Velocity Financial, Inc. Announces First Quarter 2020 Results

First Quarter Highlights:

  • Net income of $2.6 million and earnings per share (EPS) of $0.13
  • “Core” EPS of $0.29(1) that includes the impact of one-time expense from the paydown of corporate debt in addition to provisioning for COVID-19 impacts
  • Book value growth to $250.4 million at March 31, 2020, from $152.8 million at December 31, 2020
  • Net loan portfolio interest income of $21.8 million
  • Total loan portfolio of $2.1 billion(2)
  • Completed first securitization of 2020 for $249 million
  • Loan production of $248 million in UPB

 

WESTLAKE VILLAGE, Calif.--()--Velocity Financial, Inc. (NYSE:VEL) (“Velocity” or the “Company”) reported net income of $2.6 million, a decrease from $5.2 million in the fourth quarter of 2019. Core net income for the first quarter of 2020 was $5.8 million, or $0.29 per share. “Core” earnings per share reflect adjustments for unique 1Q20 impacts, including one-time debt amortization cost in addition to COVID-19 impacts on the Company’s loan loss reserve. Book value of stockholders’ equity was $250.4 million at March 31, 2020, reflecting growth from new IPO capital and retained earnings as the Company did not engage in distressed loan sales or have significant impairments in its loans portfolio.

President and CEO, Chris Farrar commented, “Our first quarter results reflect one-time costs from our corporate debt paydown with IPO proceeds and an increase to our loan loss reserve due to COVID-19. While the last two months have presented near-term challenges for Velocity’s business, we remained profitable in the first quarter and have undertaken a number of steps to strengthen business continuity, improve the Company’s liquidity position and prioritize the safety and productivity of our employees. While it is still too early to accurately predict the ultimate impact of this health crisis on the economy and Velocity’s short term operations, we are positioning the business to thrive in the long term.”

Please see footnotes at the end of this release.

Velocity’s Response to COVID-19

As a result of the severe market volatility due to the COVID-19 pandemic, Velocity temporarily suspended loan origination activities until markets stabilize. Many of the Company’s loan production staff have been placed on 60-day temporary furlough, effective May 1, 2020. In addition, our special servicing team implemented a forbearance program to help small investors and business owners manage through these unprecedented times.

The Company also entered into an agreement with our original sponsors, Snow Phipps and TOBI to issue $45 million of convertible preferred stock and warrants and entered into amendments with the lenders on our existing warehouse repurchase agreements. The amended agreements provide the Company with a more flexible and stable financing solution for its recently originated whole loans.

These initiatives have stabilized the company’s liquidity and financing. For additional information, please refer to Velocity’s first quarter 2020 earnings presentation.

First Quarter Operating Results

 
KEY PERFORMANCE INDICATORS
($ in thousands)

1Q 2020

4Q 2019

 

$ Variance

 

% Variance

Pretax income

$

3,727

 

$

8,142

 

$

(4,415

)

(54

)%

Net income

$

2,579

 

$

5,182

 

$

(2,603

)

(50

)%

Diluted EPS(1)

$

0.13

 

$

0.44

 

$

(0.31

)

(71

)%

"Core" Earnings

$

5,804

 

NA

 

-

 

-

 

"Core" EPS(2)

$

0.29

 

NA

 

-

 

-

 

Pretax return on equity

 

7

%

 

22

%

NA

(69

)%

Net interest margin - portfolio

 

4.2

%

 

4.3

%

NA

(3

)%

Avergage equity

$

225,125

 

$

150,388

 

$

74,737

 

50

%

Discussion of results:

  • First quarter 2020 EPS was $0.13 per share
  • Core EPS reflects a $0.16 per share adjustment from the following:

‒ $0.13 per share impact related to one-time debt amortization costs from a $75 million reduction in long-term corporate debt utilizing proceeds from Velocity Financial, Inc.’s initial public offering (IPO) on January 17, 2020

‒ $0.03 per share impact related to loan loss provisioning for macroeconomic impacts of the COVID-19 global pandemic

