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 September 30, 2021

OR

☐ 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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

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 November 1, 2021, the registrant had 32,293,042 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’/ Members’ 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	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
SIGNATURES		52

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PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

VELOCITY FINANCIAL, INC.

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC AND SUBSIDIARIES)

CONSOLIDATED BALANCE SHEETS

($ in thousands, except par value amounts)

	September 30, 2021		December 31, 2020
	(Unaudited)
ASSETS
Cash and cash equivalents	$	35,497	$	13,273
Restricted cash		9,586		7,020
Loans held for sale, net		—		13,106
Loans held for investment, net		2,295,697		1,948,089
Loans held for investment, at fair value		1,360		1,539
Total loans, net		2,297,057		1,962,734
Accrued interest receivables		11,974		11,373
Receivables due from servicers		57,058		71,044
Other receivables		870		4,085
Real estate owned, net		17,905		15,767
Property and equipment, net		3,348		4,145
Net deferred tax asset		17,026		6,654
Other assets		6,843		6,779
Total assets	$	2,457,164	$	2,102,874
LIABILITIES
Accounts payable and accrued expenses	$	79,360	$	63,361
Secured financing, net		163,449		74,982
Securitizations, net		1,623,674		1,579,019
Warehouse and repurchase facilities, net		258,491		75,923
Total liabilities		2,124,974		1,793,285
MEZZANINE EQUITY
Series A Convertible preferred stock (45,000 shares designated, $0.01 par value; 45,000    shares issued and outstanding)		90,000		90,000
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value, 25,000,000 shares authorized; 45,000 issued and    outstanding as reflected in Mezzanine Equity)		—		—
Common stock ($0.01 par value, 100,000,000 shares authorized at September 30, 2021 and December 31, 2020; 20,604,732 and 20,087,494 shares issued, respectively)		206		201
Additional paid-in capital		205,915		204,190
Retained earnings		36,069		15,198
Total stockholders' equity		242,190		219,589
Total liabilities, mezzanine equity and stockholders' equity	$	2,457,164	$	2,102,874

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

ASSETS
Restricted cash	$	5,475	$	6,743
Loans held for investment, net		1,933,800		1,874,991
Accrued interest and other receivables		67,664		82,342
Real estate owned, net		12,257		9,698
Other assets		5		12
Total assets	$	2,019,201	$	1,973,786
LIABILITIES
Accounts payable and accrued expenses	$	43,157	$	43,795
Securities issued		1,623,674		1,579,019
Total liabilities	$	1,666,831	$	1,622,814

See accompanying Notes to Consolidated Financial Statements.

2

VELOCITY FINANCIAL, INC.

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021			2020
Interest income	$	46,923	$	41,374		$	132,608		$	125,766
Interest expense — portfolio related		20,321		22,347			61,720			66,384
Net interest income — portfolio related		26,602		19,027			70,888			59,382
Interest expense — corporate debt		4,488		1,913			16,147			10,149
Net interest income		22,114		17,114			54,741			49,233
Provision for (reversal of) loan losses		228		1,573			(668	)		4,662
Net interest income after provision for (reversal of) loan losses		21,886		15,541			55,409			44,571
Other operating income
Gain (loss) on disposition of loans		306		(51	)		5,536			2,721
Unrealized gain on fair value loans		—		379			18			411
Other income (expense)		33		1,021			18			(1,504	)
Total other operating income		339		1,349			5,572			1,628
Operating expenses
Compensation and employee benefits		4,738		5,692			14,470			16,595
Rent and occupancy		447		415			1,340			1,319
Loan servicing		2,014		2,168			5,803			5,825
Professional fees		736		1,051			2,064			2,823
Real estate owned, net		1,186		898			2,734			2,439
Other operating expenses		2,177		1,641			6,154			5,822
Total operating expenses		11,298		11,865			32,565			34,823
Income before income taxes		10,927		5,025			28,416			11,376
Income tax expense		2,905		1,544			7,545			3,175
Net income	$	8,022	$	3,481		$	20,871		$	8,201
Less undistributed earnings attributable to participating securities	$	3,030	$	—		$	7,884		$	—
Less deemed dividends on preferred stock	$	—	$	—		$	—		$	48,955
Net earnings (loss) attributable to common stockholders	$	4,992	$	3,481		$	12,987		$	(40,754	)
Earnings (loss) per common share
Basic	$	0.25	$	0.17		$	0.65		$	(2.03	)
Diluted	$	0.23	$	0.11		$	0.62		$	(2.03	)
Weighted average common shares outstanding
Basic		20,090		20,087			20,088			20,087
Diluted		34,212		32,435			33,858			20,087

See accompanying Notes to Consolidated Financial Statements.

3

VELOCITY FINANCIAL, INC.

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ / MEMBERS' EQUITY

($ in thousands)

(Unaudited)

				Common Stock
	Members’ Equity			Shares		Par Value		Additional Paid-in Capital			Retained Earnings			Total Stockholders' Equity
Balance – December 31, 2019	$	152,844			—	$	—	$	—		$	—		$	152,844
Cumulative effect of change in accounting principle (1)		—			—		—		—			(96	)		(96	)
Balance - January 1, 2020	$	152,844			—	$	—	$	—		$	(96	)	$	152,748
Class A equity units conversion		(92,650	)		—		—		—			—			(92,650	)
Class D equity units conversion		(60,194	)		—		—		—			—			(60,194	)
Issuance of common stock		—			20,087,494		201		247,539			—			247,740
Stock-based compensation		—			—		—		207			—			207
Net income		—			—		—		—			2,579			2,579
Balance – March 31, 2020	$	—			20,087,494	$	201	$	247,746		$	2,483		$	250,430
Deemed dividends-convertible preferred stock		—			—		—		(46,472	)		(2,483	)		(48,955	)
Issuance of warrants		—			—		—		2,158			—			2,158
Stock-based compensation		—			—		—		253			—			253
Net income		—			—		—		—			2,141			2,141
Balance – June 30, 2020	$	—			20,087,494	$	201	$	203,685		$	2,141		$	206,027
Stock-based compensation		—			—		—		252			—			252
Net income		—			—		—		—			3,481			3,481
Balance – September 30, 2020	$	—		$	20,087,494	$	201	$	203,937		$	5,622		$	209,760
Balance – December 31, 2020	$	—			20,087,494	$	201	$	204,190		$	15,198		$	219,589
Restricted stock awarded and earned stock compensation		—			480,000		5		226			—			231
Stock-based compensation - Options		—			—		—		254			—			254
Net income		—			—		—		—			3,396			3,396
Balance – March 31, 2021		—			20,567,494	$	206	$	204,670		$	18,594		$	223,470
Restricted stock awarded and earned stock compensation		—			26,511		—		291			—			291
Stock-based compensation - Options		—			—		—		254			—			254
Net income		—			—		—		—			9,453			9,453
Balance – June 30, 2021	$	—		$	20,594,005	$	206	$	205,215		$	28,047		$	233,468
Issuance of common stock		—			10,727		—		137			—			137
Restricted stock awarded and earned stock compensation		—			—		—		307			—			307
Stock-based compensation - Options		—			—		—		256			—			256
Net income		—			—		—		—			8,022			8,022
Balance – September 30, 2021	$	—			20,604,732	$	206	$	205,915		$	36,069		$	242,190

(1) Impact due to adoption of ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", and related amendments on January 1, 2020.

See accompanying Notes to Consolidated Financial Statements.

4

VELOCITY FINANCIAL, INC.

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Nine Months Ended September 30,
	2021			2020
	(Unaudited)
Cash flows from operating activities:
Net income	$	20,871		$	8,201
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		883			918
Amortization of right-of-use assets		885			916
(Reversal of) provision for loan losses		(668	)		4,662
Origination of loans held for sale		—			(96,064	)
Proceeds from sales of loans held for sale		—			80,858
Purchase of held for sale loans		(755	)		(1,232	)
Repayments on loans held for sale		16			19,850
Accretion and amortization of loan costs, net		4,696			3,288
Provision for uncollectible borrower advances		170			518
Gain on disposition of loans		(4,745	)		(2,209	)
Real estate acquired through foreclosure in excess of recorded investment		(791	)		(511	)
Amortization of debt issuance discount and costs		14,088			12,807
Loss on disposal of property and equipment		18			41
Change in valuation of real estate owned		1,619			1,744
Change in valuation of fair value loans		(18	)		(411	)
Change in valuation of held for sale loans		(15	)		(345	)
Gain on sale of real estate owned		(240	)		(652	)
Stock-based compensation		1,595			712
Net deferred tax benefit		(10,373	)		6,489
(Increase) decrease in operating assets and liabilities:
Accrued interest and other receivables		(1,043	)		(5,549	)
Other assets		(512	)		(5,112	)
Accounts payable and accrued expenses		13,893			8,445
Net cash provided by operating activities		39,574			37,364
Cash flows from investing activities:
Purchase of loans held for investment		(9,412	)		(3,571	)
Origination of loans held for investment		(840,798	)		(161,797	)
Payoffs of loans held for investment and loans at fair value		427,224			242,166
Proceeds from sales of loans originally classified as held for investment		99,117			—
Proceeds from sale of real estate owned		7,459			5,867
Capitalized real estate owned improvements		(78	)		(598	)
Change in advances		(1,597	)		(5,272	)
Change in impounds and deposits		1,894			(2,732	)
Purchase of property and equipment		(104	)		(724	)
Net cash (used in) provided by investing activities		(316,295	)		73,339
Cash flows from financing activities:
Warehouse repurchase facilities advances		717,605			267,539
Warehouse repurchase facilities repayments		(534,062	)		(670,404	)
Proceeds from secured financing		175,000			—
Repayment of secured financing		(81,063	)		(75,000	)
Proceeds of securitizations, net		456,184			517,995
Repayment of securitizations		(412,916	)		(284,901	)
Debt issuance costs		(18,981	)		(8,552	)
Issuance of common stock		137			100,800
Preferred stock issuance costs		—			41,044
Proceeds from issuance of warrants		—			2,158
Stock issuance costs		(393	)		—
IPO deal costs		—			(1,903	)
Net cash provided by (used in) financing activities		301,511			(111,224	)
Net increase (decrease) in cash, cash equivalents, and restricted cash		24,790			(521	)
Cash, cash equivalents, and restricted cash at beginning of period		20,293			27,552
Cash, cash equivalents, and restricted cash at end of period	$	45,083		$	27,031

See accompanying Notes to Consolidated Financial Statements.

5

VELOCITY FINANCIAL, INC.

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Nine Months Ended September 30,
	2021		2020
	(Unaudited)
Supplemental cash flow information:
Cash paid during the period for interest	$	63,706	$	63,516
Cash paid during the period for income taxes		7,224		2,861
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to held for sale		80,498		—
Transfer of loans held for investment to real estate owned		10,107		7,435
Transfer of accrued interest to loans held for investment		1,776		6,574
Discount on issuance of securitizations		223		6,428
Transfer of loans held for sale to held for investment		10,178		213,609
Deferred IPO costs charged against additional paid-in capital		—		4,000
Deferred stock issuance costs charged against additional paid-in capital	1			—

See accompanying Notes to Consolidated Financial Statements

6

VELOCITY FINANCIAL, INC. AND SUBSIDIARIES

(FORMERLY KNOWN AS VELOCITY FINANCIAL, LLC 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 small balance 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 engage in any other significant line of business or offer any other products or services, nor does it 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 2014-1 Trust through and including the 2021-2 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.

