First Quarter Highlights:

• Net income of $17.3 million, up 62.0% from $10.6 million for 1Q23. Diluted EPS of $0.49, up $0.18 from $0.31 per share for 1Q23
• Core net income⁽¹⁾ of $18.2 million, an increase of 60.4% from $11.4 million for 1Q23. Core diluted EPS⁽¹⁾ of $0.51, up from $0.33 per share for 1Q23

• Loan production of $378.7 million in UPB, a 7.5% increase from 4Q23 and 74.5% from 1Q23
  • Loan production in April 2024 totaled $129.0 million with an 11.0% weighted average coupon (WAC)

• Nonperforming loans as a percentage of Held for Investment (HFI) loans was 10.1%, up slightly from the 9.7% as of December 31, 2023, and an increase from 8.7% as of March 31, 2023
• Resolutions of nonperforming loans (NPL) and real estate owned (REO) totaled
  
  $54.5 million in UPB
  • Realized gains of $1.3 million or 102.3% of UPB resolved

• Portfolio net interest margin (NIM) of 3.35%, a decrease of 17 bps Q/Q and an increase of 12 bps from 3.23% for 1Q23
• Completed the VCC 2024-1 securitization totaling $209.9 million of securities issued
• Issued $75.0 million of senior secured notes to support ongoing investment portfolio growth
• Liquidity⁽²⁾ of $78.5 million as of March 31, 2024
• Recourse debt to equity ratio of 1.4x
• GAAP Book value per common share of $14.01 as of March 31, 2024, an increase from $13.49 as of December 31, 2023

Velocity Financial, Inc. (NYSE: VEL) (Velocity or the Company), a leader in business purpose loans, reported net income of $17.3 million and core net income of $18.2 million for 1Q24, compared to net income of $10.6 million and core net income of $11.4 million for 1Q23. Earnings and core earnings per diluted share were $0.49 and $0.51, respectively, for 1Q24, compared to $0.31 and $0.33 for 1Q23.

“Velocity began 2024 with another quarter of strong production and loan portfolio growth, resulting in the second highest quarterly net earnings in the Company’s history,” said Chris Farrar, President and CEO. “We saw strong demand for financing to purchase real estate assets, particularly in traditional commercial properties, which equaled our 1-4 Investor loan volume this quarter and drove our production volume growth. While base rates increased during the first quarter, we continued to see an improvement of spreads in the securitization markets and robust investor demand for asset-backed securities. We remain on track to attain our “5X25” goal of a $5 billion loan portfolio by 2025 and deliver another year of solid financial performance.”

First Quarter Operating Results

Discussion of results:

• Net income in 1Q24 was $17.3 million, compared to $10.6 million for 1Q23
  • Robust production volume with weighted average coupons of 11.1% drove strong fair market value gains

• Core net income⁽¹⁾ was $18.2 million, compared to $11.4 million for 1Q23
  • 1Q24 core adjustments include incentive compensation expenses and costs related to the Company’s employee stock purchase plan (ESPP)

• Portfolio NIM for 1Q24 was 3.35%, compared to 3.23% for 1Q23, a 4.0% Y/Y increase driven by 11.1% average loan coupons on recent loan production and continued NPL resolutions, partially offset by higher funding costs
• The GAAP pretax return on equity was 20.77% for 1Q24, compared to 15.27% for 1Q23

Discussion of results:

• Velocity’s total loan portfolio was $4.3 billion in UPB as of March 31, 2024, an increase of 19.1% from $3.6 billion in UPB as of March 31, 2023
  • Primarily driven by 22.7% Y/Y growth in loans collateralized by Investor 1-4 Rental properties and 25.1% Y/Y growth in loans collateralized by “Other” commercial properties
  • Loan prepayments totaled $142.0 million, an increase of 20.9% Q/Q and 64.1% Y/Y

• The UPB of Fair Value (FVO) loans was $1.58 billion, or 36.9% of total HFI loans, as of March 31, 2024, an increase from $454.0 million in UPB and 12.6%, as of
  
