8-K
Velocity Financial, Inc. (VEL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 12, 2020
Velocity Financial, Inc.
(Exact name of Registrant as Specified in Its Charter)
| Delaware | 001-39183 | 46-0659719 |
|---|---|---|
| (State or Other Jurisdiction<br><br><br>of Incorporation) | (Commission<br><br><br>File Number) | (IRS Employer<br><br><br>Identification No.) |
| 30699 Russell Ranch Road, Suite 295<br><br><br>Westlake Village, California | 91362 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (818) 532-3700
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading<br><br><br>Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, par value $0.01 per share | VEL | The New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition.
On August 12, 2020, we issued a press release announcing financial results for the quarter ended June 30, 2020. The press release is attached as Exhibit 99.1 and is incorporated herein by reference.
Item 7.01 Regulation FD Disclosure.
In addition to our earnings press release, we posted to our Investor Relations website, www.velfinance.com, management's second quarter 2020 earnings presentation. A copy of the presentation is furnished as Exhibit 99.2 and is incorporated herein by reference.
The information provided in Items 2.02 and 7.01, including Exhibits 99.1 and 99.2, is intended to be furnished and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any other filing under the Securities Act or the Securities Exchange Act, except as expressly set forth by specific reference in such a filing.
Item 9.01 Exhibits.
| Exhibit<br><br><br>Number | Description |
|---|---|
| 99.1 | Press Release dated August 12, 2020 |
| 99.2 | Management's Earnings Presentation Materials |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Velocity Financial, Inc. | ||
|---|---|---|
| Date: August 12, 2020 | /s/ Roland T. Kelly | |
| Roland T. Kelly | ||
| General Counsel |
2
vel-ex991_6.htm
Exhibit 99.1
Investors and Media:
Chris Oltmann
(818) 532-3708
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, CA – August 12, 2020 – 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 $90.0 million as of June 30, 2020.
“In light of the unprecedented environment we faced, I am pleased with our second quarter results and the tremendous accomplishments of the Velocity team to address
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Second Quarter 2020 Earnings
the pandemic’s impact on our company and preparations to restart our loan production operations in the third quarter,” said Chris Farrar, President and CEO. “Net income for the second quarter and year-to-date was positive and reflects the resiliency of Velocity’s business model under extreme conditions. While challenges remain, we are now fully devoted to restarting our loan production activities, and I am excited about driving growth and future returns for our stockholders.”
Second Quarter Operating Results
| KEY PERFORMANCE INDICATORS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 2Q 2020 | 1Q 2020 | Variance | % Variance | |||||||
| Pretax income | $ | 2,625 | $ | 3,727 | ) | (30 | )% | ||||
| Net income | $ | 2,141 | $ | 2,579 | ) | (17 | )% | ||||
| Preferred stock deemed dividend^(1)^ | $ | (48,955 | ) | - | - | - | |||||
| Diluted (loss) earnings per share | $ | (2.33 | ) | $ | 0.13 | ) | (1915 | )% | |||
| "Core" Earnings^(2)^ | $ | 3,408 | $ | 5,804 | ) | (41 | )% | ||||
| "Core" EPS^(2)^ | $ | 0.17 | $ | 0.29 | ) | (41 | )% | ||||
| Pretax return on equity | 4.9 | % | 6.6 | % | )% | (25 | )% | ||||
| Return on equity | 4.0 | % | 4.6 | % | )% | (12 | )% | ||||
| Net interest margin - portfolio | 3.5 | % | 4.2 | % | )% | (15 | )% | ||||
| Avergage common equity | $ | 212,407 | $ | 225,125 | (6 | )% |
All values are in US Dollars.
