EDGAR 10-K Filing

Company CIK: 1692376
Filing Year: 2021
Filename: 1692376_10-K_2021_0001564590-21-013680.json

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ITEM 1. BUSINESS
Item 1. Business.
Our Company
We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 17 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.
We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating attractive risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.
Our primary growth strategy is predicated on continuing to serve and build loyalty within our network of mortgage brokers, while also expanding our network with new mortgage brokers through targeted marketing and improved brand awareness. We believe our reputation and 17-year history within our core market position us well to capture future growth opportunities.
We make loans for business purposes only, which we believe limits our exposure to the regulatory constraints of consumer lending. We do not make consumer loans or lend on raw land and we generally avoid special-purpose properties such as churches, assisted-living facilities and gas stations.
On January 16, 2020, we converted from a limited liability company to a corporation incorporated under the law of the State of Delaware by filing a certificate of conversion with the Secretary of State of the State of Delaware and changed our name from Velocity Financial, LLC to Velocity Financial, Inc.
Strategies to Address Uncertainties Caused by COVID-19:
The COVID-19 outbreak has caused significant disruption in business activity and the financial markets both globally and in the United States. As a result of the spread of COVID-19, economic uncertainties have arisen which have negatively impacted our financial condition, results of operations and cash flows. The further extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of any subsequent outbreaks and their impact on our customers, employees and vendors, the impact of a new mutant strain of the virus, and the long-term success of vaccines, all of which remain uncertain at this time and cannot be predicted.
We have executed a number of business initiatives during 2020 as a result of the effects of the COVID-19 pandemic, including the following:
•
We temporarily suspended our loan originations and loan purchases from mid-March through August and furloughed a significant number of our employees, mostly within our loan origination function. We resumed loan origination activities in September.
•
We issued and sold Preferred Stock and Warrants in April resulting in gross proceeds to us of $45.0 million. We used the proceeds from this private placement to pay down our existing warehouse repurchase facilities and for general corporate purposes.
•
In April we entered into amendments to the master repurchase agreements on both of our warehouse repurchase agreements with the lenders under such agreements. The balances due under these agreements were completely paid off with the 2020- MC1 securitization that closed in July.
•
We implemented a voluntary COVID-19 forbearance program from April through June designed to help small investors retain their properties and minimize our portfolio losses.
•
In July we securitized $276.0 million of short-term and long-term investor real estate loans and issued $179.4 million of notes and certificates (2020-MC1). We used the proceeds from this securitization to fully pay off our existing warehouse lines.
•
In September, we resumed our loan origination activities. We reduced our workforce by 60 employees as we streamlined our loan operations processes.
•
We renewed two of our warehouse facilities, one non-mark-to-market facility and one modified mark-to-market facility. We added a third non-mark-to-market warehouse facility in January 2021.
•
In order to protect our employees, we have been primarily working remotely since late March. In addition, we have implemented COVID-19-related protective measures and protocols to allow a limited number of staff to work from our offices located across the country.
We will continue to evaluate our business strategy in light of rapidly changing market conditions.
Our Competitive Advantages
We believe that the following competitive advantages enhance our ability to execute our business strategy and position us well for future growth:
Established Franchise with Strong Brand Recognition
We believe our reputation and deep history within the real estate lending community position us as a preferred lender for mortgage brokers. We have been originating and acquiring loans in our core market since our inception in 2004, making us a recognizable brand with a proven ability to execute. Additionally, we have successfully executed fifteen securitizations of our investor real estate loans, raising over $3.1 billion in gross debt proceeds between 2011 and the year ended December 31, 2020. We have a keen understanding of this securitization market, including complicated structural issues, investor expectations and rating agency requirements. We executed our fourteenth and fifteenth securitizations in June and July during the pandemic. We believe this demonstrates that we have a strong reputation with investors in the securitization market, which enables us to maintain efficient access to debt capital that ultimately improves our ability to offer competitive pricing to our borrowers.
Customized Technology and Proprietary Data Analytics
We have invested in and customized automated systems to support our use of data analytics which drives our lending process. We believe the investor real estate lending market requires a highly-specialized skill set and infrastructure. To effectively compete and execute on a sustainable long-term business strategy, lenders must control the cost to originate and manage loans without sacrificing credit quality. We believe our investment in technology and use of data analytics helps us achieve these critical objectives and positions our business for sustainable, long-term growth.
We apply the same asset-driven underwriting process to all of the loans in our portfolio, regardless of whether we originate or acquire these loans. Our credit and underwriting philosophy encompasses individual borrower and property due diligence, taking into consideration several factors. Our access to 17 years of proprietary data allows us to perform analytics that inform our lending decisions efficiently and effectively, which we believe is a strong competitive advantage.
Large In-Place Portfolio with Attractive, Long-Term Financing
We believe our in-place portfolio provides a significant and stable income stream for us to invest in future earnings growth. The majority of our loans are structured to provide for interest rate protection, by floating after an initial fixed-rate period, subject to a floor equal to the starting fixed rate. The loans are mainly financed with long-term fixed-rate debt, resulting in a spread that could increase over time, but not decrease. As a result, our in-place portfolio generally benefits from rising interest rates. The stable income stream was demonstrated from March through August 2020, the period of suspension of our loan origination activities. Despite not having originated a
single loan from mid-March through the end of August, we generated $67.4 million in net interest income for the year ended December 31, 2020 from our in-place portfolio. Excluding the interest expense paid on our corporate debt, which we partially repaid with a portion of the net proceeds from our January 2020 initial public offering (our “IPO”), we generated $79.5 million in portfolio related net interest income, representing a 3.89% portfolio related net interest margin, during the year ended December 31, 2020. Including the interest expense paid on our corporate debt, we generated $67.4 million in total net interest income, representing a 3.30% net interest margin, during the year ended December 31, 2020.
Our In-House Asset Management Results in Successful Loss Mitigation
Direct management of individual loans is critical to avoiding or minimizing credit losses and we work with our third-party primary servicers with whom we have developed strong relationships to emphasize disciplined loan monitoring and early contact with delinquent borrowers to resolve delinquencies. We have a dedicated asset management team that, augmented with primary servicing from our loan servicers, focuses exclusively on resolving delinquent loans. Our hands-on approach enables us to generally preserve the value of our assets and helps us to minimize losses. We believe this expertise, combined with our outsourced servicing relationships, gives us a distinct competitive advantage.
Our Experienced Management Team
Led by co-founder and Chief Executive Officer Christopher Farrar, our management team averages more than 25 years of experience in the financial services and real estate lending industries, including extensive experience in commercial and residential lending, structured finance and capital markets. We have successfully navigated both positive and negative economic cycles and retained our core team of experienced professionals in appraisal, underwriting, processing and production, while bolstering our finance and asset management team with professionals possessing extensive experience in financial reporting and real estate management. We believe our in-depth knowledge of our core market provides a distinct competitive advantage.
Our Growth Strategy
The market for investor real estate loans is large and highly fragmented. We have built a dedicated and scalable national lending platform focused specifically on serving this market and believe our capabilities position us well to maintain our reputation as a preferred lender in this market. Our growth strategy is predicated on further penetrating our existing network of mortgage brokers and expanding our network with new mortgage brokers. A key element of our implementation of this strategy is the growth and development of our team of account executives, as well as targeted marketing initiatives. We will continue to supplement the extension of our broker network with the development of new products to support the evolving needs of borrowers in our core market.
Further Penetrate Our Existing Mortgage Broker Network
We strive to be the preferred lender within our network of approved mortgage brokers. We have developed a strong reputation in the market for high quality execution and timely closing, which we believe are the most important qualities our mortgage brokers value in selecting a lender. There is significant opportunity for us to further penetrate the more than 3,100 mortgage brokers with whom we have done business over the last five years. Approximately 93% of loan originators originated five or fewer loans with us during the year ended December 31, 2020. We believe this presents a compelling opportunity for us to capture incremental volume from our existing broker network.
Expand Our Network with New Mortgage Brokers
We believe that our targeted sales effort, combined with consistent high-quality execution, positions us well to continue adding to the network of mortgage brokers that rely on us to serve their borrower clients.
Despite the suspension of loan production from mid-March through August and adverse macroeconomic conditions caused by the COVID-19 pandemic, we funded 1,271 loans sourced by approximately 650 different mortgage brokers during the year ended December 31, 2020. We believe that represents a small portion of the mortgage originators in the United States, which consisted of approximately 590,000 state-licensed mortgage originators as of December 31, 2019 according to the Nationwide Multistate Licensing System. The size of the
mortgage broker market presents an attractive opportunity for us to capture significant growth with very small increases in the share of mortgage brokers that recognize our platform capabilities and utilize us as a preferred lender in our core market.
Develop New Products
Our primary products are a 30-year amortizing term loan with a three-year fixed-rate period which floats at a spread to the prime rate thereafter subject to a floor equal to the starting fixed rate, and a 30-year fixed-rate amortizing term loan. These loans comprised 77.9% of our loan originations during the year ended December 31, 2020. These products are used by borrowers to finance stabilized long-term real estate investments. We believe these products have strong receptivity in our market, as evidenced by our success in growing loan originations over time. Since our inception, we have continued to expand our product offering in response to developing market opportunities and the evolving financing needs of our broker network. For example, in 2013, in response to the increased demand for rental properties, we moved aggressively into the market for 1-4 unit residential rental loans, which comprised 49.6% of our held for investment loan portfolio as of December 31, 2020.
In March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product. The short-term, interest-only loan allows borrowers to address any qualifying issues with their credit and/or the underlying property before bridging into a longer-term loan. In June 2018, we added a second short-term, interest-only loan product which allows borrower draws for rehabbing residential rental property. Historically, we have aggregated and sold most of these short-term, interest-only loans at a premium to par to institutional investors, which has generated attractive income for us with limited capital while also allowing us to establish an underwriting track record and monitor the performance of these loans. Since the resumption of our loan origination activities in September 2020, we have focused on only originating our 30-year loan products and may elect to originate short-term loans in the future to be consistent with our broader investment strategy of holding loans in our portfolio and earning a spread.
Opportunistically Acquire Portfolios
We continually assess opportunities to acquire portfolios of loans that meet our investment criteria. Over the past 17 years, our management team has developed relationships with many financial institutions and intermediaries that have been active investor real estate loan originators or investors. We believe that our experience, reputation, and ability to effectively manage these loans makes us an attractive buyer for this asset class, and we are regularly asked to review pools of loans available for purchase. In our experience, portfolio acquisition opportunities have generally been more attractive and plentiful during market conditions when origination opportunities are less favorable. Accordingly, we believe our acquisition strategy not only augments our origination business, but also provides a counter-cyclical benefit to our overall business. In light of recent market disruptions caused by COVID-19, we have begun to increase our focus on this growth strategy.
Our Portfolio
Loans Held for Investment
Our typical investor real estate loan is secured by a first lien on the underlying property with the added protection of a personal guarantee and, based on the loans in our portfolio as of December 31, 2020, has an average balance of approximately $331,000. As of December 31, 2020, our portfolio of loans held for investment totaled $1.9 billion of unpaid principal balance, or UPB, on properties in 45 states and the District of Columbia. Of the 5,833 loans held for investment as of December 31, 2020, 98.3% of the portfolio, as measured by UPB, was attributable to our loan origination business, while the remaining 1.7% of the portfolio, or 72 loans, totaling $33.1 million in UPB, were related to acquisitions. During the years ended December 31, 2020 and 2019, we originated 955 and 1,881 loans to be held for investment totaling $338.8 million and $673.9 million, respectively.
As of December 31, 2020, 90.8% of our loans held for investment, as measured by UPB, were fully-amortizing over 30 years. The principal amount of a fully-amortizing loan is repaid ratably over the term of the loan, as compared to a balloon loan where all, or a substantial portion of, the original loan amount is due in a single
payment at the maturity date. We believe that fully-amortizing loans face a lower risk of default than balloon loans, as the final payment due under the balloon loan may require the borrower to refinance or sell the property.
We target investor real estate loans with loan-to-value ratios, or LTVs, between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of December 31, 2020, our loans held for investment had a weighted average LTV at origination of 66.1%. Additionally, as of December 31, 2020, borrowers personally guaranteed 99.9% of the loans in our held for investment portfolio and had a weighted average credit score at origination of 702, excluding the 0.6% of loans for which a credit score is not available.
The following charts illustrate the composition of our loans held for investment as of December 31, 2020:
(*)
Percentages may not sum to 100% due to rounding.
(1)
Portfolio stratifications based on unpaid principal balance for loans held for investment as of December 31, 2020.
(2)
Represents LTV at origination for population of loans held for investment as of December 31, 2020. In instances where LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at time of acquisition.
(3)
The approximately 1% portion of our loans held for investment with an LTV greater than 75% consists primarily of acquired loans.
We typically do not lend on any property located in a city with a population less than 25,000 and outside a 25-mile radius of a city with a population in excess of 100,000. We generally prefer to lend in larger metropolitan statistical areas.
Loans Held for Sale
In November and December of 2020, we sold some of our 30-year loans with an aggregate UPB of $96.3 million at an attractive premium and used the proceeds to fund new loan originations resulting from strong demand for our product in the market.
As of December 31, 2020, our portfolio of loans held for sale consisted of 45 loans with an aggregate UPB of $12.9 million and carried a weighted average original loan term of 360 months and a weighted average coupon of 7.5%. As of December 31, 2020, 100% of our held for sale portfolio, as measured by UPB, was attributable to our loan origination business.