  • The Company remained profitable and increased book value in the first quarter, despite a challenging environment and significant market volatility, which reflects prudent capital management and the quality of Velocity’s business model
TOTAL LOAN PORTFOLIO
($ in millions)

1Q 2020

4Q 2019

 

$ Variance

 

% Variance

Held for Investment
Investor 1-4 Rental

$

872

 

$

859

 

$

12

1

%

Mixed Use

 

265

 

 

251

 

 

14

5

%

Multi-Family

 

201

 

 

198

 

 

3

1

%

Retail

 

181

 

 

180

 

 

2

1

%

All Other

 

384

 

 

355

 

 

29

8

%

Total

$

1,903

 

$

1,843

 

$

59

3

%

Held for Sale
Short-term loans

$

224

 

$

216

 

$

8

4

%

Total Managed Loan Portfolio

$

2,127

 

$

2,059

 

$

68

3

%

Key loan portfolio metrics:

Total loan count

 

6,504

 

 

6,373

 

Weighted average loan to value

 

66

%

 

66

%

Weighted average total portfolio yield

 

8.57

%

 

8.89

%

Weighted average total debt cost

 

5.88

%

 

5.44

%

Discussion of results:

  • Velocity’s total loan portfolio was $2.1 billion at March 31, 2020, a 3 percent quarter-over-quarter increase from the fourth quarter of 2019, driven by Velocity’s organic loan production
  • The loans held for investment portfolio was $1.9 billion at March 31, 2020, a 3 percent quarter-over-quarter increase from the prior quarter, driven by growth of Mixed Use and Other loan investments
  • The loans held for sale portfolio was $224 million in UPB at March 31, 2020, a 4 percent increase from the prior quarter. Loans held for sale are short-term interest-only loans with contractual maturities of two years or less.
  • Net loan additions to the portfolio totaled $68 million in UPB in the first quarter of 2020
  • The weighted average loan-to-value ratio of the total portfolio was 66 percent at March 31, 2020, essentially unchanged from the prior quarter
  • The weighted average total portfolio yield was 8.57 percent in the first quarter, a decrease of 32 basis points from the fourth quarter of 2019, primarily resulting from growth in nonaccrual loans
  • The decrease in portfolio related debt cost was attributable to our more recent, lower cost pro rata securitizations
LOAN PRODUCTION VOLUMES
($ in millions)

1Q 2020

4Q 2019

$ Variance

% Variance

Investor 1-4 Rental

$

65

$

95

$

(29

)

(31

)%

Traditional Perm.

 

86

 

103

$

(17

)

(17

)%

Short-term loans

 

96

 

123

$

(27

)

(22

)%

Total loan production

$

248

$

321

$

(73

)

(23

)%

Discussion of results:

  • In late March, Velocity temporarily suspended loan origination activities until the current market volatility subsides. This action resulted in origination volume lower than originally forecast
  • Loan origination volume in the first quarter of 2020 totaled $248 million, a 23 percent decrease from $321 million in the fourth quarter of 2019
  • Revising post-COVID-19 origination strategy to identify best risk/reward opportunities
REVENUES
($ in thousands)

1Q 2020

4Q 2019

 

$ Variance

 

% Variance

Interest income

$

44,637

 

$

44,124

 

$

512

 

1

%

Interest expense - portfolio related

 

(22,848

)

 

(22,690

)

 

(158

)

1

%

Interest expense - corporate debt

 

(6,342

)

 

(4,069

)

 

(2,273

)

56

%

Provision for loan losses

 

(1,289

)

 

(242

)

 

(1,047

)

433

%

Net Interest Income

$

14,157

 

$

17,123

 

$

(2,966

)

(17

)%

Gain on loan sales

 

2,617

 

 

1,496

 

 

1,121

 

75

%

Other Operating (loss) income

 

(998

)

 

(665

)

 

(333

)

50

%

Total Revenues

$

15,777

 

$

17,955

 

$

(2,177

)

(12

)%

Discussion of results:

