Velocity Financial, Inc. - Quarter Report: 2022 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _____

Commission File Number: 001-39183

Velocity Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	46-0659719
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
30699 Russell Ranch Road, Suite 295 Westlake Village, California	91362
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (818) 532-3700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

VEL

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 1, 2022, the registrant had 32,384,645 shares of common stock outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Changes in Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48

SIGNATURES		50

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

VELOCITY FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except par value amounts)


	March 31, 2022			December 31, 2021
	(Unaudited)
ASSETS
Cash and cash equivalents	$	36,629		$	35,965
Restricted cash		10,837			11,639
Loans held for sale, net		77,503			87,908
Loans held for investment, net		2,828,302			2,527,564
Loans held for investment, at fair value		1,352			1,359
Total loans, net		2,907,157			2,616,831
Accrued interest receivables		14,169			13,159
Receivables due from servicers		78,278			74,330
Other receivables		4,527			1,812
Real estate owned, net		16,177			17,557
Property and equipment, net		3,690			3,830
Deferred tax asset		16,477			16,604
Mortgage servicing rights, at fair value		7,661			7,152
Goodwill		6,775			6,775
Other assets		7,345			6,824
Total assets	$	3,109,722		$	2,812,478
LIABILITIES
Accounts payable and accrued expenses	$	92,768		$	92,195
Secured financing, net		208,956			162,845
Securitizations, net		2,035,374			1,911,879
Warehouse and repurchase facilities, net		424,692			301,069
Total liabilities		2,761,790			2,467,988
Commitments and contingencies
EQUITY
Common stock ($0.01 par value, 100,000,000 shares authorized at March 31, 2022 and December 31, 2021; 32,384,645 and 32,293,042 shares issued and outstanding, respectively)		325			323
Treasury stock, at cost (33,647 common shares at March 31, 2022 and none December 31, 2021)		(458	)		—
Additional paid-in capital		297,031			296,364
Retained earnings		47,543			44,422
Total Velocity Financial Inc. stockholders' equity		344,441			341,109
Noncontrolling interest in subsidiary		3,491			3,381
Total equity		347,932			344,490
Total liabilities and equity	$	3,109,722		$	2,812,478

The following table represents the assets and liabilities of our consolidated variable interest entities as follows:


ASSETS
Restricted cash	$	4,014	$	4,713
Loans held for investment, net		2,335,880		2,202,010
Accrued interest and other receivables		87,451		83,493
Real estate owned, net		11,148		9,861
Other assets		11		9
Total assets	$	2,438,504	$	2,300,086
LIABILITIES
Accounts payable and accrued expenses	$	45,454	$	45,705
Securities issued		2,035,374		1,911,879
Total liabilities	$	2,080,828	$	1,957,584

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2022			2021
Interest income	$	52,049		$	40,707
Interest expense — portfolio related		23,556			20,832
Net interest income — portfolio related		28,493			19,875
Interest expense — corporate debt		17,140			7,350
Net interest income		11,353			12,525
Provision for loan losses		730			105
Net interest income after provision for loan losses		10,623			12,420
Other operating income
Gain on disposition of loans		4,540			2,839
Unrealized gain (loss) on fair value loans		11			(2	)
Other income (expense)		1,097			(36	)
Total other operating income		5,648			2,801
Operating expenses
Compensation and employee benefits		5,323			5,186
Rent and occupancy		442			463
Loan servicing		2,450			1,867
Professional fees		1,362			533
Real estate owned, net		(175	)		509
Other operating expenses		2,848			2,059
Total operating expenses		12,250			10,617
Income before income taxes		4,021			4,604
Income tax expense		790			1,208
Net income		3,231			3,396
Net income attributable to noncontrolling interest		110			—
Net income attributable to Velocity Financial, Inc.		3,121			3,396
Less undistributed earnings attributable to participating securities		48			1,281
Net earnings attributable to common stockholders	$	3,073		$	2,115
Earnings per common share
Basic	$	0.10		$	0.11
Diluted	$	0.09		$	0.10
Weighted average common shares outstanding
Basic		31,892			20,087
Diluted		34,204			33,407

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands)

(Unaudited)


	Common Stock								Treasury Stock
	Shares		Par Value		Additional Paid-in Capital		Retained Earnings		Shares			Amount			Total Stockholders' Equity			Noncontrolling Interest		Total Equity
Balance – December 31, 2020		20,087,494	$	201	$	204,190	$	15,198		—		$	—		$	219,589			—	$	219,589
Restricted stock awarded and earned stock compensation		480,000		5		226		—		—			—			231			—		231
Stock-based compensation - Options		—		—		254		—		—			—			254			—		254
Net income		—		—		—		3,396		—			—			3,396			—		3,396
Balance – March 31, 2021		20,567,494	$	206	$	204,670	$	18,594		—		$	—		$	223,470			—	$	223,470

Balance – December 31, 2021		32,293,042	$	323	$	296,364	$	44,422		—		$	—		$	341,109		$	3,381	$	344,490
Purchase of treasury stock, at cost		—		—		—		—		(33,647	)		(458	)		(458	)		—		(458	)
Restricted stock awarded and earned stock compensation		125,250		2		416		—		—			—			418			—		418
Stock-based compensation - Options		—		—		251		—		—			—			251			—		251
Net income		—		—		—		3,121		—			—			3,121			110		3,231
Balance – March 31, 2022		32,418,292	$	325	$	297,031	$	47,543		(33,647	)	$	(458	)	$	344,441		$	3,491	$	347,932

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	Three Months Ended March 31,
	2022			2021
	(Unaudited)
Cash flows from operating activities:
Net income including noncontrolling interest	$	3,231		$	3,396
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		206			301
Amortization of right-of-use assets		330			367
Provision for loan losses		730			105
Provision for repurchase of loans		228			—
Purchase of held for sale loans		—			(1,950	)
Repayments on loans held for sale		—			(121	)
Net accretion of discount on purchased loans and deferred loan origination costs		1,927			1,368
Provision for uncollectible borrower advances		50			261
Gain on disposition of loans		(4,254	)		(2,592	)
Real estate acquired through foreclosure in excess of recorded investment		(286	)		(247	)
Amortization of debt issuance discount and costs		12,092			6,403
Loss on disposal of property and equipment		—			1
Change in valuation of real estate owned		(235	)		435
Change in valuation of fair value loans		(10	)		2
Change in valuation of mortgage servicing rights		(510	)		—
Change in valuation of held for sale loans		—			(17	)
Gain on sale of real estate owned		(320	)		(188	)
Stock-based compensation		669			485
Deferred tax expense (benefit)		127			(2,592	)
(Increase) decrease in operating assets and liabilities:
Accrued interest and other receivables		(1,870	)		2,800
Other assets		(858	)		(930	)
Accounts payable and accrued expenses		589			3,137
Net cash provided by operating activities		11,836			10,424
Cash flows from investing activities:
Purchase of loans held for investment		(4,629	)		—
Origination of loans held for investment		(585,713	)		(236,484	)
Payoffs of loans held for investment and loans at fair value		146,217			124,189
Proceeds from sales of loans originally classified as held for investment		147,340			57,924
Proceeds from sale of real estate owned		4,630			2,942
Capitalized real estate owned improvements		—			(10	)
Change in advances		(193	)		(548	)
Change in impounds and deposits		(1,244	)		(1,620	)
Purchase of property and equipment		(66	)		(49	)
Net cash used in investing activities		(293,658	)		(53,656	)
Cash flows from financing activities:
Warehouse repurchase facilities advances		607,760			196,633
Warehouse repurchase facilities repayments		(483,600	)		(68,261	)
Proceeds from secured financing		215,000			140,000
Repayment of secured financing		(170,844	)		(78,875	)
Proceeds of securitizations, net		268,967			—
Repayment of securitizations		(145,057	)		(128,357	)
Purchase of treasury stock		(458	)		—
Debt issuance costs		(10,084	)		(10,959	)
Net cash provided by financing activities		281,684			50,181
Net (decrease) increase in cash, cash equivalents, and restricted cash		(138	)		6,949
Cash, cash equivalents, and restricted cash at beginning of period		47,604			20,293
Cash, cash equivalents, and restricted cash at end of period	$	47,466		$	27,242

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	Three Months Ended March 31,
	2022		2021
	(Unaudited)
Supplemental cash flow information:
Cash paid during the period for interest	$	27,316	$	21,594
Cash paid during the period for income taxes		277		100
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to held for sale		149,379		44,892
Transfer of loans held for investment to real estate owned		2,408		1,652
Transfer of accrued interest to loans held for investment		466		618
Discount on issuance of securitizations		4,627		—
Transfer of loans held for sale to held for investment		13,975		1,747

See accompanying Notes to Consolidated Financial Statements

VELOCITY FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Organization and Description of Business

Velocity Financial, LLC (VF or the Company) was a Delaware limited liability company formed on July 9, 2012 for the purpose of acquiring all membership units in Velocity Commercial Capital, LLC (VCC). On January 16, 2020, Velocity Financial, LLC converted from a Delaware limited liability company to a Delaware corporation and changed its name to Velocity Financial, Inc. Upon completion of the conversion, Velocity Financial, LLC’s Class A equity units of 97,513,533 and Class D equity units of 60,193,989 were converted to 11,749,994 shares of Velocity Financial, Inc. common stock. On January 22, 2020, the Company completed its initial public offering of 7,250,000 shares of common stock at a price to the public of $13.00 per share. On January 28, 2020, the Company completed the sale of an additional 1,087,500 shares of its common stock, representing the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $13.00 per share. The Company’s stock trades on The New York Stock Exchange under the symbol “VEL”.

VCC, a California LLC formed on June 2, 2004, is a mortgage lender that originates and acquires commercial investor real estate loans, providing capital to the investor real estate loan market. The Company is licensed as a California Finance Lender and, as such, is required to maintain a minimum net worth of $250 thousand. The Company does not believe there is any potential risk of not being able to meet this regulatory requirement. The Company uses its equity capital and borrowed funds to originate and invest in investor real estate loans and seeks to generate income based primarily on the difference between the yield on its investor real estate loan portfolio and the cost of its borrowings. The Company may also sell loans from time to time. The Company does not originate or acquire investments outside of the United States of America.

The Company, through its wholly owned subsidiaries, is the sole beneficial owner of the Velocity Commercial Capital Loan Trusts, from the 2015-1 Trust through and including the 2022-1 Trust, all of which are New York common law trusts, with the exception of VCC 2020-MC1 Trust which is a Delaware statutory trust. The Trusts are bankruptcy remote, variable interest entities (VIE) formed for the purpose of providing secured borrowings to the Company and are consolidated with the accounts of the Company.

On December 28, 2021, the Company acquired an 80% ownership interest in Century Health & Housing Capital, LLC (“Century”), paying a cash purchase price of $12.8 million. Century is a licensed “Ginnie Mae” issuer/servicer that provides government-insured Federal Housing Administration (FHA) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century is a consolidated subsidiary of the Company as of completion of the acquisition.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited Consolidated Financial Statements as of and for the three months ended March 31, 2022 and 2021 have been prepared on a basis that is substantially consistent with the accounting principles applied to the Company’s audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter for the full year. The interim financial information should be read in conjunction with the Company’s audited Consolidated Financial Statements.

(a)

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of consolidated income and expenses during the reporting period.

(b)

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 — Basis of Presentation and Summary of Significant Accounting Policies, of its audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission.

There have been no significant changes to the Company’s significant accounting policies as described in its 2021 Annual Report.

(c)

Principles of Consolidation

The principles of consolidation require management to determine and reassess the requirement to consolidate VIEs each reporting period, and therefore, the determination may change based on new facts and circumstances pertaining to each VIE. This could result in a material impact to the Company’s consolidated financial statements in subsequent reporting periods.

The Company consolidates the assets, liabilities, and remainder interests of the Trusts as management determined that VCC is the primary beneficiary of these entities. The Company’s ongoing asset management responsibilities provide the Company with the power to direct the activities that most significantly impact the VIE’s economic performance, and the remainder interests provide the Company with the right to receive benefits and the obligation to absorb losses, limited to its investment in the remainder interest of the Trusts.

The consolidated financial statements as of March 31, 2022 and December 31, 2021 include only those assets, liabilities, and results of operations related to the business of the Company, its subsidiaries, and VIEs.

Note 3 — Current Accounting Developments

(a)

Recently Issued Accounting Standards

ASU 2022-2, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this ASU eliminate the recognition and measurement guidance for troubled debt restructuring by Creditors, and require enhanced disclosures for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-4 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables. This ASU is effective January 1, 2023 for the Company. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

(b) Treasury Shares

The Company separately presents treasury shares, which represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. Treasury shares are carried at cost.

