Velocity Financial, Inc. (NYSE:VEL) (“Velocity”) reported net interest income of $17.1 million, an increase of 40 percent from the fourth quarter of 2018. Net income for the fourth quarter of 2019 was $5.2 million, or $0.44 per diluted share on a pro forma basis1, an increase of 167 percent from the fourth quarter of the prior year. Net operating income was $12.2 million, an 81 percent increase from the fourth quarter of 2018 and pro forma book value at December 31, 2019 was $13.01 per share.

President and CEO, Chris Farrar commented, “We are very pleased with the company’s performance in the fourth quarter and for the full year 2019, with results largely at the mid-points of the ranges we provided in our IPO prospectus filed on January 17th.”

Mr. Farrar continued, “Over the past two weeks, the Capital Markets have become increasingly volatile. In particular, prices for mortgage assets across the industry have been adversely impacted by the expected economic ramifications stemming from the COVID-19 pandemic. To proactively address these unprecedented events, we have entered into an agreement with our original sponsors, Snow Phipps and PIMCO to issue $45 million of convertible preferred stock and warrants. We have also temporarily suspended our loan origination operations until the current market volatility subsides, and entered into an agreement with our warehouse repurchase lending partners to provide a more flexible and stable financing solution for our recently originated whole loans. Together, these measures have significantly enhanced the strength of the company’s balance sheet and liquidity profile. Furthermore, it is our expectation that delinquencies in our loan portfolio will increase and we are implementing strategies to address this challenge, including redeployment of production staff to our internal Special Servicing department, enhanced portfolio monitoring and expanded borrower outreach. While it is still too early to predict how loan performance will be impacted, we expect that our large in-place loan portfolio will continue to generate significant cash flow and earnings for Velocity.”

Discussion of results:

• We experienced strong demand for financing from property investors during the quarter, supported by strong rental markets and continued real estate price appreciation for both commercial and residential real estate
• Loan origination volume in the fourth quarter of 2019 totaled $321 million, a 52 percent increase from $211 million in the fourth quarter of 2018
• Loan origination volume growth was primarily driven by a 103 percent year-over-year growth in short-term loans. These loans typically serve as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product
• Investor 1-4 Permanent loans provide a long-term debt financing solution for investors in residential rental properties. Fourth quarter origination volumes rose 37 percent from the fourth quarter of 2018
• Traditional Permanent loans are secured by traditional commercial and multi-family real estate. Fourth quarter origination volumes rose 27 percent from the fourth quarter of 2018
• Broker relationships reached 3,256 at December 31, 2019, up from 2,530 at December 31, 2018

Discussion of results:

• Our total loan portfolio continued its steady growth during 2019, driven by strong loan production growth sourced through our nationwide production platform
• Loans held for investment totaled $1.84 billion at December 31, 2019, a 19 percent year-over-year increase. Loans held for investment have grown at a 36 percent compounded annual growth rate over the last five years
• Loans held for sale totaled $216 million, a 172 percent increase from the same period a year ago
• During the fourth quarter, net loan additions to the portfolio totaled $131 million in UPB. For the full year 2019, net loan additions were $428 million in UPB.
• We introduced a 30-year fixed rate loan product in the second quarter that has been met with strong borrower demand and comprised 17 percent of our held for investment portfolio at December 31, 2019. As production increases, we expect that this product will gradually increase the duration of our portfolio.
• We have maintained our underwriting discipline as the portfolio has grown. The weighted average loan-to-value ratio of the total portfolio was 66 percent at December 31, 2019, compared to 63 percent at December 31, 2018.
• The weighted average total portfolio yield increased to 8.89 percent in the fourth quarter, an increase of 27 basis point from the fourth quarter of 2018, primarily driven by the growth in short-terms loans, which carry a higher coupon than our 30-year product.
• The decrease in the weighted average debt cost resulted from the ongoing pay-down of our older, higher cost sequential structure securitizations and the addition of lower cost pro-rata structure securitizations

Discussion of results:

• The increase in interest income in the fourth quarter was the result of portfolio growth from strong organic loan production volumes and a higher weighted average coupon
• The increase in portfolio-related interest expense resulted from the addition of three securitizations in 2019 to finance our portfolio growth, partially offset by improved financing costs
• The provision for loan losses increased modestly, reflecting the continued strong credit performance of the held for investment loan portfolio
• During the quarter we completed sales of short-terms loans totaling $41 million in UPB and $190 million in UPB for the full year 2019
• Other operating loss in the fourth quarter of 2019 was mainly driven by fair value losses on our interest-only securities received as proceeds from our loan sales, which was largely offset by the interest income earned on these securities

Discussion of results:

• The modest growth in compensation and employee benefits prudent expense management and realization of technology-driven efficiencies
• Rent and occupancy increases were driven by the addition of an additional sales office in Austin, Texas and the expansion of our Westlake Village, California headquarters
• Growth in expenses related to Real Estate Owned resolutions during the quarter were primarily driven by growth in the portfolio to 24 properties at December 31, 2019, up from 12 properties at December 31, 2018
• The primary drivers of other expenses include office equipment, data processing, and marketing

Discussion of results:

