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Velocity Financial, Inc. Announces Third Quarter 2020 Results

·13 min read

Third Quarter Highlights:

  • Net income of $3.5 million, core earnings of $3.9 million(1) and diluted EPS of $0.11

    • Net income growth of 63% from the prior quarter primarily driven by normalization of credit loss provision expense

      • Normalized provision expense of $0.4 million.

  • Restarted loan production activities in September to strong demand

    • September loan applications totaled $226 million in unpaid principal balance (UPB), mirroring pre-COVID levels; loan production totaled $8 million in UPB

    • October loan originations totaled $63 million in UPB

  • Book value per common share as of September 30, 2020, was $10.44 compared to $10.26 as of June 30, 2020

  • Portfolio net interest margin of 3.77%, an increase of 23 basis points from the second quarter of 2020

  • Approximately $335 million in UPB of loans in the COVID-19 forbearance program were brought current during the quarter

  • Resolutions of delinquent loans in 3Q20 were 103.5% of assets resolved, continuing our consistent track record of net gains on delinquent loan and real estate owned (REO) resolutions over and above contractual principal and interest

Velocity Financial, Inc. (NYSE: VEL) ("Velocity" or the "Company") reported net income of $3.5 million for the third quarter of 2020 and diluted earnings per common share of $0.11. Core income(1) for the third quarter of 2020 was $3.9 million, excluding severance costs related to workforce reductions. Book value per common share was $10.44, an increase from $10.26 as of June 30, 2020.

"Velocity’s third quarter results highlight the significant progress our team has made in normalizing business operations and improving earnings performance," said Chris Farrar, President and CEO. "The strong volumes we have experienced with the restart of our loan production activities have exceeded our expectations and reflect significant demand for the financing solutions we provide. We believe that opportunities for Velocity have expanded due to fundamental shifts in real estate markets, which have helped fuel heightened interest from our existing brokers and driven the recent addition of nearly four hundred new relationships. With the restart of our production operations, our business is back on track and poised to deliver strong performance and attractive returns going forward."

Third Quarter Operating Results

KEY PERFORMANCE INDICATORS

($ in thousands)

3Q 2020

2Q 2020

$ Variance

% Variance

Pretax income

$

5,025

$

2,625

$

2,400

91

%

Net income

$

3,481

$

2,141

$

1,340

63

%

Preferred stock deemed dividend(1)

-

$

(48,955

)

n.a.

n.a.

Basic earnings (loss) per share

$

0.17

$

(2.33

)

$

2.5

n.a.

Diluted earnings (loss) per share

$

0.11

$

(2.33

)

$

2.4

n.a.

Core Earnings(2)

$

3,913

$

3,408

$

505

15

%

Pretax return on equity

9.60

%

4.94

%

n.a.

94

%

Return on equity

6.60

%

4.03

%

n.a.

64

%

Net interest margin - portfolio

3.77

%

3.54

%

n.a.

6

%

Net interest margin -total company

3.39

%

3.18

%

n.a.

7

%

Average common equity

$

209,468

$

212,407

$

(2,939

)

(1

)%

(1) Charged against common equity

(2) Core earnings is a non-GAAP measure. Please see the reconciliation to GAAP net income at the end of this release.

Discussion of results:

  • 3Q20 net income of $3.5 million reflects continued improvement in Velocity’s platform as it recovers from the COVID-driven market dislocation earlier this year

  • The difference between core earnings(1) and GAAP net income is severance costs related to workforce reduction resulting from streamlining of our loan operations processes

  • Net interest margin improvement was driven by fewer new nonperforming loans during 3Q20

TOTAL LOAN PORTFOLIO

($ of UPB in millions)

3Q 2020

2Q 2020

$ Variance

% Variance

Held for Investment

Investor 1-4 Rental

$

1,008

$

841

$

166

20

%

Mixed Use

254

260

(5

)

(2

)%

Multi-Family

187

193

(6

)

(3

)%

Retail

173

178

(5

)

(3

)%

All Other

364

373

(9

)

(2

)%

Total

$

1,986

$

1,845

$

142

8

%

Held for Sale

Investor 1-4 Rental

$

-

$

214

$

(214

)

(100

)%

Total Managed Loan Portfolio UPB

$

1,986

$

2,059

$

(73

)

(4

)%

Key loan portfolio metrics:

Total loan count

6,029

6,294

Weighted average loan to value

66.18

%

65.86

%

Weighted average total portfolio yield

8.21

%

7.59

%

Weighted average portfolio debt cost

5.07

%

4.63

%

Discussion of results:

  • The weighted average total portfolio yield was 8.21% in 3Q20, an increase of 62 basis points from 2Q20, primarily driven by fewer new NPLs

  • The 44 basis point increase in portfolio related debt cost was primarily attributable to the higher cost 2020-2 and 2020-MC1 securitizations, completed in June and July, respectively

  • Velocity’s loan portfolio was $1.986 billion as of September 30, 2020, a 4% quarter-over-quarter decrease from June 30, 2020

  • Transferred approximately $214 million in UPB of short-term loans to the held for investment (HFI) portfolio during 3Q20. Previously these loans were accounted for as held for sale (HFS).