Note 4 — Cash, Cash Equivalents, and Restricted Cash

The Company is required to hold cash for potential future advances due to certain borrowers. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets to the total of the same such amounts shown in the consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022		2021
Cash and cash equivalents	$	36,629	$	20,434
Restricted cash		10,837		6,808
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	47,466	$	27,242

Note 5 — Loans Held for Sale, Net

The following table summarizes loans held for sale as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022		December 31, 2021
Unpaid principal balance	$	76,869	$	87,422
Valuation adjustments		—		—
Deferred loan origination costs		634		486
Ending balance	$	77,503	$	87,908

Note 6 — Loans Held for Investment and Loans Held for Investment at Fair Value

The following tables summarize loans held for investment as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	2,798,632		$	1,315	$	2,799,947
Valuation adjustments on FVO loans		—			37		37
Deferred loan origination costs		34,334			—		34,334
		2,832,966			1,352		2,834,318
Allowance for loan losses		(4,664	)		—		(4,664	)
Total loans held for investment and loans held for investment at fair value, net	$	2,828,302		$	1,352	$	2,829,654


	December 31, 2021
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	2,498,466		$	1,332	$	2,499,798
Valuation adjustments on FVO loans		—			27		27
Deferred loan origination costs		33,360			—		33,360
		2,531,826			1,359		2,533,185
Allowance for loan losses		(4,262	)		—		(4,262	)
Total loans held for investment and loans held for investment at fair value, net	$	2,527,564		$	1,359	$	2,528,923

The following tables summarize the Unpaid Principal Balance (“UPB”) and amortized cost basis of loans in the Company's COVID-19 forbearance program for the three months ended March 31, 2022 and the year ended December 31, 2021 ($ in thousands):


	March 31, 2022
	UPB			%	Amortized Cost			%
Beginning balance	$	292,429			$	295,990
Additions		—				—
Foreclosures		—				—
Repayments		(31,720	)			(32,130	)
Ending balance	$	260,709			$	263,860

Performing/Accruing	$	206,495		79.2%	$	209,033		79.2%

Nonperforming/Nonaccrual	$	54,214		20.8%	$	54,827		20.8%


	December 31, 2021
	UPB			%	Amortized Cost			%
Beginning balance	$	392,073			$	396,918
Additions		2,616				2,615
Foreclosures		(402	)			(408	)
Repayments		(101,858	)			(103,135	)
Ending balance	$	292,429			$	295,990

Performing/Accruing	$	233,307		79.8%	$	236,076		79.8%

Nonperforming/Nonaccrual	$	59,122		20.2%	$	59,914		20.2%

Since April 1, 2020, the inception of the COVID-19 forbearance program, the Company has modified $408.7 million in UPB of loans, which includes capitalized interest of $10.5 million. As of March 31, 2022, $167.4 million in UPB of modified loans has been paid down, which includes $3.3 million of capitalized interest received and we have not forgiven any capitalized interest.

Approximately 79.2% and 79.8% of the COVID forbearance loans in UPB were performing, and 20.8% and 20.2% were on nonaccrual status as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, the gross unpaid principal balance of loans held for investment pledged as collateral for the Company’s warehouse facilities, and securitizations issued were as follows (in thousands):


	March 31, 2022		December 31, 2021
The 2013 repurchase agreement	$	249,172	$	202,511
The 2021 repurchase agreement		214,612		114,072
The Bank credit agreement		47,153		30,959
The 2021 term repurchase agreement		42,151		53,217
The July 2021 term repurchase agreement		2,873		—
Total pledged loans	$	555,961	$	400,759

2015-1 Trust		29,198		31,931
2016-1 Trust		48,686		52,623
2017-2 Trust		84,592		94,809
2018-1 Trust		63,955		71,051
2018-2 Trust		138,776		154,974
2019-1 Trust		127,360		144,727
2019-2 Trust		122,774		132,358
2019-3 Trust		98,414		103,266
2020-1 Trust		174,770		189,547
2020-2 Trust		90,335		98,403
2020-MC1 Trust		115,709		134,957
2021-1 Trust		242,200		249,396
2021-2 Trust		192,130		198,039
2021-3 Trust		198,949		202,138
2021-4 Trust		302,541		314,547
2022-1 Trust		274,402		—
Total	$	2,304,791	$	2,172,766

(a) Nonaccrual Loans

The following tables present the amortized cost basis, or recorded investment, of the Company’s loans held for investment that were nonperforming and on nonaccrual status as of March 31, 2022 and December 31, 2021. There were no loans accruing interest that were greater than 90 days past due as of March 31, 2022 and December 31, 2021.


	March 31, 2022
	Total Nonaccrual		Nonaccrual with No Allowance for Loan Loss		Nonaccrual with Allowance for Loan Loss		Allowance for Loans Individually Evaluated		% of Allowance to Total Nonaccrual Loans with Allowance
	($ in thousands)
Commercial - Purchase	$	16,712	$	15,731	$	981	$	28		0.2	%
Commercial - Refinance		83,695		77,673		6,022		770		5.4
Residential 1-4 Unit - Purchase		24,934		24,677		257		96		0.7
Residential 1-4 Unit - Refinance		107,362		105,273		2,089		198		1.4
Short Term 1-4 Unit - Purchase		2,869		2,764		105		32		0.2
Short Term 1-4 Unit - Refinance		43,231		38,506		4,725		475		3.4
Total	$	278,803	$	264,624	$	14,179	$	1,599		11.3	%

Troubled Debt Restructuring included in nonaccrual loans:	$	165	$	—	$	—	$	25		—


	December 31, 2021
	Total Nonaccrual		Nonaccrual with No Allowance for Loan Loss		Nonaccrual with Allowance for Loan Loss		Allowance for Loans Individually Evaluated		% of Allowance to Total Nonaccrual Loans with Allowance
	($ in thousands)
Commercial - Purchase	$	17,260	$	16,501	$	759	$	9		0.1	%
Commercial - Refinance		85,935		79,131		6,804		826		6.2
Residential 1-4 Unit - Purchase		17,385		17,128		257		96		0.7
Residential 1-4 Unit - Refinance		107,552		105,515		2,037		138		1.0
Short Term 1-4 Unit - Purchase		2,986		2,881		105		31		0.2
Short Term 1-4 Unit - Refinance		45,300		41,870		3,430		306		2.3
Total	$	276,418	$	263,026	$	13,392	$	1,406		10.5	%

Troubled Debt Restructuring included in nonaccrual loans:	$	165	$	—	$	—	$	25		—

The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables. The Company has also made the accounting policy election to write off accrued interest receivables by reversing interest income when loans are placed on nonaccrual status, or 90 days or more past due.

The Company will continue to evaluate the COVID-19 forbearance-granted loans on an individual basis to determine if a reserve should be established on the collectability of the accrued interest and whether any loans should be placed on nonaccrual status at a future date.

The following tables present the amortized cost basis in the loans held for investment, excluding loans held for investment at fair value, as of March 31, 2022 and 2021, and the amount of accrued interest receivables written off by reversing interest income by portfolio segment for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022					2021
	Amortized Cost		Interest Reversal			Amortized Cost		Interest Reversal
Commercial - Purchase	$	609,232	$	(115	)	$	326,082	$	(140	)
Commercial - Refinance		889,829		(253	)		693,247		(468	)
Residential 1-4 Unit - Purchase		448,727		(219	)		239,201		(58	)
Residential 1-4 Unit - Refinance		782,105		(298	)		598,744		(521	)
Short Term 1-4 Unit - Purchase		38,683		(22	)		40,739		(46	)
Short Term 1-4 Unit - Refinance		64,390		(238	)		116,373		(242	)
Total	$	2,832,966	$	(1,145	)	$	2,014,386	$	(1,475	)

For the three months ended March 31, 2022 and 2021 cash basis interest income recognized on nonaccrual loans was $7.3 million and $6.7 million, respectively. No accrued interest income was recognized on nonaccrual loans for the three months ended March 31, 2022, and interest income recognized on loans 90 days or more past due and still accruing for the three months ended March 31, 2021 was $5.0 thousand. The average recorded investment of individually evaluated loans, computed using month-end balances, was $281.9 million and $337.1 million for the three months ended March 31, 2022 and 2021, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified as of March 31, 2022 and 2021.

(b)

Allowance for Credit Losses

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. The allowance for credit losses is measured using two components. A component that measures expected credit losses on a collective (pool) basis when similar risk characteristics exist and a component that measures expected credit losses on an individual loan basis. To estimate the allowance for credit losses in the loans held for investment portfolio, management follows a detailed internal process, considering a number of different factors including, but not limited to, the 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 Company uses an open pool loss rate methodology to model expected credit losses on a collective basis. To determine the loss rates for the open pool method, the Company starts with its 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 rates by dividing the respective pool's quarterly historical losses by the pool's respective prior quarter’s 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. For the March 31, 2022 estimate, the Company considered a severe stress scenario with a five-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the uncertainty around future COVID cases, the war between Russia and Ukraine, spike in inflation, and the continued disruption in the supply chain.

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). Nonperforming loans are considered collateral dependent by the Company. These loans are evaluated individually using the practical expedient to determine the credit exposure.

The following tables present the activity in the allowance for credit losses for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31, 2022
							Residential			Residential			Short Term		Short Term
	Commercial			Commercial			1-4 Unit			1-4 Unit			1-4 Unit		1-4 Unit
	Purchase			Refinance			Purchase			Refinance			Purchase		Refinance			Total
Allowance for credit losses:
Beginning Balance - January 1, 2022	$	385		$	2,144		$	400		$	948		$	43	$	342		$	4,262
Provision for loan losses (1)		281			1			(11	)		186			7		266			730
Charge-offs		(147	)		(5	)		—			(105	)		—		(71	)		(328	)
Ending balance	$	519		$	2,140		$	389		$	1,029		$	50	$	537		$	4,664

Allowance related to:
Loans individually evaluated	$	28		$	770		$	96		$	198		$	32	$	475		$	1,599
Loans collectively evaluated		490			1,370			293			832			17		62			3,064
Amortized cost related to:
Loans individually evaluated	$	16,712		$	83,695		$	24,934		$	107,362		$	2,869	$	43,231		$	278,803
Loans collectively evaluated		592,520			806,134			423,793			674,743			35,814		21,159			2,554,163


	Three Months Ended March 31, 2021
							Residential			Residential		Short Term			Short Term
	Commercial			Commercial			1-4 Unit			1-4 Unit		1-4 Unit			1-4 Unit
	Purchase			Refinance			Purchase			Refinance		Purchase			Refinance			Total
Allowance for credit losses:
Beginning Balance - January 1,2021	$	373		$	2,093		$	333		$	1,216	$	595		$	1,235			5,845
Provision for loan losses (1)		(45	)		(103	)		26			11		(195	)		411			105
Charge-offs		—			—			(37	)		—		(14	)		(18	)		(69	)
Ending balance	$	328		$	1,990		$	322		$	1,227	$	386		$	1,646		$	5,881

Allowance related to:
Loans individually evaluated	$	116		$	570		$	96		$	525	$	323		$	1,347			2,977
Loans collectively evaluated		212			1,419			226			703		63			281			2,904
Amortized cost related to:
Loans individually evaluated	$	22,241		$	103,778		$	21,857		$	127,106	$	4,345		$	59,434		$	338,761
Loans collectively evaluated		303,841			589,469			217,344			471,638		36,394			56,939			1,675,625

(1)

The provision for loan losses increased from approximately $0.1 million for the three months ended March 31,2021 to $0.7 million for the three months ended March 31, 2022 due mainly to an increase in the held for investment loan portfolio.

(c)

Credit Quality Indicator

A credit quality indicator is a statistic used by the Company to monitor and assess the credit quality of loans held for investment, excluding loans held for investment at fair value. The Company monitors its charge-off rate in relation to its nonperforming loans as its credit quality indicator. Nonperforming loans are loans that are 90 or more days past due, in bankruptcy, in foreclosure, or not accruing interest. As of March 31, 2022, the annualized charge-off rate was 0.47% of average nonperforming loans. The charge-off rate was 0.42% for the year ended December 31, 2021.

