Velocity Financial, Inc. Announces Second Quarter 2020 Results

Velocity Financial, Inc. (NYSE:VEL) ("Velocity" or the "Company") reported a loss per common share of $(2.33) resulting from a non-cash deemed dividend on preferred stock issued during the quarter. Net income for the second quarter of 2020 was $2.1 million, compared to net income of $2.6 million in the prior quarter. "Core" net income⁽¹⁾ for the second quarter of 2020 was $3.4 million, or $0.17 per share. "Core" earnings⁽¹⁾ excludes the increase to the macroeconomic model forecast of the CECL loan loss reserve of ($0.06) per share due to a more adverse outlook regarding the impacts of the COVID-19 pandemic and the ($2.44) per share impact of the preferred stock deemed dividend. Book value of common stockholders' equity was $206.0 million and Convertible Preferred stock was $90.0 million as of June 30, 2020.

"In light of the unprecedented environment we faced, I am pleased with our second quarter results and the tremendous accomplishments of the Velocity team to address the pandemic's impact on our company and preparations to restart our loan production operations in the third quarter," said Chris Farrar, President and CEO. "Net income for the second quarter and year-to-date was positive and reflects the resiliency of Velocity's business model under extreme conditions. While challenges remain, we are now fully devoted to restarting our loan production activities, and I am excited about driving growth and future returns for our stockholders."

Second Quarter Operating Results

Discussion of results:

• 2Q20 "Core" EPS⁽¹⁾ was $0.17 per share and reflects a $2.50 per share adjustments for the following:
  • $0.06 per share impact driven by the increase in the macroeconomic forecast of the CECL loan loss reserve resulting from a more-adverse outlook related to the impacts of the COVID-19 pandemic
  • $2.44 per share impact related the non-cash deemed dividend on preferred stock
• The preferred stock deemed dividend reduced common stockholders' equity and correspondingly increased preferred stock under mezzanine equity. This transaction reflects the redemption value of the preferred stock as of June 30, 2020.

Discussion of results:

• The weighted average total portfolio yield was 7.59 percent in the second quarter, a decrease of 98 basis points from the first quarter of 2020, primarily driven by an increase in nonaccrual loans
• The 105 basis point decrease in portfolio related debt cost was primarily attributable to the lower corporate debt expense resulting from the paydown of corporate debt upon completion of our IPO
• Velocity's total loan portfolio (comprised of loans held for sale and loans held for investment) was $2.059 billion as of June 30, 2020, a 3 percent quarter-over-quarter decrease from the first quarter of 2020
• The weighted average loan-to-value ratio of the total portfolio was 66 percent as of June 30, 2020, essentially unchanged from the prior quarter

Discussion of results:

• In late March, Velocity temporarily suspended loan origination activities, which resulted in origination volume lower than originally forecast in the first quarter of 2020 and no loan production in the second quarter of 2020.
• The completion of the VCC 2020-2 and the VCC 2020-MC1 securitizations in June and July, respectively, marks the culmination of our strategy to find permanent financing solutions for our assets previously financed with warehouse facilities. With this objective achieved, the Company can now devote its full attention to restarting loan production operations in early September 2020.

Discussion of results:

• Net Revenue was lower by $2.2 million driven primarily driven by a decrease in gains from loan sales caused by our decision to hold the short-term loans to maturity
• The CECL provision increase was driven primarily by an increase in the macroeconomic model forecast of the reserve, resulting from a more-adverse outlook related to the sustained impacts of the COVID-19 pandemic

Discussion of results:

• Operating expenses were $1.1 million lower as a result of lower REO valuation expenses and lower one-time professional fees related to our IPO, offset by slightly higher compensation expenses.

Discussion of results:

• The Company issued its second securitization of 2020 (VCC 2020-2) in June, and our fourteenth securitization overall totaling $96 million of securities issued and a weighted average rate of 4.50 percent.
• In July, the Company issued its third securitization of the year (VCC 2020-MC1) total $179 million of securities issued at a weighted average rate of 4.50 percent. 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.

Discussion of results:

• Continued strong recovery rate, realizing 102 percent of nonperforming UPB resolved during the quarter
• Nonaccrual loans paid in full during the second quarter of 2020 totaled $6.7 million in UPB with a $0.34 million net gain on resolutions. Gains primarily reflect the collection of default interest, in addition to regular interest and prepayment penalties
• Loans paid current during the second quarter of 2020 totaled $19.6 million in UPB with a $0.21 million net gain. Gains primarily reflects collections of default interest, in addition to regular interest, and the loan remains in our portfolio
• REO sales totaled $1.4 million for net gains of $0.04 million

Conference Call Information

The Company will host a webcast to discuss the second quarter 2020 results on August 12, 2020, at 5:00 p.m. Eastern Time. Listeners can access the webcast via the link below:

https://services.choruscall.com/links/vel200812GlpLAgtc.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. An audio replay of the call will also be available on Velocity's website following the call.

A replay of the call will be available through midnight on August 19, 2020 and can be accessed by dialing 1-877-344-7529 in the U.S. and 1-855-669-9658 in Canada or 1-412-317-0088 internationally and entering access code #10146597. The replay will also be available on the Investor Relations section of the Company's website a 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 and Core Earnings Per Share, which are non-GAAP financial measures. 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 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," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases. 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 course and severity of the COVID-19 pandemic, and its direct and indirect impacts (2) general economic conditions and real estate market conditions, (3) regulatory and/or legislative changes, (4) our ability to retain and attract loan originators and other professionals, and (5) changes in federal government fiscal and monetary policies.

For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see the section titled ''Risk Factors" previously disclosed in our Form 10-K filed with the SEC on April 7, 2020 and Form 10-Q filed with the SEC on May 14, 2020. Such filings are available publicly on our Investor Relations web page at www.velfinance.com.