Velocity Financial, Inc. Announces Second Quarter 2020 Results

Second Quarter Highlights:

  • Net Income of $2.1 million and “Core” EPS of $0.17(1)
  • The preferred stock deemed dividend reduced common stockholders’ equity and correspondingly increased preferred stock under mezzanine equity, resulting in a non-cash loss per common share of $(2.33) during the quarter
  • Eliminated all mark-to-market risk for assets previously financed with legacy warehouse lines
    • Completed VCC 2020-2 securitization totaling $128 million in June
    • Completed the VCC 2020-MC1 securitization totaling $276 million in July
  • Book value per common share as of June 30, 2020 was $10.26 compared to $12.47 as of March 31, 2020
  • Preparations to restart loan production operations largely complete, targeting early September resumption of new lending activities
  • Continued strong recovery rate of 102 percent of unpaid principal balance (UPB) on resolved delinquent assets

WESTLAKE VILLAGE, Calif.--()--Velocity Financial, Inc. (NYSE:VEL) (“Velocity” or the “Company”) reported a loss per common share of $(2.33) resulting from a non-cash deemed dividend on preferred stock issued during the quarter. Net income for the second quarter of 2020 was $2.1 million, compared to net income of $2.6 million in the prior quarter. “Core” net income(1) for the second quarter of 2020 was $3.4 million, or $0.17 per share. “Core” earnings(1) excludes the increase to the macroeconomic model forecast of the CECL loan loss reserve of ($0.06) per share due to a more adverse outlook regarding the impacts of the COVID-19 pandemic and the ($2.44) per share impact of the preferred stock deemed dividend. Book value of common stockholders’ equity was $206.0 million and Convertible Preferred stock was $90.0 million as of June 30, 2020.

“In light of the unprecedented environment we faced, I am pleased with our second quarter results and the tremendous accomplishments of the Velocity team to address the pandemic’s impact on our company and preparations to restart our loan production operations in the third quarter,” said Chris Farrar, President and CEO. “Net income for the second quarter and year-to-date was positive and reflects the resiliency of Velocity’s business model under extreme conditions. While challenges remain, we are now fully devoted to restarting our loan production activities, and I am excited about driving growth and future returns for our stockholders.”

Second Quarter Operating Results

KEY PERFORMANCE INDICATORS
($ in thousands)

2Q 2020

1Q 2020

$ Variance % Variance
Pretax income

$

2,625

 

$

3,727

 

$

(1,102

)

(30)%

Net income

$

2,141

 

$

2,579

 

$

(438

)

(17)%

Preferred stock deemed dividend(1)

$

(48,955

)

 

-

 

 

-

 

-

Diluted (loss) earnings per share

$

(2.33

)

$

0.13

 

$

(2.46

)

(1915)%

"Core" Earnings(2)

$

3,408

 

$

5,804

 

$

(2,396

)

(41)%

"Core" EPS(2)

$

0.17

 

$

0.29

 

$

(0.12

)

(41)%

Pretax return on equity

 

4.9

%

 

6.6

%

 

(2

)%

(25)%

Return on equity

 

4.0

%

 

4.6

%

 

(1

)%

(12)%

Net interest margin - portfolio

 

3.5

%

 

4.2

%

 

(1

)%

(15)%

Average common equity

$

212,407

 

$

225,125

 

$

74,737

 

(6)%

(1)

Charged against common equity

(2)

"Core" earnings and "Core" earnings per share are non-GAAP measures.
Please see the reconciliation to GAAP net income at the end of this release.