Other credit quality indicators include aging status and accrual status. The following table presents the aging status of the amortized cost basis in the loans held for investment portfolio, excluding loans held for investment at fair value, which include $263.9 million and $296.0 million loans in the Company’s COVID-19 forbearance program as of March 31, 2022 and December 31, 2021, respectively (in thousands):


	30–59 days		60–89 days		90+days		Total				Total
March 31, 2022	past due		past due		past due(1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	2,132	$	1,468	$	13,112	$	16,712	$	—	$	16,712
Commercial - Refinance		4,074		6,660		72,961		83,695		—		83,695
Residential 1-4 Unit - Purchase		322		249		24,363		24,934		—		24,934
Residential 1-4 Unit - Refinance		3,209		3,948		100,205		107,362		—		107,362
Short Term 1-4 Unit - Purchase		—		99		2,770		2,869		—		2,869
Short Term 1-4 Unit - Refinance		2,749		1,580		38,902		43,231		—		43,231
Total loans individually evaluated	$	12,486	$	14,004	$	252,313	$	278,803	$	—	$	278,803
Loans collectively evaluated
Commercial - Purchase	$	16,861	$	7,650	$	—	$	24,511	$	568,009	$	592,520
Commercial - Refinance		33,414		15,803		—		49,217		756,917		806,134
Residential 1-4 Unit - Purchase		11,000		1,993		—		12,993		410,800		423,793
Residential 1-4 Unit - Refinance		27,634		14,535		—		42,169		632,574		674,743
Short Term 1-4 Unit - Purchase		3,350		—		—		3,350		32,464		35,814
Short Term 1-4 Unit - Refinance		3,081		2,306		—		5,387		15,772		21,159
Total loans collectively evaluated	$	95,340	$	42,287	$	—	$	137,627	$	2,416,536	$	2,554,163
Ending balance	$	107,826	$	56,291	$	252,313	$	416,430	$	2,416,536	$	2,832,966


	30–59 days		60–89 days		90+days		Total				Total
December 31, 2021	past due		past due		past due(1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	700	$	2,314	$	14,246	$	17,260	$	—	$	17,260
Commercial - Refinance		4,464		6,818		74,488		85,770		165		85,935
Residential 1-4 Unit - Purchase		—		682		16,703		17,385		—		17,385
Residential 1-4 Unit - Refinance		807		1,088		105,657		107,552		—		107,552
Short Term 1-4 Unit - Purchase		1,224		—		1,762		2,986		—		2,986
Short Term 1-4 Unit - Refinance		615		1,010		43,675		45,300		—		45,300
Total loans individually evaluated	$	7,810	$	11,912	$	256,531	$	276,253	$	165	$	276,418
Loans collectively evaluated
Commercial - Purchase	$	17,319	$	4,034	$	—	$	21,353	$	470,808	$	492,161
Commercial - Refinance		31,769		7,025		—		38,794		658,532		697,326
Residential 1-4 Unit - Purchase		14,905		5,580		—		20,485		370,900		391,385
Residential 1-4 Unit - Refinance		39,045		9,548		—		48,593		574,175		622,768
Short Term 1-4 Unit - Purchase		21,412		217		—		21,629		4,374		26,003
Short Term 1-4 Unit - Refinance		4,060		5,561		—		9,621		16,144		25,765
Total loans collectively evaluated	$	128,510	$	31,965	$	—	$	160,475	$	2,094,933	$	2,255,408
Ending balance	$	136,320	$	43,877	$	256,531	$	436,728	$	2,095,098	$	2,531,826

(1)

Includes loans in bankruptcy and foreclosure less than 90 days past due.

In addition to the aging status, the Company also evaluates credit quality by accrual status. The following tables present the amortized cost in loans held for investment, excluding loans held for investment at fair value, based on accrual status and by loan origination year as of March 31, 2022 and December 31, 2021 (in thousands).


	Term Loans Amortized Cost Basis by Origination Year
March 31, 2022:	2022	2021	2020	2019	2018	Pre-2018	Total
Commercial - Purchase
Payment performance


Performing	$	126,178	$	271,850	$	43,643	$	72,467	$	41,001	$	37,381	$	592,520
Nonperforming		—		1,310		186		6,945		3,335		4,936		16,712
Total Commercial - Purchase	$	126,178	$	273,160	$	43,829	$	79,412	$	44,336	$	42,317	$	609,232

Commercial - Refinance
Payment performance
Performing	$	150,900	$	233,066	$	63,018	$	136,891	$	108,844	$	113,415	$	806,134
Nonperforming		—		5,644		3,240		23,869		23,908		27,034		83,695
Total Commercial - Refinance	$	150,900	$	238,710	$	66,258	$	160,760	$	132,752	$	140,449	$	889,829

Residential 1-4 Unit - Purchase
Payment performance
Performing	$	59,343	$	251,221	$	12,751	$	44,716	$	24,706	$	31,056	$	423,793
Nonperforming		—		9,742		2,171		4,126		3,566		5,329		24,934
Total Residential 1-4 Unit - Purchase	$	59,343	$	260,963	$	14,922	$	48,842	$	28,272	$	36,385	$	448,727

Residential 1-4 Unit - Refinance
Payment performance
Performing	$	95,030	$	328,551	$	27,422	$	103,584	$	51,501	$	68,655	$	674,743
Nonperforming		—		16,473		7,005		30,117		28,765		25,002		107,362
Total Residential 1-4 Unit - Purchase	$	95,030	$	345,024	$	34,427	$	133,701	$	80,266	$	93,657	$	782,105

Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	9,018	$	7,412	$	14,980	$	4,404	$	—	$	—	$	35,814
Nonperforming		—		—		1,562		1,202		105		—		2,869
Total Short Term 1-4 Unit - Purchase	$	9,018	$	7,412	$	16,542	$	5,606	$	105	$	—	$	38,683

Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	7,301	$	1,638	$	8,051	$	4,169	$	—	$	—	$	21,159
Nonperforming		—		243		13,679		23,695		5,614		—		43,231
Total Short Term 1-4 Unit - Refinance	$	7,301	$	1,881	$	21,730	$	27,864	$	5,614	$	—	$	64,390

Total Portfolio	$	447,770	$	1,127,150	$	197,708	$	456,185	$	291,345	$	312,808	$	2,832,966


	Term Loans Amortized Cost Basis by Origination Year
December 31, 2021	2021		2020		2019		2018		2017		Pre-2017		Total
Commercial - Purchase
Payment performance
Performing	$	277,618	$	45,836	$	81,541	$	46,637	$	24,164	$	16,365	$	492,161
Nonperforming		288		1,781		5,541		4,180		3,539		1,931		17,260
Total Commercial - Purchase	$	277,906	$	47,617	$	87,082	$	50,817	$	27,703	$	18,296	$	509,421

Commercial - Refinance
Payment performance
Performing	$	239,688	$	64,966	$	144,017	$	118,735	$	62,374	$	67,545	$	697,325
Nonperforming		2,482		3,949		26,012		26,869		16,492		10,131		85,935
Total Commercial - Refinance	$	242,170	$	68,915	$	170,029	$	145,604	$	78,866	$	77,676	$	783,260

Residential 1-4 Unit - Purchase
Payment performance
Performing	$	263,180	$	12,878	$	48,930	$	29,544	$	12,863	$	23,990	$	391,385
Nonperforming		1,372		2,749		3,896		3,736		3,487		2,145		17,385
Total Residential 1-4 Unit - Purchase	$	264,552	$	15,627	$	52,826	$	33,280	$	16,350	$	26,135	$	408,770



Residential 1-4 Unit - Refinance
Payment performance
Performing	$	343,199	$	31,334	$	114,145	$	59,825	$	31,774	$	42,492	$	622,769
Nonperforming		11,646		6,040		31,816		30,626		16,677		10,747		107,552
Total Residential 1-4 Unit - Purchase	$	354,845	$	37,374	$	145,961	$	90,451	$	48,451	$	53,239	$	730,321

Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	1,890	$	15,582	$	8,531	$	—	$	—	$	—	$	26,003
Nonperforming		—		1,565		1,316		105		—		—		2,986
Total Short Term 1-4 Unit - Purchase	$	1,890	$	17,147	$	9,847	$	105	$	—	$	—	$	28,989

Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	1,448	$	11,991	$	12,326	$	—	$	—	$	—	$	25,765
Nonperforming		1,038		15,819		22,618		5,825		—		—		45,300
Total Short Term 1-4 Unit - Refinance	$	2,486	$	27,810	$	34,944	$	5,825	$	—	$	—	$	71,065

Total Portfolio	$	1,143,849	$	214,490	$	500,689	$	326,082	$	171,370	$	175,346	$	2,531,826

Note 7 — Receivables Due From Servicers

The following tables summarize receivables due from servicers as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022
	Securitizations		Warehouse and repurchase facilities and other		Total
Loan principal payments due from servicers	$	43,392	$	1,115	$	44,507
Other loan servicing receivables		13,437		817		14,254
Loan servicing receivables		56,829		1,932		58,761
Corporate and escrow advances receivable		17,837		1,680		19,517
Total receivables due from servicers	$	74,666	$	3,612	$	78,278


	December 31, 2021
	Securitizations		Warehouse and repurchase facilities and other		Total
Loan principal payments due from servicers	$	42,344	$	1,165	$	43,509
Other loan servicing receivables		10,718		730		11,448
Loan servicing receivables		53,062		1,895		54,957
Corporate and escrow advances receivable		17,884		1,489		19,373
Total receivables due from servicers	$	70,946	$	3,384	$	74,330

Note 8 — Mortgage Servicing Rights

Mortgage loans serviced are related to the Century business and not included in the consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others amounted to $514.8 million and $520.6 million as of March 31, 2022 and December 31, 2021, respectively. The Company has elected to record its mortgage servicing rights using the fair value measurement method. Significant assumptions used in determining the fair value of servicing rights as of March 31, 2022 and December 31, 2021 include: 1) Weighted average discount rate of 8.0%, and 2) Weighted average conditional prepayment rate of 3.1% and 3.2%, respectively. The following table presents the Company's mortgage servicing rights (in thousands):


	March 31, 2022		December 31, 2021
Balance at the beginning of year	$	7,152	$	—
Mortgage servicing rights acquired, at fair value		—		7,152
Additions		—		—
Fair value adjustments		509		—
Balance at end of period	$	7,661	$	7,152

Note 9 — Securitizations, Net

From May 2011 through March 2022, the Company completed twenty securitizations of $4.7 billion of loans, issuing $4.3 billion of securities to third parties through twenty respective Trusts. The Company is the sole beneficial interest holder of the remaining Trusts, which are variable interest entities included in the consolidated financial statements. The transactions are accounted for as secured borrowings under U.S. GAAP. The securities are subject to redemption by the Company 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 dates of the securities issued could be earlier than their respective stated maturity dates, ranging from September 2044 through February 2052.

The following table summarizes the outstanding balance, net of discounts and deal costs, of the securities and the effective interest rate for the three months ended March 31, 2022 and 2021 ($ in thousands):


	Three Months Ended March 31,
Securitizations:	2022			2021
Securitizations, net	$	2,035,374		$	1,453,386
Interest expense		19,791			19,127
Average outstanding balance		2,018,186			1,548,642
Effective interest rate (1)		3.92	%		4.94	%

(1)

Represents annualized interest expense divided by average gross outstanding balance and includes average rate of 3.22% and debt issuance cost amortization of 0.70% and average rate of 4.24% and debt issuance cost amortization of 0.70% for the three months ended March 31, 2022 and 2021, respectively.

Note 10 — Other Debt

Secured financings and warehouse facilities were utilized to finance the origination and purchase of commercial real estate mortgage loans. Warehouse facilities are designated to fund mortgage loans that are purchased and originated within specified underwriting guidelines. These lines of credit fund less than 100% of the principal balance of the mortgage loans originated and purchased, requiring the use of working capital to fund the remaining portion.

(a)

Secured Financing, Net (Corporate Debt)

On February 5, 2021, the Company entered into a five-year $175.0 million syndicated corporate debt agreement, the (“the 2021 Term Loan”). The 2021 Term Loan had an interest rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matured on February 4, 2026. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the amounts owed pursuant to the 2019 debt agreement (“2019 Term Loan”). The remaining portion of the net proceeds from the 2021 Term Loan was used for loan originations and general corporate purposes. The 2021 Term Loan was paid off in March 2022.

On March 15, 2022, the Company entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. Interest on the 2022 Term Loan is paid every six months. A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to the 2021 Term Loan. The remaining portion of the net proceeds from the 2022 Term Loan will be used for loan originations and general corporate purposes. As of March 31, 2022, the balance of the 2022 Term Loan was $215.0 million. The balance in the consolidated balance sheets is net of debt issuance costs of $6.0 million as of March 31, 2022 . The 2022 Term Loan is secured by substantially all assets of the Company not otherwise pledged under a securitization or warehouse facility and contains certain reporting and financial covenants. Should the Company fail to adhere to those covenants, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2022, the Company was in compliance with these covenants.

(b)

Warehouse Repurchase and Revolving Loan Facilities, Net

On May 17, 2013, the Company entered into a Repurchase Agreement (“the 2013 Repurchase Agreement”) with a warehouse lender. The 2013 Repurchase Agreement is a modified mark-to-market agreement and has a current maturity date of September 29, 2023, and is a short-term 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 3.25%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. The effective interest rates were 4.0% and 4.2% as of March 31, 2022 and December 31, 2021, respectively.

