Velocity Financial, Inc. Announces Third Quarter 2020 Results

Third Quarter Highlights:

• Net income of $3.5 million, core earnings of $3.9 million⁽¹⁾ and diluted EPS of $0.11
  • Net income growth of 63% from the prior quarter primarily driven by normalization of credit loss provision expense
    • Normalized provision expense of $0.4 million.
• Restarted loan production activities in September to strong demand
  • September loan applications totaled $226 million in unpaid principal balance (UPB), mirroring pre-COVID levels; loan production totaled $8 million in UPB
  • October loan originations totaled $63 million in UPB
• Book value per common share as of September 30, 2020, was $10.44 compared to $10.26 as of June 30, 2020
• Portfolio net interest margin of 3.77%, an increase of 23 basis points from the second quarter of 2020
• Approximately $335 million in UPB of loans in the COVID-19 forbearance program were brought current during the quarter
• Resolutions of delinquent loans in 3Q20 were 103.5% of assets resolved, continuing our consistent track record of net gains on delinquent loan and real estate owned (REO) resolutions over and above contractual principal and interest

Velocity Financial, Inc. VEL ("Velocity" or the "Company") reported net income of $3.5 million for the third quarter of 2020 and diluted earnings per common share of $0.11. Core income⁽¹⁾ for the third quarter of 2020 was $3.9 million, excluding severance costs related to workforce reductions. Book value per common share was $10.44, an increase from $10.26 as of June 30, 2020.

"Velocity's third quarter results highlight the significant progress our team has made in normalizing business operations and improving earnings performance," said Chris Farrar, President and CEO. "The strong volumes we have experienced with the restart of our loan production activities have exceeded our expectations and reflect significant demand for the financing solutions we provide. We believe that opportunities for Velocity have expanded due to fundamental shifts in real estate markets, which have helped fuel heightened interest from our existing brokers and driven the recent addition of nearly four hundred new relationships. With the restart of our production operations, our business is back on track and poised to deliver strong performance and attractive returns going forward."

Discussion of results:

• 3Q20 net income of $3.5 million reflects continued improvement in Velocity's platform as it recovers from the COVID-driven market dislocation earlier this year
• The difference between core earnings⁽¹⁾ and GAAP net income is severance costs related to workforce reduction resulting from streamlining of our loan operations processes
• Net interest margin improvement was driven by fewer new nonperforming loans during 3Q20

Discussion of results:

• The weighted average total portfolio yield was 8.21% in 3Q20, an increase of 62 basis points from 2Q20, primarily driven by fewer new NPLs
• The 44 basis point increase in portfolio related debt cost was primarily attributable to the higher cost 2020-2 and 2020-MC1 securitizations, completed in June and July, respectively
• Velocity's loan portfolio was $1.986 billion as of September 30, 2020, a 4% quarter-over-quarter decrease from June 30, 2020
• Transferred approximately $214 million in UPB of short-term loans to the held for investment (HFI) portfolio during 3Q20. Previously these loans were accounted for as held for sale (HFS).

Discussion of results:

• Velocity resumed loan production activities in September, funding $8 million in UPB of 30-year Investor 1-4 and Traditional Commercial loans in 3Q20
  • The relaunch has been met with strong demand from existing broker relationships and the addition of 396 new broker registrations resulted in $226 million in UPB of loan applications
• Loan application volume in October totaled $252 million in UPB, and production volume totaled $63 million in UPB

Discussion of results:

• Nonperforming loans as a percent of total loans as of September 30, 2020, decreased to 15.84% from 15.99% as of June 30, 2020, driven by:
  • Continued strong nonperforming asset resolution activity and fewer new nonperforming loans
• The quarter-over-quarter increase in charge-offs was primarily due to one loan totaling $787 thousand, resulting from an unusual circumstance not indicative of worsening credit conditions
  • Adjusted for the unusual circumstance loan, 3Q20 charge-offs were $259 thousand and in-line with historical levels
• The CECL reserve increase in 3Q20 was driven a $1.6 million loan loss provision, $1.2 million of which was related to the transfer of short-term loans to the HFI portfolio, with the remainder related to normal provisioning

Discussion of results:

• Net Revenue grew by 25% quarter-over-quarter, driven by normalized loan loss provisioning levels and increased interest collections on nonperforming loans
• Approximately $1.2 million of the reported $1.6 million total provision expense was offset by a $1.3 million LOCOM valuation reversal in other income driven by the transfer HFS loans to the HFI portfolio, resulting in a net P&L increase of $0.1 million

Discussion of results:

• Operating expenses increased $1.0 million due to loans servicing expense growth resulting from higher securitized loan balances, legal fees related to pending litigation, and REO expenses

Discussion of results:

• In July, the Company issued its third securitization of the year (VCC 2020-MC1) for $179 million at a rate of 4.50%. The VCC 2020- MC1 securitization was collateralized primarily by short-term loans secured by 1-4 unit investor properties, in addition to 30-year loans secured by residential 1-4 unit investor and small commercial properties originated through Velocity's operating platform.
• Expect to complete Velocity's next securitization in the first quarter of 2021, backed by newly originated 30-year loans

Discussion of results:

• Strong asset resolution trends continued in 3Q20, realizing gains of $440 thousand, or 103.5% of nonperforming UPB resolved during the quarter

Conference Call Information

The Company will host a webcast to discuss the third quarter 2020 results on November 11, 2020 at 5:00 p.m. Eastern Time. Listeners can access the webcast via the link below:

https://services.choruscall.com/links/vel201111roBZnCkl.html

The earnings discussion can also be accessed by dialing 1-866-807-9684 in the U.S. and Canada. International callers must dial 1-412-317-5415. Callers should ask to be joined into the Velocity Financial, Inc. earnings call. 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 on the Company's Investor Relations website at www.velfinance.com after the market close on Wednesday, November 11, 2020.

A replay of the call will be available through midnight on November 18, 2020 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 and entering access code #10148332. 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 it has built and refined over 15 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 Earnings, which is a non-GAAP financial measure. For more information on Core Earnings, 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.

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