Investor 1-4 Mixed-Use Multi-Family Commercial > 1Q21 Earnings Presentation May 6, 2021 Forward-looking statements Some of the statements contained in this presentation may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements b ...

Velocity Financial, Inc. (NYSE:VEL) Q1 2021 Earnings Conference Call May 6, 2021 5:00 PM ET Company Participants Chris Oltmann - Chief Accounting Officer Chris Farrar - President & Chief Executive Officer Mark Szczepaniak - Chief Financial Officer Conference Call Participants Don Fandetti - Wells Fargo Arren Cyganovich - Citi Chris Muller - JMP Securities Operator Good day and welcome to the Velocity Financial First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Oper ...

PART I. FINANCIAL INFORMATION This section details Velocity Financial, Inc.'s unaudited consolidated financial statements and management's analysis of operations [Consolidated Financial Statements (Unaudited)](index=2&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents Velocity Financial, Inc.'s unaudited consolidated financial statements for Q1 2021, detailing financial position, performance, and cash flows [Consolidated Balance Sheets](index=2&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2021, total assets increased to **$2.16 billion** from **$2.10 billion** at year-end 2020, primarily driven by an increase in loans held for investment, while total liabilities grew to **$1.85 billion** mainly due to increased borrowings, and total stockholders' equity saw a slight increase to **$223.5 million** Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$2,164,839** | **$2,102,874** | | Total loans, net | $2,009,869 | $1,962,734 | | Cash and cash equivalents | $20,434 | $13,273 | | **Total Liabilities** | **$1,851,369** | **$1,793,285** | | Securitizations, net | $1,453,386 | $1,579,019 | | Warehouse and repurchase facilities, net | $203,314 | $75,923 | | **Total Stockholders' Equity** | **$223,470** | **$219,589** | [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) For the three months ended March 31, 2021, the company reported net income of **$3.4 million**, an increase from **$2.6 million** in the same period of 2020, achieved despite a decrease in net interest income, primarily due to a significant reduction in the provision for loan losses and lower operating expenses, with diluted earnings per share at **$0.10** compared to **$0.13** in the prior-year quarter Q1 2021 vs Q1 2020 Performance (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Interest income | $40,707 | $44,637 | | Net interest income | $12,525 | $15,447 | | Provision for loan losses | $105 | $1,290 | | Total operating expenses | $10,617 | $12,050 | | **Net income** | **$3,396** | **$2,579** | | **Basic EPS** | **$0.11** | **$0.13** | | **Diluted EPS** | **$0.10** | **$0.13** | [Consolidated Statements of Changes in Stockholders'%20/%20Members'%20Equity](index=4&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20/%20Members'%20Equity) Total stockholders' equity increased from **$219.6 million** at the end of 2020 to **$223.5 million** as of March 31, 2021, primarily driven by net income of **$3.4 million** and stock-based compensation - The increase in stockholders' equity during Q1 2021 was mainly due to net income of **$3,396 thousand** and stock-based compensation of **$485 thousand**[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=5&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the first quarter of 2021, the company generated **$10.4 million** in cash from operating activities, used **$53.7 million** in investing activities primarily for loan originations, and provided **$50.2 million** from financing activities, resulting in a net increase in cash and cash equivalents of **$6.9 million** Cash Flow Summary for Three Months Ended March 31 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,424 | $1,366 | | Net cash used in investing activities | $(53,656) | $(52,064) | | Net cash provided by financing activities | $50,181 | $35,278 | | **Net increase (decrease) in cash** | **$6,949** | **$(15,420)** | [Notes to Unaudited Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) These notes detail the company's accounting policies, significant financial events like its 2020 IPO, loan portfolio status, debt facilities, and subsequent financing activities - In January 2020, the company converted from an LLC to a corporation and completed its IPO, trading on the NYSE under the symbol 'VEL'[23](index=23&type=chunk) - As of March 31, 2021, loans in the COVID-19 