In line with our overall investment strategy, we target loans held for sale with LTVs between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of December 31, 2020, our loans held for sale had a weighted average LTV at origination of 68.9%. Additionally, as of December 31, 2020, borrowers personally guaranteed 100% of the loans in our held for sale portfolio and had a weighted average credit score at origination of 711, excluding any loan for which a credit score is not available.
The following charts illustrate the composition of our loans held for sale as of December 31, 2020:
(*)
Percentages may not sum to 100% due to rounding.
(1)
Portfolio stratifications based on unpaid principal balance for loans held for sale as of December 31, 2020.
(2)
Represents LTV at origination for population of loans held for sale as of December 31, 2020.
Our Financing Strategy
We typically finance our new loan originations using warehouse facilities. Once we have originated between approximately $175 million and $400 million in new loans, we securitize the loans through a real estate mortgage investment conduit, or REMIC, structure and issue the bonds to third parties through individual trust vehicles. All of our securitizations are issued as private placements pursuant to Rule 144A under the Securities Act and utilize a REMIC structure except for the 2020 MC1 transaction which was not a REMIC and issued one class of bonds treated as debt for tax purposes. These REMIC transactions create significant U.S. GAAP versus tax differences as the U.S. GAAP treatment is a debt financing, however the IRS requires sale treatment and requires us to recognize taxable income to the extent the fair market value exceeds our cost basis, the payment of which creates a deferred tax asset. We are the sole beneficial interest holder of each of the trusts, through our wholly-owned subsidiaries. Proceeds from the issuance of the securities are then used to pay down the balances on our warehouse facilities. As
of December 31, 2020, we had successfully executed fifteen securitizations of our investor real estate loans, raising over $3.1 billion in gross debt proceeds. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information about our warehouse repurchase facilities and securitizations.
In February 2021, we entered into a five-year $175.0 million syndicated corporate debt agreement (“2021 Term Loan”). The 2021 Term Loan bears interest at a rate equal to one-month LIBOR plus 8.00%, with a 1.00% LIBOR floor, and matures in February 2026. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the outstanding corporate debt owing pursuant to our 2019 debt agreement with Owl Rock Capital Corporation (“2019 Term Loan”). The remaining portion of the net proceeds from the 2021 Term Loan will be used for loan originations and general corporate purposes.
Depending on market conditions, we may increase leverage on our investments with an amount of debt we deem prudent, subject to applicable risk retention rules. Our decision to use leverage to finance our assets will be based on our assessment of a variety of factors, including, among others, the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in our portfolio, the availability of credit at favorable prices, the credit quality of our assets and the outlook for our borrowing costs relative to the interest income earned on our assets and, where applicable, regulatory requirements with respect to securitizations.
Going forward, our financing sources may include borrowings in the form of additional bank credit facilities (including term loans and revolving facilities), additional warehouse repurchase facilities, structured financing arrangements, future securitizations and public and private equity and debt issuances, in addition to transaction or asset-specific funding arrangements. We intend to use leverage primarily to finance our portfolio and not for speculating on changes in the level of interest rates. We are not required to employ specific debt levels, and we believe the appropriate leverage for the particular assets we may finance depends on the factors discussed above.
We expect to continue financing our loan portfolio with equity and our financing arrangements, including warehouse lines for short-term financing and securitizations for long-term financing. We believe using securitizations to finance our investor real estate loans fits well with our strategy of holding interest-earning assets over the long-term to earn a spread. This type of financing structure more closely matches the asset duration with the duration of the financing.
Competition
The business of financing investor real estate loans is competitive. We compete with specialty finance companies, regional and community banks and thrifts, public and private entities, institutional investors, mortgage bankers, insurance companies, investment banking firms, and other financial institutions, and we expect that additional competitors may be organized or otherwise enter our core market in the future. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face. Some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services. Such rates may be impacted by the competitor’s size, cost of funds, and access to funding sources that are not available to us, such as GSE financing programs for 1-4 unit residential rental loans and certain multifamily loans.
Government Regulation
Certain states in which we conduct business require approval, registration or licensing. Typically, the mortgage broker that originates the loan that we make, fund or acquire is licensed or exempt from licensing in the state where the loan is made. We also hold a Federal Housing Administration, or FHA, Title II approval from the Department of Housing and Urban Development, which permits us to make certain government-insured loans.
We may be required to obtain licenses to originate investor real estate loans in the various additional jurisdictions in which we conduct our business or to acquire investor real estate loans. If we are required to obtain additional licenses to originate or acquire investor real estate loans, the process may be costly and could take several months. There is no assurance that we will obtain the licenses required or that we will not experience significant delays in seeking these licenses. Furthermore, we may be subject to various reporting and other requirements to maintain these licenses, and there is no assurance that we may satisfy those requirements. Our failure to maintain or obtain licenses may restrict our investment options and could harm our business.
Human Capital Resources
As of December 31, 2020, we had 175 employees, a 33% decrease from the prior year. None of our employees are represented by a labor union. The decrease in our employees was a result of our furlough of a significant number of our employees in mid-March through August of 2020 due primarily to COVID-19, followed by a decrease of 60 employees as we resumed loan originations and streamlined our loan operations processes in September 2020.
A driving force in our ability to generate revenue comes from the work of our Account Executives, or AEs. Our AEs generate business for us through their relationships with third-party brokers. Our ability to retain and attract AEs is essential to the growth of our business. A significant number of our employees are AEs, representing 36% of our workforce at year-end. Although 2020 was a unique year for us due to our COVID-related furloughs and headcount reduction, at the end of the prior year, our AEs represented approximately 52% of our workforce.
Our employment strategy is to create a culture that allows us to attract and retain the very best talent in our industry, provide competitive pay and benefits, and to ensure a healthy work environment comprised of an employee base that is considerate, collaborative, productive and driven. We are committed to building a great place to work for all of our employees. We provide an hourly wage or salary to our employees as well as the potential for discretionary bonuses. AEs are also eligible to receive additional quarterly bonuses based partially on the AEs revenue-generating results during the quarter.
While we have not adopted any diversity quotas, 66% of our employees are men and 34% are women. Overall, ethnic diversity of our workforce represented 54% of our employees.
We are committed to the health, safety, and wellness of our employees. In response to the pandemic, we implemented precautionary policies and significant operational changes to protect and support our employees, including remote working. As of December 31, 2020, substantially all our employees have been able, and continue, to work remotely.
We and our employees are also committed to improving the communities in which we work and live. Periodically throughout the year through Velocity Volunteers, we pick a local charitable cause and project and encourage our employees to donate their time and needed materials to meet our stated charitable objective.
Our Corporate Information and History
Velocity Commercial Capital, LLC, a California limited liability company (“VCC”), was formed in 2004. In 2012, we were formed as a limited liability company, organized under the law of the State of Delaware and named Velocity Financial, LLC for the purpose of acquiring all membership units in VCC. On January 16, 2020, we converted from a limited liability company to a corporation incorporated under the law of the State of Delaware by filing a certificate of conversion with the Secretary of State of the State of Delaware and changed our name to Velocity Financial, Inc.
On January 22, 2020, we completed the initial public offering (“IPO”) of our common stock, par value $0.01 per share (our “common stock”). The net proceeds received from the sale of our common stock in the IPO was $100.8 million. Shares of our common stock trade on the New York Stock Exchange under the symbol “VEL.”
Our offices are located at 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362, and the telephone number of our offices is (818) 532-3700. Our internet address is www.velfinance.com. Our internet website and the information contained therein or connected to or linked from our internet web site are not incorporated information and do not constitute a part of this Annual Report or any amendment thereto.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Intentionally omitted pursuant to smaller reporting company reduced disclosure requirements.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Other than real estate owned in connection with our lending activities, we do not own any real property. Our corporate headquarters are located in leased space at 30699 Russell Ranch Road, Suite 295, Westlake Village, CA 91362.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
From time to time, in the ordinary course of business, we are involved in various judicial, regulatory or administrative claims, proceedings and investigations. These proceedings and actions may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future judicial, regulatory or administrative claims or proceedings. Although occasional adverse decisions or settlements may occur, our management does not believe that the final disposition of any currently pending or threatened matter will have a material adverse effect on our business, financial position, results of operations or cash flows.
On January 25, 2021, the judge presiding over the previously disclosed IPO-related class action lawsuit filed against us and certain of our directors, shareholders and underwriters granted our motion to dismiss the class action lawsuit.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on The New York Stock Exchange under the symbol VEL.
As of February 10, 2021, there were approximately 1,470 beneficial holders of our common stock.
Dividend Policy
We have not declared or paid cash dividends to date on our common stock and we do not intend to pay dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, limitations in our debt instruments and other factors that our board of directors may deem relevant.
Issuer Purchases of Equity Securities
None.
Unregistered Sales of Equity Securities and Use of Proceeds
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
The consolidated statements of income information for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 and the consolidated statements of financial condition information presented below as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements. The information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes. You should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including the related notes, included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future.
Year Ended December 31,
Consolidated Statements of Income Information
(in thousands)
Interest income
$
167,322
$
157,531
$
124,722
$
97,830
$
78,418
Interest expense - portfolio related
87,826
83,903
62,597
47,638
37,406
Net interest income - portfolio related
79,496
73,628
62,125
50,192
41,012
Interest expense - corporate debt
12,049
14,618
13,322
13,654
13,419
Net interest income
67,447
59,010
48,803
36,538
27,593
Provision for loan losses
5,068
1,139
1,455
Net interest income after provision for loan losses
62,379
57,871
48,602
36,117
26,138
Other operating income
Gain on disposition of loans
7,576
4,410
1,200
Unrealized gain (loss) on fair value loans
(9
)
Other (expense) income
(1,698
)
(1,752
)
1,366
Total other operating income
6,320
2,649
2,807
2,008
Operating expenses
Compensation and employee benefits
20,731
15,511
15,105
11,904
10,085
Rent and occupancy
1,743
1,531
1,320
1,115
Loan servicing
7,802
7,396
6,009
4,907
3,657
Professional fees
4,238
2,056
3,040
1,661
2,637
Real estate owned, net
2,656
2,647
1,373
Other operating expenses
8,400
5,981
5,313
3,946
2,420
Total operating expenses
45,570
35,122
32,160
24,136
20,051
Income before income taxes
23,129
25,398
19,249
13,989
6,797
Income tax expense
5,352
8,106
11,618
-
-
Net income
$
17,777
$
17,292
$
7,631
$
13,989
$
6,797
Less deemed dividends on preferred stock (1)
$
48,955
NA
NA
NA
NA
Net income (loss) allocated to common shareholders
$
(31,178
)
NA
NA
NA
NA
Earnings (loss) per common share (1)
Basic
$
(1.55
)
NA
NA
NA
NA
Diluted
$
(1.55
)
NA
NA
NA
NA
Weighted average common shares outstanding (1)
Basic
20,087
NA
NA
NA
NA
Diluted
20,087
NA
NA
NA
NA
(1)
Not applicable prior to the Company's IPO on January 17, 2020.
December 31,
Consolidated Statements of Financial Condition Information
(in thousands)
Assets
Cash and cash equivalents
$
13,273
$
21,465
$
15,008
$
15,422
$
49,978
Restricted cash
7,020
6,087
1,669
1,766
Loans held for sale, net
13,106
214,467
78,446
5,651
-
Loans held for investment, net
1,948,089
1,863,360
1,567,408
1,299,041
1,039,401
Loans held for investment at fair value
1,539
2,960
3,463
4,632
7,278
Total loans, net
1,962,734
2,080,787
1,649,317
1,309,324
1,046,679
Accrued interest receivables
11,373
13,295
10,096
7,678
5,954
Receivables due from servicers
71,044
49,659
40,473
25,306
22,234
Other receivables
4,085
4,778
1,287
Real estate owned, net
15,767
13,068
7,167
5,322
1,454
Property and equipment, net
4,145
4,680
5,535
5,766
3,875
Deferred tax asset
6,654
8,280
-
-
Other assets
6,779
12,667
4,479
1,435
Total assets
$
2,102,874
$
2,214,766
$
1,735,235
$
1,371,845
$
1,133,129
Liabilities and Members’ Equity
Accounts payable and accrued expenses
$
63,361
$
56,146
$
26,797
$
22,029
$
12,264
Secured financing, net
74,982
145,599
127,040
126,486
119,286
Securitizations, net
1,579,019
1,438,629
1,202,202
982,393
742,890
Warehouse repurchase facilities, net
75,923
421,548
215,931
85,303
110,308
Total liabilities
1,793,285
2,061,922
1,571,970
1,216,211
984,748
Preferred Stock/Class C
preferred units
90,000
-
26,465
24,691
23,036
Shareholders'/Members’ equity
219,589
152,844
136,800
130,943
125,345
Total liabilities and members’ equity
$
2,102,874
$
2,214,766
$
1,735,235
$
1,371,845
$
1,133,129

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with “Item 6. Selected Financial Data” and the consolidated financial statements and related notes and the other financial information included elsewhere in this Annual Report. This discussion contains forward-looking statements, as described above under the heading “Forward-Looking Statements” that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report.
Business
We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 17 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.
We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.
Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of December 31, 2020, has an average balance of approximately $331,000. As of December 31, 2020, our loan portfolio totaled $1.9 billion of UPB on properties in 45 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 66.1%, and was concentrated in 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, representing 50.0% of the UPB. During the year ended December 31, 2020, the yield on our total portfolio was 8.19%.