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

The accompanying unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2021 and 2020 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, 2020.

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) Partnership to Corporation Conversion

On January 16, 2020, Velocity Financial, LLC converted from a limited liability company to a corporation and changed its name to Velocity Financial, Inc. The Conversion was accounted for in accordance with ASC 805-50 –Business Combinations, as a transaction between entities under common control. All assets and liabilities of Velocity Financial, LLC were contributed to Velocity Financial, Inc. at their carrying value, and the results of operations are being presented as if the Conversion had occurred on January 1, 2020. Additionally, Class A and Class D’s partnership equity at December 31, 2019 were converted to stockholders’ equity and presented as such on the Consolidated Balance Sheets and the Consolidated Statement of Changes in Stockholders’ Equity effective January 1, 2020.

(b) 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.

7

(c) 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, 2020 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 2020 Annual Report.

(d) 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 following table presents a summary of the assets and liabilities of the Trusts as of September 30, 2021 and December 31, 2020.  Intercompany balances have been eliminated for purposes of this presentation (in thousands):

	September 30, 2021		December 31, 2020
Restricted cash	$	5,475	$	6,743
Loans held for investment, net		1,933,800		1,874,991
Accrued interest and other receivables		67,664		82,342
Real estate owned, net		12,257		9,698
Other assets		5		12
Total assets	$	2,019,201	$	1,973,786
Accounts payable and accrued expenses	$	43,157	$	43,795
Securities issued		1,623,674		1,579,019
Total liabilities	$	1,666,831	$	1,622,814

The consolidated financial statements as of September 30, 2021 and December 31, 2020 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

Accounting Standards Adopted in 2021

Effective January 1, 2021, the Company adopted ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” ASU 2019-12 provides guidance to simplify the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.

ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. The adoption of this standard on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied

8

through December 31, 2022. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.

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 nine months ended September 30, 2021 and 2020 (in thousands):

	Nine Months Ended September 30,
	2021		2020
Cash and cash equivalents	$	35,497	$	19,210
Restricted cash		9,586		7,821
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	45,083	$	27,031

Note 5 — Loans Held for Sale, Net

 The following table summarizes loans held for sale as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Unpaid principal balance	$	—	$	12,929
Valuation adjustments		—		(17	)
Deferred loan origination costs		—		194
Ending balance	$	—	$	13,106

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

The following tables summarize loans held for investment as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	2,269,950		$	1,344	$	2,271,294
Valuation adjustments on FVO loans		—			16		16
Deferred loan origination costs		29,775			—		29,775
		2,299,725			1,360		2,301,085
Allowance for loan losses		(4,028	)		—		(4,028	)
Total loans held for investment and loans held for investment at    fair value, net	$	2,295,697		$	1,360	$	2,297,057

	December 31, 2020
	Loans held for investment, net			Loans held for investment, at fair value			Total loans held for investment
Unpaid principal balance	$	1,930,334		$	1,541		$	1,931,875
Valuation adjustments on FVO loans		—			(2	)		(2	)
Deferred loan origination costs		23,600			—			23,600
		1,953,934			1,539			1,955,473
Allowance for loan losses		(5,845	)		—			(5,845	)
Total loans held for investment and loans held for investment at    fair value, net	$	1,948,089		$	1,539		$	1,949,628

9

The following table presents the activity in the Unpaid Principal Balance (“UPB”) and amortized cost basis of loans in the Company's COVID-19 forbearance program for the three and nine months ended September 30, 2021 ($ in thousands):

	Three Months Ended September 30, 2021								Nine Months Ended September 30, 2021
	UPB			%	Amortized Cost			%	UPB			%	Amortized Cost			%
Beginning balance	$	342,442			$	346,697			$	392,073			$	396,918
Additions		—				—				2,616				2,615
Foreclosures		—				—				(253	)			(260	)
Repayments		(22,698	)			(23,037	)			(74,692	)			(75,613	)
Ending balance	$	319,744			$	323,660			$	319,744			$	323,660
Performing/Accruing	$	249,944		78.2%	$	252,944		78.2%	$	249,944		78.2%	$	252,944		78.2%
Nonperforming/Nonaccrual	$	69,800		21.8%	$	70,716		21.8%	$	69,800		21.8%	$	70,716		21.8%

The following table presents the UPB and amortized cost basis of loans in the Company's COVID-19 forbearance program as of December 31, 2020 ($ in thousands):

	December 31, 2020
	UPB		%	Amortized Cost		%
Ending balance	$	392,073		$	396,918
Performing/Accruing	$	327,708	83.6%	$	330,495	83.3%
Nonperforming/Nonaccrual	$	64,365	16.4%	$	66,423	16.7%

Since April 1, 2020, the inception of the COVID-19 forbearance program, the Company has modified $407.9 million in UPB of loans, which includes capitalized interest of $9.8 million. As of September 30, 2021, $112.5 million in UPB of modified loans has been paid down, which includes $1.8 million of capitalized interest received.

Approximately 78.2% and 83.6% of the COVID forbearance loans in UPB were performing, and 21.8% and 16.4% were on nonaccrual status as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, 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):

	September 30, 2021		December 31, 2020
The 2013 repurchase agreement	$	101,711	$	91,074
The 2015 repurchase agreement		176,156		—
The Bank credit agreement		40,082		—
The 2021 repurchase agreement		27,496		—
Total pledged loans	$	345,445	$	91,074
2014-1 Trust		18,813		22,228
2015-1 Trust		36,163		48,179
2016-1 Trust		56,998		71,271
2016-2 Trust		34,755		47,282
2017-1 Trust		60,506		81,376
2017-2 Trust		104,385		137,970
2018-1 Trust		79,352		112,042
2018-2 Trust		174,205		224,195
2019-1 Trust		162,726		203,144
2019-2 Trust		143,020		175,560
2019-3 Trust		112,630		135,527
2020-1 Trust		203,442		241,664
2020-2 Trust		105,636		123,646
2020-MC1 Trust		155,669		228,470
2021-1 Trust		256,682		—
2021-2 Trust		203,707		—
Total	$	1,908,689	$	1,852,554

10

(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 September 30, 2021 and December 31, 2020, and accruing loans that were 90 days or more past due (“DPD”) as of September 30, 2021 and December 31, 2020. These accruing loans that were 90 or more days past due represent loans that were granted a forbearance under the Company’s COVID-19 payment forbearance programs.

	September 30, 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			Loans 90+ DPD Still Accruing COVID-19 Program
	($ in thousands)
Commercial - Purchase	$	20,707	$	19,945	$	762	$	12		0.1	%	$	—
Commercial - Refinance		84,324		74,483		9,841		938		4.5			—
Residential 1-4 Unit - Purchase		18,419		18,162		257		96		0.5			—
Residential 1-4 Unit - Refinance		114,785		110,595		4,190		261		1.3			—
Short Term 1-4 Unit - Purchase		5,982		5,144		838		110		0.5			—
Short Term 1-4 Unit - Refinance		47,591		42,607		4,984		359		1.7			—
Total	$	291,808	$	270,936	$	20,872	$	1,776		8.6	%	$	—
Troubled Debt Restructuring included in nonaccrual loans:	$	167	$	—	$	—	$	—		—		$	—

	December 31, 2020
	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			Loans 90+ DPD Still Accruing COVID-19 Program
	($ in thousands)
Commercial - Purchase	$	22,166	$	20,955	$	1,211	$	153		0.7	%	$	—
Commercial - Refinance		101,117		96,804		4,313		519		2.3			1,747
Residential 1-4 Unit - Purchase		26,373		25,839		534		128		0.6			—
Residential 1-4 Unit - Refinance		120,152		113,206		6,946		465		2.1			109
Short Term 1-4 Unit - Purchase		6,585		3,808		2,777		525		2.4			—
Short Term 1-4 Unit - Refinance		59,843		53,616		6,227		878		4.0			123
Total	$	336,236	$	314,228	$	22,008	$	2,668		12.1	%	$	1,979
Troubled Debt Restructuring included in nonaccrual loans:	$	173	$	—	$	—	$	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, other than the COVID-19 forbearance-granted loans.

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 September 30, 2021 and 2020, and the amount of accrued interest receivables written off by reversing interest income by portfolio segment for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,
	2021				2020
	Amortized Cost		Interest Reversal		Amortized Cost		Interest Reversal
Commercial - Purchase	$	426,483	$	114	$	293,886	$	151
Commercial - Refinance		710,201		146		695,664		459
Residential 1-4 Unit - Purchase		340,611		33		282,212		215
Residential 1-4 Unit - Refinance		671,703		368		735,072		773
Short Term 1-4 Unit - Purchase		50,758		103		—		—
Short Term 1-4 Unit - Refinance		99,969		165		—		—
Total	$	2,299,725	$	929	$	2,006,834	$	1,598

11

	Nine Months Ended September 30,
	2021				2020
	Amortized Cost		Interest Reversal		Amortized Cost		Interest Reversal
Commercial - Purchase	$	426,483	$	306	$	293,886	$	576
Commercial - Refinance		710,201		838		695,664		3,092
Residential 1-4 Unit - Purchase		340,611		154		282,212		724
Residential 1-4 Unit - Refinance		671,703		1,169		735,072		4,156
Short Term 1-4 Unit - Purchase		50,758		788		—		—
Short Term 1-4 Unit - Refinance		99,969		523		—		—
Total	$	2,299,725	$	3,778	$	2,006,834	$	8,548

For the nine months ended September 30, 2021 and 2020 cash basis interest income recognized on nonaccrual loans was $24.3 million and $11.6 million, respectively, and $7.6 million and $4.9 million for the three months ended September 30, 2021 and 2020, respectively. Other than loans in the Company’s COVID-19 forbearance programs, no accrued interest income was recognized on nonaccrual loans for the three and nine months ended September 30, 2021 and 2020. The average recorded investment of individually evaluated loans, computed using month-end balances, was $292.2 million and $310.7 million for the three months ended September 30, 2021 and 2020, respectively, and $332.4 million and $223.7 million for the nine months ended September 30, 2021 and 2020, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified as of September 30, 2021 and 2020.

(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 September 30, 2021 estimate, the Company considered a COVID-19 adverse stress scenario with a six-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period. Management concluded that applying the adverse stress scenario was appropriate given the status of the pandemic at the end of September 2021.

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.