Discussion of results:

  • 2Q20 “Core” EPS(1) was $0.17 per share and reflects a $2.50 per share adjustments for the following:
    • $0.06 per share impact driven by the increase in the macroeconomic forecast of the CECL loan loss reserve resulting from a more-adverse outlook related to the impacts of the COVID-19 pandemic
    • $2.44 per share impact related the non-cash deemed dividend on preferred stock
  • The preferred stock deemed dividend reduced common stockholders’ equity and correspondingly increased preferred stock under mezzanine equity. This transaction reflects the redemption value of the preferred stock as of June 30, 2020.
TOTAL LOAN PORTFOLIO
($ in millions)

2Q 2020

1Q 2020

$ Variance

% Variance

Held for Investment
Investor 1-4 Rental

$

841

 

$

872

 

$

(30

)

(3)%

Mixed Use

 

260

 

 

265

 

 

(5

)

(2)%

Multi-Family

 

193

 

 

201

 

 

(8

)

(4)%

Retail

 

178

 

 

181

 

 

(4

)

(2)%

All Other

 

373

 

 

384

 

 

(11

)

(3)%

Total

$

1,845

 

$

1,903

 

$

(58

)

(3)%

Held for Sale
Investor 1-4 Rental

$

214

 

$

224

 

$

(10

)

(4)%

Total Managed Loan Portfolio

$

2,059

 

$

2,127

 

$

(68

)

(3)%

Key loan portfolio metrics:
Total loan count

 

6,294

 

 

6,504

 

Weighted average loan to value

 

66

%

 

66

%

Weighted average total portfolio yield

 

7.59

%

 

8.57

%

Weighted average total debt cost

 

4.83

%

 

5.88

%

Discussion of results:

  • The weighted average total portfolio yield was 7.59 percent in the second quarter, a decrease of 98 basis points from the first quarter of 2020, primarily driven by an increase in nonaccrual loans
  • The 105 basis point decrease in portfolio related debt cost was primarily attributable to the lower corporate debt expense resulting from the paydown of corporate debt upon completion of our IPO
  • Velocity’s total loan portfolio (comprised of loans held for sale and loans held for investment) was $2.059 billion as of June 30, 2020, a 3 percent quarter-over-quarter decrease from the first quarter of 2020
  • The weighted average loan-to-value ratio of the total portfolio was 66 percent as of June 30, 2020, essentially unchanged from the prior quarter
LOAN PRODUCTION VOLUMES
($ in millions)

2Q 2020

1Q 2020

$ Variance

% Variance

Investor 1-4 Rental

$

-

$

65

$

(65

)

(100)%

Traditional Perm.

 

-

 

86

 

(86

)

(100)%

Short-term loans

 

-

 

96

 

(96

)

(100)%

Total loan production

$

-

$

248

$

(248

)

(100)%

Discussion of results:

  • In late March, Velocity temporarily suspended loan origination activities, which resulted in origination volume lower than originally forecast in the first quarter of 2020 and no loan production in the second quarter of 2020.
  • The completion of the VCC 2020-2 and the VCC 2020-MC1 securitizations in June and July, respectively, marks the culmination of our strategy to find permanent financing solutions for our assets previously financed with warehouse facilities. With this objective achieved, the Company can now devote its full attention to restarting loan production operations in early September 2020.
NET REVENUES
($ in thousands)

2Q 2020

1Q 2020

$ Variance

% Variance

Interest income

$

39,755

 

$

44,637

 

$

(4,882

)

(11)%

Interest expense - portfolio related

 

(21,189

)

 

(22,848

)

$

1,659

 

(7)%

Net Interest Income

$

18,566

 

$

21,789

 

$

(3,223

)

(15)%

Interest expense - corporate debt

 

(1,894

)

 

(6,342

)

$

4,448

 

(70)%

CECL provision

 

(1,800

)

 

(1,289

)

$

(511

)

40%

Gain on loan sales

 

155

 

 

2,617

 

 

(2,462

)

(94)%

Other Operating (loss) income

 

(1,494

)

 

(998

)

 

(496

)

50%

Total Net Revenues

$

13,533

 

$

15,777

 

$

(2,244

)

(14)%

Discussion of results:

  • Net Revenue was lower by $2.2 million driven primarily driven by a decrease in gains from loan sales caused by our decision to hold the short-term loans to maturity
  • The CECL provision increase was driven primarily by an increase in the macroeconomic model forecast of the reserve, resulting from a more-adverse outlook related to the sustained impacts of the COVID-19 pandemic
OPERATING EXPENSES
($ in thousands)

