Velocity Financial, Inc. Reports First Quarter 2023 Results

First Quarter Highlights:

• Net income of $10.6 million and diluted earnings per share (EPS) of $0.31, compared to $3.1 million and $0.09 per share, respectively, for 1Q22
• Core net income(1) of $11.4 million and core diluted EPS(1) of $0.33, compared to $12.4 million and $0.36 per share, respectively, for 1Q22
• Loan production volume of $217.0 million in unpaid principal balance (UPB), a decrease of 62.7% from 1Q22
  • Primarily due to management’s strategic decision to reduce volume
• Total loan portfolio of $3.6 billion as of March 31, 2023, an increase of 25.0% from March 31, 2022
• Nonperforming loans as a percentage of Held for Investment (HFI) loans was 8.7% as of March 31, 2023, a decrease from 9.8% as of March 31, 2022
• Resolutions of nonperforming loans (NPL) and real estate owned (REO) totaled $38.7 million in UPB, realizing gains of $1.3 million or 103.5% of UPB resolved
• Portfolio net interest margin (NIM) of 3.23%, compared to 4.25% for 1Q22
• Completed the VCC 2023-1 securitization totaling $198.7 million of securities issued
• Liquidity(2) of $45.3 million as of March 31, 2023
• Book value per common share of $12.18 as of March 31, 2023, an increase from $10.90 as of March 31, 2022

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company), a leader in business purpose loans, reported net income of $10.6 million and core net income of $11.4 million for 1Q23, compared to net income of $3.1 million and core net income of $12.4 million in 1Q22. Earnings and core earnings per diluted share were $0.31 and $0.33, respectively, for 1Q23, compared to $0.09 and $0.36, for 1Q22.

“Velocity’s first quarter results demonstrate the resiliency of our business model and our ability to deliver strong results in dynamic market conditions,” said Chris Farrar, President and CEO. “Our first quarter results included strong portfolio income and improved fundamentals, setting the stage for continued solid performance in 2023. Net interest margin increased by 39 basis points on a sequential-quarter basis, and gains from nonperforming loan resolutions returned to more normalized levels, resulting in solid net income growth. We continued to enjoy support from the capital markets with the April issuance of our VCC 2023-1R securitization collateralized by retained tranches of previous VCC securitizations. This transaction provides a new source of non-mark-to-market liquidity for the company at cost-effective levels and enhances our ability to capitalize on opportunities for growth. We expect to increase production from first quarter levels for the remainder of 2023 and are optimistic regarding our ability to deliver strong earnings growth in the future.”

(1) Core income and Core EPS are a non-GAAP measures that exclude nonrecurring and unusual activities from GAAP net income.

(2) Liquidity includes unrestricted cash reserves of $39.4 million and available liquidity in unfinanced loans of $5.9 million.

First Quarter Operating Results

Discussion of results:

• Net income in 1Q23 was $10.6 million, compared to $3.1 million for 1Q22
  • Driven by higher net interest income resulting from increased loan yields and portfolio growth
  • Net income in 1Q22 includes $12.8 million of deal cost write-off related to the refinancing of the Company’s corporate debt
  • Other operating income in 1Q23 was $12.5 million, compared to $5.6 million for 1Q22
• Core net income(1) was $11.4 million, compared to $12.4 million for 1Q22
  • 1Q22 core net income reflects after-tax adjustments of $9.3 million from the write-off of costs related to the refinancing of the Company’s corporate debt in 1Q22
• Portfolio NIMin 1Q23 was 3.23%, compared to 4.25% for 1Q22, resulting from increased interest expense, partially offset by increased portfolio yields due to higher loan coupons on recent loan production
• The GAAP pretax return on equity was 15.26% in 1Q23

Discussion of results:

• Velocity’s total loan portfolio was $3.6 billion in UPB as of March 31, 2023, an increase of 25.0% from $2.9 billion in UPB as of March 31, 2022
  • Primarily driven by growth in loans collateralized by Investor 1-4 Rental and Multifamily Properties
  • Loan prepayments totaled $86.9 million, a 3.1% Q/Q increase, and a 37.3% decrease Y/Y
• The UPB of FVO loans was $436.6 million in UPB, or 12.2% of total HFI loans, as of March 31, 2023, an increase from $1.3 million in UPB, or 0.05% as of March 31, 2022
  • The company elected fair value accounting treatment for new HFI loan originations effective October 1, 2022
• The weighted average portfolio loan-to-value ratio was 68.1% as of
  March 31, 2023, consistent with the 67.9% as of March 31, 2022, and the five-quarter trailing average of 68.2%
• The weighted average total portfolio yield was 8.00% in 1Q23, an increase of 24 bps from 1Q22, driven by higher loan coupons
• Portfolio-related debt cost in 1Q23 was 5.33%, an increase of 133 bps from 1Q22 driven by higher interest rates