forbearance program had an unpaid principal balance (UPB) of **$363.7 million**, of which **79.6%** were performing, a decrease from **$392.1 million** at the end of 2020[39](index=39&type=chunk)[40](index=40&type=chunk) - In February 2021, the company entered into a new five-year **$175.0 million** syndicated corporate debt agreement (the '2021 Term Loan') and used a portion of the proceeds to redeem its 2019 Term Loan[59](index=59&type=chunk) - Subsequent to the quarter end, on April 16, 2021, the company entered into a new **$100.0 million** Term Repurchase Agreement, and on April 21, 2021, it received the remaining **$35.0 million** under its 2021 Term Loan commitment[110](index=110&type=chunk)[111](index=111&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of the company's Q1 2021 financial condition and operational results, highlighting key performance drivers, portfolio quality, and liquidity enhancements - The company is a vertically integrated real estate finance company that originates and manages investor loans secured by 1-4 unit residential rental and small commercial properties[114](index=114&type=chunk) - In response to COVID-19, the company strengthened its liquidity by obtaining a new corporate credit facility of **$175.0 million** in February 2021[127](index=127&type=chunk) Q1 2021 vs Q1 2020 Results Summary (in thousands) | Metric | March 31, 2021 | March 31, 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $12,525 | $15,447 | $(2,922) | (18.9)% | | Provision for loan losses | $105 | $1,290 | $(1,185) | (91.9)% | | Total operating expenses | $10,617 | $12,050 | $(1,433) | (11.9)% | | **Net income** | **$3,396** | **$2,579** | **$817** | **31.7%** | - Loan originations for Q1 2021 totaled **$233.0 million**, a **22.4%** increase from Q4 2020, indicating a recovery in origination activity[142](index=142&type=chunk) [Portfolio and Asset Quality](index=30&type=section&id=Portfolio%20and%20Asset%20Quality) As of March 31, 2021, the total loan portfolio UPB was **$2.0 billion** across **5,935** loans, with a weighted average LTV of **66.3%**, and nonperforming loans (NPLs) represented **16.83%** of the total UPB, an increase from **8.76%** a year prior, largely due to the impact of the COVID-19 pandemic, with the portfolio concentrated in investor 1-4 unit properties and geographically in New York and California Key Portfolio Statistics | Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total loans (UPB, in thousands) | $1,990,684 | $1,944,804 | | Loan count | 5,935 | 5,878 | | Weighted average LTV | 66.3% | 66.1% | | Weighted average coupon | 8.42% | 8.51% | | Nonperforming loans (% of total) | 16.83% | 17.11% | - The increase in nonperforming loans to **16.8%** of the portfolio as of March 31, 2021, was primarily attributed to the COVID-19 pandemic, including **$74.3 million** of COVID-19 forbearance-granted loans placed on nonaccrual status[138](index=138&type=chunk)[149](index=149&type=chunk) - The company resolved **$46.5 million** of non-performing loans during Q1 2021, realizing net gains of **$1.3 million**, largely due to collecting default interest and prepayment penalties[150](index=150&type=chunk) [Key Performance Metrics](index=35&type=section&id=Key%20Performance%20Metrics) For Q1 2021, the portfolio yield was **8.41%**, and the portfolio-related cost of funds was **5.01%**, resulting in a portfolio-related net interest margin of **4.10%**, which saw a slight improvement from the previous quarter but a decrease from the prior year, while the total company net interest margin was **2.59%**, impacted by one-time costs, and the annualized return on equity was **6.10%** Key Performance Metrics (Annualized) | Metric | Q1 2021 | Q4 2020 | Q1 2020 | | :--- | :--- | :--- | :--- | | Portfolio yield | 8.41% | 8.40% | 8.57% | | Cost of funds — portfolio related | 5.01% | 4.97% | 4.84% | | **Net interest margin — portfolio related** | **4.10%** | **4.07%** | **4.18%** | | Net interest margin — total company | 2.59% | 3.68% | 2.97% | | Return on equity | 6.10% | 17.78% | 4.58% | - Excluding a one-time debt issuance cost write-off and prepayment penalties, the adjusted return on equity for Q1 2021 would have been **12.07%**[163](index=163&type=chunk) [Consolidated Results of Operations](index=38&type=section&id=Consolidated%20Results%20of%20Operations) Comparing Q1 2021 to Q1 2020, net interest income decreased by **18.9%** to **$12.5 million** due to a smaller average loan portfolio and higher corporate debt interest, but a **91.9%** decrease