| ^(1)^ | Charged against common equity |
|---|---|
| ^(2)^ | Core earnings and and Core earnings per share are a non-GAAP measure. |
| --- | --- |
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 |
| --- | --- |
| ‒ | $2.44 per share impact related the non-cash deemed dividend on preferred stock |
| --- | --- |
| ▪ | The preferred stock deemed dividend reduced common stockholders’ equity and correspondingly increased preferred stock under mezzanine equity. This transaction reflects the redemption value of the preferred stock as of June 30, 2020. |
| --- | --- |
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Second Quarter 2020 Earnings
| TOTAL LOAN PORTFOLIO | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2Q 2020 | 1Q 2020 | Variance | % Variance | |||||||
| Held for Investment | |||||||||||
| Investor 1-4 Rental | $ | 841 | $ | 872 | ) | (3 | )% | ||||
| Mixed Use | 260 | 265 | ) | (2 | )% | ||||||
| Multi-Family | 193 | 201 | ) | (4 | )% | ||||||
| Retail | 178 | 181 | ) | (2 | )% | ||||||
| All Other | 373 | 384 | ) | (3 | )% | ||||||
| Total | $ | 1,845 | $ | 1,903 | ) | (3 | )% | ||||
| Held for Sale | |||||||||||
| Investor 1-4 Rental | $ | 214 | $ | 224 | ) | (4 | )% | ||||
| Total Managed Loan Portfolio | $ | 2,059 | $ | 2,127 | ) | (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 | % |
All values are in US Dollars.
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 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 | ) | (100 | )% | ||
| Traditional Perm. | - | 86 | ) | (100 | )% | ||||
| Short-term loans | - | 96 | ) | (100 | )% | ||||
| Total loan production | $ | - | $ | 248 | ) | (100 | )% |
All values are in US Dollars.
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Second Quarter 2020 Earnings
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 | ) | (11 | )% | ||||
| Interest expense - portfolio related | (21,189 | ) | (22,848 | ) | (7 | )% | |||||
| Net Interest Income | $ | 18,566 | $ | 21,789 | ) | (15 | )% | ||||
| Interest expense - corporate debt | (1,894 | ) | (6,342 | ) | (70 | )% | |||||
| CECL provision | (1,800 | ) | (1,289 | ) | ) | 40 | % | ||||
| Gain on loan sales | 155 | 2,617 | ) | (94 | )% | ||||||
| Other Operating (loss) income | (1,494 | ) | (998 | ) | ) | 50 | % | ||||
| Total Net Revenues | $ | 13,533 | $ | 15,777 | ) | (14 | )% |
All values are in US Dollars.
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 | 16 | % | |||
| Rent and occupancy | 448 | 455 | ) | (2 | )% | ||||
| Loan servicing | 1,754 | 2,239 | ) | (22 | )% | ||||
| Professional fees | 588 | 1,184 | ) | (50 | )% | ||||
| Real estate owned, net | 408 | 1,134 | ) | (64 | )% | ||||
| Other expenses | 1,847 | 1,998 | ) | (8 | )% | ||||
| Total expenses | $ | 10,908 | $ | 12,051 | ) | (9 | )% |
All values are in US Dollars.
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Second Quarter 2020 Earnings
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 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Trusts | Securities<br><br><br>Issued | Balance at<br><br><br>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 | ||
| Paid current | ||
| REO sold | ||
All values are in US Dollars.
5 | Page
Second Quarter 2020 Earnings
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.”
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Second Quarter 2020 Earnings
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 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 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
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Second Quarter 2020 Earnings
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.
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Second Quarter 2020 Earnings
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 |
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Second Quarter 2020 Earnings
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<br><br><br>for loan losses | 14,872 | 14,157 | 17,123 | 14,372 | 12,995 | ||||||
| Other operating income | |||||||||||
| 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<br><br><br>preferreds stock | $ | 48,955 | |||||||||
| Net loss allocated to common<br><br><br>shareholders | $ | (46,814 | ) | ||||||||
| Diluted loss per common share | $ | (2.33 | ) | $ | 0.13 | ||||||
| Diluted weighted avergage common<br><br><br>shares outstanding | $ | 20,087 | $ | 20,087 | - | - | - |
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Second Quarter 2020 Earnings
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. | ||||||||||||||||||||
| --- | --- |
11 | Page
Second Quarter 2020 Earnings
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 |
12 | Page
vel-ex992_19.pptx.htm
2Q20 Earnings Presentation August 12, 2020 Exhibit 99.2
Forward-looking statements Some of the statements contained in this presentation 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 presentation 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.
