Velocity Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet amounts are as of March 31, 2023. Comparisons are primarily with Q1 2022 or December 31, 2022, as indicated. Unless stated otherwise, dollar amounts below are in millions. The company originates and manages investor real estate loans and also operates Century, an FHA multifamily mortgage lender and servicer.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period |
|---|---|---|
| Interest income | $70.5 | $52.0 in Q1 2022 |
| Portfolio-related net interest income | $28.5 | $28.5 in Q1 2022 |
| Net interest income, after corporate debt interest | $24.4 | $11.4 in Q1 2022 |
| Provision for loan losses | $0.6 | $0.7 in Q1 2022 |
| Other operating income | $12.6 | $5.6 in Q1 2022 |
| Operating expenses | $21.5 | $12.3 in Q1 2022 |
| Income before taxes / net income | $14.8 / $10.7 | $4.0 / $3.2 in Q1 2022 |
| Net earnings attributable to common stockholders; diluted EPS | $10.5; $0.31 | $3.1; $0.09 in Q1 2022 |
| Portfolio yield / portfolio-related net interest margin | 8.00% / 3.23% | 7.76% / 4.25% in Q1 2022; margin was 2.84% in Q4 2022 |
| Cash and restricted cash | $56.0 total, including $39.4 unrestricted | $62.1 total at December 31, 2022 |
| Total assets / total equity | $3,837.1 / $391.2 | $3,749.0 / $380.5 at December 31, 2022 |
| Debt, approximately | $3,360.9, including securitizations, secured financing and warehouse facilities | Debt mix changed with new fair-value securitization accounting |
The filing does not present a standalone revenue figure; interest income and other operating income are reported separately. Cash flow was negative $11.9 from operations and negative $71.6 from investing, offset by $77.5 provided by financing. Cash, cash equivalents and restricted cash decreased $6.0 during the quarter. Management reported total liquidity plus available warehouse capacity of $578.2, including $532.9 of available warehouse capacity and $5.9 of available borrowing against unencumbered loans.
Material changes and operating trends
- Interest income rose $18.5 year over year, reflecting a larger average loan portfolio and higher yield. Portfolio-related interest expense also increased $18.5, leaving portfolio-related net interest income essentially unchanged.
- Net income improved substantially versus Q1 2022, when corporate debt interest expense included a $12.8 million prepayment fee and write-off of unamortized issuance costs associated with a debt refinancing. The filing states Q1 2022 net income would have been $12.4 million excluding that one-time charge.
- Other operating income increased $6.9 year over year, including a $7.4 unrealized gain on fair-value loans; the quarter also included a $0.2 unrealized loss on fair-value securitizations. These valuation changes make reported earnings sensitive to estimates and assumptions.
- Operating expenses increased $9.3 year over year. The filing attributes changes in part to fair-value-option accounting, which causes origination costs to be expensed as incurred, $2.6 million of securitization expenses, higher servicing costs and higher REO valuation expenses.
- Originations fell to $217.0 million from $581.4 million in Q1 2022, which management attributed primarily to strategically reducing originations. Total loan UPB was $3.579 billion, up from $3.512 billion at year-end 2022; weighted-average coupon was 8.15% and weighted-average origination LTV was 68.1%.
- Nonperforming loans were $309.9 million, or 8.62% of portfolio UPB, versus $292.8 million, or 8.34%, at year-end 2022 and $275.5 million, or 9.58%, a year earlier. The allowance for credit losses was $5.0 million, up from $4.9 million at year-end.
Outlook, risks and contingencies
- The filing provides no quantified earnings, originations or margin guidance. Management says results depend on loan demand, credit performance, funding availability and cost, and property collateral values.
- Management cites uncertainty from inflation, possible recession, real estate and corporate debt market stress, recent bank failures, the Russia/Ukraine war and lingering pandemic effects. The company used a severe stress scenario in its allowance estimate, with an eight-quarter forecast and two-quarter reversion period.
- Funding risks include higher variable borrowing costs and reliance on securitization markets. Portfolio-related cost of funds was 5.33%, up from 4.00% in Q1 2022; several warehouse facilities have near-term maturities, including one scheduled for May 15, 2023. The company said it was in compliance with debt covenants at quarter-end and expected LIBOR-linked facilities to transition to SOFR or a replacement index before June 30, 2023, without material adverse effect.
- Loans and securitizations carried at fair value rely partly on Level 3 estimates and unobservable assumptions. The fair-value accounting elections for newly originated loans (from October 1, 2022) and certain securitizations (from January 1, 2023) affect comparability and exclude fair-value-option loans from the CECL allowance.
- Legal proceedings arise in the ordinary course; management does not expect pending matters to have a material adverse effect. The company reported no material off-balance-sheet arrangements and no material changes in internal control over financial reporting.
- After quarter-end, the company completed a $64.8 million securitization of retained certificates on April 28, 2023, to be accounted for as secured borrowings in Q2. The October 2022 repurchase agreement was also paid off in April using proceeds from a new securitization.
Important facts for investors to verify
- How much of reported earnings depends on fair-value gains, and how changes in valuation assumptions could affect future results.
- Whether nonperforming loans, foreclosure activity and REO balances continue to rise, and how recoveries compare with management’s expectations.
- Whether securitization access and warehouse capacity remain available at sustainable costs, including the effect of rate increases and index transitions.
- How the strategic reduction in originations affects future portfolio growth, interest income and operating efficiency.
- The status of near-term facility maturities and subsequent financing activity, including the post-quarter securitization and repayment disclosures.