in the provision for loan losses to **$0.1 million** and an **11.9%** reduction in operating expenses to **$10.6 million** led to a **23.5%** increase in income before taxes, with net income rising **31.7%** to **$3.4 million** - Portfolio-related net interest income decreased by **$1.9 million (8.8%)** YoY, driven by a lower average loan balance and a slight decrease in average loan yield due to an increase in nonperforming loans[200](index=200&type=chunk) - The provision for loan losses decreased significantly from **$1.3 million** in Q1 2020 to **$0.1 million** in Q1 2021, reflecting an improved economic outlook[211](index=211&type=chunk)[49](index=49&type=chunk) - Operating expenses decreased by **$1.4 million** YoY, primarily due to lower professional fees (down **$0.7 million**) and reduced net expenses of real estate owned (down **$0.6 million**)[214](index=214&type=chunk) [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) The company funds its activities through warehouse facilities, securitizations, corporate debt, and equity, with cash and cash equivalents at **$20.4 million** and **$201.8 million** outstanding on warehouse facilities as of March 31, 2021, further enhancing liquidity by securing a new **$175 million** five-year term loan in February 2021 and a new **$100 million** term repurchase agreement subsequent to the quarter - Primary sources of liquidity are borrowings under warehouse facilities, securitizations, corporate-level debt, and cash from operations[224](index=224&type=chunk) - On February 5, 2021, the company entered into a five-year, **$175.0 million** syndicated corporate debt agreement (2021 Term Loan), enhancing its long-term capital structure[237](index=237&type=chunk)[239](index=239&type=chunk) - As of March 31, 2021, the company had **$148.2 million** of available capacity under its warehouse and repurchase facilities[241](index=241&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not applicable for this filing period - The company has indicated that this disclosure is not applicable[249](index=249&type=chunk) [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period[251](index=251&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, such controls[252](index=252&type=chunk) PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and exhibit listings [Legal Proceedings](index=49&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings in the ordinary course of business, which management does not expect to have a material adverse effect, and a previously disclosed class action lawsuit related to the company's IPO was dismissed on January 25, 2021 - The company is party to various legal proceedings in the normal course of business, which are not expected to have a material impact[255](index=255&type=chunk) - An IPO-related class action lawsuit against the company and certain directors, shareholders, and underwriters was dismissed on January 25, 2021[256](index=256&type=chunk) [Risk Factors](index=50&type=section&id=Item%201A.%20Risk%20Factors) This section was intentionally omitted pursuant to smaller reporting company reduced disclosure requirements - Disclosure of risk factors has been intentionally omitted as permitted for smaller reporting companies[257](index=257&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section is not applicable for this filing period - The company has indicated that this disclosure is not applicable[258](index=258&type=chunk) [Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certificates of incorporation, bylaws, incentive plans, and officer certifications - A list of exhibits filed with or incorporated by reference into the Form 10-Q is provided, including corporate governance documents, agreements, and Sarbanes-Oxley certifications[264](index=264&type=chunk) Signatures This section contains the official signatures authorizing the filing of the Quarterly Report on Form 10-Q [Signatures](index=51&type=section&id=Signatures) The report is duly signed and authorized by Christopher D. Farrar, Chief Executive Officer, and Mark R. Szczepaniak, Chief Financial Officer, on May 6, 2021 - The Form 10-Q was signed on May 6, 2021, by the Chief Executive Officer and the Chief Financial Officer[267](index=267&type=chunk)[269](index=269&type=chunk)

Investor 1-4 Mixed-Use Multi-Family Commercial > 4Q20 Earnings Presentation March 16, 2021 Forward-looking statements Some of the statements contained in this presentation may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statement ...

