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MarketScreener Homepage  >  Equities  >  Nyse  >  Velocity Financial, Inc.    VEL

VELOCITY FINANCIAL, INC.

(VEL)
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VELOCITY FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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04/07/2020 | 05:24pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read together with "Item 6. Selected Financial Data" and
the consolidated financial statements and related notes and the other financial
information included elsewhere in the Annual Report on Form 10-K. This
discussion contains forward-looking statements, as described under the heading
"Forward-Looking Statements" that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below and
elsewhere in this prospectus, particularly under "Item 1A. Risk Factors."

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
15 years since our inception. Our objective is to be the preferred and one of
the most recognized brands in our core market, particularly within our network
of mortgage brokers.

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

Our growth strategy is predicated on continuing to serve and build loyalty
within our network of mortgage brokers, while also expanding our network with
new mortgage brokers through targeted marketing, improved brand awareness, and
the growth and development of our team of account executives. We believe our
reputation and 15-year history within our core market position us well to
capture future growth opportunities.

Our primary source of revenue is interest income earned on our loan portfolio.
Our typical loan is secured by a first lien on the underlying property with a
personal guarantee and, based on all loans in our portfolio as of December 31,
2019, has an average balance of approximately $323,000. As of December 31, 2019,
our loan portfolio, including both loans held for investment and loans held for
sale, totaled $2.1 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 65.8%, and was concentrated in 1-4 unit residential rental
loans, which we refer to as investor 1-4 loans, representing 52.2% of the UPB.
During the year ended December 31, 2019, the yield on our total portfolio was
8.84%.

We fund our portfolio primarily through a combination of committed and
uncommitted secured warehouse repurchase facilities, securitizations, corporate
debt and equity. The securitization market is our primary source of long-term
financing. We have successfully executed twelve securitizations, resulting in a
total of over $2.5 billion in gross debt proceeds from May 2011 through October
2019. In January 2020, we repaid $75.0 million of our existing corporate debt
with a portion of the net proceeds from our IPO. In February 2020, we completed
the securitization of $261.9 million of investor real estate loans, measured by
UPB as of the January 1, 2020 cut-off date, issuing $248.7million of
non-recourse notes payable through the Velocity Commercial Capital Loan Trust
2020-1, or 2020-1. We are the sole beneficial interest holder of 2020-1, a
variable interest entity that will be included in our consolidated financial
statements. We refer to this transaction as the "February 2020 Securitization."

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 repurchase facilities and securitizations and excludes
our corporate debt. For the year ended December 31, 2019, our portfolio related
net interest margin was 4.13%. We generate profits to the extent that our
portfolio related net interest income exceeds our interest expense on corporate
debt, provision for loan losses and operating expenses. For the year ended
December 31, 2019, we generated income before income taxes and net income of
$25.4 million and $17.3 million, respectively, and earned a pre-tax return on
equity and return on equity of 17.4% and 11.8%, 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.

Income Taxes

Prior to our initial public offering, the Company operated as Velocity
Financial, LLC, which was formed as a Delaware Limited Liability Company, or
LLC, in 2012. Until January 1, 2018, as an LLC, we had elected to be treated as
a partnership for U.S. federal and state income tax purposes, and as such, had
generally not been subject to federal and state income taxes prior to January 1,
2018. Accordingly, the results of operations presented for the years prior to
January 1, 2018 do not include any provision for federal or state income taxes.

As part of our initial public offering, we converted Velocity Financial, LLC
into a Delaware corporation and changed our name to Velocity Financial, Inc., a
transaction that we refer to as the "conversion" in this Annual Report Form
10-K. The conversion is accounted for in accordance with ASC 805-50 -Business
Combinations, as a transaction between entities under common control. The
conversion is not expected to impact our provision for income taxes or our
deferred tax assets and liabilities.

Effective January 1, 2018, we elected to be treated as a corporation for U.S.
federal and state income tax purposes. Accordingly, the results of operations
for the year ended December 31, 2018 include the impacts of income taxes. As a
result, the historical net income reported for any period prior to January 1,
2018, is not comparable to the net income reported for the year ended December
31, 2018 or the net income anticipated in future periods.