We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitizations, corporate debt and equity. The securitization market is our primary source of long-term financing. We have successfully executed fifteen securitizations, resulting in a total of over $3.1 billion in gross debt proceeds from May 2011 through December 2020.
One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitizations and excludes our corporate debt. For the year ended December 31, 2020, our portfolio related net interest margin was 3.89%. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for loan losses and operating expenses. For the year ended December 31, 2020, we generated income before income taxes and net income of $23.1 million and $17.8 million, respectively, and earned a pre-tax return on equity and return on equity of 10.7% and 8.2%, respectively.
In January 2020, we completed the initial public offering of our common stock, par value $0.01 per share. We received net proceeds from the sale of our common stock in the IPO of $100.8 million, a portion of which we used to repay $75.0 million of principal on our 2019 Term Loan.
On April 7, 2020, we issued and sold 45,000 shares of our newly designated Series A Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”), in a private placement to affiliates of Snow Phipps and TOBI (the “Purchasers”), our two largest common stockholders, at a price per share of Preferred Stock of $1,000. In addition, as part of that private placement, we issued and sold to the Purchasers warrants (the “Warrants”) to purchase an aggregate of 3,013,125 shares of our common stock. This private placement offering resulted in gross proceeds to us of $45.0 million. We used the proceeds from this private placement to pay down our existing warehouse facilities and for general corporate purposes.
Items Affecting Comparability of Results
Due to a number of factors, our historical financial results may not be comparable, either from period to period, or to our financial results in future periods. We have summarized the key factors affecting the comparability of our financial results below.
Income Taxes
Prior to our initial public offering in January 2020, the Company operated as Velocity Financial, LLC, which was formed as a Delaware Limited Liability Company, or LLC, in 2012. Until January 1, 2018, as an LLC, we had elected to be treated as a partnership for U.S. federal and state income tax purposes, and as such, had generally not been subject to federal and state income taxes prior to January 1, 2018. Accordingly, the results of operations presented for the years prior to January 1, 2018 do not include any provision for federal or state income taxes.
As part of our initial public offering, we converted Velocity Financial, LLC into a Delaware corporation and changed our name to Velocity Financial, Inc., a transaction that we refer to as the “conversion” in this Annual Report Form 10-K. The conversion is accounted for in accordance with ASC 805-50 -Business Combinations, as a transaction between entities under common control. The conversion had no significant impact on our provision for income taxes or our deferred tax assets and liabilities.
Effective January 1, 2018, we elected to be treated as a corporation for U.S. federal and state income tax purposes. Accordingly, the results of operations for the year ended December 31, 2019 include the impacts of income taxes. As a result, the historical net income reported for any period prior to January 1, 2018, is not comparable to the net income reported for the year ended December 31, 2019 or the net income anticipated in future periods.
Furthermore, in connection with the new tax treatment, we began recognizing, and will continue to recognize, deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that included the enactment date, as applicable.
Interest Expense on Corporate Debt
In August 2019, we entered into a five-year $153.0 million corporate debt agreement (“2019 Term Loan”). The 2019 Term Loan bore interest at a rate equal to one-month LIBOR plus 7.50% and was to mature in August 2024. A portion of the net proceeds from the 2019 Term Loan was used to redeem all of the outstanding 2014 Senior Secured Notes in August 2019. Another portion of the net proceeds from the 2019 Term Loan, together with cash on hand, was used to repurchase our outstanding Class C preferred units.
The 2019 Term Loan balance was $153.0 million as of December 31, 2019. During the year ended December 31, 2019, we incurred $14.6 million of interest expense related to our corporate debt. The 2019 Term Loan balance was $78.0 million as of December 31, 2020. During the year ended December 31, 2020, we incurred $12.0 million of interest expense related to our corporate debt.
We used $75.7 million of the net proceeds from our IPO to lower our interest expense through the repayment of the $75.0 million outstanding principal amount on the 2019 Term Loan. We fully paid off the remaining $78.0 million of the 2019 Term Loan in January 2021 with a portion of the net proceeds from the 2021Term Loan.
Recent Developments
2021 Warehouse Facility and Term Loans
On January 29, 2021, we entered into a Repurchase Agreement (“the 2021 Repurchase Agreement”) with another warehouse lender. The 2021 Repurchase Agreement has a current maturity date of January 29, 2022, and is a non-mark-to-market borrowing facility, collateralized by a pool of performing loans, with a maximum capacity of $200.0 million, and bears interest at one-month LIBOR plus 3.50%.
On February 5, 2021, we entered into a five-year $175.0 million syndicated corporate debt agreement (“2021 Term Loan”). The 2021 Term Loan bears interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. The 2021 Term Loan provided an initial $125.0 million of funds to us and contains a delayed draw feature allowing an additional draw of $50.0 million by February 5, 2022 provided we meet certain conditions. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the outstanding 2019 Term Loan. The remaining portion of the net proceeds from the 2021 Term Loan will be used for loan originations and general corporate purposes.
Strategies to Address Uncertainties Caused by COVID-19
The COVID-19 outbreak has caused significant disruption in business activity and the financial markets both globally and in the United States. As a result of the spread of COVID-19, economic uncertainties have arisen which negatively impacted our financial condition, results of operations and cash flows. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our customers, employees and vendors, impact of the new mutant strain of the virus, and the long-term success of the vaccine, all of which are uncertain at this time and cannot be predicted. The full extent to which COVID-19 may continue to impact our financial condition or results of operations cannot be reasonably estimated at this time.
During 2020, we proactively executed a number of business initiatives to strengthen our liquidity position and re-focus our business strategies in light of the effects of the COVID-19 pandemic, including the following:
•
On April 5, 2020, we issued and sold 45,000 shares of our newly designated Series A Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”), in a private placement to affiliates of Snow Phipps and TOBI (the “Purchasers”), our two largest common stockholders, at a price per share of Preferred Stock of $1,000. In addition, as part of that private placement, we issued and sold to the Purchasers warrants (the “Warrants”) to purchase an aggregate of 3,013,125 shares of our common stock. This private placement offering resulted in gross proceeds to us of $45.0 million, before expenses payable by us of approximately $1.0 million.
•
During this crisis, we will consider the benefits of originating mortgage loans along with opportunistically acquiring mortgage loans that comply with our credit guidelines. If we are able to prudently originate or acquire mortgage loans, they will be added to our held for investment loan portfolio and supplement our current earnings profile generated by our $1.9 billion of portfolio loans, which are primarily fixed rate loans financed with fixed rate securitizations. We will continue to evaluate our business strategy in light of rapidly changing market conditions.
•
We temporarily suspended our loan originations and loan purchases from late March through August and furloughed a significant number of our employees, mostly within our loan origination function. We resumed loan origination activities in September.
•
We implemented a voluntary COVID-19 forbearance program from April through June designed to help small investors retain their properties and minimize our portfolio losses. Subsequently, we modified many of these loans by allowing the borrower to pay any past due amounts when the loan is paid off.
•
On July 10, 2020, we securitized $276.0 million of short-term and long-term investor real estate loans and issued $179.4 million of notes and certificates. We used the proceeds from this securitization to fully pay off our existing warehouse lines.
•
We have renewed two of our warehouse facilities, one non-mark-to-market facility and one modified mark-to-market facility in 2020 and added a third non-mark-to-market warehouse facility in January 2021.
•
In September 2020, we resumed our loan origination activities. We reduced our workforce by 60 employees as we streamlined our loan operations processes.
•
In order to protect our employees, we have been working remotely since late March. In addition, we have implemented COVID-19-related protective measures and protocols to safely allow a limited number of staff to work from our offices located across the country.
•
We strengthened our liquidity by obtaining a new corporate credit facility of $175 million on February 5th, 2021. A portion of the proceeds were used to pay off existing corporate debt and the remainder will be used to grow our portfolio.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires certain judgments and assumptions, based on information available at the time of preparation of the consolidated financial statements, in determining accounting estimates used in preparation of the consolidated financial statements. The following discussion addresses the accounting policies that we believe apply to us based on the nature of our operations. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments used to prepare the company’s financial statements are based upon reasonable assumptions given the information available at that time. We believe the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the consolidated financial statements. The summary below should be read in conjunction with the disclosure of our accounting policies and use of estimates in Note 2 to the consolidated financial statements.
Allowance for Loan Losses
Prior to January 1, 2020, the allowance for loan and lease losses (ALLL) on loans held for investment was maintained at a level deemed adequate by management to provide for probable and inherent losses in the portfolio at the balance sheet date. The ALLL had a general reserve component for loans with no credit impairment and a specific reserve component for loans determined to be impaired. The allowance methodology for the general reserve component included both quantitative and qualitative loss factors which were applied to the population of unimpaired loans to estimate the general reserves. The quantitative loss factors included loan type, age of the loan, borrower FICO score, past loan loss experience, historical default rates, and delinquencies. The qualitative loss factors considered, among other things, the loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, and the underlying collateral value. The provision for loan losses and recoveries of previously recognized charge-offs were added to the ALLL, while charge-offs on loans were recorded as a reduction to ALLL.
Loans were considered impaired when, based on current information and events, it was probable that we would be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreements. Impairment was measured on a loan-by-loan basis by comparing the estimated fair value of the underlying collateral, net of estimated selling costs (net realizable value) against the recorded investment of the loan. To the extent the recorded investment of the loan exceeded the estimated fair value, a specific reserve or charge-off was recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral.
Effective January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replacing the incurred loss accounting approach with the current expected credit loss approach for all financial assets measured at amortized cost, which as of the adoption date consisted entirely of our held for investment loan portfolio. Under the CECL methodology, the allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. We identified the following portfolio segments based on risk characteristics of the loans in its loan portfolio (pool):
•
Residential 1- 4 Unit - Purchase (loans to purchase 1- 4 unit residential rental properties);
•
Residential 1- 4 Unit - Refinance (refinance loans on 1- 4 unit residential rental properties);
•
Commercial - Purchase (loans to purchase traditional commercial properties);
•
Commercial - Refinance (refinance loans on traditional commercial properties);
•
Quick Fix 1- 4 Unit - Purchase (short-term loans to purchase 1- 4 unit residential rental properties); and
•
Quick Fix 1- 4 Unit - Refinance (short-term refinance loans on 1- 4 unit residential rental properties).
We determined the collectability of our loans by evaluating certain risk characteristics. The segmentation of our loan portfolio was determined based on analyses of our loan portfolio performance over the past seven years. Based on analyses of the loan portfolio’s historical performance, we concluded that loan purpose and product types are the most significant risk factors in determining our expectation of future loan losses. Loan purpose considers whether a borrower is acquiring the property or refinancing an existing property. Our historical experience shows that refinance loans have higher loss rates than loans for property acquisitions. Product type includes residential 1-4 unit property and traditional commercial property. Our historical experience shows that traditional commercial property loans have higher loss rates than residential 1-4 unit property. Quick Fix loans have a maturity of one to 2 years from origination. Non-Quick Fix loans have a maturity of up to 30 years from origination.
We estimate the allowance for loan losses using relevant available information, from internal and external sources, relating to historical performance, current conditions, and reasonable and supportable macroeconomic forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, or term, as well as for changes in environmental conditions, such as unemployment rates, property values and changes in the competitive or regulatory environment.
We use an open pool loss rate methodology to model expected credit losses. To determine the loss rates using the open pool method, we start with our historical database of losses, segmenting the loans by loan purpose, product type and repayment period. A third-party model applying the open pool method is used to estimate an annual average loss rate by dividing the respective pool's quarterly historical losses by the pool's respective prior quarters’ ending unamortized loan cost balance and deriving an annual average loss rate from the historical quarterly loss rates. The model then adjusts the annual average loss rates based upon macroeconomic forecasts over a reasonable and supportable period, followed by a straight-line reversion to the historical loss rates. The adjusted annual average loss rates are applied to the forecasted pool balance within each segment. The forecasted balances in the loan pool segments are calculated based on a principal amortization using contractual maturity, factoring in further principal reductions from estimated prepayments. Estimated prepayments, or Constant Prepayment Rates ("CPRs") are developed from multiple loan characteristic considerations, such as property types, FICO scores, loan purpose, and prepayment penalty terms, which is the most significant driver of prepayment activity. The prepayment penalty terms differ between the short-term and long-term loans, and we have developed a CPR curve for our short-term loans (2-year or less) and one for our long-term loans (30-year). Data from 2012-2020 is used to develop prepayment rates for our long-term loans. Because of the prepayment penalty structure in our long-term loans, prepayments during the active penalty term are historically low and begin to ramp up after the prepayment penalty term. The active prepayment penalty term is considered for existing and new loans over the reasonable and supportable forecast period in determining estimated prepayments. We back-test the CPR curves on a quarterly basis and adjust the CPR curves as appropriate. The reasonable and supportable period is meant to represent the period in which we believe the forecasted macroeconomic variables can be reasonably estimated. Significant variables or assumptions incorporated in the macroeconomic forecasts include U.S. unemployment, treasury yields, U.S. real gross domestic product (GDP), and U.S. real estate housing prices. We consider multiple scenarios from different macroeconomic forecasts and use different forecast and revision periods for estimating lifetime expected credit losses.
We have determined that once a loan becomes nonperforming (90 or more days past due), it no longer shares the same risk characteristics of the other loans within its segment of homogeneous loans (pool). We pull these loans out of the segments and evaluate the loans individually using the practical expedient to determine the credit exposure. Nonperforming loans are considered collateral dependent. Using the practical expedient, the fair value of the underlying collateral, less estimated selling costs, is compared to the carrying value of the loan in the determination of a credit loss.