• During the fourth quarter, we issued our third securitization of the year (VCC 2019-3), and our twelfth securitization overall, for $154.4 million and a weighted average rate of 3.27 percent.
• We have developed a strong track record with ABS investors as a consistent issuer with strong collateral performance

Discussion of results:

• Nonperforming loans as a percentage of total loans (including short-term held for sale loans) was 6.88%. Our in-house special servicing operations assumes the servicing responsibilities for Velocity’s nonperforming loans and has a successful track record avoiding foreclosure in 93 percent of loan resolutions since 2013.
• Charge-offs as a percentage of average HFI loans was 6 basis points at quarter end, a modest increase of two basis points from December 31, 2018, driven by seasoning of our held for investment portfolio

Discussion of results:

• Growth in net income was driven by loan portfolio growth and improved funding costs
• Pro forma diluted EPS(1) was $0.44 per share compared to $0.17 per share in the fourth quarter of 2018
• Net operating income in the fourth quarter of 2019 was $12.2 million, an increase of 81 percent from the fourth quarter of 2018. The company’s operating margin in the fourth quarter was 68 percent compared to 55 percent in the prior quarter. The improvement in these metrics reflects the continued realization of scale efficiencies as the company grows.
• The increase in net interest margin reflects structural improvements in portfolio-related financing costs as older, higher-cost securitizations continue to pay down and replaced by new, lower-cost securitizations
• The growth in average equity was driven by retained earnings from Velocity’s strong profitability in 2019

Full Year 2019 Operating Results

Total loan production for the year ended December 31, 2019 was $1.01 billion, a 37 percent increase from 2018.

Total net interest income for the year ended December 31, 2019 was $60.5 million, an 18 percent increase from $51.4 million in the prior year. The increase in net interest income was driven by a 26 percent year-over-year increase in interest income to $157.5 million, mainly as a result of an increase in the portfolio’s weighted average yield. The increase in interest income was partially offset by a 30 percent year-over-year increase in interest expense to $98.5 million. The increase was the result of the older, higher-cost sequential securitizations becoming more costly as they paid down. The higher financing cost reached its peak in the fourth quarter as the newer, lower-cost post 2017 pro rata structure securitizations have now begun to reduce our ongoing financing costs. Other operating income of $2.6 million was primarily driven by sales of short-term loans.

Total operating expenses for the year ended December 31, 2019 totaled $35.1 million, a 9 percent year-over-year increase from $32.2 million in the prior year. The growth in expenses was primarily driven by (i) a $1.3 million increase in serving expenses related to portfolio growth, and (ii) REO expenses which grew by $1.3 million from the prior year, driven by higher maintenance and rehabilitation costs.

Total charge-offs for the year ended December 31, 2019 totaled $579 thousand, a 42 percent increase from $407 thousand in 2018. This increase was the result of portfolio growth over the past few years and in-line with our expectations for higher delinquencies as the loan portfolio seasons.

Net income for the year ended December 31, 2019 totaled $17.3 million, a 127 percent year-over-year increase from $7.6 million in the prior year, primarily driven by a 21 percent year-over-year increase in net interest income.

Net operating income increased to $40.0 million, a 23 percent increase from $32.6 million in the prior year. The company’s net operating margin in 2019 was 66 percent compared to 63 percent in 2018.

For the year ended December 31, 2019 and 2018, pretax return on equity was 18 percent and 15 percent, respectively, and reflects our consistent portfolio growth and unwavering focus on expense management.

Management’s slide presentation will be available on the Company’s investor relations website at www.velfinance.com beginning at 8:30 a.m. (Eastern Time) on Wednesday, April 8, 2020.

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 operating income and operating margin, which are non-GAAP financial measures. The presentation of operating income and operating margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use operating income and operating margin in addition to, and not as an alternative for, net income. Operating income represents net income before income taxes, interest expense on our corporate debt, and the amortization of deal costs related to corporate debt issuance. Additionally, operating margin is the ratio of operating income total revenues. Because not all companies use identical calculations, our presentation of net operating income and net operating margin may not be comparable to similarly titled measures of other companies. Furthermore, net operating income is not intended to be a measure of free cash flow for our management's discretionary use, as it does not reflect certain cash requirements such as tax and portfolio-related debt service payments. The amounts shown for Operating income may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.

We use operating income to evaluate the operating performance of our business, for comparison with forecasts and strategic plans and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with the Company's GAAP financials, provides useful information to investors by offering:

• The ability to make more meaningful period-to-period comparisons of the Company's on-going operating results;
• The ability to better identify trends in the Company's underlying business and perform related trend analyses; and
• A better understanding of how management plans and measures the Company's underlying business.

We believe that operating income has limitations in that it does not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and that operating income should only be used to evaluate the Company's results of operations in conjunction with net income. For more information on operating income, refer to the section of this press release below titled “Adjusted Financial Metric Reconciliation to GAAP.”

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 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 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" in the Company’s Form 10-K filed with the SEC on April 7, 2020, as such risk factors may be updated from time to time in the Company’s periodic filings with the SEC. Such filings are available publicly on our Investor Relations web page at www.velfinance.com.

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