Velocity Financial, Inc. Announces Third Quarter 2020 Results

Rhea-AI Summary

Velocity Financial, Inc. (NYSE: VEL) reported a net income of $3.5 million for Q3 2020, with diluted EPS of $0.11. Core income reached $3.9 million, excluding severance costs. Book value per share increased to $10.44. The company noted strong volumes and demand for financing solutions, adding nearly 400 new broker relationships. Key indicators show a 25% rise in net revenues, driven by improved interest income and lower loan losses. Nonperforming loans slightly decreased to 15.84% of total loans, while operating expenses rose by 9%, reflecting increased loan servicing costs.

Positive

• Net income of $3.5 million represents a 63% increase from Q2 2020.
• Core earnings increased by 15% quarter-over-quarter to $3.9 million.
• Net revenues grew 25% to $16.89 million, driven by normalized loan loss provisioning.
• Nonperforming loans decreased to 15.84%, reflecting strong asset resolution.
• Addition of 396 new broker registrations resulted in $226 million in loan applications.

Negative

• Operating expenses increased by 9%, primarily due to higher loan servicing costs.
• Total loan portfolio decreased by 4% from the previous quarter.

WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--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