2Q 2020

1Q 2020

$ Variance

% Variance

Compensation and employee benefits

$

5,863

$

5,041

$

822

 

16%

Rent and occupancy

 

448

 

455

 

(7

)

(2)%

Loan servicing

 

1,754

 

2,239

 

(485

)

(22)%

Professional fees

 

588

 

1,184

 

(596

)

(50)%

Real estate owned, net

 

408

 

1,134

 

(726

)

(64)%

Other expenses

 

1,847

 

1,998

 

(151

)

(8)%

Total expenses

$

10,908

$

12,051

$

(1,143

)

(9)%

Discussion of results:

  • Operating expenses were $1.1 million lower as a result of lower REO valuation expenses and lower one-time professional fees related to our IPO, offset by slightly higher compensation expenses.
SECURITIZATIONS
Securities Balance at
Trusts Issued 6/30/2020 W.A. Rate
2011-1 Trust

$

61,042

$

-

-

2014-1 Trust

 

161,076

 

26,659

7.29%

2015-1 Trust

 

285,457

 

44,394

7.12%

2016-1 Trust

 

319,809

 

67,333

7.42%

2016-2 Trust

 

166,853

 

52,341

6.34%

2017-1 Trust

 

211,910

 

88,950

4.79%

2017-2 Trust

 

245,601

 

146,611

3.34%

2018-1 Trust

 

176,816

 

118,605

4.01%

2018-2 Trust

 

307,988

 

219,591

4.49%

2019-1 Trust

 

235,580

 

200,484

4.04%

2019-2 Trust

 

207,020

 

183,578

3.41%

2019-3 Trust

 

154,419

 

137,789

3.27%

2020-1 Trust

 

248,700

 

240,334

2.85%

2020-2 Trust

 

96,352

 

95,963

4.50%

$

2,878,623

$

1,622,632

Discussion of results:

  • The Company issued its second securitization of 2020 (VCC 2020-2) in June, and our fourteenth securitization overall totaling $96 million of securities issued and a weighted average rate of 4.50 percent.
  • In July, the Company issued its third securitization of the year (VCC 2020-MC1) total $179 million of securities issued at a weighted average rate of 4.50 percent. The VCC 2020-MC1 securitization was collateralized primarily by short-term loans secured by 1-4 unit investor properties, in addition to 30-year loans secured by residential 1-4 unit investor and small commercial properties originated through Velocity’s operating platform.
RESOLUTION ACTIVITY - SECOND QUARTER 2020
($ in thousands)

UPB $

Gain / (Loss) $

Paid in full

$

6,658

$

336

Paid current

 

19,635

 

208

REO sold

 

1,406

 

38

$

27,699

$

582

Discussion of results:

  • Continued strong recovery rate, realizing 102 percent of nonperforming UPB resolved during the quarter
  • Nonaccrual loans paid in full during the second quarter of 2020 totaled $6.7 million in UPB with a $0.34 million net gain on resolutions. Gains primarily reflect the collection of default interest, in addition to regular interest and prepayment penalties
  • Loans paid current during the second quarter of 2020 totaled $19.6 million in UPB with a $0.21 million net gain. Gains primarily reflects collections of default interest, in addition to regular interest, and the loan remains in our portfolio
  • REO sales totaled $1.4 million for net gains of $0.04 million

Conference Call Information

The Company will host a webcast to discuss the second quarter 2020 results on August 12, 2020, at 5:00 p.m. Eastern Time. Listeners can access the webcast via the link below:

https://services.choruscall.com/links/vel200812GlpLAgtc.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. To listen to the webcast, please go to Velocity's website at least 15 minutes before the call to register and to download and install any needed software. An audio replay of the call will also be available on Velocity's website following the call.

A replay of the call will be available through midnight on August 19, 2020 and can be accessed by dialing 1-877-344-7529 in the U.S. and 1-855-669-9658 in Canada or 1-412-317-0088 internationally and entering access code #10146597. The replay will also be available on the Investor Relations section of the Company's website a under "Events and Presentations.”