On September 12, 2018, the Company entered into a three-year non-mark-to-market secured revolving loan facility agreement (“the Bank Credit Agreement”) with a bank. The Bank Credit Agreement has a current extended maturity date of November 10, 2023. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at the lesser of the one-month LIBOR Rate with a 0.75% floor, plus 3.5% per annum and the maximum rate, which is the highest lawful and non-usurious rate of interest applicable to the loan. The maximum capacity under this facility is $50.0 million. The effective interest rates were 4.7% and 7.3% as of March 31, 2022 and December 31, 2021, respectively.

On December 26, 2019, the Company entered into a $3.0 million loan agreement (“the 2019 Loan”) with a lender. The 2019 Loan is secured by five real properties acquired by the Company through foreclosure or by deed-in lieu of foreclosure. The 2019 Loan bears a fixed interest rate of 9.5% with an extended maturity date of June 1, 2022. This loan was paid off in March 2022. The effective interest rate was 10.5% as of March 31, 2022 and December 31, 2021.

On January 29, 2021, the Company entered into a non-mark-to-market Repurchase Agreement (“the 2021 Repurchase Agreement”) with a warehouse lender. The 2021 Repurchase Agreement has a maturity date of February 28, 2023, and was a short-term borrowing facility, collateralized by a pool of loans, with a maximum capacity of $200.0 million, and bore interest at one-month LIBOR plus a margin of 3.50% during the availability period and 4.50% during the amortization period. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. The effective interest rates were 4.9% and 5.9% as of March 31, 2022 and December 31, 2021, respectively.

On April 16, 2021, The Company entered into a non-mark-to-market Term Repurchase Agreement (“the 2021 Term Repurchase Agreement”) with a warehouse lender. The 2021 Term Repurchase Agreement has a maturity date of April 16, 2024, with a borrowing period through April 16, 2023. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at one-month LIBOR plus 3.0% per annum. The maximum capacity under this facility is $100.0 million. The effective interest rates were 3.6% and 3.5% as of March 31, 2022 and December 31, 2021, respectively.

On July 29, 2021, the Company entered into a non-mark-to-market Term Repurchase Agreement (“the July 2021 Term Repurchase Agreement”) with a warehouse lender. The July 2021 Term Repurchase Agreement has a maturity date of July 29, 2024, with an option to extend the term to July 29, 2025. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at one-month LIBOR with a 0.5% floor plus 4.5% per annum. The maximum capacity under this facility is $100.0 million. The effective interest rates was 21.9% as of March 31, 2022 and there was no balance outstanding as of December 31, 2021.

Certain of the Company’s loans are pledged as security under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2022 and December 31, 2021, the Company was in compliance with these covenants.

The following table summarizes the maximum borrowing capacity and current gross balances outstanding of the Company’s warehouse facilities and loan agreements as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022				December 31, 2021
	Period end balance (1)		Maximum borrowing capacity		Period end balance (1)		Maximum borrowing capacity
The 2021 term repurchase agreement	$	32,112	$	100,000	$	41,636	$	100,000
The 2021 repurchase agreement		164,563		200,000		82,580		200,000
The July 2021 term repurchase agreement		2,742		100,000		—		100,000
The 2013 repurchase agreement		192,214		200,000		153,499		200,000
The Bank credit agreement		35,328		50,000		22,385		50,000
The 2019 loan agreement		—		—		2,700		3,000
Total	$	426,959	$	650,000	$	302,800	$	653,000

(1)

Warehouse repurchase facilities amounts in the consolidated balance sheets are net of debt issuance costs amounting to $2.3 million and $1.7 million as of March 31, 2022 and December 31, 2021, respectively.

The following table provides an overview of the activity and effective interest rate for the three months ended March 31, 2022 and 2021 ($ in thousands):


	Three Months Ended March 31,
	2022			2021
Warehouse and repurchase facilities:
Average outstanding balance	$	338,247		$	113,528
Highest outstanding balance at any month-end		426,959			204,574
Effective interest rate (1)		4.45	%		6.01	%

(1)

Represents annualized interest expense divided by average gross outstanding balance and includes average rate of 3.89% and debt issuance cost amortization of 0.56%, and average rate of 4.77% and debt issuance cost amortization of 1.24%, for the three months ended March 31, 2022 and 2021, respectively.

The following table provides a summary of interest expense that includes debt issuance cost amortization, interest, amortization of discount, and deal cost amortization for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
	2022			2021
Warehouse and repurchase facilities	$	3,765		$	1,705
Securitizations		19,791			19,127
Interest expense — portfolio related		23,556			20,832
Interest expense — corporate debt		17,140	(1)		7,350	(2)
Total interest expense	$	40,696		$	28,182

(1)

Included in the $17.1 million of interest expense – corporate debt for the three months ended March 31, 2022 was the one-time debt issuance costs write-off of $7.7 million and prepayment fee of $5.1 million associated with the repayment of $170.8 million in outstanding principal amount in March 2022.

(2)

Included in the $7.4 million of interest expense – corporate debt for the March 31, 2021 was the one-time debt issuance costs write-off of $2.9 million and prepayment fee of $1.6 million associated with the payoff of $78.0 million in outstanding principal amount in February 2021.

Note 11 — Commitments and Contingencies

(a)

Repurchase Liability

When the Company sells loans, it is required to make normal and customary representations and warranties about the loans to the purchaser. The loan sale agreements generally require the Company to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In addition, the Company may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a loan shortly after its sale.

The Company records a repurchase liability relating to representations and warranties and early payment defaults. The method used to estimate the liability for repurchase is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults. The Company establishes a liability at the time loans are sold and continually updates the estimated repurchase liability. The level of the repurchase liability for representations and warranties and early payment default requires considerable management judgment. As of March 31, 2022 and December 31, 2021, the balance of repurchase liability was $369 thousand and $141 thousand, respectively, and it is included in accounts payable and accrued expenses in the consolidated balance sheets.

(b)

Legal Proceedings

The Company is a party to various legal proceedings in the normal course of business. The Company, after consultation with legal counsel, believes the disposition of all pending litigation will not have a material effect on the Company’s consolidated financial condition or results of operations.

Note 12 — Stock-Based Compensation

The Company’s 2020 Omnibus Incentive Plan, or the 2020 Plan, authorized grants of stock‑based compensation instruments to purchase or issue up to 1,520,000 shares of Company common stock. In connection with its IPO in January 2020, the Company granted stock options to non-employee directors and certain employees, including named executive officers to purchase approximately 782,500 shares of common stock with an exercise price per share equal to the initial public offering price of $13.00. 10,000 shares were forfeited in January 2020. On December 24, 2020, the Company granted stock options to a non-employee director to purchase 12,500 shares of common stock with an exercise price per share equal to the grant date market price of $6.28.

In January 2021, the Company issued 480,000 shares of restricted stock awards to certain employees, including named executive officers at no cost to employees. In May 2021, the Company issued 26,511 shares of restricted stock awards to certain non-employee directors.

In February 2022, the Company issued 125,250 shares of restricted stock awards and 102,750 shares of performance stock unit awards to certain employees, including named executive officers at no cost to employees.

Restricted stock-based awards vest ratably over a service period of three years from the date of the grant. Performance-based stock unit awards are linked to the average core net income annual growth over the three-year period of 2022 – 2024. Settlement of vested performance-based stock units will be made on the date that the Compensation Committee certifies the average core net income annual growth for the three-year period. Compensation expense related to restricted stock-based awards is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. Compensation expense related to performance-based stock unit awards is based on the fair value of the underlying stock on the award date and is

recognized over the vesting period using an estimate of the probability of achieving the performance target. The estimates will be reviewed quarterly and the expense adjusted accordingly. The Company recognized $0.6 million and $0.5 million compensation expense related to the outstanding stock options, unvested restricted stock awards, and unvested performance-based stock unit awards granted to employees for the three months ended March 31, 2022 and 2021, respectively. Such amount is included in “Compensation and employee benefits” on the Consolidated Statement of Income. The amount of unrecognized compensation expense related to unvested stock options, restricted stock awards and performance-based stock unit awards totaled $5.8 million and $5.0 million as of March 31, 2022 and 2021, respectively.

Treasury share purchases represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. During the three months ended March 31, 2022, the Company purchased treasury shares of 33,647 at an average price of $13.61 per share. No share was purchased during the three months ended March 31, 2021.

Note 13 — Earnings Per Share

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that shared in earnings.

The following table presents the basic and diluted earnings per share calculations for the three months ended March 31, 2022 and 2021:


	Three Months Ended March 31,
	2022		2021
	(In thousands, except per share data)
Basic EPS:
Net income attributable to common stockholders	$	3,121	$	3,396
Less: earnings attributable to participating securities		48		1,281
Net earnings attributable to common stock	$	3,073	$	2,115
Weighted average common shares outstanding		31,892		20,087
Basic earnings per common share	$	0.10	$	0.11
Diluted EPS:
Net income attributable to common stockholders	$	3,121	$	3,396
Weighted average common shares outstanding		31,892		20,087
Add dilutive effects for assumed conversion of Series A preferred stock		—		11,688
Add dilutive effects for warrants		2,127		1,587
Add dilutive effects for stock options		5		—
Add dilutive effects of unvested restricted stock awards		180		45
Weighted average diluted common shares outstanding		34,204		33,407
Diluted income per common share	$	0.09	$	0.10

The following table sets forth the number of shares excluded from the computation of diluted earnings per share, as their inclusion would have been anti-dilutive (in thousands):


	Three Months Ended March 31,
	2022		2021
Shares underlying warrants		—		—
Stock options		773		785
Unvested restricted stock awards		—		—
Unvested performance-based stock units		103		—
Share equivalents excluded from EPS	876		785

Note 14 — Convertible Preferred Stock

On April 7, 2020, the Company issued and sold in a private placement Series A Convertible Preferred Stock plus warrants (the “Warrants”) to purchase additional shares of the Company’s common stock to funds affiliated with Snow Phipps and a fund affiliated with Pacific Investment Management Company LLC (TOBI). Snow Phipps and TOBI are considered affiliates and, therefore, are related parties to the Company.

The Warrants are exercisable at the warrant holder’s option at any time and from time to time, in whole or in part, until April 7, 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 1,004,375 of the Warrants. The exercise price and the number of shares of common stock issuable upon exercise of the Warrants are subject to customary antidilution adjustments and certain issuances of common stock (or securities convertible into or exercisable for common stock) at a price (or having a conversion or exercise price) that is less than the then current exercise price. The Company is not required to affect an exercise of Warrants, if after giving effect to the issuance of common stock upon exercise of such Warrants such warrant holder together with its affiliates would beneficially own 49% or more of the Company’s outstanding common stock.

Note 15 — Fair Value Measurements

Fair Value Determination

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.

Level 3 - Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.

Cash and Cash Equivalents and Restricted Cash

Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

Loans Held for Investment

Loans held for investment are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for credit losses.

The Company determined the fair value estimate of loans held for investment using a third-party loan valuation model, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are discount rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

Collateral Dependent or Loans Individually Evaluated

Nonaccrual loans held for investment are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. To the extent a loan is collateral dependent, the Company determines the

allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement.

Interest-Only Strips

The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur.

Loans Held for Investment, at Fair Value

The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company uses a third-party loan valuation model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

Real Estate Owned, Net (REO)

Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.

Mortgage Servicing Rights

The Company determined the fair values based on a third-party valuation model that calculates the present value of estimated future net servicing income, a Level 3 measurement.

Secured Financing, Net (Corporate Debt)

The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Warehouse Repurchase Facilities, Net

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.

Securitizations, Net

The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The Company does not have any off-balance sheet financial instruments.