12

The following tables present the activity in the allowance for credit losses for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30, 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 - July 1,2021	$	262	$	1,923		$	281	$	847		$	73	$	577		$	3,963
Provision for loan losses (1)		—		44			27		68			62		27			228
Charge-offs		—		(18	)		—		(43	)		—		(102	)		(163	)
Ending balance	$	262	$	1,949		$	308	$	872		$	135	$	502		$	4,028
Allowance related to:
Loans individually evaluated	$	12	$	938		$	96	$	261		$	110	$	359		$	1,776
Loans collectively evaluated		250		1,010			212		611			25		144			2,252
Amortized cost related to:
Loans individually evaluated	$	20,707	$	84,324		$	18,419	$	114,785		$	5,982	$	47,591		$	291,808
Loans collectively evaluated		405,776		625,877			322,192		556,918			44,776		52,378			2,007,917

	Three Months Ended September 30, 2020
							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 - July 1,2020	$	524		$	2,687		$	403		$	1,607		$	—	$	—		5,221
Provision for loan losses (1)		(90	)		(101	)		171			1,593			—		—		1,573
Charge-offs		—			(210	)		(37	)		(799	)		—		—		(1,046	)
Ending balance	$	434		$	2,376		$	537		$	2,401		$	—	$	—	$	5,748
Allowance related to:
Loans individually evaluated	$	179		$	549		$	266		$	1,389		$	—	$	—		2,383
Loans collectively evaluated		255			1,828			271			1,011			—		—		3,365
Amortized cost related to:
Loans individually evaluated	$	20,544		$	102,337		$	27,800		$	165,434		$	—	$	—	$	316,115
Loans collectively evaluated		273,342			593,327			254,412			569,638			—		—		1,690,719

	Nine Months Ended September 30, 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)		3			(31	)		12			(150	)		(446	)		(56	)		(668	)
Charge-offs		(114	)		(113	)		(37	)		(194	)		(14	)		(677	)		(1,149	)
Ending balance	$	262		$	1,949		$	308		$	872		$	135		$	502		$	4,028
Allowance related to:
Loans individually evaluated	$	12		$	938		$	96		$	261		$	110		$	359		$	1,776
Loans collectively evaluated		250			1,010			212			611			25			144			2,252
Amortized cost related to:
Loans individually evaluated	$	20,707		$	84,324		$	18,419		$	114,785		$	5,982		$	47,591		$	291,808
Loans collectively evaluated		405,776			625,877			322,192			556,918			44,776			52,378			2,007,917

13

	Nine Months Ended September 30, 2020
							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, prior to adoption of ASC 326	$	304		$	1,016		$	148		$	772		$	—	$	—	$	2,240
Impact of adopting ASC 326		19			62			9			47			—		—		137
Balance - January 1, 2020	$	323		$	1,078		$	157		$	819		$	—	$	—	$	2,377
Provision for loan losses (1)		190			1,508			553			2,411			—		—		4,662
Charge-offs		(79	)		(210	)		(173	)		(829	)		—		—		(1,291	)
Ending balance	$	434		$	2,376		$	537		$	2,401		$	—	$	—	$	5,748
Allowance related to:
Loans individually evaluated	$	179		$	549		$	266		$	1,389		$	—	$	—		2,383
Loans collectively evaluated		255			1,828			271			1,011			—		—		3,365
Amortized cost related to:
Loans individually evaluated	$	20,544		$	102,337		$	27,800		$	165,434		$	—	$	—		316,115
Loans collectively evaluated		273,342			593,327			254,412			569,638			—		—		1,690,719

(1) The provision for loan losses decreased from approximately $1.5 million and $4.7 million for the three and nine months ended September 30,2020 respectively to $0.2 and a reversal of $(0.7) million for the three and nine months ended September 30, 2021 respectively due mainly to an improved economic outlook as the economy recovers from the COVID-19 pandemic.

(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 September 30, 2021, the annualized charge-off rate was 0.53% of average nonperforming loans. The charged-off rate was 0.65% for the year ended December 31, 2020.

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 includes $323.7 million and $396.9 million loans in the Company’s COVID-19 forbearance program as of September 30, 2021 and December 31, 2020, respectively (in thousands):

	30–59 days		60–89 days		90+days		Total				Total
September 30, 2021	past due		past due		past due(1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	673	$	2,899	$	17,135	$	20,707	$	—	$	20,707
Commercial - Refinance		2,895		7,443		73,819		84,157		167		84,324
Residential 1-4 Unit - Purchase		870		509		17,040		18,419		—		18,419
Residential 1-4 Unit - Refinance		890		4,609		109,286		114,785		—		114,785
Short Term 1-4 Unit - Purchase		—		952		5,030		5,982		—		5,982
Short Term 1-4 Unit - Refinance		217		1,442		45,932		47,591		—		47,591
Total loans individually evaluated	$	5,545	$	17,854	$	268,242	$	291,641	$	167	$	291,808
Loans collectively evaluated
Commercial - Purchase	$	8,276	$	3,938	$	—	$	12,214	$	393,562	$	405,776
Commercial - Refinance		29,512		7,573		—		37,085		588,792		625,877
Residential 1-4 Unit - Purchase		7,573		2,643		—		10,216		311,976		322,192
Residential 1-4 Unit - Refinance		32,804		7,413		—		40,217		516,701		556,918
Short Term 1-4 Unit - Purchase		—		434		—		434		44,342		44,776
Short Term 1-4 Unit - Refinance		4,590		725		—		5,315		47,063		52,378
Total loans collectively evaluated	$	82,755	$	22,726	$	—	$	105,481	$	1,902,436	$	2,007,917
Ending balance	$	88,300	$	40,580	$	268,242	$	397,122	$	1,902,603	$	2,299,725

14

	30–59 days		60–89 days		90+days		Total				Total
December 31, 2020	past due		past due		past due(1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	961	$	1,307	$	19,898	$	22,166	$	—	$	22,166
Commercial - Refinance		2,118		7,532		91,467		101,117		—		101,117
Residential 1-4 Unit - Purchase		192		2,915		23,266		26,373		—		26,373
Residential 1-4 Unit - Refinance		1,440		3,010		115,702		120,152		—		120,152
Short Term 1-4 Unit - Purchase		—		—		6,585		6,585		—		6,585
Short Term 1-4 Unit - Refinance		964		760		58,119		59,843		—		59,843
Total loans individually evaluated	$	5,675	$	15,524	$	315,037	$	336,236	$	—	$	336,236
Loans collectively evaluated
Commercial - Purchase	$	8,000	$	7,081	$	—	$	15,081	$	263,657	$	278,738
Commercial - Refinance		33,725		13,224		1,747		48,696		535,285		583,981
Residential 1-4 Unit - Purchase		5,030		1,261		—		6,291		191,928		198,219
Residential 1-4 Unit - Refinance		33,144		14,567		109		47,820		398,953		446,773
Short Term 1-4 Unit - Purchase		1,972		21,780		—		23,752		12,987		36,739
Short Term 1-4 Unit - Refinance		8,406		5,383		123		13,912		59,336		73,248
Total loans collectively evaluated	$	90,277	$	63,296	$	1,979	$	155,552	$	1,462,146	$	1,617,698
Ending balance	$	95,952	$	78,820	$	317,016	$	491,788	$	1,462,146	$	1,953,934

⁽¹⁾ Includes loans in bankruptcy and foreclosure less than 90 days past due

15

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 September 30, 2021 and December 31, 2020 (in thousands).

	Term Loans Amortized Cost Basis by Origination Year
September 30, 2021:	2021		2020		2019		2018		2017		Pre-2017		Total
Commercial - Purchase
Payment performance
Performing	$	172,073	$	51,482	$	86,618	$	52,270	$	24,583	$	18,750	$	405,776
Nonperforming		287		1,893		6,307		5,654		4,543		2,023		20,707
Total Commercial - Purchase	$	172,360	$	53,375	$	92,925	$	57,924	$	29,126	$	20,773	$	426,483
Commercial - Refinance
Payment performance
Performing	$	142,262	$	66,714	$	151,881	$	125,813	$	68,414	$	70,793	$	625,877
Nonperforming		618		3,890		23,916		27,618		17,140		11,142		84,324
Total Commercial - Refinance	$	142,880	$	70,604	$	175,797	$	153,431	$	85,554	$	81,935	$	710,201
Residential 1-4 Unit - Purchase
Payment performance
Performing	$	180,260	$	13,471	$	54,926	$	31,565	$	14,931	$	27,039	$	322,192
Nonperforming		460		2,842		5,256		3,534		3,491		2,836		18,419
Total Residential 1-4    Unit - Purchase	$	180,720	$	16,313	$	60,182	$	35,099	$	18,422	$	29,875	$	340,611
Residential 1-4 Unit - Refinance
Payment performance
Performing	$	238,761	$	31,679	$	124,991	$	75,242	$	37,915	$	48,330	$	556,918
Nonperforming		8,178		7,065		37,062		32,754		18,256		11,470		114,785
Total Residential 1-4    Unit - Purchase	$	246,939	$	38,744	$	162,053	$	107,996	$	56,171	$	59,800	$	671,703
Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	17,618	$	16,722	$	10,436	$	—	$	—	$	—	$	44,776
Nonperforming		—		4,136		1,430		416		—		—		5,982
Total Short Term 1-4    Unit - Purchase	$	17,618	$	20,858	$	11,866	$	416	$	—	$	—	$	50,758
Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	18,345	$	18,366	$	15,667	$	—	$	—	$	—	$	52,378
Nonperforming		792		16,453		25,266		5,080		—		—		47,591
Total Short Term 1-4    Unit - Refinance	$	19,137	$	34,819	$	40,933	$	5,080	$	—	$	—	$	99,969
Total Portfolio	$	779,654	$	234,713	$	543,756	$	359,946	$	189,273	$	192,383	$	2,299,725

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	Term Loans Amortized Cost Basis by Origination Year
December 31, 2020	2020		2019		2018		2017		2016		Pre-2016		Total
Commercial - Purchase
Payment performance
Performing	$	56,446	$	99,534	$	64,706	$	34,862	$	9,500	$	13,690	$	278,738
Nonperforming		1,046		4,666		5,799		7,182		1,539		1,934		22,166
Total Commercial - Purchase	$	57,492	$	104,200	$	70,505	$	42,044	$	11,039	$	15,624	$	300,904
Commercial - Refinance
Payment performance
Performing	$	75,376	$	176,854	$	157,499	$	87,476	$	34,858	$	51,918	$	583,981
Nonperforming		4,929		26,776		32,955		18,980		10,392		7,085		101,117
Total Commercial - Refinance	$	80,305	$	203,630	$	190,454	$	106,456	$	45,250	$	59,003	$	685,098
Residential 1-4 Unit - Purchase
Payment performance
Performing	$	26,215	$	69,775	$	42,537	$	25,874	$	7,056	$	26,762	$	198,219
Nonperforming		1,611		5,973		8,949		5,059		1,348		3,433		26,373
Total Residential 1-4    Unit - Purchase	$	27,826	$	75,748	$	51,486	$	30,933	$	8,404	$	30,195	$	224,592
Residential 1-4 Unit - Refinance
Payment performance
Performing	$	57,945	$	168,912	$	96,568	$	61,033	$	22,949	$	39,366	$	446,773
Nonperforming		3,934		42,159		37,451		17,942		7,653		11,013		120,152
Total Residential 1-4    Unit - Purchase	$	61,879	$	211,071	$	134,019	$	78,975	$	30,602	$	50,379	$	566,925
Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	20,563	$	15,990	$	186	$	—	$	—	$	—	$	36,739
Nonperforming		3,764		2,217		604		—		—		—		6,585
Total Short Term 1-4    Unit - Purchase	$	24,327	$	18,207	$	790	$	—	$	—	$	—	$	43,324
Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	35,234	$	37,818	$	196	$	—	$	—	$	—	$	73,248
Nonperforming		17,318		33,711		8,719		95		—		—		59,843
Total Short Term 1-4    Unit - Refinance	$	52,552	$	71,529	$	8,915	$	95	$	—	$	—	$	133,091
Total Portfolio	$	304,381	$	684,385	$	456,169	$	258,503	$	95,295	$	155,201	$	1,953,934

Note 7 — Securitizations, Net

From May 2011 through September 2021, the Company completed seventeen securitizations of $3.9 billion of loans, issuing $3.5 billion of securities to third parties through seventeen 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 August 2051.

