Velocity Financial, Inc. Reports First Quarter 2022 Results

First Quarter Highlights:

• Net income of $3.1 million and diluted earnings per share (EPS) of $0.09, down from $8.4 million and $0.24 per share, respectively, for 4Q21
• Core net income⁽¹⁾ of $12.4 million and core diluted EPS⁽¹⁾ of $0.36, up from $10.1 million and $0.29 per share, respectively, for 4Q21
• Loan production volume of $581.4 million in unpaid principal balance (UPB), a third consecutive quarterly record and an increase of 16.8% from 4Q21
• Loans held for investment (HFI) UPB of $2.8 billion as of March 31, 2022, an increase of 12.0% from December 31, 2021
• Nonaccrual loans as a percentage of Held for Investment (HFI) loans was 9.8% as of March 31, 2022, down from 10.9% as of December 31, 2021
• Resolutions of nonperforming loans (NPL) totaled $37.4 million in UPB, realizing gains of $1.8 million or 104.8% of UPB resolved
• Portfolio net interest margin (NIM) of 4.25%, consistent with 4.27% in 4Q21
• Refinanced and upsized our corporate debt, issuing $215.0 million in principal amount at a rate of 7.125% per annum and paid off higher-cost 9.00% corporate debt of $170.8 million in principal amount
• Completed our VCC 2022-1 securitization totaling $273.6 million in UPB
• Book value per common share of $10.90 as of March 31, 2022, an increase from $10.84 per share as of December 31, 2021

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company) reported net income of $3.1 million and core net income of $12.4 million for 1Q22, compared to net income of $8.4 million and core net income of $10.1 million in 4Q21. Earnings and core earnings per diluted share were $0.09 and $0.36, respectively, in 1Q22, compared to $0.24 and $0.29, respectively, in 4Q21.

“The first quarter’s performance demonstrated strong momentum in our business with record production volumes and strong financial results across the organization,” said Chris Farrar, President and CEO. “This quarter’s strong financial performance was driven by our investment loan portfolio of nearly $3 billion in UPB, which has grown at a compounded annual growth rate of 20% over the last four years from loan production sourced through our nationwide origination platform.”

Mr. Farrar continued, “While macroeconomic and geopolitical uncertainties have increased, our resilient business model has performed impressively through a variety of market environments. Going forward, we believe that Velocity’s opportunities for growth are robust. Our record production volume this quarter underscores the existence of significant investor demand for investor real estate loans, in addition to growing interest from mortgage brokers to offer commercial investor loan products to their clients. We are well-positioned to execute on these market opportunities as a result of our strong capital position, which was further improved this quarter by the advantageous refinancing of our corporate debt and continued strong investor demand for our securitizations. This capital will help us achieve our growth objectives and continue delivering strong returns for shareholders in the future.”

First Quarter Operating Results

Discussion of results:

• Net income in 1Q22 was $3.1 million, down from $8.4 million in 4Q21 resulting from deal cost write-offs and prepayments fees of $12.8 million related to refinancing the Company’s corporate debt in March
• Core net income⁽¹⁾ was $12.4 million in 1Q22, a 23.1% quarter-over-quarter increase from 4Q21. Core net income reflects after-tax adjustments of $9.3 million from the write-off of costs related to the refinancing of our corporate debt
• Portfolio NIM in 1Q22 was 4.25%, consistent with the 4.27% from 4Q21.
• The GAAP pretax return on equity was 4.42% in 1Q22, down from 13.8% in 4Q21. Adjusted for one-time debt issuance costs of $12.8 million, Core pretax return on equity was 18.90%.

Discussion of results:

• Velocity’s total loan portfolio was $2.9 billion in UPB as of March 31, 2022, an increase of 11.2% from $2.6 billion in UPB as of December 31, 2021

‒ Portfolio growth was driven by record loan production volume

‒ Payoff activity totaled $139.5 million in UPB, down 6.2% from $148.7 million in 4Q21

• The weighted average loan-to-value of the portfolio was 67.9% as of March 31, 2022, consistent with 67.7% as of December 31, 2021, and the eight-quarter trailing average of 66.7%
• The weighted average total portfolio yield was 7.76% in 1Q22, a 45 basis point (bps) quarter-over-quarter decrease driven by lower interest rates on recent production and payoff activity of older higher-rate loans
• Portfolio related debt cost in 1Q22 was 4.00%, a decrease of 58 bps from 4Q21

Discussion of results:

• Loan production in 1Q22 totaled $581.4 million in UPB, a new quarterly production record, and a 16.8% increase from the previous record of $497.8 million in UPB in 4Q21.