2Q20 Highlights Production& Portfolio Earnings Financing & Capital Net Income of $2.1 million and “Core” EPS of $0.17(1) Results reflect resiliency of Velocity’s business model, maintaining positive net income despite extreme challenges presented by the pandemic Deemed dividend to adjust the redemption value of the preferred stock resulted in a non-cash loss per common share of $(2.33) during the quarter(2) Resolutions of delinquent loans in 2Q20 totaled 102% of delinquent assets resolved, continuing our strong historical track record of net gains on delinquent loan resolutions Loans in COVID-19 forbearance plans totaled $331 million in UPB at June 30, 2020 Approximately 81% of the forbearance plans due to resume making full payments in July made their payment or paid in full Total net interest margin of 3.18%, an increase of 21 basis points (bps) from 1Q20 Paid off existing warehouse lines. All loans are now secured with long-term financing. Completed our VCC 2020-2 securitization totaling $128 million in UPB of assets in June, collateralized by 30-year mortgages Completed our VCC 2020-MC1 securitization totaling $276 million in UPB in July, collateralized primarily by short-term loans Issued and sold $45 million of convertible preferred stock and warrants and used proceeds to strengthen balance sheet (1) “Core” earnings per share is a non-GAAP measure. Please see the reconciliation to GAAP net income on page 4. (2) Please see the slide 15 in the Appendix of this presentation for more information.
Earnings and Book Value Adjusted “Core” Earnings Per Share Book Value Per Share ($0.06) ($2.44) 2Q20 Core earnings of $0.17 per share, a decrease from $0.29 in the prior quarter Book value per share at June 30, 2020 of $10.26 per share from $12.47 per share at March 31, 2020 Preferred stock deemed dividends reflects a non-cash transfer from common shareholder’s equity to preferred stock in mezzanine equity reflecting the redemption value of the preferred stock as of June 30, 2020. Increase in the macroeconomic model forecast of the CECL loan loss reserve resulting from a more adverse outlook regarding the sustained potential impacts of the COVID-19 pandemic GAAP diluted loss per common share $(2.33) Preferred stock deemed dividends $(2.44) $0.19 (2) (1) “Core” income per share is a non-GAAP measure. Please see the Company’s second quarter earnings press release for a reconciliation of “Core” income to GAAP net income. (2) Includes fair value of warrants and Increase APIC from stock options COVID-19 Reserve $(0.06) “Core” earnings per share $0.17 (1)
Production Financing / Securitization Eliminated mark-to market risk with long term, fixed rate securitizations Ability to execute two securitizations in highly disrupted and uncertain market speaks to Velocity’s franchise value and extensive track record of strong collateral performance In negotiations with various counterparties regarding new warehouse financing lines without mark to market provisions Redesigned origination workflows to incorporate greater system automation while also increasing processing speed and accuracy Retraining operations staff and targeting full operational readiness by the end of August Resuming production operations in the first week of September 2020 Re-evaluating product guidelines (LTVs, property types, geographies, etc.) and product offerings for the new environment Business Update Forbearances / Loss Mitigation Approximately 81% of the forbearance plans due to resume making full payments in July made their payment or paid in full Loans completing forbearance will be brought current and missed payments will be deferred until the loan is paid off or at maturity Offering of new forbearance plans generally ceased after June 30, 2020(21) (1 Forbearances may be offered as a loss mitigation option on a case-by-case basis going forward
Loan Portfolio – HFS and HFI $(67) $(1) Loan Portfolio Waterfall Loan Portfolio Composition (UPB in millions) Total portfolio at June 30, 2020 was $2.06 billion from $2.13 billion at March 31, 2020 Real estate markets remains very active despite COVID-19 pandemic-related issues Receiving strong indications of demand from our broker network for financing of investor properties (UPB in millions)
Portfolio Net Interest Income & NIM(1) Net Interest Income and Margin 2Q20 Net Interest Income (NII)(1) totaled $18.6 million, a decrease of 15% Q/Q and up 12% Y/Y 2Q20 Net Interest Margin (NIM)(1) was 3.54%, a decrease of 64 bps Q/Q and 37 bps Y/Y The Q/Q decrease in NII and NIM was primarily been driven by increased loan delinquency, partially offset by a decreasing weighted average cost of funds Portfolio Yield and Cost of Funds Portfolio Related Portfolio Related ($ in Millions) (1) Net Interest Income and Net Interest Margin related to the loan portfolio only; excludes corporate debt.