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The following table summarizes the outstanding balance, net of discounts and deal costs, of the securities and the effective interest rate for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

	Nine Months Ended September 30,
Securitizations:	2021			2020
Securitizations, net	$	1,623,674		$	1,670,930
Interest expense		55,288			58,749
Average outstanding balance		1,574,999			1,728,131
Effective interest rate (1)		4.68	%		4.53	%

⁽¹⁾ Represents annualized interest expense divided by average gross outstanding balance and includes average rate of 3.97% and debt issuance cost amortization of 0.71% and average rate of 3.94% and debt issuance cost amortization of 0.59% for the nine months ended September 30, 2021 and 2020, respectively.

Note 8 — 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 (“2021 Term Loan”). The 2021 Term Loan bears interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. The principal of the 2021 Term Loan amortizes quarterly at an annual rate of 2.50% for the first year and 5.00% per year thereafter. 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 is used for loan originations and general corporate purposes.

As of September 30, 2021, the balance of the 2021 Term Loan was $171.9 million. The balance of the 2019 Term Loan was $78.0 million as of December 31, 2020. The balances in the consolidated Balance Sheets are net of debt issuance costs and discounts of $8.5 million and $3.0 million as of September 30, 2021 and December 31, 2020, respectively. The 2021 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 September 30, 2021, 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 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.

On September 12, 2018, the Company entered into a three-year 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. Borrowings under this warehouse agreement were $30.7 million and zero as of September 30, 2021 and December 31, 2020, 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 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 January 29, 2022, 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.

On April 16, 2021, The Company entered into a 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.

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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.

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 September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021				December 31, 2020
	Period end balance (1)		Maximum borrowing capacity		Period end balance (1)		Maximum borrowing capacity
The 2021 term repurchase agreement	$	21,205	$	100,000		—		—
The 2021 repurchase agreement		127,898		200,000		—		—
The July 2021 term repurchase agreement		—		100,000		—		—
The 2013 repurchase agreement		77,209		200,000		73,502		100,000
The Bank credit agreement		30,732		50,000		—		—
The 2019 loan agreement		2,700		3,000		2,700		3,000

⁽¹⁾ Warehouse repurchase facilities amounts in the consolidated balance sheets are net of debt issuance costs amounting to $1.3 million and $0.3 million as of September 30, 2021 and December 31, 2020, respectively.

The following table provides an overview of the activity and effective interest rate for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Warehouse and repurchase facilities:	2021			2020			2021			2020
Average outstanding balance	$	182,383		$	22,306		$	154,297		$	204,110
Highest outstanding balance at any month-end		259,744			19,823			281,690			450,194
Effective interest rate (1)		5.19	%		12.61	%		5.56	%		4.99	%

⁽¹⁾ Represents annualized interest expense divided by average gross outstanding balance and includes average rate of 4.00% and debt issuance cost amortization of 1.19%, and average rate of 5.54% and debt issuance cost amortization of 7.07%, for the three months ended September 30, 2021 and 2020, respectively. The effective interest rate includes average rate of 4.35% and debt issuance cost amortization of 1.21%, and average rate 4.34% and debt issuance cost amortization 0.65% for the nine months ended September 30, 2021 and 2020 respectively. The average rate for the three months ended September 30, 2021 was lower compared to the same period in 2020 due to the much lower average outstanding borrowing balance in 2020, but the debt issuance cost amortization remained relatively constant. The increase in average rate for the nine months ended September 30, 2021 was primarily attributable to the higher non-usage fees paid to a lender.

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 and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021			2020
Warehouse and repurchase facilities	$	2,365	$	703	$	6,433		$	7,635
Securitizations		17,956		21,644		55,287			58,749
Interest expense — portfolio related		20,321		22,347		61,720			66,384
Interest expense — corporate debt		4,488		1,913		16,147	(1)		10,149	(2)
Total interest expense	$	24,809	$	24,260	$	77,867		$	76,533

⁽¹⁾ Included in the $16.1 million of interest expense – corporate debt for the nine months ended September 30, 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.

⁽²⁾ Included in the $10.1 million of interest expense – corporate debt for the nine months ended September 30, 2020 was the one-time debt issuance costs write-off of $3.5 million and prepayment fee of $0.3 million associated with the repayment of $75.0 million in outstanding principal amount in January 2020.

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Note 9 — 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 September 30, 2021 and December 31, 2020, the balance of repurchase liability was $140 thousand and $139 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 10 — 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.

Stock-based awards vest ratably over a service period of three years from the date of the grant. Compensation expense related to 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. The Company recognized $0.5 million and $0.2 million compensation expense related to the outstanding stock options and unvested restricted stock awards granted to employees for the three months ended September 30, 2021 and 2020, 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 and restricted stock awards totaled $4.2 million and $2.3 million as of September 30, 2021 and 2020, respectively.

Note 11 — Earnings Per Share

The Series A Convertible Preferred Stock issued by the Company in April 2020 is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares. All Series A Convertible Preferred Stock were converted into common stock on October 8,2021. The Company’s participating securities also include unvested restricted stock awards that contain non-forfeitable rights to dividends. 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.

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The following table presents the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(In thousands, except per share data)				(In thousands, except per share data)
Basic EPS:
Net income	$	8,022	$	3,481	$	20,871	$	8,201
Less: deemed dividends on preferred stock		—		—		—		48,955
Net income (loss) attributable to common stockholders	$	8,022	$	3,481	$	20,871	$	(40,754	)
Less: undistributed earnings attributable to participating securities		3,030		—		7,884		—
Net earnings (loss) attributable to common stockholders	$	4,992	$	3,481	$	12,987	$	(40,754	)
Weighted average common shares outstanding		20,090		20,087		20,088		20,087
Basic earnings (loss) per common share	$	0.25	$	0.17	$	0.65	$	(2.03	)
Diluted EPS:
Net income (loss) attributable to common stockholders	$	8,022	$	3,481	$	20,871	$	(40,754	)
Weighted average common shares outstanding		20,090		20,087		20,088		20,087
Add dilutive effects for assumed conversion of Series A preferred stock		11,688		11,688		11,688		—
Add dilutive effects for warrants		2,157		659		1,909		—
Add dilutive effects for stock options		5		—		2		—
Add dilutive effects of unvested restricted stock awards		272		—		171		—
Weighted average diluted common shares outstanding		34,212		32,435		33,858		20,087
Diluted income (loss) per common share	$	0.23	$	0.11	$	0.62	$	(2.03	)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Shares underlying Series A Convertible Preferred Stock		—		—		—		11,688
Shares underlying warrants		—		1,004		—		3,013
Stock options		773		773		773		773
Unvested restricted stock awards		—	NA			—	NA
Share equivalents excluded from EPS		773		1,777		773		15,474

Note 12 — Convertible Preferred Stock

On April 7, 2020, the Company issued and sold in a private placement 45,000 newly issued shares of Series A Convertible Preferred Stock, par value $0.01 per share (the “Preferred”), at a price per share of $1,000, plus warrants (the “Warrants”) to purchase an aggregate of 3,013,125 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. This offering resulted in net proceeds to the Company of $43.2 million. In connection with these transactions, the Company entered into a securities purchase agreement with Snow Phipps and TOBI granting TOBI the right to nominate an additional director to the Company’s board of directors for so long as TOBI and its permitted transferees meet certain ownership thresholds.

The Preferred ranks senior to the Company’s common stock with respect to the payment of dividends and distribution of assets upon liquidation, dissolution and winding up. It is entitled to receive any dividends or distributions paid in respect of the common stock on an as-converted basis and has no stated maturity and will remain outstanding indefinitely unless converted into common stock or repurchased by the Company. Holders of the Preferred will be entitled to vote, together with the holders of common stock, on an as-converted basis, subject to limitations of the rules of the New York Stock Exchange, on all matters submitted to a vote of the holders of common stock, and as a separate class as required by law. The holders of the Preferred will also have the right to elect two directors to the board of directors of the Company if the Company defaults under its obligation to repurchase the Preferred.

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The Preferred has a liquidation preference equal to the greater of (i) $2,000 per share from April 7, 2020 through October 7, 2022, which amount increases ratably to $3,000 per share from October 8, 2022 through November 28, 2024 and to $3,000 per share from and after November 28, 2024 and (ii) the amount such holder would have received if the Preferred had converted into common stock immediately prior to such liquidation.

Each share of the Preferred is convertible at the option of the holder into the number of shares of common stock equal to the applicable conversion rate of $1,000 divided by the applicable conversion price plus cash in lieu of fractional shares, if any. The initial conversion price is $3.85 and is subject to customary antidilution adjustments.

Beginning on October 8, 2021, the Company has the option to convert the preferred stock to common stock, provided that the daily Volume Weighted Average Price (“VWAP”) for a share of VEL common stock is more than 200% of the $3.85 conversion price for at least 20 trading days, whether consecutive or not, in the period of 30 consecutive trading days, provided that the 20 trading days includes the final 5 trading days of the 30-trading day period.

Beginning on October 7, 2022, if not for the repurchase prohibition contained in the Company’s material indebtedness, and in no event later than November 28, 2024, holders of the Preferred have the option to cause the Company to repurchase all or a portion of such holder’s shares of Preferred, for an amount in cash equal to such share’s liquidation preference. If the Company defaults on its repurchase obligation, the holders of the Preferred have the right (until the repurchase price has been paid in full, in cash, or such the Preferred has been converted) to initiate a sale of the Company and the holders of the Preferred will have the right to elect two directors of the Company’s Board until such default is cured. The Company is also required to redeem the Preferred upon a change of control (as defined in the certificate of designation governing the Preferred).

On October 8, 2021, the Company exercised its option to convert all of its 45,000 outstanding shares of Series A Convertible Preferred Stock into 11,688,310 shares of our common stock. The Certificate of Designation of the Series A Convertible Preferred Stock authorized the Company to convert the Series A Convertible Preferred Stock into common stock as our common stock VWAP met the requisite conditions disclosed above.

The Warrants are exercisable at the warrantholder’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 warrantholder together with its affiliates would beneficially own 49% or more of the Company’s outstanding common stock.

The Company determined that none of the features embedded in the Preferred were required to be accounted for separately as a derivative.

The Preferred is recorded as mezzanine equity (temporary equity) on the consolidated balance sheets because it is not mandatorily redeemable, but does contain a redemption feature at the option of the Preferred holders that is considered not solely within the Company’s control. At June 30, 2020, the Company recognized the Preferred maximum redemption value of $90.0 million, which is the maximum redemption value on the earliest redemption date based on a redemption value of $2,000 per share and 45,000 shares of Preferred. The recording of the Preferred maximum redemption value was treated as a deemed dividend and resulted in a $49.0 million charge to Shareholders’ Equity. The maximum redemption value of $90.0 million remains the same as of September 30, 2021.

Note 13 — 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.

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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.

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.

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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.