‒ Traditional Commercial production was up $68.2 million in UPB from 4Q21, a 33.5% quarter-over-quarter increase from 4Q21, driven by strong demand for multifamily and mixed-use properties

‒ Investor 1-4 Rental production was up $26.2 million in UPB from 4Q21, a 9.8% quarter-over-quarter increase from 4Q21

• Increased the weighted average coupon to 8.10% on April new application volume of $338 million in UPB

Discussion of results:

• Nonperforming loans (NPL) totaled $275.5 million in UPB as of March 31, 2022, or 9.8% of loans HFI, compared to $273.1 million and 10.9%, respectively, as of December 31, 2021

‒ The modest growth in NPLs UPB was driven by a 3.0% increase in the UPB of loans in foreclosure from December 31, 2021

• Charge-offs in 1Q22 totaled $328.1 thousand compared to $142.7 thousand in 4Q21

‒ 1Q22 charge-offs were consistent with the trailing five quarter charge-off average of $323.9 thousand per quarter

• The loan loss reserve totaled $4.7 million as of March 31, 2022, a 9.4% increase from $4.3 million as of December 31, 2021, driven primarily by portfolio growth
• Capitalized interest recovered on COVID forbearance loans granted a deferral totaled $3.3 million since the program's inception in April 2020, with a remaining balance of $7.2 million as of March 31, 2022. None of the capitalized interest has been forgiven.

Discussion of results:

• Total net interest income, including corporate debt interest expense, decreased by $9.9 million, or 46.5% from 4Q21, driven by nonrecurring costs from the refinancing of our corporate debt

‒ Nonrecurring costs included debt issuance cost write-off of $7.7 million and prepayment fees of $5.1 million associated with the payoff of higher-cost floating-rate corporate debt with a principal balance totaling $170.8 million

‒ Excluding these costs, net interest income was $24.2 million

• Portfolio-related net interest income (excluding corporate debt interest expense) totaled $28.5 million, an increase of 10.9% from 4Q21, resulting from portfolio growth and continued strong realization of default interest from NPL resolutions
• Gain on the disposition of loans grew 92.6% quarter-over-quarter, resulting from the sale of loans in 1Q22 totaling $144.1 million in UPB
• Other operating income growth from 4Q21 was primarily driven by a valuation gain in our servicing portfolio resulting from expected slower prepayment speeds in a rising interest-rate environment.

Discussion of results:

• Operating expenses totaled $12.3 million in 1Q22, an increase of 1.3% from 4Q21, primarily driven by higher production-related compensation

Discussion of results:

• The weighted average rate on Velocity’s outstanding securitizations decreased 8bps from 4Q21, driven mainly by the collapse of higher-cost securitization in 4Q21 and issuance of $970 million of securitizations in 2021 at a weighted average rate of 2.42%

‒ Issued the VCC 2022-1 securitization in February 2022 with a balance of $273.6 million and a weighted average rate of 3.94% as of March 31, 2022. The higher rate reflects the rising interest-rate environment.

Discussion of results:

• Total NPL resolution activities in 1Q22 totaled $37.4 million in UPB and realized net gains of $1.8 million, or 104.8% of UPB resolved, compared to $44.1 and $1.8 million, or 104.0% of UPB resolved, respectively in 4Q21

‒ Long-term loan resolutions in 1Q22 totaled $19.3 million in UPB and realized gains of $1.1 million compared to $25.4 million in UPB and realized gains of $1.0 million in 4Q21

‒ Short-term loan resolutions in 1Q22 totaled $18.1 million in UPB and realized gains of $0.72 million compared to $18.7 million in UPB and realized gains of $0.74 million, respectively, in 4Q21

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⁽¹⁾ “Core” income is a non-GAAP measure that excludes nonrecurring and unusual activities from GAAP net income.

Webcast Information

The conference call will be webcast live in listen-only mode and can be accessed through the Events and Presentations section of Velocity Financial’s 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. earnings call.

A replay of the call will be available through midnight on May 31, 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 #3636606. 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,” 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-K filed with the SEC on May 10, 2021, 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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