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

(2)

The total loan portfolio at June 30, 2020 was comprised of $1.845 billion in UPB of held for investment loans and $0.214 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 Core Earnings and Core Earnings Per Share, which are non-GAAP financial measures. For more information on Core Earnings, please refer to the section of this press release below titled “Adjusted Financial Metric Reconciliation to GAAP Net Income” at the end of this press release.

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. 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" previously disclosed in our Form 10-K filed with the SEC on April 7, 2020 and Form 10-Q filed with the SEC on May 14, 2020. 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
6/30/2020 3/31/2020 12/31/2019 09/30/2019 6/30/2019
(In thousands)
Assets
Cash and cash equivalents

$

9,803

$

7,649

$

21,465

$

8,849

$

14,105

Restricted cash

 

6,735

 

4,483

 

6,087

 

3,152

 

1,542

Loans held for sale, net

 

212,344

 

223,123

 

214,467

 

170,440

 

82,308

Loans held for investment, at fair value

 

2,956

 

2,987

 

2,960

 

2,936

 

2,974

Loans held for investment

 

1,836,065

 

1,895,684

 

1,837,646

 

1,751,178

 

1,660,387

Net deferred loan costs

 

25,754

 

26,801

 

25,714

 

24,757

 

23,346

Total loans, net

 

2,077,119

 

2,148,595

 

2,080,787

 

1,949,311

 

1,769,015

Accrued interest receivables

 

17,793

 

14,470

 

13,295

 

12,450

 

11,326

Receivables due from servicers

 

36,028

 

37,884

 

49,659

 

38,349

 

33,618

Other receivables

 

4,609

 

2,516

 

4,778

 

7,585

 

3,321

Real estate owned, net

 

15,648

 

16,164

 

13,068

 

15,806

 

14,221

Property and equipment, net

 

4,718

 

4,964

 

4,680

 

4,903

 

5,045

Deferred tax asset

 

5,556

 

10,111

 

8,280

 

4,127

 

3,228

Other assets

 

9,042

 

10,519

 

12,667

 

17,219

 

15,383

Total Assets

$

2,187,051

$

2,257,354

$

2,214,766

$

2,061,751

$

1,870,804

 
Liabilities and members' equity
Accounts payable and accrued expenses

$

55,938

$

58,591

$

56,146

$

41,957

$

30,832

Secured financing, net

 

74,571

 

74,364

 

145,599

 

145,285

 

127,061

Securitizations, net

 

1,599,719

 

1,576,431

 

1,438,629

 

1,377,733

 

1,261,456

Warehouse & repurchase facilities and other

 

160,796

 

297,537

 

421,548

 

349,115

 

279,960

Total Liabilities

 

1,891,024

 

2,006,924

 

2,061,922

 

1,914,090

 

1,699,309

 
Mezzanine Equity
Class C preferred units

 

-

 

-

 

-

 

27,399

Series A Convertible preferred stock

 

90,000

 

-

 

-

 

-

 

-

Stockholders' Equity
Stockholders' equity

 

206,027

 

250,430

 

152,844

 

147,661

 

144,096

Total Liabilities and members' equity

$

2,187,051

$

2,257,354

$

2,214,766

$

2,061,751

$

1,870,804

Velocity Financial, Inc.

Consolidated Statements of Income

(Unaudited)

 
Quarter Ended
($ in thousands) 6/30/2020 3/31/2020 12/31/2019 09/30/2019 06/30/2019
 
Revenues
Interest income

$

39,755

 

$

44,637

$

44,124

$

40,379

 

$

36,884

Interest expense - portfolio related

 

21,189

 

 

22,848

 

22,689

 

21,827

 

 

20,324

Net interest income - portfolio related

 

18,566

 

 

21,789

 

21,435

 

18,552

 

 

16,560

Interest expense - corporate debt

 

1,894

 

 

6,342

 

4,070

 

3,842

 

 

3,353

Net interest income

 

16,672

 

 

15,447

 

17,365

 