  • Corporate debt-related interest expense in the first quarter of 2020 includes one-time debt amortization of $3.5 million and a $0.3 million prepayment fee.
  • The provision for loan losses increased mainly from the macroeconomic effects of the COVID-19 pandemic on the real estate markets. The adoption of CECL had an immaterial impact.
EXPENSES
($ in thousands)

1Q 2020

4Q 2019

 

$ Variance

 

% Variance

Compensation and employee benefits

$

5,041

$

3,992

$

1,049

 

26

%

Rent and occupancy

 

455

 

426

 

29

 

7

%

Loan servicing

 

2,239

 

1,939

 

300

 

15

%

Professional fees

 

1,184

 

468

 

715

 

153

%

Real estate owned, net

 

1,134

 

1,300

 

(166

)

(13

)%

Other expenses

 

1,998

 

1,689

 

309

 

18

%

Total expenses

$

12,051

$

9,814

$

2,236

 

23

%

Discussion of results:

  • Compensation and employee benefits expense increased as a result of new operations and sales staff to support loan origination activities and a reduction in deferred compensation driven by the suspension of loan originations
  • Loan servicing expenses increased mainly as a result of loan portfolio growth.
  • Professional fees increased as a result of our new public company costs
SECURITIZATIONS

 

Securities

Balance at

 

Trusts

Issued

3/31/2020

W.A. Rate

2011-1 Trust

$

61,042

$

-

-

 

2014-1 Trust

 

161,076

 

28,116

8.04

%

2015-1 Trust

 

285,457

 

47,042

7.85

%

2016-1 Trust

 

319,809

 

73,887

7.20

%

2016-2 Trust

 

166,853

 

55,119

6.09

%

2017-1 Trust

 

211,910

 

97,576

4.77

%

2017-2 Trust

 

245,601

 

152,941

3.51

%

2018-1 Trust

 

176,816

 

125,421

3.96

%

2018-2 Trust

 

307,988

 

227,752

4.42

%

2019-1 Trust

 

235,580

 

207,144

4.03

%

2019-2 Trust

 

207,020

 

191,343

3.41

%

2019-3 Trust

 

154,419

 

143,048

3.24

%

2020-1 Trust

 

248,700

 

247,293

2.94

%

$

2,782,271

$

1,596,682

 

Discussion of results:

  • The Company issued its first securitization of the year (VCC 2020-1) in February, and our thirteenth securitization overall, for $248.7 million and a weighted average rate of 2.94 percent.
  • The more recent pro rata REMIC structure issuances have decreased our overall debt cost.
RESOLUTION ACTIVITY - FIRST QUARTER 2020
($ in thousands) UPB $ Gain / (Loss) $
Paid in full

$

12,928

$

850

 

Paid current

 

3,504

 

101

 

REO sold

 

1,091

 

(293

)

$

17,522

$

658

 

Discussion of results:

  • Nonperforming loans resolutions in the first quarter of 2020, totaled $17.5 million in UPB and realized net gains of $0.66 million
  • Payoff of nonperforming loans generally results in the collection of default interest and prepayment fees
  • Paid current are loans brought back to performing status generally realize delinquent and default interest
  • Real Estate Owned (REO) realize gains or losses when sold, net of transaction and carrying costs
  • Velocity’s in-house special servicing operations assumes responsibilities for resolution strategies on nonperforming loans and has a successful track record minimizing loan loss

Conference Call Information

The Company will host a webcast to discuss the quarterly results on May 13, 2020 at 4:30 p.m. Eastern time. Listeners can access the webcast via the link below:

https://services.choruscall.com/links/vel200513xyLJS0Kl.html

The earnings discussion can also be accessed by dialing 1-866-807-9684 in the U.S. and Canada. International callers must dial 1-412-317-5415. Callers should ask to be joined into the Velocity Financial, Inc. earnings call.

Management’s slide presentation will be available on the Company’s investor relations website at www.velfinance.com beginning at 8:30 a.m. (Eastern Time) on Wednesday, May 13, 2020.