Velocity Financial, Inc. (NYSE:VEL) Q4 2020 Earnings Conference Call March 16, 2020 5:00 PM ET Company Participants Chris Oltmann - Chief Accounting Officer Chris Farrar - President & Chief Executive Officer Mark Szczepaniak - Chief Financial Officer Conference Call Participants Arren Cyganovich - Citi Stephen Laws - Raymond James Steve DeLaney - JMP Securities Don Fandetti - Wells Fargo Operator Good day, and welcome to the Velocity Financial Incorporated Fourth Quarter 2020 Earnings Conference Call. All p ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 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 | | --- | - ...

Financial Performance - Net income reached $3.5 million and core earnings were $3.9 million, resulting in a diluted EPS of $0.11[9] - Net income increased by 63% compared to the previous quarter, primarily due to the normalization of provision expense, which was $0.4 million[9] - Portfolio net interest margin increased by 23 basis points (bps) from the second quarter of 2020 to 3.77%[9] - Core earnings increased by $0.5 million from $3.4 million in 2Q20 to $3.9 million in 3Q20[15] - Book value per share increased from $10.26 as of June 30, 2020, to $10.44 as of September 30, 2020[15] Loan Portfolio and Production - September loan applications totaled $226 million in unpaid principal balance (UPB)[7] - Loan production totaled $8 million in UPB in September[7] - Approximately $335 million in UPB of loans in forbearance were brought current[8] - The total loan portfolio as of September 30, 2020, was $1.99 billion in UPB, a decrease from $2.06 billion as of June 30, 2020[21] - The company transferred approximately $214 million in UPB of short-term loans from held for sale (HFS) to held for investment (HFI) during the third quarter[21] Asset Resolution - Resolutions of delinquent loans in 3Q20 were 103.5% of assets resolved[8] - Nonaccrual loans paid in full during 3Q20 totaled $9.7 million in UPB with a $0.73 million net gain on resolution[18] - REO sales totaled $1.2 million for a net loss of $(0.31) million[18]

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Consolidated Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(Unaudited)) The unaudited consolidated financial statements for the period ended September 30, 2020, reflect the company's financial position, results of operations, changes in equity, and cash flows, highlighting the IPO, CECL adoption, and COVID-19 impacts [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased slightly to $2.13 billion as of September 30, 2020, driven by loan reclassification and reduced warehouse facilities, while stockholders' equity increased to $209.8 million due to the IPO and equity conversions Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Total loans, net | $2,004,413 | $2,080,787 | | - Loans held for sale, net | $0 | $214,467 | | - Loans held for investment, net | $2,001,086 | $1,863,360 | | Total assets | $2,126,866 | $2,214,766 | | **Liabilities & Equity** | | | | Warehouse and repurchase facilities, net | $19,541 | $421,548 | | Securitizations, net | $1,670,930 | $1,438,629 | | Total liabilities | $1,827,106 | $2,061,922 | | Mezzanine Equity (Preferred Stock) | $90,000 | $0 | | Total stockholders' / members' equity | $209,760 | $152,844 | | Total liabilities, mezzanine equity and stockholders' / members' equity | $2,126,866 | $2,214,766 | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Net income decreased to $3.5 million in Q3 2020 and $8.2 million for the nine months, primarily due to higher loan loss provisions and increased operating expenses, leading to a $40.8 million net loss allocated to common shareholders for the nine-month period Statement of Income Summary (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $17,114 | $14,710 | $49,233 | $41,645 | | Provision for loan losses | $1,573 | $338 | $4,662 | $898 | | Total operating expenses | $11,865 | $8,484 | $34,823 | $25,308 | | **Net income** | **$3,481** | **$3,880** | **$8,201** | **$12,110** | | Less deemed dividends on preferred stock | $0 | N/A | $48,955 | N/A | | **Net income (loss) allocated to common shareholders** | **$3,481** | **N/A** | **$(40,754)** | **N/A** | | Basic EPS | $0.17 | N/A | $(2.03) | N/A | | Diluted EPS | $0.11 | N/A | $(2.03) | N/A | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, cash decreased by $0.5 million, with operating activities providing $37.4 million, investing