The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when we believe the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The allowance for credit losses is maintained at a level deemed adequate by management to provide for expected losses in the portfolio at the balance sheet date. While we use available information to estimate our required allowance for credit losses, future additions to the allowance for credit losses may be necessary based on changes in estimates resulting from economic and other conditions.
We made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables. When a loan is placed on nonaccrual status, the accrued and unpaid interest is reversed as a reduction of interest income and accrued interest receivable. Accrued interest receivable is excluded from the amortized cost of loans and it is presented as accrued interest receivable in the Consolidated Statements of Financial Condition.
Deferred Tax Assets and Liabilities
Our deferred tax assets and liabilities arise from differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We determine whether a deferred tax asset is realizable based on facts and circumstances, including our current and projected future tax position, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the realization of our deferred tax assets may no longer be considered more likely than not and, accordingly, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.
How We Assess Our Business Performance
Net income is the primary metric by which we assess our business performance. Accordingly, we closely monitor the primary drivers of net income which consist of the following:
Net Interest Income
Net interest income is the largest contributor to our net income and is monitored on both an absolute basis and relative to provisions for loan losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitizations. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.
To evaluate net interest income, we measure and monitor: (1) the yields on our loans, (2) the costs of our funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread measures the difference between the rates earned on our loans and the rates paid on our funding sources. Net interest margin measures the difference between our annualized interest income and annualized interest expense, or net interest income, as a percentage of average loans outstanding over the specified time period.
Periodic changes in net interest income are primarily driven by: (1) origination volume and changes in average outstanding loan balances and (2) interest rates and changes in interest earned on our portfolio or paid on our debt. Historically, origination volume and portfolio size have been the largest contributors to the growth in our net interest income. We measure net interest income before and after interest expense related to our corporate debt and before and after our provisions for loan losses.
Credit Losses
We strive to minimize actual credit losses through our rigorous screening and underwriting process and life of loan portfolio management and special servicing practices. We closely monitor the credit performance of our loan portfolio, including delinquency rates and expected and actual credit losses, as a key factor in assessing our overall business performance.
Operating Expenses
We incur operating expenses from compensation and benefits related to our employee base, rent and other occupancy costs associated with our leased facilities, our third-party primary loan servicing vendors, professional fees to the extent we utilize third-party legal, consulting and advisory firms, and costs associated with the resolution and disposition of real estate owned, among other items. We monitor and strive to prudently manage operating expenses and to balance current period profitability with investment in the continued development of our platform. Because volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume along with all key terms of new loan originations, such as interest rates, loan-to-value ratios, estimated credit losses and expected duration.
Factors Affecting Our Results of Operations
We believe there are a number of factors that impact our business, including those discussed below and elsewhere in this Annual Report.
Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by a number of factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, the availability of funding sources and the underlying performance of the collateral supporting our loans. While we have been successful at managing these elements in the past, there are certain circumstances beyond our control, including the current disruption caused by the COVID-19 pandemic, macroeconomic conditions and market fundamentals, which can affect each of these factors and potentially impact our business performance.
Origination Volume
Portfolio related net interest income is the largest contributor to our net income. We grew our portfolio related net interest income by $5.9 million or 8.0% from $73.6 million for the year ended December 31, 2019 to $79.5 million for the year ended December 31, 2020. Our portfolio related net interest income grew by $11.5 million or 18.5% from $62.1 million for the year ended December 31, 2018 to $73.6 million for the year ended December 31, 2019. The growth in net interest income is largely attributable to a higher average portfolio balance from new loan originations which we have achieved by executing our principal strategies of expanding our broker network and further penetrating our network of existing brokers. We anticipate that our future performance will continue to depend on growing our origination volume and believe that the large and highly fragmented nature of our core market provides meaningful opportunity to achieve this. We intend to grow originations by continuing to serve and build loyalty within our existing network of brokers while expanding our network with new brokers through targeted marketing and improved brand awareness.
Our future performance could be impacted to the extent that our origination volumes decline as we rely on new loans to offset maturities and prepayments in our existing portfolio. To augment our core origination business, we continually assess opportunities to acquire portfolios of loans that meet our investment criteria. In our experience, portfolio acquisition opportunities have generally been more attractive and plentiful during market conditions when origination opportunities are less favorable. Accordingly, we believe our acquisition strategy not only expands our core business, but also provides a counter-cyclical benefit.
Competition
The investor real estate loan market is highly competitive which could affect our profitability and growth. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services.
Availability and Cost of Funding
Our primary funding sources have historically included cash from operations, warehouse facilities, term securitizations, corporate debt and equity. We believe we have an established brand in the term securitization market
and that this market will continue to support our portfolio growth with long-term financing. Changes in macroeconomic conditions can adversely impact our ability to issue securitizations and, thereby, limit our options for long-term financing. In consideration of this potential risk, we have entered into a credit facility for longer-term financing that will provide us with capital resources to fund loan growth in the event we are not able to issue securitizations.
Loan Performance
We underwrite and structure our loans to minimize potential losses. We believe our fully amortizing loan structures and avoidance of large balloon payments, coupled with meaningful borrower equity in properties, limit the probability of losses and that our proven in-house asset management capability allows us to minimize potential losses in situations where there is insufficient equity in the property. Our income is highly dependent upon borrowers making their payments and resolving delinquent loans as favorably as possible. Macroeconomic conditions can, however, impact credit trends in our core market and have an adverse impact on financial results.
Macroeconomic Conditions
The investor real estate loan market may be impacted by a wide range of macroeconomic factors such as interest rates, residential and commercial real estate prices, home ownership and unemployment rates, and availability of credit, among others. We believe our prudent underwriting, conservative loan structures and interest rate protections, and proven in-house asset management capability leave us well positioned to manage changing macroeconomic conditions.
Operating Efficiency
We generate positive operating leverage to the extent that our revenue grows at a faster rate than our expenses. We believe our platform is highly scalable and that we can generate positive operating leverage in future periods, primarily due to the technology and other investments we have made in our platform to date and our focus on a scalable, cost-effective mortgage broker network to generate new loan originations.
Portfolio and Asset Quality
Key Portfolio Statistics
As of December 31,
($ in thousands)
Total loans
$
1,944,804
$
2,059,344
$
1,631,326
Loan count
5,878
6,373
5,171
Average loan balance
$
$
$
Weighted average loan-to-value
66.1
%
65.8
%
63.8
%
Weighted average coupon
8.51
%
8.69
%
8.56
%
Nonperforming loans (UPB)
$
332,813
(A)
$
141,607
$
95,385
Nonperforming loans (% of total)
17.11
%
(A)
6.88
%
5.85
%
(A)
Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $64.4 million of nonaccrual loans in the Company’s COVID-19 forbearance program.
Total Loans. Total loans reflects the aggregate UPB at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for loan losses.
Loan Count. Loan count reflects the number of loans at the end of the period. It includes all loans with an outstanding principal balance.
Average Loan Balance. Average loan balance reflects the average UPB at the end of the period (i.e., total loans divided by loan count).
Weighted Average Loan-to-Value. Loan-to-value, or LTV, reflects the ratio of the original loan amount to the appraised value of the underlying property at the time of origination. In instances where the LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at the time of acquisition. Weighted average LTV is calculated for the population of loans outstanding at the end of each specified period using the original loan amounts and appraised LTVs at the time of origination of each loan. LTV is a key statistic because requiring the borrower to invest more equity in the collateral minimizes our exposure for future credit losses.
Nonperforming Loans. Prior to January 1, 2020, nonperforming loans consisted of loans that were 90 or more days past due, in bankruptcy, or in foreclosure. Starting January 1, 2020, nonperforming loans include all loans on nonaccrual status. Loans that were granted a COVID-19 forbearance by the Company were not placed on nonaccrual status during the forbearance period and were not considered nonperforming loans during the forbearance period. If loans granted a COVID-19 forbearance subsequently became 90 days past due after the forbearance period, such loans were then placed on nonaccrual and considered nonperforming loans.
Originations and Acquisitions
The following table presents new loan originations and acquisitions and includes average loan size, weighted average coupon and weighted average loan-to-value for the periods indicated:
($ in thousands)
Loan Count
Loan Balance
Average
Loan Size
Weighted
Average
Coupon
Weighted
Average
LTV
Year Ended December 31, 2020:
Loan originations - held for investment
338,815
8.3
%
68.0
%
Loan originations - held for sale
96,223
9.7
%
68.3
%
Total loan originations
1,271
$
435,038
$
8.6
%
68.1
%
Loan acquisitions - held for investment
3,467
1,156
6.5
%
73.5
%
Total loans originated and acquired
1,274
$
438,505
Year Ended December 31, 2019:
Loan originations - held for investment
1,881
$
673,877
$
8.5
%
67.1
%
Loan originations - held for sale
1,152
$
338,846
$
10.0
%
68.4
%
Total loan originations
3,033
$
1,012,723
$
9.0
%
67.5
%
Loan acquisitions - held for investment
9,062
$
7.2
%
61.9
%
Total loans originated and acquired
3,068
$
1,021,785
Year Ended December 31, 2018:
Loan originations - held for investment
1,708
$
587,241
8.4
%
63.4
%
Loan originations - held for sale
$
150,056
9.9
%
65.1
%
Total loan originations
2,327
737,297
8.7
%
63.8
%
Loan acquisitions - held for investment
$
16,243
7.3
%
53.5
%
Total loans originated and acquired
2,346
753,540
Over the periods shown, prior to the COVID-19 pandemic which adversely impacted our loan originations from March 2020 through September 2020, we had increased our origination volumes. Once loan origination was resumed, we funded $179.3 million for the quarter ended December 31, 2020 which was an increase of $13.1 million, or 7.9%, from $166.2 million for the quarter ended December 31, 2019. For the year ended December 31, 2020, we originated $435.0 million of loans, which was a decrease of $577.7 million, or 57.0% from $1.0 billion for the year ended December 31, 2019. For the year ended December 31, 2019, we originated $1.0 billion of loans, which was an increase of $275.4 million, or 37.4%, from $737.3 million for the year ended December 31, 2018.
Loans Held for Investment
Our total portfolio of loans held for investment consists of both loans held for investment at cost, which are presented in the consolidated financial statements as loans held for investment, net, and loans held for investment at fair value, which are presented in the financial statements as loans held for investment at fair value. The following tables show the various components of loans held for investment as of the dates indicated:
(in thousands)
Unpaid principal balance
$
1,931,875
$
1,843,290
$
1,551,866
Discount on acquired loans
-
-
(541
)
Valuation adjustments on FVO loans
(2
)
(444
)
(586
)
Deferred loan origination costs
23,600
25,714
21,812
Total loans held for investment, gross
1,955,473
1,868,560
1,572,551
Allowance for credit losses
(5,845
)
(2,240
)
(1,680
)
Loans held for investment, net
$
1,949,628
$
1,866,320
$
1,570,871
The following table illustrates the contractual maturities for our loans held for investment in aggregate UPB and as a percentage of our total held for investment loan portfolio as of December 31, 2020:
December 31, 2020
($ in thousands)
UPB
%
Loans due in less than one year
$
100,025
5.2
%
Loans due in one to five years
79,398
4.1
Loans due in more than five years
1,752,452
90.7
Total loans held for investment
$
1,931,875
100.0
%
Allowance for Loan Losses
Our allowance for loan losses increased to $5.8 million as of December 31, 2020, compared to $2.2 million as of December 31, 2019. The increase in allowance is primarily due to the adverse business conditions caused by the COVID-19 pandemic assumed in our loan loss model projections and the one-time transfer of our held for sale loan portfolio to loans held for investment.
Our allowance increased to $2.2 million as of December 31, 2019, compared to $1.7 million as of December 31, 2018, primarily due to the increase in our loan portfolio from December 31, 2018 to December 31, 2019.
Our allowance for loan losses is based on an analysis of historical loan loss data from January 1, 2015 through December 31, 2020. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses should a loan become impaired.
To estimate the allowance for loan losses in our loans held for investment portfolio, we follow a detailed internal process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.
The following table illustrates the activity in our allowance for loan losses over the periods indicated:
As of December 31,
Allowance for credit losses:
Beginning balance, prior to adoption of
ASC 326
$
2,240
$
1,680
$
1,886
Impact of adopting ASC 326
-
-
Provision for loan losses (1)
5,068
1,139
Charge-offs
(1,600
)
(579
)
(407
)
Ending balance
$
5,845
$
2,240
$
1,680
Total loans held for investment (UPB),
excluding FVO (2)
$
1,930,334
$
1,839,886
$
1,547,817
% of allowance for credit losses /
loans held for investment,
excluding FVO
0.30
%
0.12
%
0.11
%
(1) The provision for loans losses would have been approximately $3.9 million for the year ended December 31, 2020, excluding the $1.2 million impact from the loans held for sale transferred to loans held for investment. The additional $1.2 million provision was mainly offset by the reversal of the $1.3 million valuation allowance on the held for sale loans, which was recorded to “Other income” in the consolidated statements of income.
(2) Reflects the UPB of loans held for investment excluding loans held for investment at fair value (FVO). Loans held for investment, net on the Consolidated Statements of Financial Condition is net of allowance for credit losses of $5.8 million, and net deferred loan origination fees/costs of $23.6 million as of December 31, 2020.