A replay of the call will be available through midnight on May 20, 2020 and can be accessed by dialing 1-877-344-7529 in the U.S. and in Canada 855-669-9658 or 1-412-317-0088 internationally and entering access code #10143890. The replay will also be available on the Investor Relations section of the Company's website a under "Events and Presentations.”

Management’s slide presentation will be available on the Company’s investor relations website at www.velfinance.com beginning at 8:30 a.m. (Eastern Time) on Wednesday, April 8, 2020.

About Velocity Financial, Inc.

Based in Westlake Village, California, Velocity is a vertically integrated real estate finance company that primarily originates and manages investor loans secured by 1-4-unit residential rental and small commercial properties. Velocity originates loans nationwide across an extensive network of independent mortgage brokers it has built and refined over 15 years.

(1)

“Core EPS” is a non-GAAP financial measure the Company presents to help investors better understand unique items that impact earnings. For a reconciliation of GAAP EPS to “Core” EPS, please refer to the sections of this press release titled “Non-GAAP Financial Measures” and “Adjusted Financial Metric Reconciliation to GAAP.”

(2)

The total loan portfolio at March 31, 2020 was comprised of $1.903 billion in UPB of held for investment loans and $0.224 billion of held for sale loans.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles (“GAAP”), the Company uses operating income and operating margin, which are non-GAAP financial measures. The presentation of operating income and operating margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use operating income and operating margin in addition to, and not as an alternative for, net income. Operating income represents net income before income taxes, interest expense on our corporate debt, and the amortization of deal costs related to corporate debt issuance. Additionally, operating margin is the ratio of operating income total revenues. Because not all companies use identical calculations, our presentation of net operating income and net operating margin may not be comparable to similarly titled measures of other companies. Furthermore, net operating income is not intended to be a measure of free cash flow for our management's discretionary use, as it does not reflect certain cash requirements such as tax and portfolio-related debt service payments. The amounts shown for Operating income may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.

We use operating income to evaluate the operating performance of our business, for comparison with forecasts and strategic plans and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with the Company's GAAP financials, provides useful information to investors by offering:

  • The ability to make more meaningful period-to-period comparisons of the Company's on-going operating results.
  • The ability to better identify trends in the Company's underlying business and perform related trend analyses; and
  • A better understanding of how management plans and measures the Company's underlying business.

We believe that operating income has limitations in that it does not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and that operating income should only be used to evaluate the Company's results of operations in conjunction with net income. For more information on operating income, refer to the section of this press release below titled “Adjusted Financial Metric Reconciliation to GAAP.”

Forward-Looking Statements

Some of the statements contained in this press release may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions.

The forward-looking statements contained in this press release reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. While forward-looking statements reflect our good faith projections, assumptions and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. Factors that could cause our results to differ materially include, but are not limited to (1) the course and severity of the COVID-19 pandemic, and its direct and indirect impacts (2) general economic conditions and real estate market conditions, (3) regulatory and/or legislative changes, (4) our ability to retain and attract loan originators and other professionals, and (5) changes in federal government fiscal and monetary policies.

For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see the section titled ''Risk Factors" in the Company’s Form 10-K filed with the SEC on April 7, 2020, as such risk factors may be updated from time to time in the Company’s periodic filings with the SEC. Such filings are available publicly on our Investor Relations web page at www.velfinance.com.

Velocity Financial, Inc.