activities providing $73.3 million, and financing activities using $111.2 million Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $37,364 | $(77,193) | | Net cash provided by (used in) investing activities | $73,339 | $(219,034) | | Net cash (used in) provided by financing activities | $(111,224) | $291,551 | | **Net decrease in cash** | **$(521)** | **$(4,676)** | [Notes to Unaudited Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) The notes detail significant events and accounting policies, including the company's IPO, CECL adoption, COVID-19 forbearance impact, transfer of held-for-sale loans, and issuance of convertible preferred stock - On January 16, 2020, the company converted from an LLC to a corporation, and on January 22, 2020, it completed its IPO of **7,250,000 shares** at **$13.00 per share**[27](index=27&type=chunk) - The company adopted the CECL (ASU 2016-13) accounting standard on January 1, 2020, resulting in a **$96,000 decrease to retained earnings**. The CECL estimate for September 30, 2020, used a COVID-19 stress scenario with a five-quarter forecast period[38](index=38&type=chunk)[44](index=44&type=chunk)[52](index=52&type=chunk) - Effective July 1, 2020, the entire loans held for sale portfolio, with a UPB of **$214.4 million**, was transferred to the held for investment portfolio[59](index=59&type=chunk) - As of September 30, 2020, loans with a UPB of **$411.2 million** had participated in the COVID-19 forbearance program. Of these, approximately **81% ($335.1 million)** were subsequently brought current[60](index=60&type=chunk)[56](index=56&type=chunk) - In April 2020, the company issued **45,000 shares of Series A Convertible Preferred Stock** and warrants, resulting in net proceeds of **$43.2 million**. This preferred stock is recorded as mezzanine equity[98](index=98&type=chunk)[105](index=105&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The MD&A details the company's business, operational results, and financial condition, focusing on COVID-19 impacts, management strategies, increased nonperforming loans, higher credit loss provisions, and bolstered liquidity from IPO and private placement [Business and Recent Developments](index=31&type=section&id=Business%20and%20Recent%20Developments) Velocity Financial, a real estate finance company, was significantly impacted by COVID-19, leading to suspended originations, a forbearance program, capital raising, and workforce reductions upon resuming operations - The company's loan portfolio totaled **$2.0 billion** in UPB as of September 30, 2020, with a weighted average LTV of **66.2%**[134](index=134&type=chunk) - In response to COVID-19, the company temporarily suspended loan originations, furloughed staff, implemented a loan forbearance program, and raised **$45.0 million** in gross proceeds from issuing Preferred Stock and Warrants[145](index=145&type=chunk) - Loan originations resumed in September 2020, with over **$220 million** in applications received during the month. The company also reduced its workforce by **60 employees** to improve cost efficiency[143](index=143&type=chunk) [Portfolio and Asset Quality](index=36&type=section&id=Portfolio%20and%20Asset%20Quality) The loan portfolio totaled $2.0 billion, with nonperforming loans significantly increasing to 15.8% due to COVID-19, and the allowance for credit losses rising to $5.7 million reflecting CECL adoption and portfolio reclassification Key Portfolio Statistics (UPB in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total loans (UPB) | $1,986,344 | $2,059,344 | | Weighted average LTV | 66.2% | 65.8% | | Weighted average coupon | 8.56% | 8.69% | | Nonperforming loans (UPB) | $314,727 | $141,607 | | Nonperforming loans (% of total) | 15.84% | 6.88% | - Loan originations were suspended from late March through August 2020. In September 2020, the company resumed originations, closing **$8.1 million** in new loans[178](index=178&type=chunk) - The allowance for credit losses increased to **0.29%** of loans held for investment (excluding FVO) as of September 30, 2020, compared to **0.12%** as of September 30, 2019, primarily due to the impact of COVID-19 and the transfer of the HFS portfolio[183](index=183&type=chunk) [Consolidated Results of Operations](index=45&type=section&id=Consolidated%20Results%20of%20Operations) Net income declined in Q3 2020 and for the nine-month period, primarily due to increased