Credit Quality - Loans Held for Investment
The following table provides delinquency information, by unpaid principal balance, on our held for investment loan portfolio as of the dates indicated:
As of December 31,
2020 (A)
2020 COVID-19 Forbearance
2019 (B)
2018 (B)
Performing/Accruing:
Current
$
1,445,131
74.9
%
$
259,147
$
1,559,373
84.6
%
$
1,358,043
87.5
%
30-59 days past due
89,284
4.6
32,115
123,704
6.7
78,848
5.1
60-89 days past due
62,694
3.2
34,493
48,062
2.6
23,881
1.5
90+ days past due
1,953
0.1
1,953
-
-
-
-
Total performing loans
1,599,062
82.8
327,708
1,731,139
93.2
1,460,772
94.1
%
Nonperforming/Nonaccrual:
<90 days past due
20,778
1.1
-
-
-
-
90+ days past due
82,004
4.2
34,120
24,790
1.3
16,181
1.0
Bankruptcy
12,655
0.7
1,650
8,695
0.5
5,901
0.4
In foreclosure
217,376
11.2
27,868
78,666
4.3
69,012
4.4
Total nonperforming
loans
332,813
17.2
64,365
112,151
6.1
91,094
5.9
Total loans held for
investment
$
1,931,875
100.0
%
$
392,073
$
1,843,290
100.0
%
$
1,551,866
100.0
%
(A)
Balance includes $392.1 million UPB of loans held for investment in our COVID-19 forbearance program.
(B)
Prior to January 1, 2020, nonperforming loans included loans that were 90 or more days past due, in bankruptcy, or in foreclosure.
Other than loans while they were in the COVID-19 forbearance program, loans that are 90+ days past due, in bankruptcy, or in foreclosure, or not accruing interest are considered nonperforming loans. Loans that were brought current under the COVID-19 forbearance program are considered nonperforming loans if they become 90 days or more past due subsequent to being brought current. Nonperforming loans were $332.8 million, or 17.2% of our held
for investment loan portfolio as of December 31, 2020, compared to $112.2 million, or 6.1% as of December 31, 2019, and $91.1 million, or 5.9% of the loan portfolio as of December 31, 2018. The increase in total nonperforming loans as of December 31, 2020 was primarily attributable to the COVID-19 pandemic.
Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following table summarizes the resolution activities of loans that were nonperforming or became nonperforming during the periods indicated. We resolved $83.4 million and $73.4 million of nonperforming loans during the years ended December 31, 2020 and 2019, respectively. Nonperforming loan resolutions were $29.8 million and $13.0 million during the quarters ended December 31, 2020 and 2019, respectively. Including REO resolutions, we realized net gains of $2.7 million and $1.8 million during the years ended December 31, 2020 and December 31, 2019, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual interest due and collected.
Year Ended December 31, 2020
Year Ended December 31, 2019
($ in thousands)
UPB
Gain/(Loss)
UPB
Gain/(Loss)
Resolved - paid in full
45,662
$
2,029
37,211
$
1,197
Resolved - paid current
37,705
1,213
36,169
Resolved - REO sold
4,362
(498
)
4,077
(68
)
Total resolutions
$
87,729
$
2,744
$
77,457
$
1,846
Recovery rate on resolved
nonperforming UPB
103.1
%
102.4
%
Our actual losses incurred have been small as a percentage of nonperforming loans held for investment. The table below shows our actual loan losses for the periods indicated.
Year Ended December 31,
($ in thousands)
Average nonperforming loans for the period (1)
246,972
102,567
76,834
Charge-offs
1,600
Charge-offs / Average nonperforming loans for the period (1)
0.65
%
0.56
%
0.53
%
(1)
Reflects the monthly average of nonperforming loans held for investment during the period.
Concentrations - Loans Held for Investment
As of December 31, 2020, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 49.6% of the UPB and mixed used properties represented 13.4% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. By geography, the principal balance of our loans held for investment were concentrated 23.5% in California, 22.8% in New York, 11.5% in Florida, and 8.1% in New Jersey.
Property Type
December 31, 2020
($ in thousands)
Loan Count
UPB
% of Total
UPB
Investor 1-4
3,483
$
958,512
49.6
%
Mixed use
259,094
13.4
Multifamily
182,358
9.5
Retail
171,971
8.9
Office
108,576
5.6
Warehouse
118,547
6.1
Other(1)
132,817
6.9
Total loans held for investment
5,833
$
1,931,875
%
(1)
All other properties individually comprise less than 5.0% of the total unpaid principal balance.
Geography (State)
December 31, 2020
($ in thousands)
Loan Count
UPB
% of Total
UPB
California
$
453,795
23.5
%
New York
441,483
22.8
Florida
221,540
11.5
New Jersey
156,440
8.1
Other(1)
2,597
658,617
34.1
Total loans held for investment
5,833
$
1,931,875
%
(1)
All other states individually comprise less than 5.0% of the total unpaid principal balance.
Loans Held for Sale
Historically, we have sold some portion of the loans we originate. We started originating short-term, interest-only loans in March 2017, which we aggregated and sold at a premium to institutional investors. In July 2020, we decided to retain these loans and $214.4 million were transferred to the held for investment loan portfolio. The related valuation allowance of $1.3 million on these loans was reversed through earnings.
In the fourth quarter of 2020, we sold $96.3 million of loans that were recently originated, and we may continue to augment our long term investment strategy with opportunistic sales of loans in future periods. The following tables show the various components of loans held for sale as of the dates indicated:
As of December 31,
($ in thousands)
UPB
$
12,929
$
216,054
$
79,335
Valuation adjustments
(17
)
(396
)
(173
)
Deferred loan origination fees, net
(1,191
)
(716
)
Total loans held for sale, net
$
13,106
$
214,467
$
78,446
Real Estate Owned (REO)
REO includes real estate we acquire through foreclosure or by deed-in-lieu of foreclosure. REO assets are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure. Adjustments that reduce the carrying value of the loan to the fair value of the real estate at the time of foreclosure are recognized as charge-offs in the allowance for loan losses. Positive adjustments at the time of foreclosure are recognized in other operating income. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments.
As of December 31, 2020, our REO included 35 properties with a carrying value of $15.8 million compared to 24 properties with a carrying value of $13.1 million as of December 31, 2019.
Key Performance Metrics
Year Ended December 31,
($ in thousands)
Average loans
$
2,043,665
$
1,782,558
$
1,429,877
Portfolio yield
8.19
%
8.84
%
8.72
%
Average debt - portfolio related
1,803,188
1,603,459
1,234,818
Average debt - total company
1,885,306
1,745,728
1,362,412
Cost of funds - portfolio related
4.87
%
5.23
%
5.07
%
Cost of funds - total company
5.30
%
5.64
%
5.57
%
Net interest margin - portfolio related
3.89
%
4.13
%
4.34
%
Net interest margin - total company
3.30
%
3.31
%
3.41
%
Charge-offs
0.08
%
0.03
%
0.03
%
Pre-tax return on equity
10.69
%
17.37
%
14.30
%
Return on equity
8.22
%
11.78
%
7.80
%
Average Loans
Average loans reflects the daily average of total outstanding loans, including both loans held for investment and loans held for sale, as measured by UPB, over the specified time period.
Portfolio Yield
Portfolio yield is an annualized measure of the total interest income earned on our loan portfolio as a percentage of average loans over the given period. Interest income includes interest earned on performing loans, cash interest received on nonperforming loans, default interest and prepayment fees. The decrease in our portfolio yield from 2019 to 2020 reflects the impact of the COVID-19 pandemic and increase in nonperforming loans. Historically, most loans that become nonperforming resolve prior to converting to REO.
Average Debt - Portfolio Related and Total Company
Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse repurchase facilities and securitizations. Total company debt consists of portfolio- related debt and corporate debt. The measures presented here reflects the monthly average of all portfolio- related and total company debt, as measured by outstanding principal balance, over the specified time period.
Cost of Funds - Portfolio Related and Total Company
Portfolio related cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt as a percentage of average portfolio-related debt outstanding over the given period. Total company cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt and corporate debt outstanding over the given period. Interest expense includes the amortization of expenses incurred in connection with our portfolio related financing activities and corporate debt. Through the issuance of long-term securitizations, we have been able to fix a significant portion of our borrowing costs over time. The strong credit performance on our securitizations has allowed us to issue debt at attractive rates. Our portfolio related cost of funds decreased to 4.87% for the year ended December 31, 2020 from 5.23% and 5.07% for the years ended December 31, 2019 and 2018, respectively. The decrease in portfolio related cost of funds was primarily attributable to improved execution on the securitizations.
Net Interest Margin - Portfolio Related and Total Company
Portfolio related net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt as a percentage of average loans over the specified time period. Total company net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt and corporate debt as a percentage of average loans over the specified time period.
The following tables show the average outstanding balance of our loan portfolio and portfolio-related debt, together with interest income and the corresponding yield earned on our portfolio, and interest expense and the corresponding rate paid on our portfolio-related debt for the periods indicated:
Year Ended December 31, 2020
Year Ended December 31, 2019
Year Ended December 31, 2018
Interest
Average
Interest
Average
Interest
Average
Average
Income /
Yield /
Average
Income /
Yield /
Average
Income /
Yield /
($ in thousands)
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
Loan portfolio:
Loans held for sale
$
110,810
$
106,852
$
26,306
Loans held for investment
1,932,855
1,675,706
1,403,571
Total loans
$
2,043,665
$
167,322
8.19
%
$
1,782,558
$
157,531
8.84
%
$
1,429,877
$
124,722
8.72
%
Debt:
Warehouse and repurchase facilities
$
168,099
8,352
4.97
%
$
240,608
13,583
5.65
%
$
171,637
$
9,213
5.37
%
Securitizations
1,635,089
79,474
4.86
%
1,362,851
70,320
5.16
%
1,063,181
53,384
5.02
%
Total debt - portfolio related
1,803,188
87,826
4.87
%
1,603,459
83,903
5.23
%
1,234,818
62,597
5.07
%
Corporate debt
82,117
12,049
14.67
%
(3)
142,269
14,617
10.27
%
127,594
13,322
10.44
%
Total debt
$
1,885,305
$
99,875
5.30
%
$
1,745,728
$
98,520
5.64
%
$
1,362,412
$
75,919
5.57
%
Net interest spread -
portfolio related (1)
3.32
%
3.60
%
3.65
%
Net interest margin -
portfolio related
3.89
%
4.13
%
4.34
%
Net interest spread -
total company
2.89
%
(3)
3.19
%
3.15
%
Net interest margin -
total company (2)
3.30
%
(3)
3.31
%
3.41
%
(1)
Net interest spread - portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.
(2)
Net interest spread - total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.
(3)
Excluding the one-time debt issuance costs write-off of $3.5 million and prepayment penalties of $0.3 million associated with the $75.0 million repayment of our corporate debt in January 2020, the Corporate debt average rate would have been 10.08%; Net interest spread - total company would have been 3.09%; and Net interest margin - total company would have been 3.48% for the year ended December 31, 2020.
Charge-Offs
The charge-offs ratio reflects charge-offs as a percentage of average loans held for investment over the specific time period. We do not record charge-offs on our loans held for sale which are carried at the lower of cost or estimated fair value.
Pre-Tax Return on Equity and Return on Equity
Pre-tax return on equity and return on equity reflect income before income taxes and net income, respectively, as a percentage of the monthly average of members’ equity over the specified time period.
Year Ended December 31,
($ in thousands)
Income before income taxes (A)
$
23,129
$
25,398
$
19,249
Net income (B)
17,777
17,292
7,631
Monthly average balance:
Stockholders' / Members' equity (C)
216,289
146,236
134,913
Pre-tax return on equity (A)/(C)
10.7
%
17.4
%
14.3
%
Return on equity (B)/(C)
8.2
%
11.8
%
5.7
%
Components of Results of Operations
Interest Income
We accrue interest on the UPB of our loans in accordance with the individual terms and conditions of each loan, discontinuing interest and reversing previously accrued interest once a loan becomes 90 days or more past due (nonaccrual status). When a loan is placed on nonaccrual status, the accrued and unpaid interest is reversed as a reduction to interest income and accrued interest receivable. Interest income is subsequently recognized only to the extent that cash payments are received or when the loan has returned to accrual status. Payments received on nonaccrual loans are first applied to interest due, then principal. Interest accrual resumes once a borrower has made all principal and interest payments due, bringing the loan back to current status.
Interest income on loans held for investment is comprised of interest income on loans and prepayment fees less the amortization of deferred net costs related to the origination of loans. Interest income on loans held for sale is comprised of interest income earned on loans prior to their sale. The net fees and costs associated with loans held for sale are deferred as part of the carrying value of the loan and recognized as a gain or loss on the sale of the loan.
Interest Expense - Portfolio Related
Portfolio related interest expense is incurred on the debt we incur to fund our loan origination and portfolio activities and consists of our warehouse repurchase facilities and securitizations. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our securitizations and warehouse liabilities.
Net Interest Income - Portfolio Related
Portfolio related net interest income represents the difference between interest income and portfolio related interest expense.
Interest Expense - Corporate Debt
Through December 31, 2020, interest expense on corporate debt primarily consists of interest expense paid with respect to the 2019 Term Loan, as reflected on our consolidated statement of financial condition, and the related amortization of deferred debt issuance costs.
In August 2019, we redeemed the 2014 Senior Secured Notes and repurchased our outstanding Class C preferred units with the proceeds of the 2019 Term Loan, which bears interest at a rate equal to the one-month LIBOR plus 7.50% and matures in August 2024, together with cash on hand. We used $75.7 million of the net proceeds from our IPO to repay $75.0 million in outstanding principal amount on the 2019 Term Loan.