Fair Value Disclosures

The following tables present information on assets measured and recorded at fair value as of September 30, 2021 and December 31, 2020, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at
September 30, 2021	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,360	$	1,360
Interest-only strips		—		—		16		16
Total recurring fair value measurements		—		—		1,376		1,376
Nonrecurring fair value measurements:
Real estate owned, net		—		—		13,113		13,113
Individually evaluated loans requiring specific allowance, net		—		—		19,096		19,096
Total nonrecurring fair value measurements		—		—		32,209		32,209
Total assets	$	—	$	—	$	33,585	$	33,585

	Fair value measurements using						Total at
December 31, 2020	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,539	$	1,539
Interest-only strips		—		—		238		238
Total recurring fair value measurements		—		—		1,777		1,777
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		13,106		13,106
Real estate owned, net		—		—		15,767		15,767
Impaired loans requiring specific allowance, net		—		—		19,340		19,340
Total nonrecurring fair value measurements		—		—		48,213		48,213
Total assets	$	—	$	—	$	49,990	$	49,990

The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Gain (loss) on assets measured on a nonrecurring basis	2021			2020			2021			2020
Loans held for sale, net	$	15		$	1,307		$	17		$	345
Real estate held for sale, net		(384	)		(528	)		(1,619	)		(1,744	)
Individually evaluated loans requiring specific allowance, net		172			(1,109	)		893			(1,469	)
Total net loss	$	(197	)	$	(330	)	$	(709	)	$	(2,868	)

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The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of September 30, 2021 and December 31, 2020 (dollars in thousands):

	September 30, 2021
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Individually evaluated    loans requiring specific    allowance, net	$	19,096	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		13,113	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment,    at fair value		1,360	Discounted cash flow	Discount rate	6.3%	6.3%
				Collateral value (% of UPB)	94.0% to 124.0%	107.0%
				Timing of resolution/payoff (months)	1 to 70		56.0
				Prepayment rate	20.9% to 50.0%	20.9% to 50.0%
				Default rate	0.26% to 3.25%	1.0%
				Loss severity rate	0.0% to 12.71%	3.0%
Interest-only strips		16	Discounted cash flow	Discount rate	15.0%	15.0%
				Timing of resolution/payoff (months)	0 to 12		1.0

	December 31, 2020
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Individually evaluated    loans requiring specific    allowance, net	$	19,340	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		15,767	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment,    at fair value		1,539	Discounted cash flow	Discount rate	6.2%	6.2%
				Collateral value (% of UPB)	94.0% to 104.0%	100.0%
				Timing of resolution/payoff (months)	14 to 31		25.0
				Prepayment rate	17.5% to 30.0%	17.5% to 30.0%
				Default rate	5.0% to 15.0%	12.0%
				Loss severity rate	1.0%	1.0%
Loans held for sale		13,106	Discounted cash flow	Discount rate	6.2%	6.2%
				Timing of resolution/payoff (months)	31 to 34		32.0
Interest-only strips	238		Discounted cash flow	Discount rate	15.0%	15.0%
				Timing of resolution/payoff (months)	0 to 12		1.5

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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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	1,370		$	2,956		$	1,539		$	2,960
Loans liquidated		—			—			(163	)		—
Principal paydowns		(10	)		(9	)		(34	)		(44	)
Total unrealized gain (loss) included in net income		—			380			18			411
Ending balance	$	1,360		$	3,327		$	1,360		$	3,327

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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	81		$	845		$	238		$	894
Interest-only strip additions		—			—			—			1,820
Interest-only strip write-offs		(65	)		(365	)		(222	)		(2,234	)
Total unrealized loss included in net income		—			(7	)		—			(7	)
Ending balance	$	16		$	473		$	16		$	473

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 September 30, 2021 and December 31, 2020, 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, 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 $19.1 million and $19.3 million as of September 30, 2021 and December 31, 2020, net of specific allowance for credit losses of approximately $1.8 million and $2.7 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):

	September 30, 2021
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	35,497	$	35,497	$	—	$	—	$	35,497
Restricted cash		9,586		9,586		—		—		9,586
Loans held for investment, net		2,295,697		—		—		2,437,824		2,437,824
Loans held for investment, at fair value		1,360		—		—		1,360		1,360
Accrued interest receivables		11,974		11,974		—		—		11,974
Interest-only strips		16		—		—		16		16
Liabilities:
Secured financing, net	$	163,449	$	—	$	—	$	171,938	$	171,938
Warehouse repurchase facilities, net		258,491		—		258,491		—		258,491
Securitizations, net		1,623,674		—		—		1,699,916		1,699,916
Accrued interest payable		5,577		5,577		—		—		5,577

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	December 31, 2020
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	13,273	$	13,273	$	—	$	—	$	13,273
Restricted cash		7,020		7,020		—		—		7,020
Loans held for sale, net		13,106		—		—		13,106		13,106
Loans held for investment, net		1,948,089		—		—		2,003,301		2,003,301
Loans held for investment, at fair value		1,539		—		—		1,539		1,539
Accrued interest receivable		11,373		11,373		—		—		11,373
Interest-only strips	238			—		—	238			238
Liabilities:
Secured financing, net	$	74,982	$	—	$	—	$	78,000	$	78,000
Warehouse repurchase facilities, net		75,923		—		75,923		—		75,923
Securitizations, net		1,579,019		—		—		1,616,222		1,616,222
Accrued interest payable		5,503		5,503		—		—		5,503

Note 14 — Subsequent Events    

On October 8, 2021, the Company voluntarily converted all of its 45,000 outstanding shares of Series A Convertible Preferred Stock into 11,688,310 shares of its common stock.  The shares of Series A Convertible Preferred Stock were originally issued on April 7, 2020.  The Certificate of Designation of the Series A Convertible Preferred Stock authorized the Company to voluntarily convert the Series A Convertible Preferred Stock into common stock provided the Company's common stock traded at prices greater than $7.70 for a certain period of time prior to conversion.

As a result of the conversion, the $90 million liquidation preference value reflected as mezzanine equity in the consolidated balance sheet as of September 30, 2021 will be reclassified to stockholders’ equity during the quarter ending December 31, 2021.

The Company completed the securitization of $204.5 million of investor real estate loans on October 22, 2021 which will be accounted for as secured borrowings during the quarter ending December 31, 2021.

The Company has evaluated events that have occurred subsequent to September 30, 2021 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.       

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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, 2020, 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 small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 17 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front- end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of September 30, 2021, has an average balance of approximately $353,000. As of September 30, 2021, our loan portfolio totaled $2.3 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 67.2%, and was concentrated in 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, representing 50.6% of the UPB. For the three months ended September 30, 2021, the annualized yield on our total portfolio was 8.77%.

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 17 securitizations, resulting in a total of over $3.5 billion in gross debt proceeds from May 2011 through September 2021.

We may also 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 September 30, 2021, our annualized portfolio related net interest margin was 4.97%, an improvement of 14 basis points over the previous quarter mainly from the receipt of nonperforming loan interest and default interest from the resolutions of loans that went nonperforming in 2020 due to the COVID pandemic. 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 September 30, 2021, we generated pre-tax income and net income of $10.9 million and $8.0 million, respectively.

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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.

In January 2020, we used $75.7 million of the net proceeds from our IPO to lower our interest expense through the repayment of $75.0 million outstanding principal amount on the 2019 Term Loan.

In late March 2020, we temporarily suspended our loan originations and purchases due to the business and economic uncertainties caused by the COVID-19 outbreak. In addition, effective May 1, 2020, we furloughed a significant number of our employees, mostly within our loan origination function.

On April 7, 2020, we issued and sold Preferred Stock and Warrants resulting in gross proceeds to us of $45.0 million.

In September 2020, we resumed loan originations and enhanced our loan operations processes during the temporary suspension, enabling us to streamline our operations by approximately 60 employees to be more cost effective going forward.

We fully paid off the remaining $78.0 million of the 2019 Term Loan in January 2021 with a portion of the net proceeds from the 2021 Term Loan.

Recent Developments

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 September 30, 2021, we sold 10,727 shares of our common stock under our ATM Program for net proceeds of $137,333, net of $2,803 in commissions.

Continued Uncertainties Caused by COVID-19

The COVID-19 outbreak has caused significant disruption in business activity and the financial markets both globally and in the United States. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our customers, employees and vendors, impact of new variant strains of the virus, and the long-term success of the vaccines, all of which are uncertain at this time and cannot be predicted. The full extent to which COVID-19 may continue to impact our business, financial condition or results of operations cannot be reasonably estimated at this time.

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, 2020 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.

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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.

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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

	September 30, 2021				December 31, 2020			September 30, 2020
	($ in thousands)
Total loans	$	2,271,294			$	1,944,804		$	1,986,344
Loan count		6,430				5,878			6,029
Average loan balance	$	353			$	331		$	329
Weighted average loan-to-value		67.2	%			66.1	%		66.2	%
Weighted average coupon		8.10	%			8.51	%		8.56	%
Nonperforming loans (UPB)	$	288,436		(A)	$	332,813		$	314,727
Nonperforming loans (% of total)		12.70	%	(A)		17.11	%		15.84	%

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $64.2 million of COVID-19 forbearance-granted loans placed on nonaccrual status as of September 30, 2021.

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 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.

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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 September 30, 2021:
Loan originations — held for investment		747		340,664		456		7.05	%		70.2	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		747	$	340,664	$	456		7.05	%		70.2	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated and acquired		747	$	340,664	$	456		7.05	%		70.2	%
Three Months Ended June 30, 2021:
Loan originations — held for investment		683		256,512		376		7.32	%		69.7	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		683	$	256,512	$	376		7.32	%		69.7	%
Loan acquisitions — held for investment		1		1,072		—		6.75	%		47.9	%
Total loans originated and acquired		684	$	257,584	$	377		7.32	%		69.6	%
Three Months Ended September 30, 2020:
Loan originations — held for investment		19		8,094		426		7.35	%		68.8	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		19		8,094		426		7.35	%		68.8	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated and acquired		19		8,094		426		7.35	%		68.8	%

During the third quarter of 2021, we originated $340.7 million of loans, which was an increase of $84.2 million, or 32.8% from the quarter ended June 30, 2021. We had no loan acquisitions during the quarter ended September 30, 2021. Given the suspension of loan production from mid-March through early September 2020 due to the dislocation caused by COVID-19, we had loan originations of $8.1 million during the quarter ended September 30, 2020.

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)	September 30, 2021			December 31, 2020			September 30, 2020
Unpaid principal balance	$	2,271,294		$	1,931,875		$	1,986,344
Valuation adjustments on FVO loans		16			(2	)		(33	)
Deferred loan origination costs		29,775			23,600			23,850
Total loans held for investment, gross		2,301,085			1,955,473			2,010,161
Allowance for credit losses		(4,028	)		(5,845	)		(5,748	)
Loans held for investment, net	$	2,297,057		$	1,949,628		$	2,004,413

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:

	September 30, 2021					December 31, 2020					September 30, 2020
($ in thousands)	UPB		%			UPB		%			UPB		%
Loans due in less than one year	$	128,843		5.7	%	$	100,025		5.2	%	$	86,029		4.3	%
Loans due in one to five years		23,142		1.0			79,398		4.1			115,465		5.8
Loans due in more than five years		2,119,309		93.3			1,752,452		90.7			1,784,850		89.9
Total loans held for investment	$	2,271,294		100.0	%	$	1,931,875		100.0	%	$	1,986,344		100.0	%

Allowance for Loan Losses

For the March 31, 2021 CECL estimate, the Company considered a COVID-19 adverse stress scenario and a COVID-19 severe stress scenario, both with a five-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period. Management decided that using only the adverse stress scenario did not factor for the unknown impact and success of the

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COVID vaccine initiative and the accelerated reopening of schools and businesses. Management concluded that applying a 50% weight to the adverse stress scenario and a 50% weight to the severe stress scenario, was appropriate given the status of the pandemic at the end of March 2021.