Receivables Due From Servicers

The carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

Fair Value Disclosures

The following tables present information on assets measured and recorded at fair value as of March 31, 2022 and December 31, 2021, by level, in the fair value hierarchy (in thousands):


	Fair value measurements using						Total at
March 31, 2022	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,352	$	1,352
Mortgage servicing rights		—		—		7,661		7,661
Total recurring fair value measurements		—		—		9,013		9,013
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		76,869		76,869
Real estate owned, net		—		—		16,177		16,177
Individually evaluated loans requiring specific allowance, net		—		—		12,580		12,580
Total nonrecurring fair value measurements		—		—		105,626		105,626
Total assets	$	—	$	—	$	114,639	$	114,639


	Fair value measurements using						Total at
December 31, 2021	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,359	$	1,359
Mortgage servicing rights		—		—		7,152		7,152
Total recurring fair value measurements		—		—		8,511		8,511
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		87,422		87,422
Real estate owned, net		—		—		17,557		17,557
Impaired loans requiring specific allowance, net		—		—		11,987		11,987
Total nonrecurring fair value measurements		—		—		116,966		116,966
Total assets	$	—	$	—	$	125,477	$	125,477

The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
Gain (loss) on assets measured on a nonrecurring basis	2022			2021
Loans held for sale, net	$	—		$	17
Real estate held for sale, net		235			(435	)
Individually evaluated loans requiring specific allowance, net		(192	)		(308	)
Total net loss	$	43		$	(726	)

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of March 31, 2022 and December 31, 2021 ($ in thousands):


	March 31, 2022
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Individually evaluated loans requiring specific allowance, net	$	12,580	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		16,177	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment, at fair value		1,352	Discounted cash flow	Discount rate	5.7%	5.7%
				Collateral value (% of UPB)	96.0% to 120.0%	106.0%
				Timing of resolution/payoff (months)	1 - 40	37.0
				Prepayment rate	1.0% - 30.0%	21.5%
				Default rate	0.4% - 6.6%	1.0%
				Loss severity rate	0% - 21%	8.0%
Loans held for sale		76,869	Discounted cash flow	Discount rate	5.7%	5.7%
				Timing of resolution/payoff (months)	38 to 40	39.0
Mortgage servicing rights		7,661	Discounted cash flow	Discount rate	8.0% - 12.0%	8.0%
				Prepayment rate	2.0% - 7.0%	3.1%

December 31, 2021

Asset category

Fair value

Primary
valuation
technique

Unobservable
input

Range

Weighted
average

Individually evaluated
loans requiring specific
allowance, net

11,987

Market comparables

Selling costs

8.0%

Real estate owned, net

17,557

Market comparables

Selling costs

8.0%

Loans held for investment,
at fair value

1,359

Discounted cash flow

Discount rate

5.8%

Collateral value (% of UPB)

95.0% to 120.0%

106.0%

Timing of resolution/payoff (months)

1 to 38

34.8

Prepayment rate

19.2% to 50%

Default rate

0.0% to 6.7%

1.0%

Loss severity rate

0.0% to 13.4%

3.0%

Loans held for sale

87,422

Discounted cash flow

Discount rate

5.8%

Timing of resolution/payoff (months)

3 to 37

13.0

Mortgage servicing rights

7,152

Discounted cash flow

Discount rate

8.0% to 12.0%

8.0%

Prepayment rate

2.4% to 3.5%

3.2%

The following is a rollforward of loans that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended March 31,
	2022			2021
Beginning balance	$	1,359		$	1,539
Loans liquidated		—			(163	)
Principal paydowns		(17	)		(10	)
Total unrealized gain (loss) included in net income		10			(2	)
Ending balance	$	1,352		$	1,364

The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended March 31,
	2022		2021
Beginning balance	$	—	$	238
Interest-only strip additions		—		—
Interest-only strip write-offs		—		(113	)
Total unrealized loss included in net income		—		—
Ending balance	$	—	$	125

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of March 31, 2022 and December 31, 2021, the only financial assets measured at fair value, or lower of cost or fair value, were certain individually evaluated loans held for investment, loans held for sale, mortgage servicing rights, interest-only strips, REO and FVO loans, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $12.6 million and $12.0 million as of March 31, 2022 and December 31, 2021, net of specific allowance for credit losses of approximately $1.6 million and $1.4 million, respectively.

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated (in thousands):


	March 31, 2022
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	36,629	$	36,629	$	—	$	—	$	36,629
Restricted cash		10,837		10,837		—		—		10,837
Loans held for sale, net		77,503		—		—		77,503		77,503
Loans held for investment, net		2,828,302		—		—		2,973,430		2,973,430
Loans held for investment, at fair value		1,352		—		—		1,352		1,352
Accrued interest receivables		14,169		14,169		—		—		14,169
Mortgage servicing rights		7,661		—		—		7,661		7,661

Liabilities:
Secured financing, net	$	208,956	$	—	$	—	$	215,000	$	215,000
Warehouse repurchase facilities, net		424,692		—		424,692		—		424,692
Securitizations, net		2,035,374		—		—		1,966,780		1,966,780
Accrued interest payable		7,467		7,467		—		—		7,467


	December 31, 2021
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	35,965	$	35,965	$	—	$	—	$	35,965
Restricted cash		11,639		11,639		—		—		11,639
Loans held for sale, net		87,908		—		—		87,908		87,908
Loans held for investment, net		2,527,564		—		—		2,655,357		2,655,357
Loans held for investment, at fair value		1,359		—		—		1,359		1,359
Accrued interest receivable		13,159		13,159		—		—		13,159
Mortgage servicing rights		7,152		—		—		7,152		7,152

Liabilities:
Secured financing, net	$	162,845	$	—	$	—	$	170,843	$	170,843
Warehouse repurchase facilities, net		301,069		—		301,069		—		301,069
Securitizations, net		1,911,879		—		—		1,931,002		1,931,002
Accrued interest payable		6,254		6,254		—		—		6,254

Note 16 — Subsequent Events

The Company completed the securitization of $252.6 million of investor real estate loans on April 8, 2022, which will be accounted for as secured borrowings during the quarter ended June 30, 2022.

The Company has evaluated events that have occurred subsequent to March 31, 2022 through the issuance of the accompanying consolidated financial statements and has concluded there are no other subsequent events that would require recognition or disclosure in the accompanying consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”).

In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of federal securities laws. In particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond are forward-looking statements. For important information regarding these forward-looking statements, please see the discussion below under the caption “Cautionary Note on Forward-Looking Statements.”

References to “the Company,” “Velocity,” “we,” “us” and “our” refer to Velocity Financial, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.

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 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 18 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 March 31, 2022, has an average balance of approximately $391,000. As of March 31, 2022, our loan portfolio totaled $2.9 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 67.9%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 48.5% of the UPB. For the three months ended March 31, 2022, the annualized yield on our total portfolio was 7.76%.

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 twenty securitizations, resulting in a total of over $4.3 billion in gross debt proceeds from May 2011 through March 2022.

We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

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 three months ended March 31, 2022, our annualized portfolio related net interest margin was 4.25%, relatively flat compared to the 4.27% for the quarter ended December 31, 2021. 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 three months ended March 31, 2022, we generated pre-tax income and net income of $3.9 million and $3.1 million, respectively. The $3.9 million of pre-tax income is inclusive of an one-time debt issuance cost write-off of $7.7 million and prepayment penalties of $5.1 million due to the refinancing of our previous corporate debt with lower-cost new corporate debt.

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.

Recent Developments

Acquisition of Majority Interest in Century Health & Housing Capital

On December 28, 2021, the Company acquired an 80% ownership interest in Century Health & Housing Capital, LLC (“Century”), paying a cash purchase price of $12.8 million. Century is a licensed “Ginnie Mae” issuer/servicer that provides government-insured Federal Housing Administration (FHA) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century manages a servicing portfolio of $521 million in UPB as of December 31, 2021. Century’s pre-tax income for the year ended December 31, 2021 was approximately $2.3 million.

Securitizations

In February 2022, we completed the securitization of $273.6 million of investor real estate loans.

At-The-Market Equity Offering Program

On September 3, 2021, we entered into separate Equity Distribution Agreements with JMP Securities LLC and Virtu Americas LLC to establish an at-the-market equity offering program (“ATM Program”) where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for aggregate gross sales of our common stock of up to $50,000,000 provided that the number of shares sold under the ATM Program does not exceed 4,000,000. For the three months ended March 31, 2022, no common stock was issued under our ATM Program.

Uncertainties Caused by COVID-19 and Other Events

The COVID-19 outbreak has caused significant disruption in business activity and the financial markets both globally and in the United States. The extent of the impact of COVID-19 on our operational and financial performance continued to depend on certain developments, including the duration and spread of the outbreak and impact on our customers, employees and vendors, impact of new variant strains of the virus, and the long-term success of the vaccines, some of which remained uncertain at this time and cannot be predicted. The Russia and Ukraine war that started in February 2022 has been impacting the global economy and adding fuel to high inflation.

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 our financial statements are based upon reasonable assumptions given the information available at that time.

These polices and estimates relate to the allowance for loan losses and deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC.

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

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.

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.

Our five warehouse facilities and our corporate debt have interest payment obligations tied to the one-month USD London Interbank Offered Rate, or LIBOR. The authorized administrator of LIBOR confirmed during March 2021 that it intended to cease the publication or loss of representativeness of LIBOR. In particular, the last date of publication or representativeness of one-month USD LIBOR will be June 30, 2023. We expect that the index used in the calculation of the interest rate for our warehouse facilities and corporate debt will transition from LIBOR to a Secured Overnight Financing Rate (“SOFR”) or a suitable replacement index prior to June 20, 2023. As we renew our financing agreements with our warehouse facilities, we are working with our warehouse facilities to include language on the transition to SOFR. We do not expect the cessation of LIBOR nor the transition to a replacement index to have a material adverse effect on our cost of funding, results of operations or financial condition.

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.

Portfolio and Asset Quality

Key Portfolio Statistics


	March 31, 2022				December 31, 2021				March 31, 2021
	($ in thousands)
Total loans	$	2,876,816			$	2,587,221			$	1,990,684
Loan count		7,365				6,964				5,935
Average loan balance	$	391			$	372			$	335
Weighted average loan-to-value		67.9	%			67.7	%			66.3	%
Weighted average coupon		7.50	%			7.76	%			8.42	%
Nonperforming loans (UPB)	$	275,487		(A)	$	273,100		(A)	$	335,048		(A)
Nonperforming loans (% of total)		9.58	%	(A)		10.56	%	(A)		16.83	%	(A)

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $46.9 million of COVID-19 forbearance-granted loans placed on nonaccrual status as of March 31, 2022.

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 credit 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 Coupon. Weighted average coupon reflects the weighted average loan rate at the end of the period.

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. Loans that are 90 or more days past due, except for certain loans in our COVID-19 forbearance program, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. The dollar amount of nonperforming loans presented in the table above reflects the UPB of all loans that meet this definition.

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
Three Months Ended March 31, 2022:
Loan originations — held for investment		1,167		581,369		498		6.29	%		69.2	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		1,167	$	581,369	$	498		6.29	%		69.2	%
Loan acquisitions — held for investment		2		3,954		1,977		6.34	%		57.0	%
Total loans originated and acquired		1,169	$	585,323	$	501		6.30	%		69.1	%
Three Months Ended December 31, 2021:
Loan originations — held for investment		1,062		497,751		469		6.29	%		69.4	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		1,062	$	497,751	$	469		6.29	%		69.4	%
Loan acquisitions — held for investment		25		10,227		409		7.34	%		62.8	%
Total loans originated and acquired		1,087	$	507,978	$	467		6.31	%		69.3	%
Three Months Ended March 31, 2021:
Loan originations — held for investment		618		233,041		377		7.44	%		68.5	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		618	$	233,041	$	377		7.44	%		68.5	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated and acquired		618	$	233,041	$	377		7.44	%		68.5	%

During the first quarter of 2022, we originated $581.4 million of loans, which was an increase of $83.6 million, or 16.8% from $497.8 million from the quarter ended December 31, 2021, and an increase of $348.3 million, or 149.5%, from $233.0 million from the quarter ended March 31, 2021.

Loans Held for Investment and Loans Held for Investment at Fair Value

Our total portfolio of loans held for investment consists of both loans held for investment at amortized cost, which are presented in the consolidated balance sheet as loans held for investment, net, and loans held for investment at fair value, which are presented in the consolidated balance sheets 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)	March 31, 2022			December 31, 2021			March 31, 2021
Unpaid principal balance	$	2,799,947		$	2,499,798		$	1,992,684
Valuation adjustments on FVO loans		37			27			(4	)
Deferred loan origination costs		34,334			33,360			25,070
Total loans held for investment, gross		2,834,318			2,533,185			2,017,750
Allowance for credit losses		(4,664	)		(4,262	)		(5,881	)
Loans held for investment, net	$	2,829,654		$	2,528,923		$	2,011,869

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 the dates indicated:


	March 31, 2022					December 31, 2021					March 31, 2021
($ in thousands)	UPB		%			UPB		%			UPB		%
Loans due in less than one year	$	88,820		3.2	%	$	96,502		3.9	%	$	146,142		7.3	%
Loans due in one to five years		15,847		0.6			5,023		0.2			13,717		0.7
Loans due in more than five years		2,695,280		96.3			2,398,273		95.9			1,830,825		92.0
Total loans held for investment	$	2,799,947		100.0	%	$	2,499,798		100.0	%	$	1,990,684		100.0	%

Allowance for Loan Losses

For the December 31, 2021 CECL estimate, we used the COVID-19 severe stress scenario with a five-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period. We considered the potential impact of the Omicron variant and the effect of the variant on further supply chain disruptions. We also considered lower than forecasted employment numbers, expiring unemployment benefits, and an upcoming flu season.

