VEL - Velocity Financial Inc. Reports Third Quarter 2021 Results

Third Quarter Highlights:

• Net income and Core income ⁽¹⁾ of $8.02 million; diluted EPS and Core diluted EPS ⁽¹⁾ of $0.23
• Loan production volume increased 32.81% quarter-over-quarter and totaled $340.66 million in unpaid principal balance (UPB), driven mainly by growth in demand for Investor 1-4 Rental loans
• Portfolio net interest income of $26.6 million, an increase of 9.0% from 2Q21
• Portfolio net interest margin of 4.97%
• Book value per common share of $12.05 as of September 30, 2021, an increase from $11.62 per share as of June 30, 2021
• Loans held for investment (HFI) UPB of $2.27 billion as of September 30, 2021
• Nonaccrual loans as a percentage of HFI loans was 12.7% as of September 30, 2021
• 3Q21 nonperforming loan (NPL) resolutions totaled $59.96 million in UPB, realizing 103.5% of UPB resolved
• Issued our VCC 2021-2 securitization totaling $205.18 million in UPB
• Upsized and renewed a warehouse financing facility with a key liquidity provider, doubling the maximum capacity to $200 million and extending the renewal period from one year to two years
• Completed a registration statement with the capacity to issue up to $100 million of our common stock, $50 million of which, or up to a maximum of 4,000,000 shares, is authorized for issuance through a newly established “at the market” (ATM) program

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company) reported net income and core income of $8.02 million for 3Q21, compared to net income of $9.45 million and core income of $8.45 million in 2Q21. Earnings and core earnings per diluted share were $0.23 in 3Q21, compared to $0.28 and $0.25, respectively, in 2Q21. Book value per common share was $12.05 as of September 30, 2021, compared to $11.62 as of June 30, 2021.

“Third quarter results reflect outstanding execution by our loan origination team which delivered 33% quarter-over-quarter production growth, in addition to strong earnings and improved credit performance from our held for investment portfolio,” said Chris Farrar, President and CEO. “Demand for small balance business purposed loans accelerated in the third quarter with solid growth in rental demand driven by consumer preference for single family homes. Our strong originations trends continued in October as we originated $138.5 million of new loans, an all-time record for Velocity.”

“We are focused on driving continued organic growth in our core business, while at the same time seeking attractive opportunities that will allow us to reach new markets as we continue to execute on our vision of becoming the lender of choice in small-balance commercial lending.”

Discussion of results:

• Net income for 3Q21 totaled $8.02 million, a decrease from $9.45 million in 2Q21, mainly as a result of a $2.2MM gain from the sale of loans during 2Q21 and only a $0.3 million gain from loans sold in 3Q21, as we decided to retain all new production for securitization
• GAAP Net income and Core income were the same in 3Q21
• Portfolio NIM in 3Q21 was 4.97%, a 14 bps increase from 4.83% in 2Q21, driven by a quarter-over-quarter increase in portfolio-related interest income and a decrease in portfolio-related interest expense
• The pretax return on equity was 18.23% in 3Q21, a decrease from 22.57% for 2Q21, mainly as a result our decision to reduce whole loan sales in 3Q21.

Discussion of results:

• Velocity’s total loan portfolio was $2.27 billion in UPB as of September 30, 2021, a 9.71% increase from $2.07 billion in UPB as of June 30, 2021
  ? HFI portfolio growth driven by record production activity, and also aided by a 5% quarter-over-quarter decrease in loan payoffs
• The weighted average loan-to-value of the HFI portfolio was 67.22% as of September 30, 2021, consistent with 66.70% as of June 30, 2021
• The weighted average total portfolio yield was 8.77% in 3Q21, a decrease of 13 bps from 2Q21, primarily driven by a reduction in delinquent contractual (NPL) interest received in 3Q21
• Portfolio related debt cost in 3Q21 was 4.48%, a decrease of 33 bps from 2Q21, primarily driven by the attractive issuance levels of Velocity’s securitization thus far in 2021