For the June 30, 2021 CECL estimate, due to the improvements in the U.S. economy tempered with the unknown impact from the COVID variants in the second quarter of 2021, we decided it was no longer necessary to consider the 50% weighting of the COVID-19 adverse and severe stress scenarios. We instead used the COVID-19 adverse stress scenario with a five-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period.

For the September 30, 2021 CECL estimate, we used the COVID-19 adverse stress scenario with a six-quarter reasonable and supportable forecast period followed by a four-quarter straight-line reversion period. We increased the reasonable and supportable forecast period from five-quarters to six-quarters in light of the lingering effects of the COVID-19 pandemic, including increased mandated vaccinations, lower than forecasted employment numbers, expiring unemployment benefits, continued disruptions in the economic supply chain, and concerns of the Delta variant combined with an upcoming flu season. 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.

Our allowance for loan losses as of September 30, 2021 remained at $4.0 million, consistent with the balance at June 30, 2021, and decreased by $1.7 million as compared to $5.7 million as of September 30, 2020. The decreases in allowance for credit losses from September 30, 2020 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.

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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Allowance for credit losses:
Beginning balance	$	3,963		$	5,220		$	5,845		$	2,240
Impact of adopting ASC 326		—			—			—			137
Provision for loan losses		228			1,574			(668	)		4,663
Charge-offs		(163	)		(1,046	)		(1,149	)		(1,292	)
Ending balance	$	4,028		$	5,748		$	4,028		$	5,748
Total loans held for investment (UPB), excluding FVO (1)	$	2,269,950		$	1,982,984		$	2,269,950		$	1,982,984
Allowance for credit losses / loans held for investment, excluding FVO		0.18	%		0.29	%		0.18	%		0.29	%

(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 $4.0 million, and net deferred loan origination fees/costs of $29.8 million as of September 30, 2021.

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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:

	September 30, 2021 (A)				COVID-19 Forbearance		June 30, 2021 (A)				COVID-19 Forbearance		September 30, 2020 (A)				COVID-19 Forbearance
Performing/Accruing:
Current	$	1,878,555	82.7	%	$	228,001	$	1,645,019	79.8	%	$	227,682	$	1,474,076	74.2	%	$	266,446
30-59 days past due		81,893	3.6			16,669		69,165	3.4			14,947		108,601	5.5			42,609
60-89 days past due		22,410	1.0			5,273		32,484	1.6			9,148		74,351	3.7			52,636
90+ days past due		—	—			—		152	0.0			152		14,589	0.7			14,590
Total Performing Loans		1,982,858	87.3			249,943		1,746,820	84.7			251,929		1,671,617	84.2			376,281
Nonperforming/Nonaccrual:
<90 days past due		23,195	1.0			5,559		20,740	1.0			4,622		23,502	1.2			603
90+ days past due		48,365	2.1			16,332		50,637	2.4			19,330		119,248	6.0			31,546
Bankruptcy		19,983	0.9			6,407		17,659	0.9			6,560		8,646	0.4			1,620
In foreclosure		196,893	8.7			41,503		226,506	11.0			60,001		163,331	8.2			1,114
Total nonperforming loans		288,436	12.7			69,801		315,542	15.3			90,513		314,727	15.8			34,883
Total loans held for investment	$	2,271,294	100.0	%	$	319,744	$	2,062,362	100.0	%	$	342,442	$	1,986,344	100.0	%	$	411,164

(A) Balance includes $319.7 million UPB of loans held for investment as of September 30, 2021, $342.4 million as of June 30, 2021, and $411.2 million as of September 30, 2020 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 $288.4 million, or 12.7% of our held for investment loan portfolio as of September 30, 2021, compared to $315.5 million, or 15.3% as of June 30, 2021, and $314.7 million, or 15.8% of the held for investment loan portfolio as of September 30, 2020. The decrease in total nonperforming loans as of September 30, 2021 as compared to June 30, 2021 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 $55.2 million and $10.9 million of long-term and short-term non-performing loans during the quarter ended September 30, 2021 and 2020, respectively. Including REO resolutions, we realized net gains of $2.1 million and $0.4 million during the quarter ended September 30, 2021 and 2020, 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	September 30, 2021					June 30, 2021					September 30, 2020
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	13,353	$	1,251		$	21,925	$	1,446		$	9,705	$	728
Resolved — paid current		7,722		79			14,949		219			1,152		24
Resolved — REO sold (1)		4,680		31			947		(2	)		1,628		(312	)
Total resolutions	$	25,755	$	1,361		$	37,821	$	1,663		$	12,485	$	440
Recovery rate on resolved    nonperforming UPB				105.3	%				104.4	%				103.5	%
Note (1) There was an REO property held since January 2019 that was sold during the quarter ended September 30, 2021, with a total lifetime loss of $1.7 million, all of which was recognized in prior periods.

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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	September 30, 2021					June 30, 2021					September 30, 2020
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	8,960	$	664		$	13,517	$	682		$	—	$	—
Resolved — paid current		25,141		29			7,794		59			—		—
Resolved — REO sold		104		47			164		(73	)		—		—
Total resolutions	$	34,205	$	740		$	21,475	$	668		$	—	$	—
Recovery rate on resolved    nonperforming UPB				102.2	%				103.1	%			N/A

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.

	Nine Months Ended				Six Months Ended				Nine Months Ended
($ in thousands)	September 30, 2021				June 30, 2021				September 30, 2020
Average nonperforming loans for the period (1)		288,778				334,120				311,136
Charge-offs		1,149				987				1,292
Charge-offs / Average nonperforming loans for the period (1)		0.53	%	(2)		0.59	%	(2)		0.55	%	(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 September 30, 2021, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 50.6% of the UPB. Mixed used properties represented 13.3% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. By geography, the principal balance of our loans held for investment were concentrated 23.2% in California, 22.1% in New York, 13.3% in Florida, and 7.8% in New Jersey.

Property Type	September 30, 2021
($ in thousands)	Loan Count		UPB		% of Total UPB
Investor 1-4		3,829	$	1,150,029		50.6	%
Mixed use		793		302,459		13.3
Multifamily		444		202,535		8.9
Retail		441		197,326		8.7
Office		306		129,305		5.7
Warehouse		231		150,693		6.6
Other(1)		386		138,947		6.1
Total loans held for investment		6,430	$	2,271,294		100	%

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

Geography (State)	September 30, 2021
($ in thousands)	Loan Count		UPB		% of Total UPB
California	957		$	527,618		23.2	%
New York	1008			501,997		22.1
Florida	955			302,169		13.3
New Jersey	663			177,431		7.8
Other(1)		2,847		762,079		33.6
Total loans held for investment		6,430	$	2,271,294		100	%

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

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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. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments.

As of September 30, 2021, our REO included 35 properties with a lower of cost or estimated fair value of $17.9 million compared to 40 properties with a lower of cost or estimated fair value of $20.0 million as of June 30, 2021.

Key Performance Metrics

	Three Months Ended
($ in thousands)	September 30, 2021 (1)			June 30, 2021 (1)			September 30, 2020 (1)
Average loans	$	2,139,789		$	2,022,486		$	2,016,414
Portfolio yield		8.77	%		8.90	%		8.21	%
Average debt — portfolio related		1,815,442			1,710,276			1,764,975
Average debt — total company		1,988,376			1,876,611			1,842,975
Cost of funds — portfolio related		4.48	%		4.81	%		5.07	%
Cost of funds — total company		4.99	%		5.30	%		5.27	%
Net interest margin — portfolio related		4.97	%		4.83	%		3.77	%
Net interest margin — total company		4.13	%		3.98	%		3.39	%
Charge-offs/Average loans held for investment		0.01	%		0.05	%		0.05	%
Pre-tax return on equity (2)		18.23	%		22.57	%		9.60	%
Return on equity (2)		13.38	%		16.56	%		6.65	%

(1) Percentages are annualized.

(2) Pre-tax return on equity and return on equity were higher during the quarter ended June 30, 2021, compared to the quarter ended September 30, 2021 due to more loans sold during the quarter ended June 30, 2021. Management decided to securitize more loans for the quarter ended September 30, 2021. The gain on sale of loans, a component of gain on disposition of loans, was $2.2 million for the quarter ended June 30, 2021, compared to $0.5 million for the quarter ended September 30, 2021.

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.

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Our portfolio related cost of funds decreased to 4.48% for the three months ended September 30, 2021 from 4.81% for the three months ended June 30, 2021 and decreased from 5.07% for the three months ended September 30, 2020.

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 increased from 4.83% for the three months ended June 30, 2021 and 3.77% for the three months ended September 30, 2020 to 4.97% for the three months ended September 30, 2021 due to strong resolutions on nonperforming loans and a modest improvement in the nonperforming loans ratio to total loans.

Our total company net interest margin increased to 4.13% for the three months ended September 30, 2021 from 3.39% and 3.98% for the three months ended September 30, 2020 and June 30, 2021, respectively. The increase in total company net interest margin was primarily attributable to the lower cost of funds on securitizations issued in the current year.

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
	September 30, 2021							June 30, 2021							September 30, 2020
			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	$	2,284						$	11,524						$	—
Loans held for investment		2,137,505							2,010,962							2,016,414
Total loans	$	2,139,789	$	46,923		8.77	%	$	2,022,486	$	44,978		8.90	%	$	2,016,414	$	41,374		8.21	%
Debt:
Warehouse facilities	$	182,383		2,365		5.19	%	$	166,981		2,361		5.66	%	$	22,306	$	703		12.61	%
Securitizations		1,633,059		17,956		4.40	%		1,543,295		18,205		4.72	%		1,742,669		21,644		4.97	%
Total debt - portfolio related		1,815,442		20,321		4.48	%		1,710,276		20,566		4.81	%		1,764,975		22,347		5.07	%
Corporate debt		172,934		4,488		10.38	%		166,335		4,309		10.36	%		78,000		1,913		9.81	%
Total debt	$	1,988,376	$	24,809		4.99	%	$	1,876,611	$	24,875		5.30	%	$	1,842,975	$	24,260		5.27	%
Net interest spread -    portfolio related (2)						4.29	%						4.08	%						3.14	%
Net interest margin -    portfolio related						4.97	%						4.83	%						3.77	%
Net interest spread -    total company (3)						3.78	%						3.59	%						2.94	%
Net interest margin -    total company						4.13	%						3.98	%						3.39	%

(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.

Charge-Offs

Our annualized charge-off rate for the three months ended September 30, 2021 decreased to 0.01% from 0.05% for the three months ended June 30, 2021 and September 30, 2020. The decrease in the charge-off rate was primarily attributable to the decrease in charge-offs during the period ended September 30, 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.

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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 higher during the quarter ended June 30, 2021, compared to the quarter ended September 30, 2021, due to more loans sold during the quarter ended June 30, 2021. Management decided to securitize more loans for the quarter ended September 30, 2021. The gain on sale of loans, a component of gain on disposition of loans, was $2.2 million for the quarter ended June 30, 2021, compared to $0.5 million for the quarter ended September 30, 2021.

	Three Months Ended
($ in thousands)	September 30, 2021			June 30, 2021			September 30, 2020
Income before income taxes (A)	$	10,927		$	12,885		$	5,025
Net income (B)		8,022			9,453			3,481
Monthly average balance:
Stockholders' equity (C)		239,790			228,314			209,468
Pre-tax return on equity (A)/(C) (1)		18.2	%		22.6	%		9.6	%
Return on equity (B)/(C) (1)		13.4	%		16.6	%		6.6	%

(1) Annualized.