Our allowance for loan losses as of March 31, 2022 was $4.7 million compared to $4.3 million as of December 31, 2021 and $5.9 million as of March 31, 2021. The increase in the allowance for credit losses from December 31, 2021 was primarily due to the growth in our loan portfolio. The decrease in allowance for credit losses from March 31, 2021 was primarily attributable to the improvements in the U.S. economy resulting from the reopening of businesses assumed in our loan loss macroeconomic model projections. 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. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and the Company’s ability to forecast economic events evolves.

To estimate the allowance for credit losses in our loans held for investment portfolio, we follow a detailed internal review 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 credit losses over the periods indicated:


	Three Months Ended
($ in thousands)	March 31, 2022			December 31, 2021			March 31, 2021
Allowance for credit losses:
Beginning balance	$	4,262		$	4,028		$	5,845
Provision for loan losses		730			377			105
Charge-offs		(328	)		(143	)		(69	)
Ending balance	$	4,664		$	4,262		$	5,881
Total loans held for investment (UPB), excluding FVO (1)	$	2,798,632		$	2,498,466		$	1,989,316
Allowance for credit losses / loans held for investment, excluding FVO		0.17	%		0.17	%		0.30	%

(1)

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 balance sheets is net of allowance for credit losses of $4.7 million, and net deferred loan origination fees/costs of $34.3 million as of March 31, 2022.

Credit Quality – Loans Held for Investment and Loans Held for Investment at Fair Value

The following table provides delinquency information on our loans held for investment and loans held for investment at fair value by UPB as of the dates indicated:


($ in thousands)	March 31, 2022 (A)				COVID-19 Forbearance		December 31, 2021 (A)				COVID-19 Forbearance		March 31, 2021 (A)				COVID-19 Forbearance
Performing/Accruing:
Current	$	2,388,442	85.3	%	$	186,569	$	2,068,023	82.7	%	$	188,466	$	1,528,684	76.8	%	$	234,365
30-59 days past due		94,058	3.4			12,698		127,046	5.1			36,579		67,100	3.4			20,473
60-89 days past due		41,960	1.5			7,228		31,629	1.3			8,262		59,700	3.0			34,451
90+ days past due		—	—			—		—	—			—		152	0.0			152
Total Performing Loans		2,524,460	90.2			206,495		2,226,698	89.1			233,307		1,655,636	83.2			289,441
Nonperforming/Nonaccrual:
<90 days past due		26,044	0.9			7,354		19,533	0.8			5,325		18,076	0.9			3,426
90+ days past due		27,472	1.0			3,794		35,787	1.4			8,510		72,303	3.6			29,314
Bankruptcy		18,334	0.7			4,380		20,038	0.8			6,242		15,226	0.8			3,126
In foreclosure		203,637	7.3			38,686		197,742	7.9			39,045		229,443	11.5			38,432
Total nonperforming loans		275,487	9.8			54,214		273,100	10.9			59,122		335,048	16.8			74,298
Total loans held for investment	$	2,799,947	100.0	%	$	260,709	$	2,499,798	100.0	%	$	292,429	$	1,990,684	100.0	%	$	363,739

(A)

Balance includes $260.7 million UPB of loans held for investment as of March 31, 2022, $292.4 million as of December 31, 2021, and $363.7 million as of March 31, 2021 in our COVID-19 forbearance program.

Other than loans in the COVID-19 forbearance program, loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $275.5 million, or 9.8% of our held for investment loan portfolio as of March 31, 2022, compared to $273.1 million, or 10.9% as of December 31, 2021, and $335.0 million, or 16.8% of the held for investment loan portfolio as of March 31, 2021. The decrease in the rate(%) of total nonperforming loans to total loans held for investment was primarily attributed to loan resolutions by our Special Servicing department, along with improvement in the U.S. economy. We believe the significant equity cushion at origination and the active management of loans will continue to minimize credit losses on the resolution of defaulted loans and disposition of REO properties.

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 tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $34.3 million and $46.5 million of long-term and short-term non-performing loans during the quarter ended March 31, 2022 and 2021, respectively. Including REO resolutions, we realized net gains of $1.8 million and $1.3 million during the quarter ended March 31, 2022 and 2021, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual principal and interest due on loans.

The table below includes nonperforming loan resolutions for our long-term loans.


	Three Months Ended
Long-Term Loans	March 31, 2022					December 31, 2021					March 31, 2021
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	9,144	$	474		$	11,464	$	614		$	15,961	$	795
Resolved — paid current		7,597		117			12,209		290			10,774		62
Resolved — REO sold		2,522		469			1,770		121			2,754		76
Total resolutions	$	19,263	$	1,060		$	25,443	$	1,025		$	29,489	$	933
Recovery rate on resolved nonperforming UPB				105.5	%				104.0	%				103.2	%

The table below includes nonperforming loan resolutions for our short-term loans, now being held for investment, and also includes loans that were granted a COVID-19 forbearance in 2020. Prior to January 1, 2021, nonperforming loan resolutions presented only consisted of long-term nonperforming loans held for investment since the short-term loans, or loans with a maturity of two-year or less, were being held for sale until later in 2020. The short-term loans do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans.


	Three Months Ended
Short-Term and Forbearance Loans	March 31, 2022					December 31, 2021					March 31, 2021
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	13,820	$	646		$	12,567	$	623		$	8,569	$	343
Resolved — paid current		3,783		39			5,837		67			11,170		40
Resolved — REO sold		503		35			266		48			—		—
Total resolutions	$	18,106	$	720		$	18,670	$	738		$	19,739	$	383
Recovery rate on resolved nonperforming UPB				104.0	%				104.0	%				101.9	%

Our charge-offs 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.


	Three Months Ended
($ in thousands)	March 31, 2022				December 31, 2021				March 31, 2021
Average nonperforming loans for the period (1)		278,349				274,112				333,239
Charge-offs		328				143				69
Charge-offs / Average nonperforming loans for the period (1)		0.47	%	(2)		0.21	%	(2)		0.08	%	(2)

(1)

Reflects the monthly average of nonperforming loans held for investment during the period.

(2)

Reflects annualized year-to-date charge-offs to average nonperforming loans for the period.

Concentrations – Loans Held for Investment

As of March 31, 2022, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 47.1% of the UPB. Mixed used properties represented 13.6% of the UPB. Multifamily properties represented 10.0% 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 24.2% in California, 21.7% in New York, 13.1% in Florida, and 7.6% in New Jersey.


Property Type	March 31, 2022
($ in thousands)	Loan Count		UPB		% of Total UPB
Investor 1-4		3,988	$	1,318,992		47.1	%
Mixed use		920		379,762		13.6
Multifamily		524		279,086		10.0
Retail		556		278,033		9.9
Warehouse		295		200,866		7.2
Office		396		172,325		6.1
Other(1)		475		170,883		6.1
Total loans held for investment		7,154	$	2,799,947		100.0	%

(1)

All other properties individually comprise less than 5.0% of the total unpaid principal balance.


Geography (State)	March 31, 2022
($ in thousands)	Loan Count		UPB		% of Total UPB
California		1,081	$	677,998		24.2	%
New York		1,121		606,427		21.7
Florida		1,035		367,117		13.1
New Jersey		731		212,772		7.6
Other(1)		3,186		935,633		33.4
Total loans held for investment		7,154	$	2,799,947		100.0	%

(1)

All other states individually comprise less than 5.0% of the total unpaid principal balance.

Loans Held for Sale

The following tables show the various components of loans held for sale as of the dates indicated:


($ in thousands)	March 31, 2022		December 31, 2021
UPB	$	76,869	$	87,422
Valuation adjustments		—		—
Deferred loan origination fees, net		634		486
Total loans held for sale, net	$	77,503	$	87,908

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 credit losses. Positive adjustments at the time of foreclosure are recognized in other operating income. Subsequent to foreclosure, we periodically obtain new valuations, reduction in fair value are reflected as valuation adjustments.

As of March 31, 2022, our REO included 38 properties with a lower of cost or estimated fair value of $16.2 million compared to 34 properties with a lower of cost or estimated fair value of $17.6 million as of December 31, 2021.

Key Performance Metrics


	Three Months Ended
($ in thousands)	March 31, 2022 (1)				December 31, 2021 (1)			March 31, 2021 (1)
Average loans	$	2,682,851			$	2,404,451		$	1,936,664
Portfolio yield		7.76	%			8.21	%		8.41	%
Average debt — portfolio related		2,356,433				2,068,304			1,662,170
Average debt — total company		2,535,348				2,240,230			1,770,535
Cost of funds — portfolio related		4.00	%			4.58	%		5.01	%
Cost of funds — total company		6.42	%	(2)		5.02	%		6.37	%	(3)
Net interest margin — portfolio related		4.25	%			4.27	%		4.10	%
Net interest margin — total company		1.69	%	(2)		3.53	%		2.59	%	(3)
Charge-offs/Average loans held for investment		0.05	%			0.02	%		0.00	%
Pre-tax return on equity		4.42	%	(2)		13.75	%		8.27	%	(3)
Return on equity		3.65	%	(2)		10.10	%		6.10	%	(3)

(1)

Percentages are annualized.

(2)

Excluding the one-time debt issuance cost write-off of $7.7 million and prepayment penalties of $5.1 million associated with the $170.8 million payoff of our corporate debt in March 2022, key performance metrics for the three months ended March 31, 2022 are as follows: Costs of funds – total company 4.40%; Net interest margin – total company 3.60%; Pre-tax return on equity 18.90%; and Return on equity 14.16%.

(3)

Excluding the one-time debt issuance cost write-off of $2.9 million and prepayment penalties of $1.6 million associated with the $78.0 million payoff of our corporate debt in February 2021, key performance metrics for the three months ended March 31, 2021 are as follows: Costs of funds – total company 5.35%; Net interest margin – total company 3.52%; Pre-tax return on equity 16.36%; and Return on equity 12.07%.

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 fluctuations in our portfolio yield over the periods shown was primarily driven by loans placed on non-accrual status during the periods.

Average Debt — Portfolio Related and Total Company

Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse facilities and securitizations. Total company debt consists of portfolio- related debt and corporate debt. The measures presented here reflect 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 4.00% for the three months ended March 31, 2022 from 4.58% for the three months ended December 31, 2021 and decreased from 5.01% for the three months ended March 31, 2021.

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.

Over the periods shown below, our portfolio related net interest margin of 4.25% for the three months ended March 31, 2022 is relatively consistent with the 4.27% for the three months ended December 31, 2021, and increased from 4.10% for the three months ended March 31, 2021 primarily due to the lower cost of funds on more recent securitizations issued.

Our total company net interest margin decreased to 1.69% for the three months ended March 31, 2022 from 2.59% and 3.53% for the three months ended March 31, 2021 and December 31, 2021, respectively. The decrease in total company net interest margin was primarily attributable to the prepayment fees paid and the unamortized debt issuance write-off associated with the payoff of our corporate debt in the current quarter.

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:


	Three Months Ended
	March 31, 2022								December 31, 2021							March 31, 2021
			Interest		Average						Interest		Average					Interest		Average
	Average		Income /		Yield /				Average		Income /		Yield /			Average		Income /		Yield /
($ in thousands)	Balance		Expense		Rate (1)				Balance		Expense		Rate (1)			Balance		Expense		Rate (1)
Loan portfolio:
Loans held for sale	$	69,092							$	40,464						$	8,904
Loans held for investment		2,613,759								2,363,987							1,927,760
Total loans	$	2,682,851	$	52,049		7.76	%		$	2,404,451	$	49,360		8.21	%	$	1,936,664	$	40,707		8.41	%

Debt:
Warehouse facilities	$	338,247		3,765		4.45	%		$	271,761		3,273		4.82	%	$	113,528	$	1,705		6.01	%	(5)
Securitizations		2,018,186		19,791		3.92	%			1,796,543		20,392		4.54	%		1,548,642		19,127		4.94	%
Total debt - portfolio related		2,356,433		23,556		4.00	%			2,068,304		23,665		4.58	%		1,662,170		20,832		5.01	%
Corporate debt		178,915		17,140		38.32	%	(4)		171,926		4,462		10.38	%		108,365		7,350		27.13	%	(6)
Total debt	$	2,535,348	$	40,696		6.42	%		$	2,240,230	$	28,127		5.02	%	$	1,770,535	$	28,182		6.37	%

Net interest spread - portfolio related (2)						3.76	%							3.63	%						3.39	%
Net interest margin - portfolio related						4.25	%							4.27	%						4.10	%

Net interest spread - total company (3)						1.34	%	(4)						3.19	%						2.04	%	(6)
Net interest margin - total company						1.69	%	(4)						3.53	%						2.59	%	(6)

(1)

Annualized.