Furthermore, in connection with the new tax treatment, we began recognizing, and
will continue to recognize, deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of our existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that included the enactment date, as applicable.

Interest Expense on Corporate Debt


In 2014, we entered into a five-year, $100.0 million corporate debt agreement
with the owners of our Class C preferred units, pursuant to which we issued at
par senior secured notes, the 2014 Senior Secured Notes, that mature on December
16, 2019. The 2014 Senior Secured Notes bear interest, at our election, at
either 10% annually paid in cash or 11% annually paid in kind.

In August 2019, we entered into a five-year $153.0 million corporate debt
agreement with Owl Rock Capital Corporation ("2019 Term Loans"). The 2019 Term
Loans under this agreement bear interest at a rate equal to one-month LIBOR plus
7.50% and mature in August 2024. A portion of the net proceeds from the 2019
Term Loans was used to redeem all of the outstanding 2014 Senior Secured Notes
in August 2019. Another portion of the net proceeds from the 2019 Term Loans,
together with cash on hand, was used to repurchase our outstanding Class C
preferred units.

As of December 31, 2018, including paid-in-kind interest, the 2014 Senior
Secured Notes balance was $127.6 million, and is presented as secured financing,
net of debt issuance costs, on the consolidated statement of financial
condition. The 2019 Term Loans balance was $153.0 million as of December 31,
2019. During the year ended December 31, 2019, we incurred $14.6 million of
interest expense related to the 2014 Senior Secured Notes and the 2019 Term
Loans.

We used $75.7 million of the net proceeds from our IPO to lower our interest
expense through the repayment of the $75.0 million outstanding principal amount
on the 2019 Term Loans.

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Recent Developments

January 2020 IPO

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. 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. The Conversion had no impact
on our provision for income taxes or our deferred tax assets and liabilities.
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,
we completed our initial public offering ("IPO"). The net proceeds received from
the sale of our common stock in the IPO was $100.7 million, including $13.1
million from the underwriters fully exercising their over-allotment option to
purchase an additional 1,087,500 shares of our common stock. The proceeds were
net of underwriting discounts and commissions and offering expenses payable by
us.

We used $75.7 million of the net proceeds from our IPO to repay $75.0 million
principal amount of our outstanding 2019 Term Loans described below (plus $0.7
million for related prepayment penalties and accrued interest), and the
remainder for general corporate purposes, including originating or acquiring
investor real estate loans. The 2019 Term Loans bear interest at a rate equal to
one-month LIBOR plus 7.50% and mature in August 2024.

Strategies to Address Uncertainties Caused by COVID-19


The COVID-19 outbreak has caused significant disruption in business activity and
the financial markets both globally and in the United States. As a result of the
spread of COVID-19, economic uncertainties have arisen which are likely to
negatively impact our financial condition, results of operations and cash flows.
The extent of the impact of COVID-19 on our operational and financial
performance will depend on certain developments, including the duration and
spread of the outbreak and impact on our customers, employees and vendors, all
of which is uncertain at this time and cannot be predicted. The extent to which
COVID-19 may impact our financial condition or results of operations cannot be
reasonably estimated at this time. For more information on the potential impacts
of the COVID-19 outbreak on our business see "Item 1A. Risk Factors-The outbreak
of the recent coronavirus, COVID-19, or an outbreak of another highly infectious
or contagious disease, could adversely affect our business, financial condition,
results of operations and cash flow, and limit our ability to obtain additional
financing."

