Velocity Financial(VEL) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section details Velocity Financial, Inc.'s unaudited consolidated financial statements and management's analysis of operations Consolidated Financial Statements (Unaudited) This section presents Velocity Financial, Inc.'s unaudited consolidated financial statements for Q1 2021, detailing financial position, performance, and cash flows Consolidated Balance Sheets As of March 31, 2021, total assets increased to $2.16 billion from $2.10 billion at year-end 2020, primarily driven by an increase in loans held for investment, while total liabilities grew to $1.85 billion mainly due to increased borrowings, and total stockholders' equity saw a slight increase to $223.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,164,839 | $2,102,874 | | Total loans, net | $2,009,869 | $1,962,734 | | Cash and cash equivalents | $20,434 | $13,273 | | Total Liabilities | $1,851,369 | $1,793,285 | | Securitizations, net | $1,453,386 | $1,579,019 | | Warehouse and repurchase facilities, net | $203,314 | $75,923 | | Total Stockholders' Equity | $223,470 | $219,589 | Consolidated Statements of Income For the three months ended March 31, 2021, the company reported net income of $3.4 million, an increase from $2.6 million in the same period of 2020, achieved despite a decrease in net interest income, primarily due to a significant reduction in the provision for loan losses and lower operating expenses, with diluted earnings per share at $0.10 compared to $0.13 in the prior-year quarter Q1 2021 vs Q1 2020 Performance (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Interest income | $40,707 | $44,637 | | Net interest income | $12,525 | $15,447 | | Provision for loan losses | $105 | $1,290 | | Total operating expenses | $10,617 | $12,050 | | Net income | $3,396 | $2,579 | | Basic EPS | $0.11 | $0.13 | | Diluted EPS | $0.10 | $0.13 | Consolidated Statements of Changes in Stockholders'%20/%20Members'%20Equity Total stockholders' equity increased from $219.6 million at the end of 2020 to $223.5 million as of March 31, 2021, primarily driven by net income of $3.4 million and stock-based compensation - The increase in stockholders' equity during Q1 2021 was mainly due to net income of $3,396 thousand and stock-based compensation of $485 thousand[15] Consolidated Statements of Cash Flows For the first quarter of 2021, the company generated $10.4 million in cash from operating activities, used $53.7 million in investing activities primarily for loan originations, and provided $50.2 million from financing activities, resulting in a net increase in cash and cash equivalents of $6.9 million Cash Flow Summary for Three Months Ended March 31 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,424 | $1,366 | | Net cash used in investing activities | $(53,656) | $(52,064) | | Net cash provided by financing activities | $50,181 | $35,278 | | Net increase (decrease) in cash | $6,949 | $(15,420) | Notes to Unaudited Consolidated Financial Statements These notes detail the company's accounting policies, significant financial events like its 2020 IPO, loan portfolio status, debt facilities, and subsequent financing activities - In January 2020, the company converted from an LLC to a corporation and completed its IPO, trading on the NYSE under the symbol 'VEL'[23] - As of March 31, 2021, loans in the COVID-19 forbearance program had an unpaid principal balance (UPB) of $363.7 million, of which 79.6% were performing, a decrease from $392.1 million at the end of 2020[39][40] - In February 2021, the company entered into a new five-year $175.0 million syndicated corporate debt agreement (the '2021 Term Loan') and used a portion of the proceeds to redeem its 2019 Term Loan[59] - Subsequent to the quarter end, on April 16, 2021, the company entered into a new $100.0 million Term Repurchase Agreement, and on April 21, 2021, it received the remaining $35.0 million under its 2021 Term Loan commitment[110][111] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's Q1 2021 financial condition and operational results, highlighting key performance drivers, portfolio quality, and liquidity enhancements - The company is a vertically integrated real estate finance company that originates and manages investor loans secured by 1-4 unit residential rental and small commercial properties[114] - In response to COVID-19, the company strengthened its liquidity by obtaining a new corporate credit facility of $175.0 million in February 2021[127] Q1 2021 vs Q1 2020 Results Summary (in thousands) | Metric | March 31, 2021 | March 31, 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $12,525 | $15,447 | $(2,922) | (18.9)% | | Provision for loan losses | $105 | $1,290 | $(1,185) | (91.9)% | | Total operating expenses | $10,617 | $12,050 | $(1,433) | (11.9)% | | Net income | $3,396 | $2,579 | $817 | 31.7% | - Loan originations for Q1 2021 totaled $233.0 million, a 22.4% increase from Q4 2020, indicating a recovery in origination activity[142] Portfolio and Asset Quality As of March 31, 2021, the total loan portfolio UPB was $2.0 billion across 5,935 loans, with a weighted average LTV of 66.3%, and nonperforming loans (NPLs) represented 16.83% of the total UPB, an increase from 8.76% a year prior, largely due to the impact of the COVID-19 pandemic, with the portfolio concentrated in investor 1-4 unit properties and geographically in New York and California Key Portfolio Statistics | Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total loans (UPB, in thousands) | $1,990,684 | $1,944,804 | | Loan count | 5,935 | 5,878 | | Weighted average LTV | 66.3% | 66.1% | | Weighted average coupon | 8.42% | 8.51% | | Nonperforming loans (% of total) | 16.83% | 17.11% | - The increase in nonperforming loans to 16.8% of the portfolio as of March 31, 2021, was primarily attributed to the COVID-19 pandemic, including $74.3 million of COVID-19 forbearance-granted loans placed on nonaccrual status[138][149] - The company resolved $46.5 million of non-performing loans during Q1 2021, realizing net gains of $1.3 million, largely due to collecting default interest and prepayment penalties[150] Key Performance Metrics For Q1 2021, the portfolio yield was 8.41%, and the portfolio-related cost of funds was 5.01%, resulting in a portfolio-related net interest margin of 4.10%, which saw a slight improvement from the previous quarter but a decrease from the prior year, while the total company net interest margin was 2.59%, impacted by one-time costs, and the annualized return on equity was 6.10% Key Performance Metrics (Annualized) | Metric | Q1 2021 | Q4 2020 | Q1 2020 | | :--- | :--- | :--- | :--- | | Portfolio yield | 8.41% | 8.40% | 8.57% | | Cost of funds — portfolio related | 5.01% | 4.97% | 4.84% | | Net interest margin — portfolio related | 4.10% | 4.07% | 4.18% | | Net interest margin — total company | 2.59% | 3.68% | 2.97% | | Return on equity | 6.10% | 17.78% | 4.58% | - Excluding a one-time debt issuance cost write-off and prepayment penalties, the adjusted return on equity for Q1 2021 would have been 12.07%[163] Consolidated Results of Operations Comparing Q1 2021 to Q1 2020, net interest income decreased by 18.9% to $12.5 million due to a smaller average loan portfolio and higher corporate debt interest, but a 91.9% decrease in the provision for loan losses to $0.1 million and an 11.9% reduction in operating expenses to $10.6 million led to a 23.5% increase in income before taxes, with net income rising 31.7% to $3.4 million - Portfolio-related net interest income decreased by $1.9 million (8.8%) YoY, driven by a lower average loan balance and a slight decrease in average loan yield due to an increase in nonperforming loans[200] - The provision for loan losses decreased significantly from $1.3 million in Q1 2020 to $0.1 million in Q1 2021, reflecting an improved economic outlook[211][49] - Operating expenses decreased by $1.4 million YoY, primarily due to lower professional fees (down $0.7 million) and reduced net expenses of real estate owned (down $0.6 million)[214] Liquidity and Capital Resources The company funds its activities through warehouse facilities, securitizations, corporate debt, and equity, with cash and cash equivalents at $20.4 million and $201.8 million outstanding on warehouse facilities as of March 31, 2021, further enhancing liquidity by securing a new $175 million five-year term loan in February 2021 and a new $100 million term repurchase agreement subsequent to the quarter - Primary sources of liquidity are borrowings under warehouse facilities, securitizations, corporate-level debt, and cash from operations[224] - On February 5, 2021, the company entered into a five-year, $175.0 million syndicated corporate debt agreement (2021 Term Loan), enhancing its long-term capital structure[237][239] - As of March 31, 2021, the company had $148.2 million of available capacity under its warehouse and repurchase facilities[241] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for this filing period - The company has indicated that this disclosure is not applicable[249] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period[251] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, such controls[252] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and exhibit listings Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, which management does not expect to have a material adverse effect, and a previously disclosed class action lawsuit related to the company's IPO was dismissed on January 25, 2021 - The company is party to various legal proceedings in the normal course of business, which are not expected to have a material impact[255] - An IPO-related class action lawsuit against the company and certain directors, shareholders, and underwriters was dismissed on January 25, 2021[256] Risk Factors This section was intentionally omitted pursuant to smaller reporting company reduced disclosure requirements - Disclosure of risk factors has been intentionally omitted as permitted for smaller reporting companies[257] Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable for this filing period - The company has indicated that this disclosure is not applicable[258] Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certificates of incorporation, bylaws, incentive plans, and officer certifications - A list of exhibits filed with or incorporated by reference into the Form 10-Q is provided, including corporate governance documents, agreements, and Sarbanes-Oxley certifications[264] Signatures This section contains the official signatures authorizing the filing of the Quarterly Report on Form 10-Q Signatures The report is duly signed and authorized by Christopher D. Farrar, Chief Executive Officer, and Mark R. Szczepaniak, Chief Financial Officer, on May 6, 2021 - The Form 10-Q was signed on May 6, 2021, by the Chief Executive Officer and the Chief Financial Officer[267][269]