Discussion of results:

• Loan production in 1Q23 totaled $217.0 million in UPB, a 62.7% decrease from
  $581.4 million in UPB in 1Q22
  • Driven by management’s strategic decision to reduce volume
• The weighted average coupon (WAC) on 1Q23 HFI loan production was 11.1%, an increase of 473 bps from 1Q22

Discussion of results:

• Nonperforming loans (NPL) totaled $309.9 million in UPB as of March 31, 2023, or 8.7% of loans HFI, compared to $278.3 million and 9.8%, respectively, as of March 31, 2022
• Charge-offs in 1Q23 totaled $484.2 thousand, compared to $328.1 thousand in 1Q22
  • The trailing five-quarter charge-off average was $200.8 thousand
• The loan loss reserve totaled $5.0 million as of March 31, 2023, an 8.2% increase from $4.7 million as of March 31, 2022
  • The Q/Q increase resulted from modest growth in the reserve’s macroeconomic component, partially offset by run-off of the amortized cost HFI loan portfolio
  • Loans carried at fair value are not subject to a CECL reserve

Discussion of results:

• Net Revenue in 1Q23 was $36.3 million, compared to $16.3 million for 1Q22
• Total net interest income, including corporate debt interest expense, increased by
  $13.0 million from 1Q22
  • Net Interest income was $28.5 million in 1Q23, essentially unchanged from 1Q22
  • 1Q22 corporate debt interest expense includes $12.8 million of deal cost write-off related to the corporate debt refinancing
• Total other operating income, includes gains on disposition of loans, unrealized gain/(loss) on fair value loans, and other operating income, and totaled $12.6 million in 1Q23 compared to $5.6 million in 1Q22
  • Gain on disposition of loans includes gains from loan sales and transfer of loans. In 1Q23, gains on transfer to REO totaled $1.2 million, and loan sales realized gains of $679.7 thousand on $20.8 million in UPB sold
  • Other operating income in 1Q23 totaled $3.3 million, compared to $1.1 million for 1Q22, driven by a $2.1 million increase in origination fees and $0.95 million increase in bank deposit earnings. Origination fees were deferred prior to our election of fair value accounting treatment for new HFI loan originations, effective October 1, 2022.

Discussion of results:

• Operating expenses totaled $21.5 million in 1Q23, an increase of 75.7% from 1Q22. The variance to prior year results is mostly attributable to our FVO accounting election
  • Compensation expense totaled $10.0 million, compared to $5.3 million for 1Q22. In 1Q23, compensation expense related to loan originations was expensed as incurred under fair value accounting rather than deferred over the life of the loan under amortized cost accounting in 1Q22.
  • Origination (income)/expenses improved by $644 thousand compared to the prior year resulting from the election of fair value accounting
  • Securitization issuance costs in 1Q23 totaled $2.6 million. Securitization issuance costs are now expensed under fair value accounting and were previously deferred
  • Loan servicing expense growth was driven by the increase in securitizations outstanding to $2.9 billion as of March 31, 2023, from $2.1 billion as of March 31, 2022

Discussion of results

• Completed the VCC 2023-1 securitization totaling $198.7 million of securities issued in January, comprised of long-term business-purpose loans
• The weighted average rate on Velocity’s outstanding securitizations was 4.29% as of March 31, 2023, an increase of 117 bps from March 31, 2022, driven by higher rates
• After quarter end, the Company completed the issuance of the VCC 2023-1R totaling $64.8 million of securities issued, collateralized by retained tranches from previous VCC securitizations

Discussion of results:

• Total NPL and REO resolution activities in 1Q23 totaled $38.7 million in UPB and realized net gains of $1.3 million, or 103.5% of UPB resolved, compared to $37.4 million in UPB and net gains of $1.8 million, or 104.8% of UPB resolved in 1Q22
  • Long-term loan and REO resolutions in 1Q23 totaled $30.3 million in UPB and realized gains of $1.0 million, compared to $19.3 million in UPB and realized gains of $1.1 million in 1Q22
  • Short-term loan and REO resolutions in 1Q23 totaled $8.4 million in UPB and realized gains of $0.3 million, compared to $18.1 million in UPB and realized gains of $0.7 million in 1Q22
• The UPB of loan resolutions in 1Q23 were in line with the recent five-quarter resolution average of $39.4 million in UPB

Velocity’s executive management team will host a conference call and webcast to review 1Q23 financial results on May 4th, 2023, 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 May 31, 2023, 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 #4004772. 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 business purpose 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 19 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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