Net Interest Income
Net interest income represents the difference between portfolio related net interest income and interest expense on corporate debt.
Provision for Loan Losses
Effective January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replacing the incurred loss accounting approach with the current expected credit loss (CECL) approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loans position as of the balance sheet date, and assumptions from us.
Prior to January 1, 2020, the allowance for loan losses consists of a specific valuation allowance on those loans that were 90 days or more delinquent, in bankruptcy, or in foreclosure, and a general reserve allowance for all other loans in our existing portfolio.
Other Operating Income
Gain on Disposition of Loans. When we sell a loan held for sale, we record a gain or loss that reflects the difference between the proceeds received for the sale of the loans and their respective carrying values. The gain or loss that we ultimately realize on the sale of our loans held for sale is primarily determined by the terms of the originated loans, current market interest rates and the sales price of the loans. In addition, when we transfer a loan to REO, we record the REO at its fair value at the time of the transfer. The difference between the fair value of the real estate and the carrying value of the loan is recorded as a gain or loss. Lastly, when our acquired loans, which were purchased at a discount, pay off, we record a gain related to the recognition of the remaining purchase discount.
Unrealized Gain/(Loss) on Fair Value Loans. We have elected to account for certain purchased distressed loans at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). We regularly estimate the fair value of these loans as discussed more fully in the notes to our consolidated financial statements included elsewhere in this Annual Report. Changes in fair value are reported as a component of other operating income within our consolidated statements of income.
Other Income. Other income includes the following:
Unrealized Gains/(Losses) on Retained Interest Only Securities. As part of the proceeds received for the sale of our held for sale loans, we may receive an interest only security that we mark to fair value at the end of each period.
Fee Income. In certain situations, we collect fee income by originating loans and realizing miscellaneous fees such as late fees.
Operating Expenses
Compensation and Employee Benefits. Costs related to employee compensation, commissions and related employee benefits, such as health, retirement, and payroll taxes.
Rent and Occupancy. Costs related to occupying our locations, including rent, maintenance and property taxes.
Loan Servicing. Costs related to our third-party servicers.
Professional Fees. Costs related to professional services, such as external audits, legal fees, tax, compliance and outside consultants.
Real Estate Owned, Net. Costs related to our real estate owned, net, including gains/(losses) on disposition of REO, maintenance of REO properties, and taxes and insurance.
Other Operating Expenses. Other operating expenses consist of general and administrative costs such as, travel and entertainment, marketing, data processing, insurance and office equipment.
Provision for Income Taxes
The provision for income taxes consists of the current and deferred U.S. federal and state income taxes we expect to pay, currently and in future years, with respect to the net income for the year. The amount of the provision is derived by adjusting our reported pretax income with various permanent differences. The tax-adjusted income amount is then multiplied by the applicable federal and state income tax rates to arrive at the provision for income taxes. Prior to January 1, 2018, we had elected to be treated as a partnership for U.S. federal income tax purposes and were, therefore, not required to pay income taxes because of our treatment as a pass-through entity. Effective January 1, 2018, we changed our election to be taxed as a corporation for U.S. federal income tax purposes and are now recording provisions for income taxes.
Consolidated Results of Operations
The following table summarizes our consolidated results of operations for the periods indicated:
As of December 31,
($ in thousands)
Interest income
$
167,322
$
157,531
$
124,722
Interest expense - portfolio related
87,826
83,903
62,597
Net interest income - portfolio related
79,496
73,628
62,125
Interest expense - corporate debt
12,049
14,618
13,322
Net interest income
67,447
59,010
48,803
Provision for loan losses
5,068
1,139
Net interest income after provision for loan
losses
62,379
57,871
48,602
Other operating income
6,320
2,649
2,807
Total operating expenses
45,570
35,122
32,160
Income before income taxes
23,129
25,398
19,249
Income tax expense
5,352
8,106
11,618
Net income
$
17,777
$
17,292
$
7,631
Less deemed dividends on preferred stock (1)
$
48,955
NA
NA
Net income (loss) allocated to common shareholders
$
(31,178
)
NA
NA
Earnings (loss) per common share (1)
Basic
$
(1.55
)
NA
NA
Diluted
$
(1.55
)
NA
NA
Weighted average common shares outstanding (1)
Basic
20,087
NA
NA
Diluted
20,087
NA
NA
(1)
Not applicable prior to the Company's IPO on January 17, 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net Interest Income - Portfolio Related
Year Ended December 31,
($ in thousands)
$ Change
% Change
Interest income
$
167,322
$
157,531
$
9,791
6.2
%
Interest expense - portfolio related
87,826
83,903
3,923
4.7
%
Net interest income - portfolio related
$
79,496
$
73,628
$
5,868
8.0
%
Interest Income. Interest income increased by $9.8 million, or 6.2%, to $167.3 million during the year ended December 31, 2020, compared to $157.5 million during the year ended December 31, 2019. The increase is primarily attributable to an increase in average loans (volume), which increased $261.1 million, or 14.6%, from $1.8 billion for the year ended December 31, 2019 to $2.0 billion for the year ended December 31, 2020. The average
yield over those same periods decreased from 8.84% to 8.19% mainly due to the increase in nonperforming loans due to the COVID-19 pandemic.
The following table distinguishes between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate. The effect of changes in volume is determined by multiplying the change in average loan balance by the previous period’s average yield. The effect of rate changes is calculated by multiplying the change in average yield by the current period’s average loan balance.
Year Ended December 31, 2020 and 2019
($ in thousands)
Average
Loans
Interest
Income
Average
Yield
Year Ended December 31, 2020
$
2,043,665
$
167,322
8.19
%
Year Ended December 31, 2019
1,782,558
157,531
8.84
%
Volume variance
261,107
23,075
Rate variance
(13,284
)
(0.65
)%
Total interest income variance
$
9,791
Interest Expense - Portfolio Related. Portfolio related interest expense consists of interest incurred on our warehouse facilities and securitizations, which increased by $3.9 million, or 4.7% to $87.8 million for the year ended December 31, 2020, from $83.9 million for the year ended December 31, 2019. The increase in portfolio related interest expense in 2020 was primarily attributable to the increased average balance, partially offset by a lower cost of funds, which decreased to 4.87% for the year ended December 31, 2020 from 5.23% for the year ended December 31, 2019, and was mainly attributable to improved securitization spreads.
The following table presents information regarding the increase in portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the years ended December 31, 2020 and 2019.
Year Ended December 31, 2020 and 2019
($ in thousands)
Average
Debt (1)
Interest
Expense
Cost of
Funds
Year Ended December 31, 2020
$
1,803,188
$
87,826
4.87
%
Year Ended December 31, 2019
1,603,459
83,903
5.23
%
Volume variance
199,729
10,451
Rate variance
(6,528
)
(0.36
)%
Total interest expense variance
$
3,923
(1)
Includes securitizations and warehouse repurchase agreements.
Net Interest Income After Provision for Loan Losses
Year Ended December 31,
($ in thousands)
$ Change
% Change
Net interest income - portfolio related
$
79,496
$
73,628
$
5,868
8.0
%
Interest expense - corporate debt
12,049
14,618
(2,569
)
(17.6
)
%
Net interest income
67,447
59,010
8,437
14.3
%
Provision for loan losses
5,068
1,139
3,929
345.0
%
Net interest income after provision
for loan losses
$
62,379
$
57,871
$
4,508
7.8
%
Interest Expense - Corporate Debt. Corporate debt interest expense decreased by $2.6 million from $14.6 million for the year ended December 31, 2019 to $12.0 million for the year ended December 31, 2020 primarily due to the decrease in the corporate debt balance. The corporate debt balance was $78.0 million as of December 31, 2020 compared to $153.0 million as of December 31, 2019, as a result of a $75.0 million debt paydown in January 2020 using a portion of our IPO proceeds.
Provision for Loan Losses. Our provision for loan losses increased by approximately $3.9 million from $1.1 million during the year ended December 31, 2019 to $5.1 million during the year ended December 31, 2020,
primarily attributable to the adverse business conditions caused by the COVID-19 pandemic assumed in our loan loss model projections and the $1.2 million increase due to the one-time transfer of our held for sale loan portfolio.
Other Operating Income
The table below presents the various components of other operating income for the year ended December 31, 2020 compared to the year ended December 31, 2019. The $3.7 million net increase is primarily due to the increase in gain on disposition of loans.
Year Ended December 31,
($ in thousands)
$ Change
% Change
Gain on disposition of loans
$
7,576
$
4,410
$
3,166
71.8
%
Unrealized gain (loss) on fair value loans
(9
)
(5011.1
)%
Other expense
(1,698
)
(1,752
)
(3.1
)%
Total other operating income
$
6,320
$
2,649
$
3,671
138.6
%
Operating Expenses
Total operating expenses increased by $10.5 million, or 29.7%, to $45.6 million during the year ended December 31, 2020 from $35.1 million during the year ended December 31, 2019. This increase is primarily attributable to direct loan origination costs included in the Compensation and employee benefits and Other operating expenses that were expensed in 2020 due to the suspension of loan production from mid-March through August.
Ended December 31,
($ in thousands)
$ Change
% Change
Compensation and employee benefits
$
20,731
$
15,511
$
5,220
33.7
%
Rent and occupancy
1,743
1,531
13.8
%
Loan servicing
7,802
7,396
5.5
%
Professional fees
4,238
2,056
2,182
106.1
%
Real estate owned, net
2,656
2,647
0.3
%
Other operating expenses
8,400
5,981
2,419
40.4
%
Total operating expenses
$
45,570
$
35,122
$
10,448
29.7
%
Compensation and Employee Benefits. Compensation and employee benefits increased from $15.5 million during the year ended December 31, 2019 to $20.7 million during year ended December 31, 2020. During April through August, when loan originations were suspended and staff was working on offering existing borrowers the COVID-19 forbearance program, compensation costs for the employees were expensed when, under normal operating conditions, the same compensation costs would be deferred over new loan production. In addition, we expensed a one-time severance payment of $0.6 million in September 2020 as a result of the staff reduction caused by the COVID-19 pandemic.
Rent and Occupancy. Rent and occupancy expenses increased from $1.5 million during the year ended December 31, 2019 to $1.7 million during the year ended December 31, 2020, primarily due to the increase in office space.
Loan Servicing. Loan servicing expenses increased from $7.4 million during the year ended December 31, 2019 to $7.8 million during the year ended December 31, 2020. The $0.4 million increase during the year ended December 31, 2020 is mainly due to the increase in our loan portfolio.
Professional Fees. Professional fees increased from $2.1 million for the year ended December 31, 2019 to $4.2 million for the year ended December 31, 2020, mainly due to our growth and increased costs as a public company.
Net Expenses of Real Estate Owned. Net expenses of real estate owned remained fairly constant at $2.6 million during the year ended December 31, 2019 compared to $2.7 million during the year ended December 31, 2020, and were mainly comprised of valuation adjustment expense.
Other Operating Expenses. Other operating expenses increased from $6.0 million for the year ended December 31, 2019 to $8.4 million for the year ended December 31, 2020, mainly due to increased costs of being a public company, such as insurance, directors’ expense, and SEC filing fees.
Income Tax Expense. Income tax expense was $5.4 million for the year ended December 31, 2020, compared to $8.1 million for the year ended December 31, 2019. Our consolidated effective tax rate as a percentage of pre-tax income for 2020 was 23.1%, compared to 31.9% for 2019. The 2020 effective tax rate differed from the federal statutory rate of 21.0% principally because of state taxes. The reduction in the 2020 consolidated effective tax rate, compared to the 2019 rate, was mainly due to a change in unrecognized tax benefits in 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net Interest Income - Portfolio Related
Year Ended December 31,
($ in thousands)
$ Change
% Change
Interest income
$
157,531
$
124,722
$
32,809
26.3
%
Interest expense - portfolio related
83,903
62,597
21,306
34.0
%
Net interest income - portfolio related
$
73,628
$
62,125
$
11,503
18.5
%
Interest Income. Interest income increased by $32.8 million, or 26.3% to $157.5 million during the year ended December 31, 2019, compared to $124.7 million during the year ended December 31, 2018. The increase is attributable to a combination of an increase in average loans (volume) and an increase in average yield (rate). Average loans increased $352.7 million, or 24.7%, from $1.4 billion during the year ended December 31, 2018 to $1.8 billion during the year ended December 31, 2019. The average yield over those same periods increased from 8.72% to 8.84%.
The following table distinguishes between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate. The effect of changes in volume is determined by multiplying the change in volume (i.e., $352.7 million) by the previous period’s average rate (i.e., 8.72%). Similarly, the effect of rate changes is calculated by multiplying the change in average rate (i.e., 0.12%) by the current period’s volume (i.e., $1.8 billion).