LOAN PRODUCTION VOLUMES

($ in millions)

Oct. 2020

Sept. 2020

$ Variance

% Variance

Investor 1-4 Rental

$

47

$

6

$

40

656

%

Traditional Perm.

16

2

14

733

%

Short-term loans

-

-

-

-

Total loan production

$

63

$

8

$

55

674

%

Note: Loan production operations were suspended in late March 2020 and resumed in September 2020.

Discussion of results:

  • Velocity resumed loan production activities in September, funding $8 million in UPB of 30-year Investor 1-4 and Traditional Commercial loans in 3Q20

    • The relaunch has been met with strong demand from existing broker relationships and the addition of 396 new broker registrations resulted in $226 million in UPB of loan applications

  • Loan application volume in October totaled $252 million in UPB, and production volume totaled $63 million in UPB

CREDIT PERFORMANCE INDICATORS

($ in thousands)

3Q 2020

2Q 2020

$ Variance

% Variance

Nonperforming loans(1)

$

314,727

$

329,132

$

(14,405

)

(4

)%

Nonperforming loans % total HFI Loans

15.84

%

15.99

%

-

(1

)%

Total Charge Offs(2)

$

1,046

$

75

$

971

n.a.

Charge-offs as a % of HFI loans

0.053

%

0.004

%

-

n.a.

CECL Reserve

$

5,748

$

5,221

$

527

10

%

(1) Nonperforming/Nonaccrual loans include loans 90+ days past due, loans in foreclosure and in bankruptcy.

(2) $788 thousand of 3Q 2020 is related to an unusual and nonrecurring charge-off due to a fraud loan and not related to COVID-19 pandemic.

Discussion of results:

  • Nonperforming loans as a percent of total loans as of September 30, 2020, decreased to 15.84% from 15.99% as of June 30, 2020, driven by:

    • Continued strong nonperforming asset resolution activity and fewer new nonperforming loans

  • The quarter-over-quarter increase in charge-offs was primarily due to one loan totaling $787 thousand, resulting from an unusual circumstance not indicative of worsening credit conditions

    • Adjusted for the unusual circumstance loan, 3Q20 charge-offs were $259 thousand and in-line with historical levels

  • The CECL reserve increase in 3Q20 was driven a $1.6 million loan loss provision, $1.2 million of which was related to the transfer of short-term loans to the HFI portfolio, with the remainder related to normal provisioning

NET REVENUES

($ in thousands)

3Q 2020

2Q 2020

$ Variance

% Variance

Interest income

$

41,374

$

39,755

$

1,619

4

%

Interest expense - portfolio related

(22,347

)

(21,189

)

(1,158

)

5

%

Interest expense - corporate debt

(1,913

)

(1,894

)

(19

)

1

%

Net Interest Income

$

17,114

$

16,672

$

442

3

%

CECL provision

(1,573

)

(1,800

)

227

(13

)%

Gain on loan sales

(51

)

155

(206

)

(133

)%

Other Operating (loss) income

1,400

(1,494

)

2,894

n.a.

Total Net Revenues

$

16,890

$

13,533

$

3,357

25

%

CECL Reserve Reconciliation (Balance Sheet):

3Q 2020

($ in thousands)

Beginning Balance 6/30/2020

$

(5,220

)

Add: Reserve for short-term loans transferred to HFI

(1,166

)

3Q20 CECL provision

(407

)

Deduct: 3Q20 charge-offs

1,046

Ending Balance 9/30/2020

$

(5,748

)

Income Statement (HFS to HFI Reclass):

3Q 2020

Interest Income

Provision for Loan Loss

$

(1,166

)

Other Income

Reversal of HFS LOCOM Valuation

1,307

Net P&L Impact

$

141

Discussion of results:

  • Net Revenue grew by 25% quarter-over-quarter, driven by normalized loan loss provisioning levels and increased interest collections on nonperforming loans

  • Approximately $1.2 million of the reported $1.6 million total provision expense was offset by a $1.3 million LOCOM valuation reversal in other income driven by the transfer HFS loans to the HFI portfolio, resulting in a net P&L increase of $0.1 million

OPERATING EXPENSES

($ in thousands)

3Q 2020

2Q 2020

$ Variance

% Variance

Compensation and employee benefits

$

5,692

$

5,863

$

(171

)

(3

)%

Rent and occupancy

415

448

(33

)

(7

)%

Loan servicing

2,168

1,754

414

24

%

Professional fees

1,051

588

463

79

%

Real estate owned, net

898

408

490

120

%

Other expenses

1,641

1,847

(206

)

