Velocity Financial, Inc. Reports Third Quarter 2023 Results

Third Quarter Highlights:

• Net income of $12.1 million, up 21.1% from $10.0 million for 3Q22. Diluted EPS of $0.35, up $0.06 from $0.29 per share for 3Q22
• Core net income⁽¹⁾ of $12.9 million, up 29.4% from $10.0 million for 3Q22. Core diluted EPS⁽¹⁾ of $0.37, up $0.08 from $0.29 per share for 3Q22
• Loan production of $290.6 million in UPB, a 12.3% increase from 2Q23 and a decrease of 36.5% from 3Q22
  • October loan production of $130.8 million with an 11.2% weighted average coupon (WAC), our strongest monthly volume level in 12 months
• Total loan portfolio of $3.9 billion in UPB, an increase of 12.9% from September 30, 2022
• Nonperforming loans as a percentage of Held for Investment (HFI) loans was 10.1%, essentially flat Q/Q and an increase from 7.4% as of September 30, 2022
• Resolutions of nonperforming loans (NPL) and real estate owned (REO) totaled
  
  $65.7 million in UPB,
  • Realizing gains of $1.2 million or 101.8% of UPB resolved
• Portfolio net interest margin (NIM) of 3.34%, up 10 bps Q/Q and down 25 bps from 3.59% for 3Q22
• Initiated hedging strategies for new production to offset recent Treasury yield moves
• Completed two securitizations - VCC 2023-3 totaling $234.7 million and the VCC 2023-RTL1 totaling $81.6 million of securities issued
• Liquidity⁽²⁾ of $60.3 million as of September 30, 2023
• Book value per common share of $13.00 as of September 30, 2023, an increase from $11.61 as of September 30, 2022

Velocity Financial, Inc. (NYSE:VEL) (Velocity or the Company), a leader in business purpose loans, reported net income of $12.1 million and core net income of $12.9 million for 3Q23, compared to net income and core net income of $10.0 million for 3Q22. Earnings and core earnings per diluted share were $0.35 and $0.37, respectively, for 3Q23, compared to $0.29 and $0.29 for 3Q22.

"Velocity's differentiated business model and portfolio management strategies delivered another strong quarter for shareholders," said Chris Farrar, President and CEO. "Our third quarter results continued to build upon our momentum from the first half of 2023, with sequential quarter production volume increases and higher portfolio interest income resulting from continued portfolio growth. We also successfully increased the coupon on production volumes again this quarter while capitalizing on the continued tightening of credit from regulated lenders. The result was higher net interest margin growth from 2Q23 and growth in non-interest-related origination income that delivered solid net income and return on equity this quarter. We also remain focused on opportunities to expand Velocity's franchise by growing market share in our core lending business in addition to exploring opportunities to expand into other established loan products where we can leverage our lending expertise and existing infrastructure as a competitive advantage."

Discussion of results:

• Net income in 3Q23 was $12.1 million, compared to $10.0 million for 3Q22
  • Driven by higher net interest income resulting from continued strong portfolio growth and fair value gains on securitizations, partially offset by unrealized losses on FVO loans and securitization issuance costs from closing two securitizations in the quarter
• Core net income⁽¹⁾ was $12.9 million, compared to $10.0 million for 3Q22
  • Core adjustments included equity incentive compensation expenses and costs related to the Company's employee stock purchase plan (ESPP)
• Portfolio NIM in 3Q23 was 3.34%, compared to 3.59% for 3Q22, a 6.9% Y/Y decrease resulting from increased funding costs that have been mainly offset by rising portfolio yields from higher loan coupons on recent loan production
• The GAAP pretax return on equity was 16.8% for 3Q23, compared to 15.3% for 3Q22

Discussion of results:

• Velocity's total loan portfolio was $3.9 billion in UPB as of September 30, 2023, an increase of 12.9% from $3.4 billion in UPB as of September 30, 2022
  • Primarily driven by 19.3% Y/Y growth in loans collateralized by Investor 1-4 Rental properties and a combined 8.7% Y/Y growth in Multifamily and Mixed Use properties
  • Approximately 75% of the loans in Velocity's HFI portfolio are collateralized by properties that have a housing component (Investor 1-4 Rental, Multifamily, and Mixed Use)
  • Loan prepayments totaled $104.5 million, a decrease of 1.0% Q/Q and 6.0% Y/Y
• The UPB of Fair Value (FVO) loans was $936.6 million, or 24.3% of total HFI loans, as of September 30, 2023, an increase from $0.9 million in UPB, or 0.03% as of
  
  September 30, 2022
  • The company elected fair value accounting treatment for new loan originations effective October 1, 2022
• The weighted average portfolio loan-to-value ratio was 68.0% as of
  