(2)

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.

(3)

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.

(4)

Excluding the one-time debt issuance costs write-off of $7.7 million and prepayment penalties of $5.1 million associated with the $170.8 million repayment of our corporate debt in March 2022, the Corporate debt average rate would have been 9.70%; Net interest spread — total company would have been 3.36%; and Net interest margin — total company would have been 3.60% for the three months ended March 31, 2022.

(5)

The debt issuance cost amortization was higher for the three months ended March 31, 2021 as a result of a lower average outstanding borrowing balance from a new financing facility.

(6)

Excluding the one-time debt issuance cost write-off of $2.9 million and prepayment penalties of $1.6 million associated with the $78.0 million payoff of our corporate debt in February 2021, the corporate debt average rate would have been 10.49%; net interest spread — total company would have been 3.06%; and net interest margin — total company would have been 3.52% for the three months ended March 31, 2021.

Charge-Offs

Our annualized charge-off rate for the three months ended March 31, 2022 remained low at 0.47% compared to 0.21% for the three months ended December 31, 2021 and 0.08% for the three months ended March 31, 2021. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarter. 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 stockholders’ equity over the specified period. Pre-tax return on equity and return on equity were lower during the quarter ended March 31, 2022 compared to the quarters ended December 31, 2021 and March 31, 2021 due to the prepayment fees and write-off of unamortized debt issuance cost of approximately $12.8 million associated with the payoff of our corporate debt in the current quarter.


	Three Months Ended
($ in thousands)	March 31, 2022 (2)			December 31, 2021			March 31, 2021 (3)
Income before income taxes (A)	$	3,911		$	11,377		$	4,604
Net income (B)		3,231			8,354			3,396

Monthly average balance:
Stockholders' equity (C)		353,635			330,968			222,810

Pre-tax return on equity (A)/(C) (1)		4.4	%		13.8	%		8.3	%

Return on equity (B)/(C) (1)		3.7	%		10.1	%		6.1	%

(1)

Annualized.

(2)

Excluding the one-time debt issuance cost write-off of $7.7 million and prepayment penalties of $5.1 million associated with the $170.8 million payoff of our corporate debt in March 2022, income before income taxes would have been $16.7 million; net income would have been $16.0 million; pre-tax return on equity would have been 18.90%; and return on equity would have been 14.16% for the three months ended March 31, 2022.

(3)

Excluding the one-time debt issuance cost write-off of $2.9 million and prepayment penalties of $1.6 million associated with the $78.0 million payoff of our corporate debt in February 2021, income before income taxes would have been $9.1 million; net income would have been $6.7 million; pre-tax return on equity would have been 16.4%; and return on equity would have been 12.1% for the three months ended March 31, 2021.

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 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

Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2021 Term Loan and the 2022 Term Loan, as reflected on our consolidated balance sheets, and the related amortization of deferred debt issuance costs.

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.

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 a loan charge-off.

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. Changes in fair value subsequent to initial recognition of fair value loans are reported as unrealized gain/(loss) on fair value loans, a component of other operating income within the 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. Changes in fair value subsequent to initial recognition are reported as unrealized gains/(losses) on interest-only securities.

Valuation Allowance on Loans Held for Sale. Loans held for sale are carried at the lower of cost or estimated fair value. Adjustments to the carrying value of loans held for sale to estimate fair value are reported as valuation allowance.

Fee Income. In certain situations, we collect fee income by originating loans and realizing miscellaneous 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 net income with various permanent differences. The tax- adjusted net income amount is then multiplied by the applicable federal and state income tax rates to arrive at the provision for income taxes.

Consolidated Results of Operations

The following table summarizes our consolidated results of operations for the periods indicated:


	Three Months Ended
($ in thousands)	March 31, 2022		March 31, 2021
Interest income	$	52,049	$	40,707
Interest expense - portfolio related		23,556		20,832
Net interest income - portfolio related		28,493		19,875
Interest expense - corporate debt		17,140		7,350
Net interest income		11,353		12,525
Provision for loan losses		730		105
Net interest income after provision for loan losses		10,623		12,420
Other operating income		5,648		2,801
Total operating expenses		12,250		10,617
Income including noncontrolling interests		4,021		4,604
Less net income attributable to noncontrolling interests		110		—
Income before income taxes		3,911		4,604
Income tax expense		790		1,208
Net income	$	3,121	$	3,396

Net Interest Income — Portfolio Related


	Three Months Ended March 31,
($ in thousands)	2022		2021		$ Change
Interest income	$	52,049	$	40,707	$	11,342
Interest expense - portfolio related		23,556		20,832	$	2,724
Net interest income - portfolio related	$	28,493	$	19,875	$	8,618

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased by 43% or $8.6 million from $19.9 million for the three months ended March 31, 2021 to $28.5 million for the three months ended March 31, 2022. The increase was driven by a higher portfolio balance, increased recoveries from delinquent loans, and a decrease in nonperforming loans.

Interest Income. Interest income increased by $11.3 million to $52.0 million for the three months ended March 31, 2022, compared to $40.7 million for the three months ended March 31, 2021. The increase is primarily attributable to higher portfolio balances offset by a decrease in the average loan yield, which decreased from 8.41% for the three months ended March 31, 2021 to 7.76% for the three months ended March 31, 2022.

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate for the three months ended March 31, 2022 and 2021, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance (i.e., $746.2 million) by the previous period’s average yield (i.e., 8.41%). The effect of rate changes is calculated by multiplying the change in average yield (i.e., (0.65)%) by the current period’s average loan balance (i.e., $2.7 billion).


	Three Months Ended March 31, 2022 and 2021
($ in thousands)	Average Loans		Interest Income			Average Yield (1)
Three months ended March 31, 2022	$	2,682,851	$	52,049			7.76	%
Three months ended March 31, 2021		1,936,664		40,707			8.41	%
Volume variance		746,187		15,684
Rate variance				(4,342	)		(0.65	)%
Total interest income variance			$	11,342
(1) Annualized.


	Three Months Ended March 31, 2022 and December 31, 2021
($ in thousands)	Average Loans		Interest Income			Average Yield (1)
Three months ended March 31, 2022	$	2,682,851	$	52,049			7.76	%
Three months ended December 31, 2021		2,404,451		49,360			8.21	%
Volume variance		278,400		5,715
Rate variance				(3,026	)		(0.45	)%
Total interest income variance			$	2,689
(1) Annualized.

Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitizations, remained flat from $23.7 million for the three months ended December 31, 2021 to $23.6 million for the three months ended March 31, 2022. Portfolio related interest expense increased from $20.8 million for the three months ended March 31, 2021 to $23.6 million for the three months ended March 31, 2022, primarily attributable to a higher loan portfolio being financed partially offset by a significantly lower cost of funds.

The following tables present the information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three months ended March 31, 2022 and 2021, respectively.


	Three Months Ended March 31, 2022 and 2021
($ in thousands)	Average Debt (1)		Interest Expense			Cost of Funds (2)
Three months ended March 31, 2022	$	2,356,433	$	23,556			4.00	%
Three months ended March 31, 2021		1,662,170		20,832			5.01	%
Volume variance		694,263		8,701
Rate variance				(5,977	)		(1.01	)%
Total interest expense variance			$	2,724

(1)

Includes securitizations and warehouse agreements.

(2)

Annualized.


	Three Months Ended March 31, 2022 and December 31, 2021
($ in thousands)	Average Debt (1)		Interest Expense			Cost of Funds (2)
Three months ended March 31, 2022	$	2,356,433	$	23,556			4.00	%
Three months ended December 31, 2021		2,068,304		23,666			4.58	%
Volume variance		288,129		3,297
Rate variance				(3,407	)		(0.58	)%
Total interest expense variance			$	(110	)

(1)

Includes securitizations and warehouse agreements.

(2)

Annualized.

Net Interest Income After Provision for Loan Losses


	Three Months Ended March 31,
($ in thousands)	2022		2021		$ Change
Net interest income - portfolio related	$	28,493	$	19,875	$	8,618
Interest expense - corporate debt		17,140		7,350		9,790
Net interest income		11,353		12,525		(1,172	)
Provision for loan losses		730		105		625
Net interest income after provision for loan losses	$	10,623	$	12,420	$	(1,797	)

Interest Expense — Corporate Debt. Corporate debt interest expense increased by $9.8 million to $17.1 million for the three months ended March 31, 2022, primarily due to the $12.8 million prepayment fee and write-off of unamortized debt issuance costs associate with the payoff of our corporate debt in the current quarter.

Provision for Loan Losses. Our provision for loan losses increased from $0.1 million for the three months ended March 31, 2021 to $0.7 million for the three months ended March 31, 2022, primarily due to the 41% increase in our loans held for investment portfolio.

Other Operating Income

The $2.8 million increase of other operating income during the three months ended March 31, 2022 was mainly due to the increase in gain on disposition of loans, the servicing fee income and MSR valuation gain on the Century servicing portfolio.


	Three Months Ended March 31,
($ in thousands)	2022		2021			$ Change
Gain on disposition of loans	$	4,540	$	2,839		$	1,701
Unrealized gain/(loss) on fair value loans		11		(2	)		13
Other income (expense)		1,097		(36	)		1,133
Total other operating income	$	5,648	$	2,801		$	2,847

Operating Expenses

Total operating expenses increased by $1.6 million to $12.3 million for the three months ended March 31, 2022 from $10.6 million for three months ended March 31, 2021, primarily due to the $0.8 million increase in professional fees, offset by the $0.7 million decrease in net expenses of real estate owned.


	Three Months Ended March 31,
($ in thousands)	2022			2021		$ Change
Compensation and employee benefits	$	5,323		$	5,186	$	137
Rent and occupancy		442			463		(21	)
Loan servicing		2,450			1,867		583
Professional fees		1,362			533		829
Real estate owned, net		(175	)		509		(684	)
Other operating expenses		2,848			2,059		789
Total operating expenses	$	12,250		$	10,617	$	1,633

Compensation and Employee Benefits. Compensation and employee benefits of $5.3 million for the three months ended March 31, 2022 remained relatively consistent compared to the $5.2 million for the three months ended March 31, 2021.

Rent and Occupancy. Rent and occupancy expenses remained consistent at $0.4 million for the three months ended March 31, 2022 and 2021.

Loan Servicing. Loan servicing expenses increased from $1.9 million for the three months ended March 31, 2021 to $2.5 million for the three months ended March 31, 2022 primarily attributable to the increase in our loan portfolio.

Professional Fees. Professional fees increased from $0.5 million for the three months ended March 31, 2021 to $1.4 million for the three months ended March 31, 2022, mainly due to higher legal fees related to our financing transactions.

Net Expenses of Real Estate Owned. Net expenses of real estate owned decreased from $0.5 million for the three months ended March 31, 2021 to income of $0.2 million for the three months ended March 31, 2022, mainly due to recapture of previous valuation write-offs as property valuations have improved.

Other Operating Expenses. Other operating expenses increased from $2.1 million for the for the three months ended March 31, 2021 to $2.8 million three months ended March 31, 2022. The increase is mainly attributable to increases in data processing costs, and an increase in appraisal expenses due to higher loan production volumes.

Income Tax Expense. Income tax expense was $0.8 million and $1.2 million for the three months ended March 31, 2022 and 2021. Our consolidated effective tax rate as a percentage of pre-tax income was 27.4% and 26.2% for the three months ended March 31, 2022 and 2021, respectively.

