Velocity Financial, Inc. Reports Third Quarter 2022 Results

Third Quarter Highlights:

• Net income of $10.0 million and diluted earnings per share (EPS) of $0.29, compared to $8.0 million and $0.23 per share, respectively, for 3Q21
• Core net income(1) of $10.0 million and core diluted EPS(1) of $0.29, compared to $8.0 million and $0.23 per share, respectively, for 3Q21
• Loan production volume of $457.3 million in unpaid principal balance (UPB), an increase of 34.2% from 3Q21
• Total loan portfolio UPB of $3.4 billion as of September 30, 2022, an increase of 51.1% from September 30, 2021
• Nonaccrual loans as a percentage of Held for Investment (HFI) loans was 7.4% as of September 30, 2022, down from 12.7% as of September 30, 2021
• Resolutions of nonperforming loans (NPL) and real estate owned (REO) totaled $45.2 million in UPB, realizing gains of $2.7 million or 105.9% of UPB resolved
• Portfolio net interest margin (NIM) of 3.59%, compared to 4.97% in 3Q21
• Completed one VCC securitization in 3Q22 totaling $308.4 million of securities issued
• Liquidity(2) of $96.0 million as of September 30, 2022
• Book value per common share of $11.61 as of September 30, 2022

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company) reported net income and core net income of $10.0 million for 3Q22, compared to net income and core net income of $8.0 million for 3Q21. Earnings and core earnings per diluted share were $0.29 for 3Q22, compared to $0.23 for 3Q21.

“Velocity delivered strong earnings in the third quarter, over 30% year-over-year production growth, further improvement in our loan portfolio’s performance, and continued book value growth,” said Chris Farrar, President and CEO. “In the third quarter, loan demand remained robust despite higher interest rates, underscoring the strong desire of our borrowers to own tangible assets. While market volatility and uncertainty have increased, we have a solid balance sheet and strong liquidity that will enable us to navigate this period and position the Company for future success.”

Third Quarter Operating Results

Discussion of results:

• Net income in 3Q22 was $10.0 million, compared to $8.0 million in 3Q21

‒ The year-over-year increase in net income was driven by higher net interest income from strong HFI portfolio growth, the realization of interest and fees from the resolution of nonperforming loans, and MSR valuation gains.

• Core net income(1) was $10.0 million, an increase of 24.4% from $8.0 million in 3Q21
• Portfolio NIMin 3Q22 was 3.59% compared to 4.97% from 3Q21, driven by a decrease in portfolio yield and higher portfolio debt costs
• The GAAP pretax return on equity was 15.26% in 3Q22, compared to 18.23% in 3Q21

‒ Driven by a higher average equity balance in 3Q22

Discussion of results:

• Velocity’s total loan portfolio was $3.4 billion in UPB as of September 30, 2022, an increase of 51.1% from $2.3 billion in UPB as of September 30, 2021

‒ Driven by record loan production volume

‒ Payoff activity totaled $110.9 million in UPB in 3Q22, a decrease of 11.9% from $125.5 million in 3Q21

• The weighted average portfolio loan-to-value ratio was 68.7% as of September 30, 2022, consistent with the 67.2% as of September 30, 2021, and the five-quarter trailing average of 67.9%
• The weighted average total portfolio yield was 7.88% in 3Q22, a decrease of 89 bps from 3Q21, driven by record loan production volume earlier this year in a lower interest rate environment
• Portfolio-related debt cost in 3Q22 was 4.81%, an increase of 33 bps from 3Q21 resulting from a higher interest rate environment

Discussion of results:

• Loan production in 3Q22 totaled $457.3 million in UPB, a 34.2% increase from $340.7 million in UPB in 3Q21

‒ Resulting primarily from 50.9% growth of Investor 1-4 long-term loan production

• The weighted average coupon (WAC) on 3Q22 HFI loan production was 8.89%, an increase of 114 bps from 2Q22 and 184 basis points from 3Q21
• October 2022 originations totaled $105.0 million in UPB with a WAC of 9.8%

Discussion of results:

• Nonperforming loans (NPL) totaled $253.3 million in UPB as of September 30, 2022, or 7.4% of loans HFI, compared to $288.4 million and 12.7%, respectively, as of
  September 30, 2021

• Charge-offs in 3Q22 totaled $155.2 thousand compared to $162.1 thousand in 3Q21

‒ 3Q22 charge-offs were in-line with the trailing five-quarter average of $165.0 thousand per quarter

• The loan loss reserve totaled $5.3 million as of September 30, 2022, a 32.3% increase from $4.0 million as of September 30, 2021, driven primarily by portfolio growth
• Capitalized interest recovered on COVID forbearance loans totaled $4.1 million since the program's inception in April 2020, with a remaining balance of $6.9 million as of September 30, 2022. None of the capitalized interest has been forgiven.