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 2019 Term Loan and the 2021 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.

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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.

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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				Nine Months Ended
($ in thousands)	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
Interest income	$	46,923	$	41,374	$	132,608		$	125,766
Interest expense - portfolio related		20,321		22,347		61,720			66,384
Net interest income - portfolio related		26,602		19,027		70,888			59,382
Interest expense - corporate debt		4,488		1,913		16,147			10,149
Net interest income		22,114		17,114		54,741			49,233
Provision for (reversal of) loan losses		228		1,573		(668	)		4,662
Net interest income after provision for (reversal of) loan losses		21,886		15,541		55,409			44,571
Other operating income		339		1,349		5,572			1,628
Total operating expenses		11,298		11,865		32,565			34,823
Income before income taxes		10,927		5,025		28,416			11,376
Income tax expense		2,905		1,544		7,545			3,175
Net income	$	8,022	$	3,481	$	20,871		$	8,201

Net Interest Income — Portfolio Related

	Three Months Ended September 30,							Nine Months Ended September 30,
($ in thousands)	2021		2020		$ Change			2021		2020		$ Change
Interest income	$	46,923	$	41,374	$	5,549		$	132,608	$	125,766	$	6,842
Interest expense - portfolio related		20,321		22,347	$	(2,026	)		61,720		66,384		(4,664	)
Net interest income - portfolio related	$	26,602	$	19,027	$	7,575		$	70,888	$	59,382	$	11,506

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased by 39.8% or $7.6 million from $19.0 million for the three months ended September 30, 2020 to $26.6 million for the three months ended September 30, 2021. The increase was driven by a higher portfolio balance, increased recoveries from delinquent loans, a decrease in nonperforming loans, and the decrease in portfolio related interest expense.

Interest Income.     Interest income increased by $5.5 million to $46.9 million for the three months ended September 30, 2021, compared to $41.4 million for the three months ended September 30, 2020. The increase is attributable to higher portfolio balances and an increase in the average loan yield, which increased from 8.21% for the three months ended September 30, 2020 to 8.77% for the three months ended September 30, 2021, primarily from the receipt of nonperforming loan interest and default interest from the resolutions of loans that went nonperforming in 2020 due to the COVID pandemic.

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 and nine months ended September 30, 2021 and 2020, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance by the previous period’s average yield. The effect of rate changes is calculated by multiplying the change in average yield by the current period’s average loan balance.

	Three Months Ended
($ in thousands)	Average Loans		Interest Income		Average Yield (1)
Three months ended September 30, 2021	$	2,139,789	$	46,923		8.77	%
Three months ended September 30, 2020		2,016,414		41,374		8.21	%
Volume variance		123,375		2,531
Rate variance				3,018
Total interest income variance			$	5,549		0.56	%
(1)  Annualized.

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	Nine Months Ended
($ in thousands)	Average Loans			Interest Income			Average Yield (1)
Nine months ended September 30, 2021	$	2,032,980		$	132,608			8.70	%
Nine months ended September 30, 2020		2,065,168			125,766			8.12	%
Volume variance		(32,188	)		(1,960	)
Rate variance					8,802
Total interest income variance				$	6,842			0.58	%
(1)  Annualized.

Interest Expense — Portfolio Related.    Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitizations, decreased by 0.59% to 4.48% for the three months ended September 30, 2021 from 5.07% for the three months ended September 30, 2020. The $2.0 million decrease from $22.3 million for the three months ended September 30, 2020 to $20.3 million for the three months ended September 30, 2021 was primarily attributable to the lower interest rates on securitizations issued in the current year.

The following tables present information regarding the portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three and nine months ended September 30, 2021 and 2020, respectively.

	Three Months Ended
($ in thousands)	Average Debt (1)		Interest Expense			Cost of Funds (2)
Three months ended September 30, 2021	$	1,815,442	$	20,321			4.48	%
Three months ended September 30, 2020		1,764,975		22,347			5.07	%
Volume variance		50,467		639
Rate variance				(2,665	)
Total interest expense variance			$	(2,026	)		(0.59	)%

(1)   Includes securitizations and warehouse agreements.

(2)  Annualized.

	Nine Months Ended
($ in thousands)	Average Debt (1)			Interest Expense			Cost of Funds (2)
Nine months ended September 30, 2021	$	1,729,296		$	61,720			4.76	%
Nine months ended September 30, 2020		1,828,836			66,384			4.84	%
Volume variance		(99,540	)		(3,613	)
Rate variance					(1,051	)
Total interest expense variance				$	(4,664	)		(0.08	)%

(1)   Includes securitizations and warehouse agreements.

(2)  Annualized.

Net Interest Income After Provision for Loan Losses

	Three Months Ended September 30,							Nine Months Ended September 30,
($ in thousands)	2021		2020		$ Change			2021			2020		$ Change
Net interest income - portfolio related	$	26,602	$	19,027	$	7,575		$	70,888		$	59,382	$	11,506
Interest expense - corporate debt		4,488		1,913		2,575			16,147			10,149		5,998
Net interest income		22,114		17,114		5,000			54,741			49,233		5,508
Provision for (reversal of) loan losses		228		1,573		(1,345	)		(668	)		4,662		(5,330	)
Net interest income after provision for (reversal of) loan losses	$	21,886	$	15,541	$	6,345		$	55,409		$	44,571	$	10,838

Interest Expense — Corporate Debt.     Corporate debt interest expense increased by $2.6 million and $6.0 million for the three and nine months ended September 30, 2021, respectively, primarily due to an increase in the corporate debt amount from $78.0 million as of September 30, 2020 to $171.9 million as of September 30, 2021.

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Provision for (reversal of) Loan Losses.      Our provision for loan losses decreased from $1.6 million for the three months ended September 30, 2020 to $0.2 million for the three months ended September 30, 2021, primarily due to a more optimistic macroeconomic forecast based on an improvement in the U.S. economy that resulted in improvements in the economic forecasts utilized in the allowance for loan loss calculation. Provision for loan losses decreased from $4.7 million for the nine months ended September 30, 2020 to the reversal of $0.7 million for the nine months ended September 30, 2021 also due to an improvement in the U.S economy.

Other Operating Income

The $1.0 million decrease during the three months ended September 30, 2021 was mainly due to the decrease in recapture of write-offs in prior periods on loans held for sale. The $3.9 million increase during the nine months ended September 30, 2021 was primarily attributable to the increase in gain on disposition of loans and the decrease in unrealized loss on interest-only strips.

	Three Months Ended September 30,								Nine Months Ended September 30,
($ in thousands)	2021		2020			$ Change			2021		2020			$ Change
Gain (loss) on disposition of loans	$	306	$	(51	)	$	357		$	5,536	$	2,721		$	2,815
Unrealized gain on fair value loans		—		379			(379	)		18		411			(393	)
Other income (expense)		33		1,021			(988	)		18		(1,504	)		1,522
Total other operating income	$	339	$	1,349		$	(1,010	)	$	5,572	$	1,628		$	3,944

Operating Expenses

Total operating expenses decreased by $0.6 million to $11.3 million for the three months ended September 30, 2021 from $11.9 million for three months ended September 30, 2020, primarily due to the $1.0 million decrease in compensation and employee benefits, offset by the $0.5 million increase in other operating expenses. For the nine months ended September 30, 2021, total operating expenses decreased by $2.3 million compared to the same period in 2020. The decrease was primarily attributable to the $2.1 million and $0.8 million decreases in compensation and employee benefits and professional fees, respectively.

	Three Months Ended September 30,							Nine months ended September 30,
($ in thousands)	2021		2020		$ Change			2021		2020		$ Change
Compensation and employee benefits	$	4,738	$	5,692	$	(954	)	$	14,470	$	16,595	$	(2,125	)
Rent and occupancy		447		415		32			1,340		1,319		21
Loan servicing		2,014		2,168		(154	)		5,803		5,825		(22	)
Professional fees		736		1,051		(315	)		2,064		2,823		(759	)
Real estate owned, net		1,186		898		288			2,734		2,439		295
Other operating expenses		2,177		1,641		536			6,153		5,822		331
Total operating expenses	$	11,298	$	11,865	$	(567	)	$	32,564	$	34,823	$	(2,259	)

Compensation and Employee Benefits.    Compensation and employee benefits decreased to $4.7 million and $14.5 million for the three and nine months ended September 30, 2021, respectively, from $5.7 million and $16.6 million for the three and nine months ended September 30, 2020, respectively. The decreases were primarily attributable to the deferral of direct loan origination related compensation. The deferral was significantly less in 2020 due to the temporary suspension of loan origination resulting from the COVID-19 pandemic.

Rent and Occupancy.    Rent and occupancy expenses remained consistent at $0.4 million for the three months ended September 30, 2021 and 2020, and at $1.3 million for the nine months ended September 30, 2021 and 2020.

Loan Servicing.     Loan servicing expenses decreased from $2.2 million for the three months ended September 30, 2020 to $2.0 million the three months ended September 30, 2021 primarily attributable to the decrease in escrow advances The expenses remained consistent at $5.8 million for the nine months ended September 30, 2020 and 2021.

Professional Fees.     Professional fees decreased from $1.1 million for the three months ended September 30, 2020 to $0.7 million for the three months ended September 30, 2021, and decreased from $2.8 million for the nine months ended September 30, 2020 to $2.1 million for the nine months ended September 30, 2021, mainly due to a higher legal fees in 2020 related to the defense of a class action lawsuit was dismissed in the beginning of 2021.

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Net Expenses of Real Estate Owned.     Net expenses of real estate owned increased from $0.9 million for the three months ended September 30, 2020 to $1.2 million for the three months ended September 30, 2021, mainly due to the increase in repairs and maintenance of a property. Net expenses of real estate owned increased from $2.4 million for the nine months ended September 30, 2020 to $2.7 million for the nine months ended September 30, 2021 due to a decrease in realized gain from real estate sales. 

Other Operating Expenses.     Other operating expenses increased from $1.6 million for the three months ended September 30, 2020 to $2.2 million for the three months ended September 30, 2021. Other operating expenses also increased by $0.3 million to $6.2 million for the nine months ended September 30, 2021. The increases are mainly attributable to increases in insurance premiums, and an increase in appraisal expenses due to higher volumes.

Income Tax Expense.    Income tax expense was $2.9 million and $1.5 million for the three months ended September 30, 2021 and 2020, and $7.5 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively. Our consolidated effective tax rate as a percentage of pre-tax income was 26.6% and 27.9% for the nine months ended September 30, 2021 and 2020, respectively.