Quarterly Results of Operations

The following table sets forth certain financial information for each completed fiscal quarter since the quarter ended June 30, 2020. 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 Quarterly 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
	March 31, 2022				December 31, 2021			September 30, 2021			June 30, 2021			March 31, 2021				December 31, 2020			September 30, 2020			June 30, 2020
($ in thousands)	(unaudited)
Interest income	$	52,049			$	49,360		$	46,923		$	44,978		$	40,707			$	41,556		$	41,374		$	39,755
Interest expense - portfolio related		23,556				23,666			20,321			20,566			20,832				21,442			22,347			21,189
Net interest income - portfolio related		28,493				25,694			26,602			24,412			19,875				20,114			19,027			18,566
Net interest margin - portfolio related		4.25	%			4.27	%		4.97	%		4.83	%		4.10	%			4.07	%		3.77	%		3.54	%
Interest expense - corporate debt		17,140				4,462			4,488			4,309			7,350				1,900			1,913			1,894
Net interest income		11,353				21,232			22,114			20,103			12,525				18,214			17,114			16,672
Net interest margin - total company		1.69	%			3.53	%		4.13	%		3.98	%		2.59	%			3.68	%		3.39	%		3.18	%
Provision for (reversal of) loan losses		730				377			228			(1,000	)		105				406			1,573			1,800
Net interest income after provision for loan losses		10,623				20,855			21,886			21,103			12,420				17,808			15,541			14,872
Other operating income (expense)		5,648				2,617			339			2,432			2,801				4,691			1,349			(1,339	)
Operating expenses		12,250				12,095			11,298			10,650			10,617				10,746			11,865			10,908
Income before income taxes		4,021				11,377			10,927			12,885			4,604				11,753			5,025			2,625
Less Income attributable to noncontrolling interest		110				—			—			—			—				—			—			—
Income tax expense		790				3,024			2,905			3,432			1,208				2,177			1,544			484
Net income	$	3,121		(1)	$	8,353		$	8,022		$	9,453		$	3,396		(2)	$	9,576		$	3,481		$	2,141

(1)

Net income for the three months ended March 31, 2022 includes a write-off of deferred deal costs and prepayment fees related to the refinancing of the corporate debt. Excluding the one-time write-off, net income for the period is $12.4 million.

(2)

Net income for the three months ended March 31, 2021 includes a write-off of deferred deal costs and prepayment fees related to the refinancing of the corporate debt. Excluding the one-time write-off, net income for the period is $6.7 million.

Liquidity and Capital Resources

Sources and Uses of Liquidity

We fund our lending activities primarily through borrowings under our warehouse facilities, securitizations, other corporate-level debt, equity, 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

We had cash of $36.3 million and $20.4 million, excluding restricted cash of $10.8 million and $6.8 million as of March 31, 2022 and 2021, respectively. The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities as of the periods indicated:


	Three Months Ended
($ in thousands)	March 31, 2022			March 31, 2021
Cash provided by (used in):
Operating activities	$	11,836		$	10,424
Investing activities		(293,658	)		(53,656	)
Financing activities		281,684			50,181
Net change in cash, cash equivalents, and restricted cash	$	(138	)	$	6,949

Cash flows from operating activities primarily includes net income adjusted for (1) cash used for origination and purchase 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 three months ended March 31, 2022, our net cash provided by operating activities consisted mainly of $3.2 million in net income, $12.1 million add-back of noncash debt issuance discounts and costs amortization.

For the three months ended March 31, 2022, our net cash used in investing activities consisted mainly of $585.7 million in cash used to originate held for investment loans, partially offset by $147.3 million proceeds from sales of loans and $146.2 million in cash received in payoffs of loans held for investment.

For the three months ended March 31, 2022, our net cash provided by financing activities consisted mainly of $607.8 million in borrowings from our warehouse and repurchase facilities, $269.0 million in proceeds of asset-backed securities issued, and $215.0 million in proceeds from secured financing. The cash generated was partially offset by payments we made of $483.6 million on our warehouse and repurchase facilities repayments, $170.8 on secured financing repayments, and $145.1 million on asset-backed securities issued repayments.

During the three months ended March 31, 2022, we used approximately $0.1 million of net cash and cash equivalents from operations, investing and financing activities. During the three months ended March 31, 2021, we generated approximately $6.9 million of net cash and cash equivalents in operations, investing and financing activities.

Warehouse Facilities

As of March 31, 2022, we had four non-mark-to-market warehouse facilities and one modified mark-to-market warehouse facility to support our loan origination and acquisition facilities. One agreement is a two-year warehouse repurchase facility, two agreements are one-year warehouse repurchase facilities and two agreements are three-year warehouse facilities. The borrowings are collateralized by primarily performing loans, bearing interest at one-month LIBOR with a 0.75% floor plus a margin that ranges from 2.75% to 4.50%. Borrowing under these facilities was $427.0 million with $223.0 million of available capacity under our warehouse and repurchase facilities as of March 31, 2022.

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 agreements 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. The warehouse facilities also contain customary covenants, including financial covenants that require us to maintain minimum liquidity, 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 March 31, 2022, we were in compliance with these covenants.

Securitizations

From May 2011 through March 2022, we have completed twenty securitizations, issuing $4.3 billion in principal amount of securities to third parties through twenty 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 secured borrowings under U.S. GAAP. The following table summarizing the investor real estate loans securitized, securities issued, securities retained by us at the time of the securitization, and as of March 31, 2022 and December 31, 2021, and the stated maturity for each securitization. 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.


($ in thousands)			Securities Retained as of
Trusts	Securities Issued		Issuance Date		March 31, 2022		December 31, 2021		Stated Maturity Date
2015-1 Trust		285,457		27,372		15,290		15,526	July 2045
2016-1 Trust		319,809		38,792		17,633		17,633	April 2046
2017-2 Trust		245,601		12,927		3,486		4,064	October 2047
2018-1 Trust		176,816		9,308		2,652		2,849	April 2048
2018-2 Trust		307,988		16,210		5,628		6,608	October 2048
2019-1 Trust		235,580		12,399		5,301		6,180	March 2049
2019-2 Trust		207,020		10,901		5,588		5,922	July 2049
2019-3 Trust		154,419		8,127		4,591		4,799	October 2049
2020-1 Trust		248,700		13,159		8,049		8,678	February 2050
2020-2 Trust		96,352		32,118		12,847		12,847	June 2050
2020-MC1 Trust		179,371		96,585		111,377		108,891	July 2050
2021-1 Trust		251,301		13,227		12,518		12,518	May 2051
2021-2 Trust		194,918		10,260		—		—	August 2051
2021-3 Trust		204,205		—		—		—	October 2051
2021-4 Trust		319,116		—		—		—	December 2051
2022-1 Trust		273,594		5,015		4,961		—	February 2052
Total	$	3,700,247	$	306,400	$	209,921	$	206,515

The following table summarizes outstanding bond balances for each securitization as of March 31, 2022 and December 31, 2021:


($ in thousands)	March 31, 2022		December 31, 2021
2015-1 Trust		14,407		17,536
2016-1 Trust		32,518		36,401
2017-2 Trust		75,303		86,497
2018-1 Trust		57,284		62,375
2018-2 Trust		123,854		143,152
2019-1 Trust		115,299		132,306
2019-2 Trust		114,665		122,205
2019-3 Trust		90,919		95,521
2020-1 Trust		162,092		174,550
2020-2 Trust		73,750		80,676
2020-MC1 Trust		12,842		35,711
2021-1 Trust		228,015		236,190
2021-2 Trust		191,183		197,744
2021-3 Trust		199,381		202,793
2021-4 Trust		305,530		315,489
2022-1 Trust		270,642		—
	$	2,067,684	$	1,939,146

As of March 31, 2022 and December 31, 2021, the weighted average rate on the securities and certificates for the Trusts were as follows:


	March 31, 2022			December 31, 2021
2015-1 Trust		7.21	%		7.22	%
2016-1 Trust		8.10	%		8.22	%
2017-2 Trust		3.36	%		3.37	%
2018-1 Trust		4.04	%		4.04	%
2018-2 Trust		4.31	%		4.39	%
2019-1 Trust		3.95	%		4.02	%
2019-2 Trust		3.45	%		3.44	%
2019-3 Trust		3.27	%		3.26	%
2020-1 Trust		2.85	%		2.82	%
2020-2 Trust		4.36	%		4.45	%
2020-MC1 Trust		4.57	%		4.42	%
2021-1 Trust		1.74	%		1.73	%
2021-2 Trust		2.01	%		2.28	%
2021-3 Trust		2.46	%		2.45	%
2021-4 Trust		3.16	%		3.11	%
2022-1 Trust		3.94	%		—

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), agreements, warehouse 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.

Secured Financing (Corporate Debt)

On February 5, 2021, the Company entered into a five-year $175.0 million syndicated corporate debt agreement, the (“the 2021 Term Loan”). The 2021 Term Loan had an interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the amounts owed pursuant to the 2019 debt agreement (“2019 Term Loan”). The remaining portion of the net proceeds from the 2021 Term Loan was used for loan originations and general corporate purposes. The 2021 Term Loan was paid off in March 2022.

On March 15, 2022, the Company entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to the 2021 Term Loan. The remaining portion of the net proceeds from the 2022 Term Loan will be used for loan originations and general corporate purposes.

At-The-Market Equity Offering Program

Contractual Obligations and Commitments

As of March 31, 2022, we maintained warehouse facilities to finance our investor real estate loans and had approximately $427.0 million in outstanding borrowings with $223.0 million of available capacity under our warehouse and repurchase facilities.

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.

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. All statements (other than statements of historical facts) in this Quarterly Report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Forward-looking statements may contain expectations regarding our operations, including the resumption of loan originations, our ability to resolve non-performing loans and avoid losses on non-performing loans and the disposition of REOs and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future funding and development of our business and products, including the future results of our recently initiated at-the-market equity offering program. Although we believe that the expectations reflected in these forward-looking statements have a reasonable basis, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this Quarterly Report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:

•

the description of our business contained in our Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the Securities and Exchange Commission (“SEC”) on March 15, 2022

•

the discussion of our analysis of financial condition and results of operations contained in this Quarterly Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

•

the notes to the consolidated financial statements contained in this Quarterly Report

•

cautionary statements we make in our public documents, reports and announcements

Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. 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 Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the our management, including the our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. 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.

In accordance with Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report and has concluded that our disclosure controls and procedures, as of such date, were effective to accomplish their objectives at a reasonable assurance level. Management concluded that the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.

Changes in Internal Control over Financial Reporting.

During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.

PART II—OTHER INFORMATION

Item 1. 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. 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.

Item 1A. Risk Factors.

Intentionally omitted pursuant to smaller reporting company reduced disclosure requirements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides the information with respect to purchases made by us of shares of our common stock during the three months ended March 31, 2022.


Period	Total Number of Shares Purchased (1)(2)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 2022		33,647	$	13.61		—	$	—
February 2022		—		—		—		—
March 2022		—		—		—		—
Total		33,647	$	13.61		—	$	—

(1)

Shares purchased during the period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards during the period.

(2)

The Company currently does not have a common stock repurchase program.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits below are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.


		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	Amended and Restated Bylaws of Velocity Financial, Inc.	8-K	001-39183	3.2	3/25/2022

3.4	Certificate of Designation of Series A Convertible Preferred Stock of Velocity Financial, Inc.	8-K	001-39183	3.1	4/7/2020

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	4/7/2020

4.3	Description of the Registrant’s Securities	10K	001-39183	4.3	4/7/2020

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	4/7/2020

10.3	Registration Rights Agreement, dated as of April 7, 2020	8-K	333-234250	10.1	4/7/2020

10.4	Securities Purchase Agreement among Velocity Financial, Inc. and the Purchasers Party thereto dated April 5, 2020	8-K	001-39183	10.1	4/6/2020

10.5	Credit Agreement Dated as of February 5, 2021, among Velocity Financial, Inc., Velocity Commercial Capital, LLC and Jefferies Finance LLC, as Administrative Agent and Collateral Agent	8-K	001-39183	10	2/9/2021

10.6	Velocity Financial, Inc. 2020 Omnibus Incentive Plan*	8-K	001-39183	10.1	1/22/2020

10.7	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

10.8	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

10.9	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

10.10	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

10.11	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

10.12	Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.11	1/6/2020

10.13	Velocity Financial 2022 Annual Incentive Program for Messrs. Farrar, Szczepaniak and Taylor*	8-K	001-39183	-	2/15/2022

10.14	Form of Equity Distribution Agreement, dated September 3, 2021	8-K	001-39183	1.1	9/7/2021

10.15	Form of Officer and Director Indemnity Agreement*	S-1/A	333-234250	10.37	11/6/2019

10.16	Form of Performance Stock Unit Grant and Agreement*

10.17	Note Purchase Agreement Dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC, U.S. Bank Trust Company, National Association, as collateral agent, and the respective purchasers of the Notes.	8-K	001-39183	10.1	3/16/2022

10.18	Security Agreement, dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC and U.S. Bank Trust Company, National Association, as collateral agent.	8-K	001-39183	10.2	3/16/2022


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		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (ii) the Consolidated Statements of Income for the quarter ended March 31, 2022 and March 31, 2021, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended March 31, 2022 and March 31, 2021, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2022 and March 31, 2021 and (v) the Notes to unaudited Consolidated Financial Statements.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL 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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	VELOCITY FINANCIAL, INC.

Date: May 5, 2022	By:	/s/ Christopher D. Farrar
		Christopher D. Farrar
		Chief Executive Officer

Date: May 5, 2022	By:	/s/ Mark R. Szczepaniak
		Mark R. Szczepaniak
		Chief Financial Officer