provision for loan losses and higher operating expenses, including expensed origination costs from production suspension Results of Operations Comparison (in thousands) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $17,114 | $14,710 | $49,233 | $41,645 | | Provision for loan losses | $1,573 | $338 | $4,662 | $898 | | Total operating expenses | $11,865 | $8,484 | $34,823 | $25,308 | | **Net income** | **$3,481** | **$3,880** | **$8,201** | **$12,110** | - The provision for loan losses for Q3 2020 included a **$1.2 million** impact from transferring the held-for-sale portfolio to held-for-investment. This was largely offset by a **$1.3 million** reversal of the valuation allowance on those loans, recorded in 'Other operating income'[251](index=251&type=chunk)[184](index=184&type=chunk) - Compensation expenses increased by **$2.0 million** in Q3 2020 vs Q3 2019, primarily because direct origination costs were expensed in 2020 due to the production suspension, whereas they were deferred in 2019. A one-time severance payment of **$0.6 million** also contributed to the increase[254](index=254&type=chunk)[255](index=255&type=chunk) [Liquidity and Capital Resources](index=49&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity was actively managed through IPO and preferred stock proceeds, used to pay down debt and reduce warehouse borrowings, with $19.2 million in cash and three securitizations totaling over $666 million completed - Primary sources of liquidity are warehouse facilities, securitizations, corporate debt, and equity. In 2020, the company raised capital via its IPO (**$100.8 million** net proceeds) and a preferred stock/warrant issuance (**$41.0 million** net proceeds)[263](index=263&type=chunk)[267](index=267&type=chunk) - The company completed three securitizations in 2020 (2020-1, 2020-2, 2020-MC1), securitizing a total of **$666.3 million** in mortgage loans and issuing **$524.4 million** in securities[276](index=276&type=chunk) - As of September 30, 2020, outstanding borrowings under warehouse and repurchase facilities were significantly reduced to **$19.8 million** (gross) from much higher levels at year-end 2019[282](index=282&type=chunk)[269](index=269&type=chunk) [Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls were effective, but a material weakness in internal control over financial reporting related to income tax accounting persists, despite an ongoing remediation plan - A material weakness related to the accounting for a 2018 tax election, identified in the 2019 10-K, remains as of September 30, 2020[290](index=290&type=chunk) - A remediation plan is in place, involving a nationally recognized accounting firm to supplement and train the accounting team and implement new internal controls over income tax processes[290](index=290&type=chunk) - Despite the material weakness, management concluded that disclosure controls and procedures were effective at a reasonable assurance level and that the financial statements are fairly presented in all material respects[291](index=291&type=chunk) [PART II. OTHER INFORMATION](index=52&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=52&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings, including a class action complaint filed on July 9, 2020, alleging securities law violations related to its January 2020 IPO, which the company intends to vigorously defend - A class action complaint was filed on July 9, 2020, alleging violations of securities laws related to the company's January 2020 IPO[296](index=296&type=chunk) - The complaint seeks unspecified damages and legal costs. The company plans to vigorously defend against the action[296](index=296&type=chunk)

Financial Data and Key Metrics Changes - The company reported a significant increase in net income, primarily driven by a return to normalized provision expenses [14] - Provision expenses returned to a normalized level in Q3, reflecting better-than-expected economic performance [11][28] - The net interest margin (NIM) expanded due to fewer non-performing loans (NPLs) [24] Business Line Data and Key Metrics Changes - The company restarted originations in Q3, with new applications returning to pre-COVID levels and a rapidly expanding pipeline [7] - Approximately $335 million of loans in the forbearance program were brought current, indicating strong recovery [16] - The company experienced strong asset resolution activity, with