Consolidated Statements of Financial Condition

(Unaudited)

 
Quarter Ended

3/31/2020

 

12/31/2019

 

09/30/2019

 

06/30/2019

 

03/31/2019

(In thousands)
Assets
Cash and cash equivalents

$

7,649

 

$

21,465

 

$

8,849

 

$

14,105

 

$

16,948

 

Restricted cash

 

4,483

 

 

6,087

 

 

3,152

 

 

1,542

 

 

1,986

 

Loans held for sale, net

 

223,123

 

 

214,467

 

 

170,440

 

 

82,308

 

 

58,123

 

Loans held for investment, at fair value

 

2,987

 

 

2,960

 

 

2,936

 

 

2,974

 

 

2,971

 

Loans held for investment

 

1,895,684

 

 

1,837,646

 

 

1,751,178

 

 

1,660,387

 

 

1,592,708

 

Net deferred loan costs

 

26,801

 

 

25,714

 

 

24,757

 

 

23,346

 

 

21,874

 

Total loans, net

 

2,148,595

 

 

2,080,787

 

 

1,949,311

 

 

1,769,015

 

 

1,675,676

 

Accrued interest receivables

 

14,470

 

 

13,295

 

 

12,450

 

 

11,326

 

 

10,788

 

Receivables due from servicers

 

37,884

 

 

49,659

 

 

38,349

 

 

33,618

 

 

35,395

 

Other receivables

 

2,516

 

 

4,778

 

 

7,585

 

 

3,321

 

 

1,190

 

Real estate owned, net

 

16,164

 

 

13,068

 

 

15,806

 

 

14,221

 

 

12,996

 

Property and equipment, net

 

4,964

 

 

4,680

 

 

4,903

 

 

5,045

 

 

5,254

 

Deferred tax asset

 

10,111

 

 

8,280

 

 

4,127

 

 

3,228

 

 

1,778

 

Other assets

 

10,519

 

 

12,667

 

 

17,219

 

 

15,383

 

 

7,365

 

Total Assets

$

2,257,354

 

$

2,214,766

 

$

2,061,751

 

$

1,870,804

 

$

1,769,376

 

 
Liabilities and members' equity
Accounts payable and accrued expenses

$

58,591

 

$

56,146

 

$

41,957

 

$

30,832

 

$

39,731

 

Secured financing, net

 

74,364

 

 

145,599

 

 

145,285

 

 

127,061

 

 

127,179

 

Securitizations, net

 

1,576,431

 

 

1,438,629

 

 

1,377,733

 

 

1,261,456

 

 

1,338,032

 

Warehouse and repurchase facilities

 

298,372

 

 

422,688

 

 

349,859

 

 

280,710

 

 

97,059

 

Debt issuance costs

 

(835

)

 

(1,140

)

 

(744

)

 

(750

)

 

(586

)

Total Liabilities

 

2,006,924

 

 

2,061,922

 

 

1,914,090

 

 

1,699,309

 

 

1,601,415

 

 
Class C preferred units

 

-

 

 

-

 

 

-

 

 

27,399

 

 

26,929

 

Stockholders' equity

 

250,430

 

 

152,844

 

 

147,661

 

 

144,096

 

 

141,032

 

Total Liabilities and members' equity

$

2,257,354

 

$

2,214,766

 

$

2,061,751

 

$

1,870,804

 

$

1,769,376

 

Velocity Financial, Inc.

Consolidated Statements of Income

(Unaudited)

 
 
Quarter Ended
($ in thousands) 3/31/2020 12/31/2019 09/30/2019 06/30/2019 03/31/2019
 
Revenues
Interest income

$

44,637

$

44,124

$

40,379

 

$

36,884

$

36,143

Interest expense - portfolio related

 

22,848

 

22,689

 

21,827

 

 

20,324

 

19,062

Net interest income - portfolio related

 

21,789

 

21,435

 

18,552

 

 

16,560

 

17,081

Interest expense - corporate debt

 

6,342

 

4,070

 

3,842

 

 

3,353

 

3,353

Net interest income

 

15,447

 

17,365

 

14,710

 

 

13,207

 

13,728

Provision for loan losses

 

1,289

 

242

 

338

 

 

212

 

348

Net interest income after provision for loan losses

 

14,157

 

17,123

 

14,372

 

 

12,995

 

13,380

Other operating income (expense)

 

1,620

 

833

 

(212

)

 

308

 

1,721

Total revenues

 

15,777

 

17,956

 

14,160

 

 

13,303

 

15,101

 
Operating expenses
Compensation and employee benefits

 