  March 31, 2023
• The weighted average portfolio loan-to-value ratio was 67.6% as of March 31, 2024, down from 68.1% as of March 31, 2023, and consistent with the five-quarter trailing average of 67.9%
• The weighted average total portfolio yield was 8.71% for 1Q24, an increase of 71 bps from 1Q23, driven by a 93 bps increase in average loan coupons from 1Q23
• Portfolio-related debt cost for 1Q24 was 5.93%, an increase of 60 bps from 1Q23, driven by higher interest rates on warehouse financing and recent securitizations

Discussion of results:

• Loan production for 1Q24 totaled $378.7 million in UPB, a 74.5% increase from $217.0 million in UPB for 1Q23
  • Driven by growing demand for Traditional Commercial financing. On a Q/Q basis, production volume rose 7.5%.
• The weighted average coupon (WAC) on 1Q24 HFI loan production was 11.1%, essentially unchanged from 1Q23

Discussion of results:

• Nonperforming loans (NPL) totaled $432.6 million in UPB as of March 31, 2024, or 10.1% of loans HFI, compared to $309.9 million and 8.7% as of March 31, 2023
  • Driven by growth in loans transitioning to foreclosure

• Charge-offs for 4Q23 totaled $504.0 thousand, compared to $484.0 thousand for 1Q23
  • The trailing five-quarter charge-off average was $508.8 thousand

• The loan loss reserve totaled $5.3 million as of March 31, 2024, a 4.4% increase from
  
  $5.0 million as of March 31, 2023
  • Primarily resulting from an increase in the individually-assessed reserve component
  • Loans carried at fair value are not subject to a CECL reserve

Discussion of results:

• Net Revenue for 1Q24 was $54.2 million, an increase of 48.4% compared to $36.6 million for 1Q23
  • Driven primarily by $12.9 million Y/Y growth in other operating income and continued strong loan portfolio performance from organically sourced production

• Total net interest income for 1Q24, including corporate debt interest expense and loan loss provision, was $28.5 million, a 20.0% increase from $23.7 million for 1Q23
  • Portfolio net Interest income was $34.9 million for 1Q24, an increase of 22.3% from 1Q23 resulting from portfolio growth and a 12bps increase in NIM

• Total other operating income was $25.8 million for 1Q24, an increase from $12.8 million for 1Q23, driven by net fair value gains and origination fees on higher 1Q24 loan production
  • Net FVO gains on loans and securitized debt were $16.6 million, resulting primarily from fair value gains on new 1Q24 loan production, partially offset by fair value losses on securitized debt
  • Origination income totaled $5.0 million, resulting from fee income realized on loans 1Q24 loan production
  • Gain on disposition of loans totaled $1.7 million for 1Q24, primarily driven by loans transferred to Real Estate Owned (REO)

Discussion of results:

• Operating expenses totaled $31.0 million for 1Q24, an increase of 42.2% from 1Q23, driven by our growth in originations and the portfolio
  • Compensation expense totaled $15.4 million, compared to $10.0 million for 1Q23
    • Compensation growth was driven by growth of the production team in addition to higher commissions expense from increased origination volumes
  • Securitization expenses totaled $2.9 million, resulting from the issuance of the VCC 2024-1 securitization during the quarter, in-line with securitization costs for 1Q23.
  • Loan servicing expense totaled $4.8 million, a 26.0% increase from $3.8 million for 1Q23, driven by portfolio growth and nonperforming loan resolution costs
  • REO expense increased totaled $2.5 million, an increase from $1.8 million for 1Q23, driven by increased valuation-related expenses

Discussion of results

• The company completed one securitization during 1Q24 totaling $209.9 million of securities issued
  • The transaction execution improved significantly from the prior quarter

• The weighted average rate on Velocity’s outstanding securitizations was 5.43% as of March 31, 2024, an increase of 96 bps from March 31, 2023

Discussion of results:

• NPL resolution totaled $54.5 million in UPB, realizing 102.3% of UPB resolved compared to $38.7 million in UPB and realization of 103.5% of UPB resolved for 1Q23
• 1Q24 NPL resolutions represented 13.8% of nonperforming loan UPB as of
  
  December 31, 2023
• The UPB of loan resolutions in 1Q24 were in-line with the recent five-quarter resolution average of $55.9 million in UPB

Velocity’s executive management team will host a conference call and webcast to review 1Q24 financial results on May 2^nd, 2024, 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 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. conference call.

A replay of the call will be available through midnight on May 24, 2024, 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 #3912582. 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 Israel 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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