good performance expected to continue [19] Market Data and Key Metrics Changes - The company noted that real estate markets are performing better than anticipated, contributing to strong recovery rates [10][29] - There has been no significant change in geographic demand for loan applications, with a focus on liquid markets [37] Company Strategy and Development Direction - The company is focused on expanding financing capacity and eliminating mark-to-market risk [30][31] - There is an intention to maintain a higher level of one-to-four rental production while reducing exposure to small commercial loans [36] - The company plans to return to pre-COVID origination levels by Q2 of the following year [30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the ability to liquidate delinquent assets and the overall stability of real estate values [29] - The company is working on new agreements that have non mark-to-market provisions, aiming for a securitization in Q1 [17][47] - Management highlighted that the economic environment has been performing better than the adverse scenarios previously modeled [28] Other Important Information - The company underwent a workforce reduction at the end of September, which was deemed necessary for future growth [9] - The CECL reserve is well-preserved at around 29 basis points, reflecting a cautious approach to potential future losses [28] Q&A Session Summary Question: What is the production run rate for October and the focus on one-to-four rental loans? - Management indicated that the $63 million production in October is not the run rate, expecting an increase over the quarter, with a focus on one-to-four rental loans continuing [35][36] Question: Have there been changes in demand based on geographic shifts? - Management noted that there have not yet been significant changes in demand geographically, with a continued focus on liquid markets [37] Question: Can you explain the other income line item of $1.3 million for the quarter? - The $1.3 million in other income was primarily due to the reversal of a valuation allowance related to loans that were moved from held-for-sale to held-for-investment [38][41] Question: What are the current yields on new originations compared to pre-COVID levels? - Management reported that coupons are about 75 basis points lower than pre-COVID levels, but they expect spreads to return to normal levels [49] Question: What is the current full-time headcount after the reduction in force? - The current full-time headcount is approximately 180-182, reflecting a reduction of 60 employees [54][56]

Loan Portfolio and Performance - As of June 30, 2020, the company's loan portfolio totaled $2.1 billion of UPB across 45 states, with an average loan balance of approximately $327,000[126] - The annualized yield on the total portfolio for the three months ended June 30, 2020, was 7.59%[126] - The portfolio-related net interest margin for the same period was 3.54%, with pre-tax income of $2.6 million and net income of $2.1 million[128] - Total loans as of June 30, 2020 amounted to $2,058,990,000, with a loan count of 6,294 and an average loan balance of $327,000[165] - The weighted average loan-to-value ratio at origination for the portfolio was 65.8%, with 51.3% of the UPB concentrated in investor 1-4 unit residential rental loans[126] - The weighted average loan-to-value ratio remained stable at 65.8% as of June 30, 2020, consistent with the previous period[165] - The weighted average coupon for loans held for investment was 8.60% as of June 30, 2020[165] - The loan portfolio was concentrated in investor 1-4 loans, which accounted for 45.6% of the total unpaid principal balance (UPB) of $1.84 billion as of June 30, 2020[181] - The weighted average interest rates on securities for the 2014-1 Trust decreased from 8.33% in December 2019 to 7.29% in June 2020[269] Financial Operations and Results - The company completed its IPO in January 2020, receiving net proceeds of $100.7 million, of which $75.0 million was used to repay corporate debt[129] - In April 2020, the company raised $45.0 million through the issuance of Preferred Stock and Warrants, which were used to pay down existing warehouse repurchase facilities[130] - The company achieved a net interest spread of 2.75% for the total company for the three months ended June 30, 2020[200] - Interest income increased by $2.9 million to $39.8 million for the