  September 30, 2023, a modest decrease from 68.7% as of September 30, 2022, and consistent with the five-quarter trailing average of 68.2%
• The weighted average total portfolio yield was 8.38% for 3Q23, an increase of 50 bps from 3Q22, driven by an average 92 bps increase in loan coupons from 3Q22
• Portfolio-related debt cost for 3Q23 was 5.63%, an increase of 82 bps from 3Q22, driven by higher interest rates on securitization and warehouse financing

Discussion of results:

• Loan production in 3Q23 totaled $290.6 million in UPB, a 36.5% decrease from
  
  $457.3 million in UPB in 3Q22
  • Driven by higher interest rates and strong real estate price appreciation. On a Q/Q basis, production volume rose 12.3% from 2Q23.
• The weighted average coupon (WAC) on 3Q23 HFI loan production was 11.1%, an increase of 189 bps from 3Q22

Discussion of results:

• Nonperforming loans (NPL) totaled $387.7 million in UPB as of September 30, 2023, or 10.1% of loans HFI, compared to $253.3 million and 7.4%, respectively, as of
  
  September 30, 2022
  • NPL growth in 3Q23 was driven by the legacy amortized cost portfolio and the Company's collection philosophy that places loans in foreclosure quickly for early delinquencies
• Charge-offs in 2Q23 totaled $95.2 thousand, compared to $155.2 thousand in 3Q22
  • The trailing five-quarter charge-off average was $290.3 thousand
• The loan loss reserve totaled $4.7 million as of September 30, 2023, a 12.1% decrease from
  
  $5.3 million as of September 30, 2022
  • Resulting from the continued 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 3Q23 was $44.6 million, an increase of 63.3% compared to $27.3 million for 3Q22
• Total net interest income, including corporate debt interest expense, was $27.4 million for 3Q23, a 10.1% increase from $24.8 million for 3Q22
  • Portfolio net Interest income was $31.5 million for 3Q23, an increase of 9.2% from 3Q22 resulting from a $15.7 million increase in interest income, partially offset by $13.0 million of interest expense growth
• Total other operating income includes gains on the disposition of loans, unrealized gains/(losses) on fair value loans and securitized debt, origination fee income, bank interest income on deposits, and other operating income, and totaled $17.4 million for 3Q23 compared to $3.0 million for 3Q22
  • Gain on disposition of loans totaled $3.6 million for 3Q23, resulting from loans transferred to REO
  • Unrealized losses on the fair value of loans totaled $(1.3) million for 3Q23, primarily driven by the impact of higher long-term interest rates on the existing FVO portfolio, partially offset by gains on 3Q23 new production
  • Unrealized gains on the fair value of securitized debt totaled $9.7 million for 3Q23, driven by an increase in long-term rates as of September 30, 2023
  • Origination income totaled $3.3 million, resulting from fee income realized on loans originated in 3Q23

Discussion of results:

• Operating expenses totaled $27.3 million for 3Q23, an increase of 106.4% from 3Q22. The variance to prior year was higher compensation expense and securitization expenses, driven by impacts attributable to our fair value accounting elections and portfolio growth.
  • Compensation expense totaled $12.5 million, compared to $6.8 million for 3Q22.
    • In 3Q23, 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 for 3Q22.
    • Compensation growth was driven, to a lesser extent, by hires of business development executives, sales account executives and operational staff
  • Securitization expenses totaled $4.9 million, resulting from the issuance of the VCC 2023-3 and VCC 2023-RTL1 securitizations during the quarter. Securitization issuance costs are now expensed under fair value accounting and were deferred in 3Q22.
  • Loan servicing expense totaled $4.9 million, a 47.9% increase from $3.3 million for 3Q22, driven by the increase in our loan portfolio and delinquent assets

Discussion of results

The company completed two securitizations during 3Q23 totaling $316.3 million of securities issued.

• The VCC 2023-3 securitization totaled $234.7 million of securities issued in August, comprised of long-term business-purpose loans
• Collapsed the 2016-1 Trust, retiring older, higher cost debt

• The VCC 2023-RTL1 securitization totaled $81.6 million of securities issued in August, comprised of short-term interest only business-purpose loans. The RTL1 transaction is Velocity's first securitization collateralized entirely by short-term loans. Velocity also has the option to replace loans that payoff with new loans up to the original issued balance for 18 months from issuance.

• The weighted average rate on Velocity's outstanding securitizations was 5.01% as of September 30, 2023, an increase of 96 bps from September 30, 2022

Discussion of results:

• NPL resolution totaled 65.7 million in UPB, realizing 101.8% of UPB resolved compared to $45.2 million in UPB and realization of 105.9% of UPB resolved for 3Q22
• 3Q23 NPL resolutions represented 17.7% of nonperforming loan UPB as of June 30, 2023
• The UPB of loan resolutions in 3Q23 was higher than the recent five-quarter resolution average of $45.0 million in UPB

Velocity's executive management team will host a conference call and webcast to review 3Q23 financial results on November 2^nd, 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 visit 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

F1-833-316-0544 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, 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 #3150552. 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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