5,041

 

3,992

 

3,712

 

 

3,801

 

4,006

Rent and occupancy

 

455

 

426

 

369

 

 

398

 

338

Loan servicing

 

2,239

 

1,939

 

1,957

 

 

1,637

 

1,863

Professional fees

 

1,184

 

469

 

398

 

 

534

 

656

Real estate owned, net

 

1,134

 

1,300

 

485

 

 

561

 

301

Provision for held for sale loan losses

 

-

 

7

 

-

 

 

-

 

-

Other operating expenses

 

1,998

 

1,681

 

1,563

 

 

1,393

 

1,336

Total operating expenses

 

12,051

 

9,814

 

8,484

 

 

8,324

 

8,500

Income before income taxes

 

3,727

 

8,142

 

5,676

 

 

4,979

 

6,601

Income tax expense

 

1,148

 

2,960

 

1,796

 

 

1,444

 

1,906

Net income

$

2,579

$

5,182

$

3,880

 

$

3,535

$

4,695

 
Earnings per share

$

0.13

NA NA NA NA
Earnings per share (diluted)

$

0.13

Velocity Financial, Inc.

Net Interest Margin ‒ Portfolio Related and Total Company

(Unaudited)

 

Quarter Ended March 31, 2020

 

Quarter Ended March 31, 2019

 

 

Interest

 

Average

 

 

 

Interest

 

Average

Average

 

Income /

 

Yield /

 

Average

 

Income /

 

Yield /

($ in thousands)

Balance

 

Expense

 

Rate(1)

 

Balance

 

Expense

 

Rate(1)

Loan portfolio:
Loans held for sale

202,474

59,684

Loans held for investment

1,881,308

1,566,314

Total loans

2,083,783

44,637

8.57

%

1,625,998

36,143

8.89

%

 
Debt:
Warehouse and repurchase facilities

344,387

4,301

5.00

%

216,250

3,141

5.81

%

Securitizations

1,545,281

18,547

4.80

%

1,228,446

15,921

5.18

%

Total debt - portfolio related

1,889,668

22,848

1,444,696

19,062

5.28

%

Corporate debt

94,468

6,342

127,594

3,353

10.51

%

Total debt

1,984,136

29,190

1,572,290

22,415

5.70

%

 
Net interest spread - portfolio related (1)

3.73

%

3.61

%

Net interest margin - portfolio related

4.18

%

4.20

%

 
Net interest spread - total company (2)

2.68

%

3.19

%

Net interest margin - total company

2.97

%

3.38

%

(1)

Net interest spread - portfolio related is the difference between the rate earned on our loan portfolio and the yield on our portfolio related debt.

(2)

Net interest spread - total company is the difference between the yield on our loan portfolio and the interest rates paid on our total debt.

Velocity Financial, Inc.

Adjusted Financial Metric Reconciliation to GAAP

(Unaudited)

 
Quarter Ended

3/31/2020

12/31/2019

09/30/2019

06/30/2019

03/31/2019

 
GAAP Net Income

$

2,579

$

5,182

$

3,880

$

3,535

$

4,695

Income tax expense

 

1,148

 

2,960

 

1,796

 

1,444

 

1,906

Interest expense - corporate debt

 

2,576

 

3,657

 

3,400

 

3,190

 

3,190

Amortization expense - corporate debt deal costs

 

3,766

 

412

 

442

 

163

 

163

Net Operating Income

$

10,069

$

7,029

$

5,638

$

4,797

$

5,259

"CORE" EARNINGS PER SHARE
Quarter Ended
($ in thousands) 3/31/2020 Per Share

 

 
GAAP Net Income

$

2,579

$

0.13

One-time Debt Amortization & Expenses

 

2,610

 

0.13

COVID-19 Impact

 

615

 

0.03

"Core" Earnings

$

5,804

$

0.29

 

Contacts

Investors and Media:
Chris Oltmann
(818) 532-3708

Contacts

Investors and Media:
Chris Oltmann
(818) 532-3708