Year Ended December 31, 2019 and 2018
($ in thousands)
Average
Loans
Interest
Income
Average
Yield
Year Ended December 31, 2019
$
1,782,558
$
157,531
8.84
%
Year Ended December 31, 2018
1,429,877
124,722
8.72
%
Volume variance
352,681
30,763
Rate variance
2,046
0.11
%
Total interest income variance
$
32,809
Interest Expense - Portfolio Related. Interest expense related to our warehouse repurchase facilities increased $4.4 million, to approximately $13.6 million during the year ended December 31, 2019, compared to approximately $9.2 million during the year ended December 31, 2018. Interest expense related to our securitizations increased by $16.9 million to approximately $70.3 million during the year ended December 31, 2019, compared to approximately $53.4 million during the year ended December 31, 2018. Our cost of funds increased to 5.23% during the year ended December 31, 2019 from 5.07% during the year ended December 31, 2018. The increase in interest expense - portfolio related was primarily due to the increase in borrowings for loan originations, as well as the impact of increased seasoning of older securitizations. As we continued to add more of the lower-cost securitizations, our interest cost for this period decreased, averaging 5.00% for the fourth quarter of 2019.
The following table presents information regarding the increase in portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate).
Year Ended December 31, 2019 and 2018
($ in thousands)
Average
Debt (1)
Interest
Expense
Cost of
Funds
Year Ended December 31, 2019
$
1,603,459
$
83,903
5.23
%
Year Ended December 31, 2018
1,234,818
62,597
5.07
%
Volume variance
368,641
18,688
Rate variance
2,618
0.16
%
Total interest expense variance
$
21,306
(1)
Includes securitizations and warehouse repurchase agreements.
(2)
Annualized.
Net Interest Income After Provision for Loan Losses
Year Ended December 31,
($ in thousands)
$ Change
% Change
Net interest income - portfolio related
$
73,628
$
62,125
$
11,503
18.5
%
Interest expense - corporate debt
14,618
13,322
1,296
9.7
%
Net interest income
59,010
48,803
10,207
20.9
%
Provision for loan losses
1,139
466.7
%
Net interest income after provision
for loan losses
$
57,871
$
48,602
$
9,269
19.1
%
Interest Expense - Corporate Debt. Corporate debt interest expense increased by $1.3 million from $13.3 million for the year ended December 31, 2018 to $14.6 million for the year ended December 31, 2019 primarily due to the increase in the corporate debt balance. In August 2019, we refinanced the 2014 Senior Secured Notes with a portion of the net proceeds from the 2019 Term Loan - a five-year $153.0 million corporate debt agreement with a new lender. The corporate debt balance was $153.0 million as of December 31, 2019 compared to $127.6 million as of December 31, 2018.
Provision for Loan Losses. Our provision for loan losses increased $0.9 million from $0.2 million during the year ended December 31, 2018 to $1.1 million during the year ended December 31, 2019 primarily due to the increase in the loan portfolio.
Other Operating Income
The table below presents the various components of other operating income for the year ended December 31, 2019 compared to the year ended December 31, 2018. The $0.2 million net decrease is primarily due to the increase in gain on disposition of loans, offset by the valuation adjustments on interest-only strips included within other (expense) income.
Year Ended December 31,
($ in thousands)
$ Change
% Change
Gain on disposition of loans
$
4,410
$
1,200
$
3,210
267.5
%
Unrealized gain (loss) on fair value loans
(9
)
(250
)
(103.7
)%
Other (expense) income
(1,752
)
1,366
(3,118
)
(228.3
)%
Total other operating income
$
2,649
$
2,807
$
(158
)
(5.6
)%
Operating Expenses
Total operating expenses increased $3.0 million, or 9.2%, to $35.1 million during the year ended December 31, 2019 from $32.2 million during the year ended December 31, 2018. This increase is primarily the result of additional personnel and loan servicing costs associated with higher loan origination volumes.
Ended December 31,
($ in thousands)
$ Change
% Change
Compensation and employee benefits
$
15,511
$
15,105
$
2.7
%
Rent and occupancy
1,531
1,320
16.0
%
Loan servicing
7,396
6,009
1,387
23.1
%
Professional fees
2,056
3,040
(984
)
(32.4
)%
Real estate owned, net
2,647
1,373
1,274
92.8
%
Other operating expenses
5,981
5,313
12.6
%
Total operating expenses
$
35,122
$
32,160
$
2,962
9.2
%
Compensation and Employee Benefits. Compensation and employee benefits increased from $15.1 million during the year ended December 31, 2018 to $15.5 million during the year ended December 31, 2019 mainly due to higher commission expenses and increased operations and sales staff to support our growth in loan origination volume.
Rent and Occupancy. Rent and occupancy expenses increased from $1.3 million during the year ended December 31, 2018 to $1.5 million during the year ended December 31, 2019 due to the increase in office space.
Loan Servicing. Loan servicing expenses increased from $6.0 million during the year ended December 31, 2018 to $7.4 million during the year ended December 31, 2019. The $1.4 million increase during 2019 is primarily related to the increase in our loan portfolio.
Professional Fees. Professional fees decreased from $3.0 million for the year ended December 31, 2018 to $2.1 million for the year ended December 31, 2019 mainly due to the timing of legal and external audit services rendered related to our public offering initiative.
Net Expenses of Real Estate Owned. Net expenses of real estate owned increased from $1.3 million during the year ended December 31, 2018 to $2.6 million during the year ended December 31, 2019, mainly due to the increase in valuation adjustment expense during the year ended December 31, 2019.
Other Operating Expenses. Other operating expenses increased from $5.3 million for the year ended December 31, 2018 to $6.0 million for the year ended December 31, 2019 mainly due to increased data processing costs related to technology investments.
Income Tax Expense. Income tax expense was $8.1 million for the year ended December 31, 2019, compared to $11.6 million for the year ended December 31, 2018. Our consolidated effective tax rate as a percentage of pre-tax income for 2019 was 31.9%, compared to 60.4% for 2018. The 2019 effective tax rate differed from the federal statutory rate of 21.0% principally because of state taxes. The 2018 effective tax rate included establishing a beginning deferred tax liability as a result of the Company electing to be taxed as a corporation.
Quarterly Results of Operations
The following table sets forth certain financial information for each completed fiscal quarter since the quarter ended March 31, 2019. The quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The following tables set for our unaudited quarterly results for the periods indicated:
Three Months Ended
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
(in thousands)
(unaudited)
Interest income
$
41,556
$
41,374
$
39,755
$
44,637
$
44,124
$
40,379
$
36,884
$
36,143
Interest expense - portfolio related
21,442
22,347
21,189
22,848
22,689
21,827
20,324
19,062
Net interest income - portfolio related
20,114
19,027
18,566
21,789
21,435
18,552
16,560
17,081
Net interest margin - portfolio related
4.07
%
3.77
%
3.54
%
4.18
%
4.32
%
4.06
%
3.91
%
4.20
%
Interest expense - corporate debt
1,900
1,913
1,894
6,342
4,070
3,842
3,353
3,353
Net interest income
18,214
17,114
16,672
15,447
17,365
14,710
13,207
13,728
Net interest margin - total company
3.68
%
3.39
%
3.18
%
2.97
%
3.50
%
3.22
%
3.12
%
3.38
%
Provision for (reversal of) loan losses
1,573
1,800
1,290
Net interest income after provision
for loan losses
17,808
15,541
14,872
14,157
17,123
14,372
12,995
13,380
Other operating income (expense)
4,691
1,349
(1,339
)
1,620
(212
)
1,721
Operating expenses
10,746
11,865
10,908
12,050
9,814
8,484
8,324
8,500
Income before income taxes
11,753
5,025
2,625
3,727
8,142
5,676
4,979
6,601
Income tax expense
2,177
1,544
1,148
2,960
1,796
1,444
1,906
Net income
$
9,576
$
3,481
$
2,141
$
2,579
$
5,182
$
3,880
$
3,535
$
4,695
Liquidity and Capital Resources
Sources and Uses of Liquidity
We fund our lending activities primarily through borrowings under our warehouse repurchase facilities, securitizations, other corporate-level debt, equity and debt securities, and net cash provided by operating activities to manage our business. We use cash to originate and acquire investor real estate loans, repay principal and interest on our borrowings, fund our operations and meet other general business needs.
Cash and Cash Equivalents
As of December 31, 2020, we had liquidity of approximately $14.5 million in cash and eligible collateral borrowings under our warehouse facilities. Cash comprised $13.3 million of our liquidity and eligible collateral borrowings under our warehouse facilities comprised $1.2 million of our liquidity. As of December 31, 2020, we had $76.5 million of uncommitted available capacity under our warehouse facilities.
As of December 31, 2019, we had liquidity of approximately $26.4 million in cash and eligible collateral borrowings under our warehouse facilities. Cash comprised $21.5 million of our liquidity and eligible collateral borrowings under our warehouse facilities comprised $4.9 million of our liquidity. As of December 31, 2019, we had $80.3 million of uncommitted available capacity under our warehouse facilities.
During the year ended December 31, 2020, we used approximately $7.3 million of net cash and cash equivalents from operations, investing and financing activities. During the year ended December 31, 2019, we generated approximately $10.9 million of net cash and cash equivalents from operations, investing and financing activities.
Warehouse Facilities
As of December 31, 2020, we had two warehouse facilities to support our loan origination and acquisition activities. One agreement is a one-year warehouse repurchase facility and the other agreement is a three-year warehouse facility. Under both agreements, the borrowings are collateralized by pools of primarily performing loans, bearing interest at one-month LIBOR with a 0.75% LIBOR floor plus a margin that ranges from 2.75% to 3.50%. As of December 31, 2020, these two agreements had an aggregated maximum borrowing capacity of $150.0 million. Borrowings under these facilities as of December 31, 2020 were $73.5 million. We added a third $200 million committed, non-mark-to-market warehouse facility in January 2021.
As of December 31, 2019, we had three warehouse facilities to support our loan origination and acquisition activities. Two agreements were one-year warehouse repurchase facilities and the other agreement was a three-year warehouse facility. Under all three agreements, the borrowings were collateralized by pools of primarily performing loans, bearing interest at one-month LIBOR plus a margin that ranges from 2.75% to 3.50%. As of December 31, 2019, these three agreements had an aggregated maximum borrowing capacity of $500.0 million. Borrowings under these facilities as of December 31, 2019 were $419.7 million.
All warehouse facilities fund less than 100% of the principal balance of the mortgage loans we own requiring us to use working capital to fund the remaining portion. We may need to use additional working capital if loans become delinquent, because the amount permitted to be financed by the facilities may change based on the delinquency performance of the pledged collateral.
All borrower payments on loans financed under the warehouse facilities are segregated into pledged accounts with the loan servicer. All principal amounts in excess of the interest due are applied to reduce the outstanding borrowings under the warehouse facilities, which then allows us to draw additional funds on a revolving basis under the facilities. The revolving warehouse facilities also contain customary covenants, including but not limited to financial covenants that require us to maintain a minimum net worth, a maximum debt-to-net worth ratio and a ratio of a minimum earnings before interest, taxes, depreciation and amortization to interest expense. If we fail to meet any of the covenants or otherwise default under the facilities, the lenders have the right to terminate their facility and require immediate repayment, which may require us to sell our loans at less than optimal terms. As of December 31, 2020, we were in compliance with these covenants.
Securitizations
From May 2011 through December 2020, we have completed fifteen securitizations of $3.4 billion of investor real estate loans, issuing $3.1 billion in principal amount of securities to third parties through fifteen respective transactions. All borrower payments are segregated into remittance accounts at the primary servicer and remitted to the trustee of each trust monthly. We are the sole beneficial interest holder of the applicable trusts, which are variable interest entities included in our consolidated financial statements. The transactions are accounted for as a secured borrowings under U.S. GAAP. Tables summarizing the investor real estate loans securitized, securities issued, securities retained by the Company at the time of the securitization, and as of December 31, 2020 and 2019, the stated maturity for each securitization, the outstanding bond balances, and the weighted average rate on the securities for the Trusts as of December 31, 2020 and 2019, are included in Item 15. Exhibits, Financial Statement Schedules. The securities are callable by us when the stated principal balance is less than a certain percentage, ranging from 5%-30%, of the original stated principal balance of loans at issuance. As a result, the actual maturity date of the securities issued will likely be earlier than their respective stated maturity date.
Our intent is to use the proceeds from the issuance of new securities primarily to repay our warehouse borrowings and originate new investor real estate loans in accordance with our underwriting guidelines, as well as for general corporate purposes. Our financing sources may include borrowings in the form of additional bank credit facilities (including term loans and revolving credit facilities), repurchase agreements, warehouse repurchase facilities and other sources of private financing. We also plan to continue using securitization as long-term financing for our portfolio, and we do not plan to structure any securitizations as sales or utilize off-balance-sheet vehicles. We believe any financing of assets and/or securitizations we may undertake will be sufficient to fund our working capital requirements.
Cash Flows
The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities as of the periods indicated:
Year Ended December 31,
($ in thousands)
Cash provided by (used in):
Operating activities
$
54,892
$
(105,336
)
$
(72,485
)
Investing activities
87,739
(305,934
)
(270,196
)
Financing activities
(149,890
)
422,145
343,631
Net change in cash, cash equivalents, and restricted
cash
$
(7,259
)
$
10,875
$
Operating Activities
Cash flows from operating activities primarily includes net income adjusted for (1) cash used for origination of held for sale loans and the related cash proceeds from the sales of such loans, (2) non-cash items including depreciation, provision for loan loss, discount accretion, and valuation changes, and (3) changes in the balances of operating assets and liabilities.
For the year ended December 31, 2020, our net cash provided by operating activities of $54.9 million consisted mainly of $96.1 million cash used to originate held for sale loans, offset by $79.6 million proceeds, net of repurchases, from sale of loans held for sale, $19.4 million in repayments on loans held for sale, and net income of $17.8 million.