Discussion of results:

• Loan production in 2Q21 totaled $340.66 million in UPB, a 32.81% increase from $256.51 million in UPB in 2Q21
  ? Driven by strong demand for 1-4 residential rental financing and the introduction of lending products tailored to meeting the evolving needs of our customers
• Loan origination volume in October 2021 totaled $138.5 million in UPB

Discussion of results:

• Nonperforming loans totaled $288.44 million as of September 30, 2021, or 12.70% of loans HFI, compared to $315.54 million as of June 30, 2021, or 15.30% of loans HFI
  ? The quarter-over-quarter improvement was driven by resolution of 19.00% of nonperforming loan UPB as of June 30, 2021, 10.41% through payoff and 7.07% were brought back to performing (accrual) status, 1.52% from sales of REO properties. Loan resolutions in 3Q21 realized all delinquent contractual interest in addition to default interest and prepayment fees.
• Charge-offs in 3Q21 totaled $162.08 thousand compared to $917.6 thousand in 2Q21
  ? Charge-offs in 3Q21 reflect a reversion to more normalized levels, which have averaged $358 thousand per quarter over the past eight quarters
• The reserve for loan losses was $4.03 million as of September 30, 2021, compared to $3.96 million as of June 30, 2021
  ? The reserve remained consistent. An increase in reserve attributable to portfolio growth was mainly offset by a reduction in reserve driven by strong resolutions on nonperforming loans.
• Capitalized interest recovered on COVID forbearance loans granted a deferral through the end of 3Q21 totaled $1.77 million, with a remaining balance of $8.03 million as of September 30, 2021. None of the capitalized interest has been forgiven.

Discussion of results:

• Total net interest income, including corporate interest expense, increased by $2.01 million, or 10.0% sequentially, primarily resulting from growth in our HFI portfolio.
• Net Revenues decreased quarter-over-quarter by $1.31 million, mainly due to our decision to retain loans for securitization and a more normalized loan loss provision

Discussion of results:

• Operating expenses in 3Q21 of $11.3 million were generally consistent with the $10.7 million in 2Q21

Discussion of results:

• Weighted Average Rate decreased 28bps as a result of our continued lower cost issuances
• Securitization balances as of September 30, 2021, totaled $1.65 billion, an increase from $1.58 billion as of June 30, 2021, driven by the issuance of Velocity’s VCC 2021-2 securitization in August, partially offset by prepayment activity and contractual principal amortization
• Exploring strategies to opportunistically refinance certain of our existing securitizations with exercisable call rights to further reduce financing costs

Discussion of results:

• Resolution activities on $60.0 million of UPB in 3Q21 resulted in net gains of $2.1 million or 103.5% of UPB resolved
• Long-term loan resolutions totaled $25.76 million in UPB and realized $1.4 million of gains
  ? Gains in 3Q21 were primarily comprised of default interest realized when the loans payoff or cure, and prepayment penalties on payoff if the loan is still within the prepayment window
• Short-term loan resolutions totaled $34.2 million in UPB and realized $0.74 million of gains
  ? Gains in 3Q21 were primarily comprised of default interest realized when the loans payoff
  ? The UPB of short-term loans that paid current was $25.1 million in 3Q21, and increase from $7.8 million in 2Q21

Conference Call and Webcast

Velocity’s executive management team will host a conference call and webcast to review its financial results on Wednesday, November 3, 2021, 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 Velocity Financial’s Investor Relations website at 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 and to download and install any needed software.

Management’s slide presentation will be available through the Events and Presentations section of the Company’s Investor Relations website after the market close on Wednesday, November 3, 2021.

Conference Call Information

To participate by phone, please dial-in 15 minutes prior to 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 be joined into the Velocity Financial, Inc. earnings call.

A replay of the call will be available through midnight on November 30, 2021 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 #10160806. 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 16 years.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles (“GAAP”), the Company uses Core Income, which is a non-GAAP financial measure. 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-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 .