Quarterly Results of Operations

The following table sets forth certain financial information for each completed fiscal quarter since the quarter ended December 31, 2019. The quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this 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
	September 30, 2021			June 30, 2021			March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019
($ in thousands)	(unaudited)
Interest income	$	46,923		$	44,978		$	40,707		$	41,556		$	41,374		$	39,755		$	44,637		$	44,124
Interest expense - portfolio related		20,321			20,566			20,832			21,442			22,347			21,189			22,848			22,689
Net interest income - portfolio related		26,602			24,412			19,875			20,114			19,027			18,566			21,789			21,435
Net interest margin - portfolio related		4.97	%		4.83	%		4.10	%		4.07	%		3.77	%		3.54	%		4.18	%		4.32	%
Interest expense - corporate debt		4,488			4,309			7,350			1,900			1,913			1,894			6,342			4,070
Net interest income		22,114			20,103			12,525			18,214			17,114			16,672			15,447			17,365
Net interest margin - total company		4.13	%		3.98	%		2.59	%		3.68	%		3.39	%		3.18	%		2.97	%		3.50	%
Provision for loan losses		228			(1,000	)		105			406			1,573			1,800			1,290			242
Net interest income after provision    for loan losses		21,886			21,103			12,420			17,808			15,541			14,872			14,157			17,123
Other operating income (expense)		339			2,432			2,801			4,691			1,349			(1,339	)		1,620			833
Operating expenses		11,298			10,650			10,617			10,746			11,865			10,908			12,050			9,814
Income before income taxes		10,927			12,885			4,604			11,753			5,025			2,625			3,727			8,142
Income tax expense		2,905			3,432			1,208			2,177			1,544			484			1,148			2,960
Net income	$	8,022		$	9,453		$	3,396		$	9,576		$	3,481		$	2,141		$	2,579		$	5,182

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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 $35.5 million and $19.2 million, excluding restricted cash of $9.6 million and $7.8 million as of September 30, 2021 and 2020, respectively. The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities as of the periods indicated:

	Nine Months Ended
($ in thousands)	September 30, 2021			September 30, 2020
Cash provided by (used in):
Operating activities	$	39,574		$	37,364
Investing activities		(316,295	)		73,339
Financing activities		301,511			(111,224	)
Net change in cash, cash equivalents, and restricted cash	$	24,790		$	(521	)

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 nine months ended September 30, 2021, our net cash provided by operating activities consisted mainly of $20.9 million in net income, $14.1 million add-back of noncash debt issuance discounts and costs amortization.

For the nine months ended September 30, 2021, our net cash used in investing activities consisted mainly of $840.8 million in cash used to originate held for investment loans, partially offset by $427.2 million in cash received in payoffs of loans held for investment and $99.1 million in proceeds from sale of loans.

For the nine months ended September 30, 2021, our net cash provided by financing activities consisted mainly of $717.6 million in borrowings from our warehouse and repurchase facilities, $456.2 million in proceeds of asset-backed securities issued, and $175.0 million in proceeds from secured financing. The cash generated was partially offset by payments we made of $534.1 million and $412.9 million on our warehouse and repurchase facilities repayments and asset-backed securities issued repayments, respectively.

During the nine months ended September 30, 2021, we generated approximately $24.8 million of net cash and cash equivalents from operations, investing and financing activities. During the nine months ended September 30, 2020, we used approximately $0.5 million of net cash and cash equivalents in operations, investing and financing activities.

Warehouse Facilities

As of September 30, 2021, 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 $257.0 million with $393.0 million of available capacity under our warehouse and repurchase facilities as of September 30, 2021.

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,

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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 September 30, 2021, we were in compliance with these covenants.

Securitizations

From May 2011 through September 2021, we have completed 17 securitizations of $3.9 billion of investor real estate loans, issuing $3.5 billion in principal amount of securities to third parties through fifteen respective transactions. All borrower payments are segregated into remittance accounts at the primary servicer and remitted to the trustee of each trust monthly. We are the sole beneficial interest holder of the applicable trusts, which are variable interest entities included in our consolidated financial statements. The transactions are accounted for as 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 September 30, 2021 and December 31, 2020, 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)					Equity in Securities Retained as of
Trusts	Mortgage Loans		Securities Issued		Issuance Date		September 30, 2021		December 31, 2020		Stated Maturity Date
2011-1 Trust (1)	$	74,898	$	61,042	$	13,856	$	—	$	—	August 2040
2014-1 Trust		191,757		161,076		30,682		—		—	September 2044
2015-1 Trust		312,829		285,457		27,372		15,525		15,522	July 2045
2016-1 Trust		358,601		319,809		38,792		17,636		17,931	April 2046
2016-2 Trust		190,255		166,853		23,402		9,514		9,514	October 2046
2017-1 Trust		223,064		211,910		11,154		11,102		11,154	April 2047
2017-2 Trust		258,528		245,601		12,927		4,408		6,232	October 2047
2018-1 Trust		186,124		176,816		9,308		3,340		6,015	April 2048
2018-2 Trust		324,198		307,988		16,210		7,261		9,762	October 2048
2019-1 Trust		247,979		235,580		12,399		6,899		11,540	March 2049
2019-2 Trust		217,921		207,020		10,901		6,243		9,728	July 2049
2019-3 Trust		162,546		154,419		8,127		5,294		6,441	October 2049
2020-1 Trust		261,859		248,700		13,159		9,273		13,085	February 2050
2020-2 Trust		128,470		96,352		32,118		12,847		12,847	June 2050
2020-MC1 Trust		275,956		179,371		96,585		107,186		98,260	July 2050
2021-1 Trust		264,528		251,301		13,227		12,897		—	May 2051
2021-2 Trust		205,178		194,918		10,260		—		—	August 2051
Total	$	3,884,691	$	3,504,213	$	380,479	$	229,425	$	228,031

(1) The Trust was collapsed in July 2019

The following table summarizes outstanding bond balances for each securitization as of September 30, 2021 and December 31, 2020:

($ in thousands)	September 30, 2021		December 31, 2020
2014-1 Trust	$	18,910	$	23,391
2015-1 Trust		21,161		36,966
2016-1 Trust		40,354		57,963
2016-2 Trust		29,207		45,195
2017-1 Trust		50,258		72,910
2017-2 Trust		94,486		129,478
2018-1 Trust		72,219		102,063
2018-2 Trust		156,587		200,451
2019-1 Trust		146,086		181,579
2019-2 Trust		130,198		158,199
2019-3 Trust		105,570		127,045
2020-1 Trust		186,400		220,052
2020-2 Trust		88,695		109,832
2020-MC1 Trust		57,111		137,794
2021-1 Trust		245,423		—
2021-2 Trust		203,743		—
	$	1,646,408	$	1,602,918

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As of September 30, 2021 and December 31, 2020, the weighted average rate on the securities and certificates for the Trusts were as follows:

	September 30, 2021			December 31, 2020
2014-1 Trust		8.12	%		7.46	%
2015-1 Trust		7.57	%		7.20	%
2016-1 Trust		8.25	%		7.78	%
2016-2 Trust		7.54	%		6.63	%
2017-1 Trust		6.34	%		5.31	%
2017-2 Trust		3.45	%		3.42	%
2018-1 Trust		4.02	%		4.04	%
2018-2 Trust		4.34	%		4.48	%
2019-1 Trust		4.08	%		4.01	%
2019-2 Trust		3.44	%		3.48	%
2019-3 Trust		3.26	%		3.26	%
2020-1 Trust		2.86	%		2.83	%
2020-2 Trust		4.51	%		4.55	%
2020-MC1 Trust		4.51	%		4.50	%
2021-1 Trust		1.72	%		—
2021-2 Trust		1.77	%		—

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 (“2021 Term Loan”). The 2021 Term Loan bears interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. The principal of the 2021 Term Loan amortizes quarterly at an annual rate of 2.50% for the first year and 5.00% per year thereafter. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the outstanding 2019 Term Loan. The remaining portion of the net proceeds from the 2021 Term Loan is used for loan originations and general corporate purposes.

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 September 30, 2021, we sold 10,727 shares of our common stock under our ATM Program for net proceeds of $137,333, net of $2,803 in commissions.

Contractual Obligations and Commitments

In August 2019, we entered into a five-year $153.0 million corporate debt agreement. This 2019 Term Loan bore interest equal to one-month LIBOR plus 7.50% and was to mature in August 2024. A portion of the net proceeds from the 2019 Term Loan was used to redeem the 2014 Senior Secured Notes. Another portion of the net proceeds from 2019 Term Loan, together with cash on hand, was used to repurchase our outstanding Class C preferred units. As of December 31, 2020 and 2019, including paid-in-kind interest, the aggregate outstanding principal amount of the 2014 Senior Secured Notes was zero and $127.6 million, respectively. In January 2020, we paid down $75.0 million of the 2019 Term Loan with a portion of our IPO proceeds. As of December 31, 2020, the outstanding principal amount of the 2019 Term Loan was $78.0 million. On February 5, 2021, we entered into a five-year $175.0 million syndicated corporate debt agreement (“2021 Term Loan”). The 2021 Term Loan under this agreement bears interest at a rate equal to one-month LIBOR plus 8.00% with a 1.00% LIBOR floor, and matures on February 4, 2026. A portion of the net proceeds from the 2021 Term Loan was used to redeem all the outstanding 2019 Term Loan. The remaining portion of the net proceeds from the 2021 Term Loan is used for loan originations and general corporate purposes.

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Velocity Commercial Capital, LLC is the borrower of the 2021 Term Loan, which is secured by substantially all of the borrower’s non-warehoused assets, with a guarantee from Velocity Financial, Inc., that is secured by the equity interests of the borrower. The syndicated corporate debt agreement contains customary affirmative and negative covenants, including financial maintenance covenants and limitations on dividends by the borrower.

As of September 30, 2021, we maintained warehouse facilities to finance our investor real estate loans and had approximately $257.0 million in outstanding borrowings with $393.0 million of available capacity under our warehouse and repurchase facilities.

Although we voluntarily converted all of our 45,000 outstanding shares of Series A Convertible Preferred Stock into 11,688,310 shares of our common stock on October 8, 2021, in the event we would have been required to pay the Preferred holders their liquidation preference due to a redemption, liquidation or change of control occurring on or prior to September 30, 2021, the amount of such liquidation preference would have equaled the greater of (i) $2,000 per share and (ii) the amount such Preferred holder would have received if the Preferred had converted into common stock immediately prior to such event.

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, 2020 and filed with the Securities and Exchange Commission (“SEC”) on March 17, 2021

• 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.

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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.

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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. We intend to defend ourselves vigorously against any pending or future judicial, regulatory or administrative claims or proceedings. Although occasional adverse decisions or settlements may occur, our management does not believe that the final disposition of any currently pending or threatened matter will have a material adverse effect on our business, financial position, results of operations or cash flows.

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.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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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	Bylaws of Velocity Financial, Inc.	8-K	001-39183	3.3	1/22/2020
3.4	Certificate of Designation of Series A Convertible Preferred Stock of Velocity Financial, Inc.	8-K	001-39183	3.1	4/7/2020
4.1	Form of Warrant to Purchase Common Stock	8-K	001-39183	4.1	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	Velocity Financial, Inc. 2020 Omnibus Incentive Plan*	8-K	001-39183	10.1	1/22/2020
10.4	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
10.5	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
10.6	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
10.7	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
10.8	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
10.9	Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.11	1/6/2020
10.10	Form of Officer and Director Indemnity Agreement*	S-1/A	333-234250	10.37	11/6/2019
10.11	Registration Rights Agreement, dated as of April 7, 2020	8-K	001-39183	10.1	4/7/2020
10.12	Form of Equity Distribution Agreement, dated September 3, 2021	8-K	001-39183	1.1	9/7/2021
10.13	Velocity Financial 2021 Annual Incentive Program for Messrs. Farrar, Szczepaniak and Taylor*	8-K	001-39183	-	8/30/2021
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
32.2	Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Management contract or compensatory plan or arrangement.

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+ 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

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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:  November 4, 2021	By:	/s/ Christopher D. Farrar
		Christopher D. Farrar
		Chief Executive Officer
Date:  November 4, 2021	By:	/s/ Mark R. Szczepaniak
		Mark R. Szczepaniak
		Chief Financial Officer

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