Nonaccrual Loans(1) Nonaccrual loans at June 30, 2020 totaled $269 million in UPB, or 14.6% of total loans held for investment, up from 7.9% at March 31, 2020 and 6.0% at March 31, 2019 Charge-offs were $75 thousand in 2Q20, continuing the historical trend of extremely low loss severity despite higher delinquencies Charge-offs $ UPB in millions HFI Loan Portfolio Performance $ thousands (1) (1) Annualized
CECL Reserve and Charge-Offs CECL Reserve Velocity’s CECL reserve increased 10 bps Q/Q to 28 bps of HFI loans at June 30, 2020, from 18 bps at March 31, 2020 The increase to the CECL reserve in 2Q20 was driven by a more-adverse economic forecast that included the following key assumptions: Deeper recession and longer recovery Resurgence of COVID-19 infections, consumer avoidance of retail, restaurants and travel; persistent fears of contagion Consumer demand adversely impacted by the expiration / reduction of Federal fiscal aid Trade / geopolitical tensions with China Potential second wave of contagion in the Fall/Winter Strengthening the CECL reserve to address the COVID-19 pandemic; model assumes more severe macroeconomic environment going forward
2Q20 Asset Resolution Activity $ UPB in millions Realized net gains of $0.59 million from 2Q20 resolution activity or 102% of UPB resolved Paid in full $6.7 Paid current REO sold $19.6 $1.4 $ UPB $ Gain / Loss $0.34 $0.21 $0.04 2Q20 Resolution Activity Nonaccrual loans paid in full during 2Q20 totaled $6.7 million in UPB with a $0.34 million net gain on resolution Gains primarily reflect the collection of all default interest, in addition to regular interest and prepayment penalties Loans paid current during 2Q20 total $19.6 million in UPB with a $0.21 million net gain Gain reflects collection of default interest, in addition to regular interest, and loan remains in our portfolio REO sales totaled $1.4 million for a net gain of $0.04 million. Continued positive 2Q20 P&L trend in resolutions of delinquent loans and REO assets
Managing Through Higher Delinquencies Profitability and Growth Demand for Our Products Real estate values have held up better than expectations and we believe that considerable demand for financing of investor properties exists Restarting lending at a measured pace with more attractive risk adjusted returns Portfolio growth from new production expected to drive increased net interest income Attractive ROE’s and improved risk profile resulting from revised product offerings for the new environment Mark-to-market removed from warehouse agreements, reducing risk and potential volatility Our special servicing group is prepared to address the growing population of delinquent loans through enhanced operational efficiencies and increased headcount We expect that Velocity’s historical track record of resolving delinquent loans at net gains will continue Expectations for the Future
Appendix
Velocity Financial, Inc. Balance Sheet (Unaudited)
Velocity Financial, Inc. Income Statement (Unaudited)
Velocity Financial, Inc. – Earnings (Loss) Per Share
Total Loan Portfolio Portfolio by Property Type (100% = $2.06 billion UPB)(1) (1) At June 30, 2020 Portfolio by State
COVID-19 Forbearance Plans (100% = 394 loans) (1) The chart above shows the population of COVID-19 forbearances. 175 of the loans had the principal and interest deferred for the three payments from April to June 2020, deferred and the paid to date of the loans were brought current as of 7/1/2020. 128 loans had the principal and interest deferred for the four or five payments from April to July, or August (as applicable), deferred and the paid to date of the loans were brought current as of 8/1/2020. Forbearance Plans for Payment Effective Date April 1, 2020(1) 175 - Paid 47 – Did Not Pay Due for 7/1 Due for 8/1 Paid In Full Not Approved for Deferral