfolio-related net interest margin was 3.89% (4.13% in 2019); total-company net interest margin was 3.30% (3.31%). Portfolio yield fell to 8.19% from 8.84%, while portfolio-related cost of funds declined to 4.87% from 5.23%. The common-shareholder loss reflects $49.0 million of deemed preferred dividends, rather than a net loss at the company level.
At year-end, total assets were $2.10 billion, total liabilities $1.79 billion, and shareholders’ equity $219.6 million. Cash and cash equivalents were $13.3 million, with another $7.0 million restricted. The company reported approximately $14.5 million of liquidity, including eligible warehouse collateral borrowings, and $76.5 million of uncommitted warehouse capacity. Debt included $1.58 billion of securitizations, $75.9 million of warehouse borrowings (net), and $78.0 million of corporate debt principal.
The held-for-investment loan portfolio had $1.93 billion UPB, a 66.1% weighted-average origination LTV, and a 8.51% weighted-average coupon. Nonperforming loans rose to $332.8 million, or 17.2% of UPB, from $112.2 million, or 6.1%, in 2019. The 2020 figure includes $64.4 million of nonaccrual loans in the COVID-19 forbearance program; $392.1 million UPB remained in that program at year-end.
Changes versus prior period and fourth quarter
- Annual originations fell 57.0% to $435.0 million from $1.01 billion, following a suspension of originations and loan purchases from mid-March through August. Production resumed in September. Fourth-quarter originations were $179.3 million, 7.9% above the prior-year quarter.
- Net interest income increased 14.3%, supported by higher average loan balances and lower corporate-debt interest expense. The lower portfolio yield and increased credit provision reflected pandemic-related borrower stress.
- Provision for loan losses increased to $5.1 million; the allowance ended the year at $5.8 million, versus $2.2 million at year-end 2019. Operating expenses increased 29.7%, partly because certain origination costs were expensed during the production pause, and because of public-company costs and severance.
- Fourth-quarter net income was $9.6 million, compared with $5.2 million in fourth-quarter 2019. Fourth-quarter pretax income was $11.8 million.
- Total loans, net, declined to $1.96 billion from $2.08 billion. The company transferred approximately $214.4 million UPB of loans from held for sale to held for investment and sold $96.3 million UPB of recently originated loans in the fourth quarter.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantified earnings or origination guidance. Management says it will assess originations and opportunistic acquisitions against changing market conditions, with future results dependent on production, funding access and cost, borrower performance, and real estate markets.
- COVID-19 effects remained uncertain, including the duration and recurrence of outbreaks and the effects on borrowers, employees, vendors, and markets. The company offered voluntary forbearance from April through June and modified many affected loans.
- In April, the company raised $45.0 million gross through preferred stock and warrants sold to affiliates of two large stockholders. The preferred stock is recorded as $90.0 million of mezzanine equity at year-end due to its redemption-value accounting; it has a holder redemption option beginning in November 2024 and mandatory redemption provisions in certain circumstances. Warrants cover approximately 3.0 million common shares.
- After year-end, the company obtained a $200 million non-mark-to-market warehouse facility and a five-year $175 million corporate term-loan agreement, with $125 million initially funded and a conditional $50 million delayed draw. Proceeds repaid the former $78 million corporate loan; the remaining proceeds were intended for originations and general corporate purposes. The new loan bears interest at one-month LIBOR plus 8.00%, with a 1.00% floor.
- Funding and liquidity risks include warehouse renewal, covenant compliance, securitization-market access, and collateral requirements. The company reported compliance with warehouse and corporate-debt covenants at year-end. Its loans are concentrated in California (23.5%) and New York (22.8%) by UPB.
- Management reported effective disclosure controls and internal control over financial reporting at year-end; a previously reported tax-accounting material weakness was considered remediated. The auditor issued an unqualified opinion and identified the allowance for loan losses as a critical audit matter. The IPO-related class action was dismissed in January 2021. Management did not expect pending legal matters to have a material effect. No common dividends are planned for the foreseeable future.
Important facts for investors to verify
- Whether elevated delinquencies and nonperforming loans resolve, and the eventual losses, recoveries, and collateral values—including performance of forbearance loans.
- Key assumptions behind the CECL allowance, including stress-scenario weighting, forecast and reversion periods, prepayment assumptions, and collateral valuations.
- Availability and terms of warehouse capacity and securitizations, and the cost, covenants, and repayment features of the 2021 term loan.
- Preferred-stock redemption and conversion terms, future deemed dividends, warrant exercise, and potential dilution; 15.5 million preferred, warrant, and option share equivalents were excluded from 2020 diluted EPS as anti-dilutive.
- The sustainability of earnings excluding one-time and classification effects, including costs from the production pause, preferred-stock accounting, loan transfers, and loan-sale gains.