three months ended June 30, 2020, compared to $36.9 million for the same period in 2019, primarily due to an increase in average loans from $1.7 billion to $2.1 billion[227] - Net interest income related to the portfolio grew by $2.0 million from $16.6 million for the three months ended June 30, 2019 to $18.6 million for the same period in 2020, and from $33.6 million to $40.4 million for the six months ended June 30, 2020[226] - Total operating expenses rose to $10.9 million for the three months ended June 30, 2020, up from $8.3 million in the same period of 2019[226] - Net income for the three months ended June 30, 2020, was $2.1 million, a decrease from $3.5 million for the same period in 2019[226] - The company recorded a net interest income after provision for loan losses of $14.9 million for the three months ended June 30, 2020, compared to $13.0 million for the same period in 2019[226] COVID-19 Impact - Due to COVID-19, the company temporarily suspended loan originations and purchases, resulting in no loans originated or purchased during the quarter ended June 30, 2020[138] - The company has implemented a COVID-19 forbearance program to help small investors retain properties and minimize portfolio losses[138] - Loan originations were suspended as of June 30, 2020, due to the COVID-19 pandemic, impacting future performance[160] - The provision for loan losses for the three months ended June 30, 2020, was $1.8 million, significantly higher than $212,000 in the same period of 2019[174] - Total nonperforming loans reached $268.8 million, or 14.6% of the held for investment loan portfolio, up from $151.1 million, or 7.9%, as of March 31, 2020, primarily due to the COVID-19 pandemic[176] - The average yield on loans decreased from 8.71% to 7.59% due to an increase in nonperforming loans attributed to COVID-19[227] Securitizations and Financing - The company has executed fourteen securitizations since May 2011, resulting in over $2.9 billion in gross debt proceeds[127] - On July 10, 2020, the company securitized $276.0 million of loans, issuing $179.4 million in notes and certificates, which were used to pay off existing warehouse lines[138] - The company executed two securitizations in June and July 2020, resulting in approximately $273.0 million in proceeds used to pay off existing warehouse lines[257] - The company completed fourteen securitizations from May 2011 through June 2020, totaling $3.1 billion in investor real estate loans, with $2.9 billion in securities issued[267] Credit Quality and Losses - Nonperforming loans increased to $329,132,000, representing 15.99% of total loans as of June 30, 2020, compared to 6.88% as of December 31, 2019[165] - The allowance for credit losses rose to $5.2 million as of June 30, 2020, an increase of $3.1 million from $2.1 million as of June 30, 2019[172] - As of June 30, 2020, the allowance for credit losses increased to $5.22 million, representing 0.28% of total loans held for investment of $1.84 billion, compared to 0.13% in the same period of 2019[174] - The charge-off rate remained low at 10 basis points for the three months ended June 30, 2020[172] - The company emphasizes rigorous screening and underwriting processes to minimize credit losses and maintain portfolio quality[172] Cash and Liquidity - Cash provided by operating activities was $23.7 million for the six months ended June 30, 2020, compared to $9.2 million for the same period in 2019[256] - The company had cash of $9.8 million as of June 30, 2020, down from $14.1 million as of June 30, 2019[256] - Borrowings under warehouse facilities decreased to $158.6 million as of June 30, 2020, from $417.2 million as of December 31, 2019[261] - As of June 30, 2020, the company maintained approximately $158.6 million in outstanding borrowings under warehouse facilities[274] Regulatory and Reporting - The company filed its Annual Report on Form 10-K for the year ended December 31, 2019, with the SEC on April 7, 2020[281] - The company filed its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, with the SEC on May 14, 2020[281] - The company discussed its financial condition and results of operations in the Quarterly Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations"[281] - The company included risk factors in its public documents, reports, and announcements[281] - There are no applicable quantitative and qualitative disclosures about market risk[282]