(11

)%

Total expenses

$

11,865

$

10,908

$

957

9

%

Discussion of results:

  • Operating expenses increased $1.0 million due to loans servicing expense growth resulting from higher securitized loan balances, legal fees related to pending litigation, and REO expenses

SECURITIZATIONS

Securities

Balance at

Trusts

Issued

9/30/2020

W.A. Rate

2011-1 Trust

$

61,042

$

-

-

2014-1 Trust

161,076

25,599

6.97%

2015-1 Trust

285,457

41,190

7.52%

2016-1 Trust

319,809

62,339

7.54%

2016-2 Trust

166,853

46,984

6.40%

2017-1 Trust

211,910

80,174

5.08%

2017-2 Trust

245,601

138,456

3.34%

2018-1 Trust

176,816

110,262

4.02%

2018-2 Trust

307,988

208,206

4.51%

2019-1 Trust

235,580

192,856

4.05%

2019-2 Trust

207,020

168,819

3.42%

2019-3 Trust

154,419

132,893

3.25%

2020-1 Trust

248,700

233,005

2.84%

2020-2 Trust

96,352

94,113

4.48%

2020-MC1 Trust

179,371

162,173

4.50%

$

3,057,994

$

1,697,069

Discussion of results:

  • In July, the Company issued its third securitization of the year (VCC 2020-MC1) for $179 million at a rate of 4.50%. 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.

  • Expect to complete Velocity’s next securitization in the first quarter of 2021, backed by newly originated 30-year loans

RESOLUTION ACTIVITY

THIRD QUARTER 2020

SECOND QUARTER 2020

($ in thousands)

UPB $

Gain / (Loss) $

UPB $

Gain / (Loss) $

Paid in full

$

9,705

$

728

$

6,658

$

336

Paid current

1,152

24

19,635

208

REO sold

1,628

(312

)

1,406

38

$

12,485

$

440

$

27,699

$

582

Resolutions as a % of nonperforming UPB

103.5

%

102.1

%

Discussion of results:

  • Strong asset resolution trends continued in 3Q20, realizing gains of $440 thousand, or 103.5% of nonperforming UPB resolved during the quarter

Conference Call Information

The Company will host a webcast to discuss the third quarter 2020 results on November 11, 2020 at 5:00 p.m. Eastern Time. Listeners can access the webcast via the link below:

https://services.choruscall.com/links/vel201111roBZnCkl.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.

Management’s slide presentation will be available on the Company’s Investor Relations website at www.velfinance.com after the market close on Wednesday, November 11, 2020.

A replay of the call will be available through midnight on November 18, 2020 and can be accessed by dialing 1-877-344-7529 in the U.S. and 855-669-9658 in Canada or 1-412-317-0088 internationally and entering access code #10148332. The replay will also be available on the Investor Relations section of the Company's website 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 Earnings is a 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 Earnings, please refer to the sections of this press release titled "Non-GAAP Financial Measures" and "Adjusted Financial Metric Reconciliation to GAAP Net Income."

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, which is a non-GAAP financial measure. 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 anticipated results, 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," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "goal," 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 continued course and severity of the COVID-19 pandemic, and its direct and indirect impacts, (2) general economic and real estate market conditions, (3) regulatory and/or legislative changes, (4) our customers' continued interest in loans and doing business with us, (5) market conditions and investor interest in our contemplated securitization and (6) changes in federal government fiscal and monetary policies.

Additional information relating to these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements can be found in the section titled ‘‘Risk Factors" in our Form 10-Q filed with the SEC on May 14, 2020, as well as other cautionary statements we make in our current and 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

9/30/2020

6/30/2020

3/31/2020

12/31/2019

09/30/2019

(In thousands)

Assets

Cash and cash equivalents

$

19,210

$

9,803

$

7,649

$

21,465

$

8,849

Restricted cash

7,821

6,735

4,483

6,087

3,152

Total loans, net

2,004,413

2,077,119

2,148,595

2,080,787

1,949,311

Accrued interest receivables

13,134

17,793

14,470

13,295

12,450

Receivables due from servicers

44,466

36,028

37,884

49,659

38,349

Other receivables

402

4,609

2,516

4,778

7,585

Real estate owned, net

14,653

15,648

16,164

13,068

15,806

Property and equipment, net

4,446

4,718

4,964

4,680

4,903

Deferred tax asset

1,832

5,556

10,111

8,280

4,127

Other assets

16,489

9,042

10,519

12,667

17,219

Total Assets

$

2,126,866

$

2,187,051

$

2,257,354

$

2,214,766

$

2,061,751

Liabilities and members' equity

Accounts payable and accrued expenses

$

61,859

$

55,938

$

58,591

$

56,146

$

41,957

Secured financing, net

74,776

74,571

74,364

145,599

145,285

Securitizations, net

1,670,930

1,599,719

1,576,431

1,438,629

1,377,733

Warehouse & repurchase facilities

19,541

160,796

297,537

421,548

349,115

Total Liabilities

1,827,106

1,891,024

2,006,924

2,061,922

1,914,090

Mezzanine Equity

Series A Convertible preferred stock

90,000

90,000

-

-

-

Stockholders' Equity

Stockholders' equity

209,760

206,027

250,430

152,844

147,661

Total Liabilities and members' equity

$

2,126,866

$

2,187,051

$

2,257,354

$

2,214,766

$

2,061,751

Book value per share

$

10.44

$

10.26

$

12.47

n.a.

n.a.