For the year ended December 31, 2019, our net cash used in operating activities of $105.3 million consisted mainly of $336.9 million cash used to originate held for sale loans, offset by $179.6 million proceeds, net of repurchases, from sale of loans held for sale, $25.1 million in repayments on loans held for sale, and net income of $17.3 million.
For the year ended December 31, 2018, our net cash used in operating activities of $72.5 million consisted mainly $148.8 million cash used to originate held for sale loans, offset by $72.9 million proceeds, net of repurchases, from sale of loans held for sale, $3.5 million in repayments on loans held for sale, and net income of $7.6 million. Changes in operating assets and liabilities resulted in cash used of $18.9 million, mainly as a result of a $16.2 million increase in interest receivable due to portfolio growth.
Investing Activities
For the year ended December 31, 2020, our net cash provided by investing activities of $87.7 million consisted mainly of $343.6 million in cash used to originate held for investment loans, offset by $342.0 million in cash received in payments on held for investment loans and by $99.6 million of proceeds from sales of loans originally classified as held for investment. We used $8.7 million in cash for escrow and corporate advances on loans held in the portfolio. We also received cash of $7.5 million from the sale of REO.
For the year ended December 31, 2019, our net cash used in investing activities of $305.9 million consisted mainly of $682.9 million in cash used to originate held for investment loans, offset by $379.3 million in cash received in payments on held for investment loans. We used cash to purchase $9.3 million of loans for investment. We also received cash of $4.5 million from proceeds of the sale of REO.
For the year ended December 31, 2018, our net cash used in investing activities of $270.2 million consisted mainly of $595.7 million in cash used to originate held for investment loans, less $334.7 million in cash received in payments on held for investment loans. We also received cash of $6.2 million from proceeds of the sale of REO.
Financing Activities
For the year ended December 31, 2020, our net cash used in financing activities of $149.9 million consisted mainly of $420.2 million and $536.7 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was offset by payments we made of $766.7 million and $398.3 million on our warehouse repurchase facilities and securitizations issued, respectively. We received cash
proceeds from the sale of our common stock in the IPO of $100.8 million, a portion of which we used to repay $75.0 million of principal on our corporate debt. We also received cash of $41.0 million in net proceeds from the issuance of preferred stocks. We used cash of $8.9 million for debt issuance costs.
For the year ended December 31, 2019, our net cash provided by financing activities of $422.1 million consisted mainly of $961.7 million and $608.1 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $756.0 million and $371.4 million on our warehouse repurchase facilities and securitizations issued, respectively. The 2019 Term Loan generated $153.0 million of cash, of which $127.6 million was used to redeem the 2014 Secured Notes, and $27.7 million was used to repurchase the Class C preferred units as return of capital. We used cash of $17.9 million for debt issuance costs.
For the year ended December 31, 2018, our net cash provided by financing activities of $343.6 million consisted mainly of $658.5 million and $535.5 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $527.9 million and $314.7 million on our warehouse repurchase facilities and securitizations issued, respectively. We used cash of $7.8 million for debt issuance costs.
April 2020 Preferred Stocks and Warrants
On April 5, 2020, we sold 45,000 shares of Preferred Stock and Warrants to purchase 3,013,125 shares of our common stock in a private placement to two of our largest stockholders. These offerings resulted in aggregate gross proceeds of $45.0 million, before expenses payable by us of approximately $1.0 million. The proceeds will be used for general corporate purposes and to strengthen our liquidity position during this current economic crisis.
Beginning on November 28, 2024, each holder of Preferred Stock has the option to cause us to repurchase all or a portion of such holder’s shares of Preferred Stock, for an amount in cash equal to the liquidation preference. We also have an obligation to repurchase the Preferred Stock for cash at a price per share equal to the liquidation preference in the event of a change of control (as defined in the certificate of designation governing the Preferred Stock). The liquidation preference is equal to the greater of (i) $2,000 per share from April 5, 2020 through October 5, 2022, which amount increases ratably to $3,000 per share between October 6, 2022 and November 28, 2024 and to $3,000 per share from and after November 28, 2024 and (ii) the amount such Preferred Stock holder would have received if the Preferred Stock had converted into common stock immediately prior to a liquidation.
We may also force a conversion of the Preferred Stock into shares of our common stock following October 7, 2021 if our shares of common stock exceed a volume weighted average trading price of $7.70 for a specified period of time.
The Warrants are exercisable at the warrantholder’s option at any time and from time to time, in whole or in part, until April 5, 2025 at an exercise price of $2.96 per share of common stock with respect to 2,008,750 of the Warrants, and at an exercise price of $4.94 per share of common stock with respect to 1,004,374 of the Warrants.
Contractual Obligations and Commitments
In August 2019, we entered into a five-year $153.0 million corporate debt agreement. This 2019 Term Loan bore interest equal to one-month LIBOR plus 7.50% and was to mature in August 2024. A portion of the net proceeds from the 2019 Term Loan was used to redeem the 2014 Senior Secured Notes. Another portion of the net proceeds from 2019 Term Loan, together with cash on hand, was used to repurchase our outstanding Class C preferred units. As of December 31, 2020 and 2019, including paid-in-kind interest, the aggregate outstanding principal amount of the 2014 Senior Secured Notes was zero and $127.6 million, respectively. In January 2020, we paid down $75.0 million of the 2019 Term Loan with a portion of our IPO proceeds. As of December 31, 2020, the outstanding principal amount of the 2019 Term Loan was $78.0 million. On February 5, 2021, we entered into a five-year $175.0 million syndicated corporate debt agreement (“2021 Term Loan”). The 2021 Term Loan under this agreement bears interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. The 2021 Term Loan provided an initial $125.0 million of funds to us and contains a delayed draw feature allowing an additional draw of $50.0 million by February 5, 2022 provided we meet certain conditions. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the outstanding 2019 Term Loan. The remaining portion of the net proceeds from the 2021 Term Loan will be used for loan originations and general corporate purposes.
Velocity Commercial Capital, LLC is the borrower of the 2021 Term Loan, which is secured by substantially all of the borrower’s non-warehoused assets, with a guarantee from Velocity Financial, Inc., formerly Velocity Financial LLC, that is secured by the equity interests of the borrower. The syndicated corporate debt agreement contains customary affirmative and negative covenants, including financial maintenance covenants and limitations on dividends by the borrower.
As of December 31, 2020, we maintained warehouse facilities to finance our investor real estate loans and had approximately $76.2 million in outstanding borrowings with $76.5 million of available capacity under our warehouse and repurchase facilities.
The following table illustrates our contractual obligations existing as of December 31, 2020:
January 1, 2021 -
January 1, 2023 -
($ in thousands)
December 31, 2022
December 31, 2024
Thereafter
Total
Warehouse
facilities
$
76,202
$
-
$
-
$
76,202
(1)
Notes payable (corporate
debt)
1,560
76,440
-
78,000
(2)
Leases payments under
noncancelable operating
leases
3,184
2,460
5,699
Total
$
80,946
$
78,900
$
$
159,901
(1)
Amount represents gross warehouse borrowing. Balance of $75.9 million in the consolidated statement of financial condition as of December 31, 2020 is net of $0.3 million debt issuance costs.
(2)
In August 2019, we entered into a five-year $153.0 million corporate debt agreement and a portion of the proceeds of the 2019 Term Loans under this agreement were used to redeem the then outstanding corporate debt. The 2019 Term Loan mature in August 2024 and are subject to a 0.25% quarterly amortization beginning on the fifth full fiscal quarter after August 2019. In January 2020, we repaid $75.0 million of our existing corporate debt with a portion of the net proceeds from our IPO.
Off-Balance-Sheet Arrangements
At no time have we maintained any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance, or special-purpose or variable interest entities, established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. Further, we have never guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13 or ASC 326, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Under the new current expected credit loss (“CECL”) model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. This standard also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with earlier adoption permitted. Entities are required to use a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified retrospective approach). We adopted the provision of ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Upon adoption, we recognized an after-tax effect reduction to retained earnings of $0.1 million.
ASU 2020-03, "Codification Improvements to Financial Instruments" ("ASU 2020-03"), revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and the adoption of this standard had no material impact on our consolidated financial statements.
Effective January 1, 2020, the Company adopted the provisions of ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements" which add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. The adoption of this standard had no impact on our consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplemental Data
Our consolidated financial statements and the notes related to the financial statements, together with the independent registered public accounting firm’s report thereon, are included in Item 15. Exhibits, Financial Statements and Schedules and are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Annual Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the Company. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Our management, with the participation of its Chief Executive Officer and Chief Financial Officer, assessed our internal control over financial reporting as of December 31, 2020, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2020.
Remediation of Previously Reported Material Weaknesses
In reviewing the accounting for a certain transaction we completed in January 2018, as part of our 2018 election to be treated as a corporation for U.S. federal and state income tax purposes, our management identified a deficiency in the effectiveness of a control intended to properly document and review relevant facts and apply the appropriate tax accounting under U.S. GAAP, which impacted the beginning of year deferred tax asset and income tax benefit accounts and related disclosures. Management concluded that it had not implemented an effective control structure to prevent or detect the material misstatements in calculating the beginning of year deferred tax position. In 2019, we implemented a plan to remediate this material weakness by contracting with a nationally recognized accounting firm to have experienced tax personnel supplement and train our current accounting team. As a result, additional internal controls over our income tax processes have been designed and implemented. During the fourth quarter of 2020 and early 2021, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, Management has concluded that the material weakness has been remediated as of December 31, 2020.
We cannot assure you that material weaknesses or significant deficiencies will not occur in the future and that we will be able to remediate such weaknesses or deficiencies in a timely manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.
Attestation Report of Registered Public Accounting Firm
As a non-accelerated filer, we are not required to provide an attestation report of our registered public accounting firm with respect to our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Other than changes to resolve the material weakness described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the year ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Information with respect to this item will be contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders, which is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Information with respect to this item will be contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders, which is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to this item will be contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders, which is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to this item will be contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders, which is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
Information with respect to this item will be contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders, which is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a)
The following documents are filed as part of this Annual Report:
(1)
Financial Statements
The financial statements filed as part of this Annual Report are included in Part II, Item 8 of this Annual Report.
(2)
Financial Statement Schedules
Financial statement schedules have been omitted in this Annual Report because they are not applicable, not required under the instructions or the information requested is set forth in the financial statements or related notes thereto.
(3)
List of Exhibits required by Item 601 of Regulation S-K
Incorporated by Reference
Exhibit
Number
Exhibit Title
Form
File No.
Exhibit
Filing Date
3.1
Certificate of Conversion
8-K
001-39183
3.1
1/22/2020
3.2
Certificate of Incorporation of Velocity Financial, Inc.
8-K
001-39183
3.2
1/22/2020
3.3
Bylaws of Velocity Financial, Inc.
8-K
001-39183
3.3
1/22/2020
3.4
Certificate of Designation of Series A Convertible Preferred Stock of Velocity Financial, Inc.
8-K
001-39183
3.1
4/07/2020
4.1
Form of Stock Certificate for Common Stock
S-1
333-234250
4.1
10/18/2019
4.2
Form of Warrant to Purchase Common Stock
8-K
001-39183
4.1
4/07/2020
4.3
Description of the Registrant’s Securities
10-K
001-39183
4.3
4/07/2020
10.1
Stockholders Agreement dated as of January 16, 2020
10-K
001-39183
10.1
4/7/2020
10.2
Registration Rights Agreement dated as of January 16, 2020
10-K
001-39183
10.2
4/07/2020
10.3
Registration Rights Agreement dated as of April 7, 2020
8-K
333-234250
10.1
4/07/2020
10.4
Securities Purchase Agreement among Velocity Financial, Inc. and the Purchasers Party thereto dated April 5, 2020
8-K
001-39183
10.1
4/06/2020
10.5
Velocity Financial, Inc. 2020 Omnibus Incentive Plan*
8-K
001-39183
10.1
1/22/2020
10.6
Form of Nonqualified Stock Option Award Notice and Agreement under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.6
1/6/2020
10.7
Form of Nonqualified Stock Option Award Notice and Agreement (Director Grant-IPO) under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.7
1/6/2020
10.8
Form of Nonqualified Stock Option Award Notice and Agreement (Executive Officer Grant-IPO) under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.8
1/6/2020
10.9
Form of Restricted Stock Unit Grant and Agreement (Director Grant) under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.9
1/6/2020
10.10
Form of Restricted Stock Unit Grant and Agreement (Standard Grant) under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.10
1/6/2020
10.11
Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan*
S-1/A
333-234250
10.11
1/6/2020
10.12
Credit Agreement among Velocity Financial, LLC, Velocity Commercial Capital, LLC and Owl Rock Capital Corporation, dated August 29, 2019
S-1
333-234250
10.35
10/18/2019
10.13
Amendment No. 1 to the Credit Agreement among Velocity Financial, LLC, Velocity Commercial Capital, LLC and Owl Rock Capital Corporation, dated as of October 15, 2019
S-1
333-234250
10.36
10/18/2019
10.14
Amendment No. 2 to the Credit Agreement among Velocity Financial, LLC, Velocity Commercial Capital, LLC and Owl Rock Capital Corporation, dated as of February 5, 2020
10-K
001-39183
10.39(b)
4/7/2020
10.15
Form of Officer and Director Indemnity Agreement
S-1/A
333-234250
10.37
11/6/2019
21.1
List of Subsidiaries of the Registrant
23.1
Consent of KPMG LLP
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
32.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Management contract or compensatory plan or arrangement.
+
This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.