14,710

 

 

13,207

Provision for loan losses

 

1,800

 

 

1,289

 

242

 

338

 

 

212

Net interest income after provision for loan losses

 

14,872

 

 

14,157

 

17,123

 

14,372

 

 

12,995

Other operating income (expense)

 

(1,339

)

 

1,620

 

833

 

(212

)

 

308

Total net revenues

 

13,533

 

 

15,777

 

17,956

 

14,160

 

 

13,303

 
Operating expenses
Compensation and employee benefits

 

5,863

 

 

5,041

 

3,992

 

3,712

 

 

3,801

Rent and occupancy

 

448

 

 

455

 

426

 

369

 

 

398

Loan servicing

 

1,754

 

 

2,239

 

1,939

 

1,957

 

 

1,637

Professional fees

 

588

 

 

1,184

 

469

 

398

 

 

534

Real estate owned, net

 

408

 

 

1,134

 

1,300

 

485

 

 

561

Other operating expenses

 

1,847

 

 

1,998

 

1,688

 

1,563

 

 

1,393

Total operating expenses

 

10,908

 

 

12,051

 

9,814

 

8,484

 

 

8,324

Income before income taxes

 

2,625

 

 

3,727

 

8,142

 

5,676

 

 

4,979

Income tax expense

 

484

 

 

1,148

 

2,960

 

1,796

 

 

1,444

Net income

$

2,141

 

$

2,579

$

5,182

$

3,880

 

$

3,535

Less deemed dividends on preferred stock

$

48,955

 

Net loss allocated to common shareholders

$

(46,814

)

 
Diluted loss per common share

$

(2.33

)

$

0.13

Diluted weighted average common shares outstanding

$

20,087

 

$

20,087

 

-

 

-

 

 

-

Velocity Financial, Inc.

Net Interest Margin ‒ Portfolio Related and Total Company

(Unaudited)

 

Quarter Ended June 30, 2020

Quarter Ended March 31, 2020

Quarter Ended June 30, 2019

Interest Average Interest Average Interest Average
Average Income / Yield / Average Income / Yield / Average Income / Yield /
($ in thousands) Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1)
Loan portfolio:
Loans held for sale

$

220,047

$

202,474

$

60,940

Loans held for investment

 

1,875,260

 

1,881,308

 

1,632,626

Total loans

$

2,095,307

$

39,755

7.59%

$

2,083,783

$

44,637

8.57%

$

1,693,566

$

36,884

8.71%

 
Debt:
Warehouse and repurchase facilities

$

242,676

 

2,632

 

347,350

 

4,301

$

179,193

 

2,692

Securitizations

 

1,589,191

 

18,557

 

1,542,318

 

18,547

 

1,325,571

 

17,632

Total debt - portfolio related

 

1,831,867

 

21,189

4.63%

 

1,889,668

 

22,848

4.84%

 

1,504,764

 

20,324

5.40%

Corporate debt

 

78,000

 

1,895

 

94,468

 

6,342

 

127,594

 

3,353

Total debt

$

1,909,867

$

23,084

4.83%

 

1,984,136

 

29,190

5.88%

$

1,632,357

$

23,677

5.80%

 
Net interest spread - portfolio related (1)

2.96%

3.73%

3.31%

Net interest margin - portfolio related

3.54%

4.18%

3.91%

 
Net interest spread - total company (2)

2.75%

2.68%

2.91%

Net interest margin - total company

3.18%

2.97%

3.12%

(1)

Net interest spread - portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid 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 Net Income

(Unaudited)

"CORE" EARNINGS PER SHARE

Quarter Ended

($ in thousands)

6/30/2020

3/31/2020

 
Net Income

$

2,141

$

2,579

One-time Debt Amortization & Expenses

 

-

 

2,610

COVID-19 Impact

 

1,267

 

615

"Core" Earnings

$

3,408

$

5,804

 
"Core" EPS

$

0.17

$

0.29

Diluted weighted average common shares outstanding

$

20,087

$

20,087

 

Contacts

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

Contacts

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