Shares outstanding

20,087

20,087

20,087

n.a.

n.a.

Velocity Financial, Inc.

Consolidated Statements of Income

(Unaudited)

Quarter Ended

($ in thousands)

9/30/2020

6/30/2020

3/31/2020

12/31/2019

09/30/2019

Revenues

Interest income

$

41,374

$

39,755

$

44,637

$

44,124

$

40,379

Interest expense - portfolio related

22,347

21,189

22,848

22,689

21,827

Net interest income - portfolio related

19,027

18,566

21,789

21,435

18,552

Interest expense - corporate debt

1,913

1,894

6,342

4,070

3,842

Net interest income

17,114

16,672

15,447

17,365

14,710

Provision for loan losses

1,573

1,800

1,289

242

338

Net interest income after provision for loan losses

15,541

14,872

14,157

17,123

14,372

Other operating income (expense)

1,349

(1,339

)

1,620

833

(212

)

Total net revenues

16,890

13,533

15,777

17,956

14,160

Operating expenses

Compensation and employee benefits

5,692

5,863

5,041

3,992

3,712

Rent and occupancy

415

448

455

426

369

Loan servicing

2,168

1,754

2,239

1,939

1,957

Professional fees

1,051

588

1,184

469

398

Real estate owned, net

898

408

1,134

1,300

485

Other operating expenses

1,641

1,847

1,998

1,688

1,563

Total operating expenses

11,865

10,908

12,051

9,814

8,484

Income before income taxes

5,025

2,625

3,727

8,142

5,676

Income tax expense

1,544

484

1,148

2,960

1,796

Net income

$

3,481

$

2,141

$

2,579

$

5,182

$

3,880

Less deemed dividends on preferreds stock

$

48,955

Net loss allocated to common shareholders

$

(46,814

)

Basic earnings (loss) per share

$

0.17

$

(2.33

)

$

0.13

n.a.

n.a.

Diluted earnings (loss) per common share

$

0.11

$

(2.33

)

$

0.13

n.a.

n.a.

Basic weighted average common shares outstanding

20,087

20,087

20,087

n.a.

n.a.

Diluted weighted average common shares outstanding

32,435

20,087

20,087

n.a.

n.a.

Velocity Financial, Inc.

Net Interest Margin ‒ Portfolio Related and Total Company

(Unaudited)

Quarter Ended September 30, 2020

Quarter Ended June 30, 2020

Quarter Ended September 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

$

122,763

Loans held for investment

2,016,414

1,875,260

1,703,377

Total loans

$

2,016,414

$

41,374

8.21

%

$

2,095,307

$

39,755

7.59

%

1,826,140

$

40,379

8.84

%

Debt:

Warehouse and repurchase facilities

$

22,306

703

12.61

%

$

242,676

2,632

4.34

%

246,532

3,527

5.72

%

Securitizations

1,742,669

21,645

4.97

%

1,589,191

18,557

4.67

%

1,401,930

18,301

5.22

%

Total debt - portfolio related

1,764,975

22,348

5.07

%

1,831,867

21,189

4.63

%

1,648,462

21,828

5.30

%

Corporate debt

78,000

1,913

9.81

%

78,000

1,895

9.72

%

136,882

3,842

11.23

%

Total debt

$

1,842,975

$

24,261

5.27

%

$

1,909,867

$

23,084

4.83

%

1,785,344

25,670

5.75

%

Net interest spread - portfolio related (1)

3.14

%

2.96

%

3.55

%

Net interest margin - portfolio related

3.77

%

3.54

%

4.06

%

Net interest spread - total company (2)

2.94

%

2.75

%

3.09

%

Net interest margin - total company

3.39

%

3.18

%

3.22

%

(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)

9/30/2020

6/30/2020

Net Income

$

3,481

$

2,141

COVID-19 Impact

1,267

Workforce reduction costs

432

-

"Core" Earnings

$

3,913

$

3,408

Diluted weighted average common shares outstanding

$

32,435

$

20,087

View source version on businesswire.com: https://www.businesswire.com/news/home/20201111005775/en/

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Investors and Media:
Chris Oltmann
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