We have proactively executed a number of business initiatives to strengthen our
liquidity position and re-focus our business strategies in light of the effects
of the COVID-19 pandemic, including the following:

• On April 5, 2020, we issued and sold 45,000 shares of our newly designated

Series A Convertible Preferred Stock, par value $0.01 per share (the

"Preferred Stock"), in a private placement to affiliates of Snow Phipps

and TOBI (the "Purchasers"), our two largest common stockholders, at a

price per share of Preferred Stock of $1,000. In addition, as part of that

private placement, we issued and sold to the Purchasers warrants (the

"Warrants") to purchase an aggregate of 3,013,125 shares of our common

stock. This private placement offering resulted in gross proceeds to us of

$45.0 million, before expenses payable by us of approximately $1.0

million. We intend to use the net proceeds from this private placement to

pay down our existing warehouse repurchase facilities and general

corporate purposes. See "Note 24 - Subsequent Events" in the consolidated

financial statements included in this Annual Report for information about

the Preferred Stock and the Warrants. We will evaluate the Preferred Stock

and the Warrants for liability or equity classification in accordance with

the provisions of ASC 480, Distinguishing Liabilities from Equity.

• On April 6, 2020, we entered into amendments to the master repurchase

agreements on both of our warehouse repurchase agreements with the lenders

under such agreements. We believe that the amended warehouse repurchase

        agreements provide us with a flexible and more stabilized financing
        solution that will allow us to better operate our business under the
        current market conditions. For more information about the amended
        warehouse repurchase agreements see "-Liquidity and Capital
        Resources-Warehouse Repurchase Facilities" below.


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• During this economic crisis, we will consider the benefits of originating

commercial mortgage loans along with opportunistically acquiring

commercial mortgage loans that comply with our credit guidelines. If we

are able to prudently originate or acquire mortgage loans, they will be

added to our held for investment loan portfolio and supplement our current

earnings profile generated by our $1.9 billion of portfolio loans, which

are primarily fixed rate loans financed with fixed rate securitizations.

We will continue to evaluate our business strategy in light of rapidly

changing market conditions.

Critical Accounting Policies and Use of Estimates


The preparation of financial statements in accordance with U.S. GAAP requires
certain judgments and assumptions, based on information available at the time of
preparation of the consolidated financial statements, in determining accounting
estimates used in preparation of the consolidated financial statements. The
following discussion addresses the accounting policies that we believe apply to
us based on the nature of our operations. Our most critical accounting policies
involve decisions and assessments that could affect our reported assets and
liabilities, as well as our reported revenues and expenses. We believe that all
of the decisions and assessments used to prepare the company's financial
statements are based upon reasonable assumptions given the information available
at that time. We believe the following are critical accounting policies that
require the most significant judgments and estimates used in the preparation of
the consolidated financial statements. The summary below should be read in
conjunction with the disclosure of our accounting policies and use of estimates
in Note 2 to the consolidated financial statements.

Allowance for Loan Losses


The allowance for loan and lease losses, or ALLL, on loans held for investment
is maintained at a level deemed adequate by management to provide for probable
and inherent losses in the portfolio at the balance sheet date. The ALLL has a
general reserve component for loans with no credit impairment and a specific
reserve component for loans determined to be impaired.

The allowance methodology for the general reserve component includes both
quantitative and qualitative loss factors which are applied to the population of
unimpaired loans to estimate the general reserves. The quantitative loss factors
include loan type, age of the loan, borrower FICO score, past loan loss
experience, historical default rates, and delinquencies. The qualitative loss
factors consider, among other things, the loan portfolio composition and risk,
current economic conditions that may affect the borrower's ability to pay, and
the underlying collateral value. While our management uses available information
to estimate its required ALLL, future additions to the ALLL may be necessary
based on changes in estimates resulting from economic and other conditions. The
provision for loan losses and recoveries of previously recognized charge-offs
are added to the ALLL, while charge-offs on loans are recorded as a reduction to
ALLL.

Loans are considered impaired when, based on current information and events, it
is probable that we will be unable to collect the scheduled payments of
principal and interest according to the contractual terms of the loan
agreements. Impairment is measured on a loan-by-loan basis by comparing the
estimated fair value of the underlying collateral, net of estimated selling
costs (net realizable value) against the recorded investment of the loan. To the
extent the recorded investment of the loan exceeds the estimated fair value, a
specific reserve or charge-off is recorded depending upon either the certainty
of the estimate of loss or the fair value of the loan's collateral.