Discussion of results:

• Total net interest income, including corporate debt interest expense, increased by $2.7 million, or 12.4% from 3Q21

‒ Portfolio-related interest income increased 35.2% from 3Q21, resulting from strong portfolio growth driven by record production volumes

‒ Portfolio interest expense increased 70.1% from 3Q21, driven by higher costs on securitizations issued in 2022 as well as higher interest rates on warehouse financing

• Other operating income growth in 3Q22 was driven by valuation gains in our mortgage servicing right (MSR) asset of $1.4 million, driven by higher interest rates

Discussion of results:

• Operating expenses totaled $12.7 million in 3Q22, an increase of 12.6% from 3Q21

‒ Higher compensation and employee benefit expense resulted from increased commissions on higher loan volume and growth of the salesforce and loan operations staff

‒ Servicing expense growth was driven by the increase in securitizations outstanding from $1.6 billion as of September 30, 2021 to $2.7 billion as of September 30, 2022

‒ Real estate owned (REO), net in 3Q22 was revenue of $0.19 million compared to an expense of $1.9 million in 3Q21, primarily driven by realized gains on the disposition of REOs totaling $1.2 million in 3Q22

Discussion of results:

• Completed the VCC 2022-4 securitization totaling $308.7 million of securities issued in August, comprised of Investor 1-4 and Traditional Commercial long-term loans
• The weighted average rate on Velocity’s outstanding securitizations increased 50 bps from September 30, 2021, driven by higher rates on securitizations issued in 2022

Discussion of results:

• Total NPL and REO resolution activities in 3Q22 totaled $45.2 million in UPB and realized net gains of $2.7 million, or 105.9% of UPB resolved, compared to $60.0 million in UPB and net gains of $2.1 million, or 103.5% of UPB resolved in 3Q21

‒ Long-term loan and REO resolutions in 3Q22 totaled $30.8 million in UPB and realized gains of $1.4 million, compared to $25.8 million in UPB and realized gains of $1.4 million in 3Q21

‒ Short-term loan and REO resolutions in 3Q22 totaled $14.4 million in UPB and realized gains of $1.3 million, compared to $34.2 million in UPB and realized gains of $0.74 million in 3Q21

Velocity’s executive management team will host a conference call and webcast to review 3Q22 financial results on November 3rd, 2022, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time.

Webcast Information

The conference call will be webcast live in listen-only mode and can be accessed through the Events and Presentations section of the Velocity Financial Investor Relations website https://www.velfinance.com/events-and-presentations. To listen to the webcast, please go to Velocity’s website at least 15 minutes before the call to register, download, and install any needed software. An audio replay of the call will also be available on Velocity’s website following the completion of the conference call.

Conference Call Information

To participate by phone, please dial-in 15 minutes before the start time to allow for wait times to access the conference call. The live conference call will be accessible by dialing 1-833-316-0544 in the U.S. and Canada and 1-412-317-5725 for international callers. Callers should ask to join the Velocity Financial, Inc. conference call.

A replay of the call will be available through midnight on November 30, 2022, 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. The passcode for the replay is #9848120. 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 built and refined over 18 years.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles (GAAP), the Company uses non-GAAP core net income and core diluted EPS, which are non-GAAP financial measures.

Non-GAAP core net income and non-GAAP core diluted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per diluted share, adjusted to eliminate the effect of certain costs incurred from activities that are not normal recurring operating expenses, such as COVID-stressed charges and recoveries of loan loss provision, nonrecurring debt amortization, the impact of operational measures taken to address the COVID-19 pandemic and workforce reduction costs, and costs associated with acquisitions. To calculate non-GAAP core diluted EPS, we use the weighted-average number of shares of common stock outstanding that is used to calculate net income per diluted share under GAAP.

We have included non-GAAP core net income and non-GAAP core diluted EPS because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe that non-GAAP core net income and non-GAAP core diluted EPS provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain items that we expect to be nonrecurring.

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

For more information on Core Income, 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,” ”position,” 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, including the risk of recession (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 future securitizations, and (6) the continued conflict in Ukraine and (7) 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.

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