Deferred Income Tax Assets and Liabilities


Our deferred income tax assets and liabilities arise from differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. We
determine whether a deferred tax asset is realizable based on facts and
circumstances, including our current and projected future tax position, the
historical level of our taxable income, and estimates of our future taxable
income. In most cases, the realization of deferred tax assets is based on our
future profitability. If we were to experience either reduced profitability or
operating losses in a future period,

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the realization of our deferred tax assets may no longer be considered more likely than not and, accordingly, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.

How We Assess Our Business Performance


Net income is the primary metric by which we assess our business performance.
Accordingly, we closely monitor the primary drivers of net income which consist
of the following:

Net Interest Income

Net interest income is the largest contributor to our net income and is
monitored on both an absolute basis and relative to provisions for loan losses
and operating expenses. We generate net interest income to the extent that the
rate at which we lend in our portfolio exceeds the cost of financing our
portfolio, which we primarily achieve through long-term securitizations.
Accordingly, we closely monitor the financing markets and maintain consistent
dialogue with investors and financial institutions as we evaluate our financing
sources and cost of funds.

To evaluate net interest income, we measure and monitor: (1) the yields on our
loans, (2) the costs of our funding sources, (3) our net interest spread and (4)
our net interest margin. Net interest spread measures the difference between the
rates earned on our loans and the rates paid on our funding sources. Net
interest margin measures the difference between our annualized interest income
and annualized interest expense, or net interest income, as a percentage of
average loans outstanding over the specified time period.

Periodic changes in net interest income are primarily driven by: (1) origination
volume and changes in average outstanding loan balances and (2) interest rates
and changes in interest earned on our portfolio or paid on our debt.
Historically, origination volume and portfolio size have been the largest
contributors to the growth in our net interest income. We measure net interest
income before and after interest expense related to our corporate debt and
before and after our provisions for loan losses.

Credit Losses


We strive to minimize actual credit losses through our rigorous screening and
underwriting process and life of loan portfolio management and special servicing
practices. We closely monitor the credit performance of our loan portfolio,
including delinquency rates and expected and actual credit losses, as a key
factor in assessing our overall business performance.

Operating Expenses


We incur operating expenses from compensation and benefits related to our
employee base, rent and other occupancy costs associated with our leased
facilities, our third-party primary loan servicing vendors, professional fees to
the extent we utilize third-party legal, consulting and advisory firms, and
costs associated with the resolution and disposition of real estate owned, among
other items. We monitor and strive to prudently manage operating expenses and to
balance current period profitability with investment in the continued
development of our platform. Because volume and portfolio size determine the
magnitude of the impact of each of the above factors on our earnings, we also
closely monitor origination volume along with all key terms of new loan
originations, such as interest rates, loan-to-value ratios, estimated credit
losses and expected duration.

Factors Affecting Our Results of Operations

We believe there are a number of factors that impact our business, including those discussed below and in this Form 10K titled "Item 1A Risk Factors."


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

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sources and the underlying performance of the collateral supporting our loans.
While we have been successful at managing these elements in the past, there are
certain circumstances beyond our control, including the current disruption
caused by the COVID-19 pandemic, macroeconomic conditions and market
fundamentals, which can affect each of these factors and potentially impact our
business performance.

Origination Volume

Portfolio related net interest income is the largest contributor to our net
income. We have grown our portfolio related net interest income by $11.5 million
or 18.5% from $62.1 million for the year ended December 31, 2018 to $73.6
million for the year ended December 31, 2019. Our portfolio related net interest
income grew by $11.9 million or 23.8% from $50.2 million for the year ended
December 31, 2018 to $62.1 million for the year ended December 31, 2018. The
growth in net interest income is largely attributable to our growth in loan
originations which we have achieved by executing our principal strategies of
expanding our broker network and further penetrating our network of existing
brokers. We anticipate that our future performance will continue to depend on
growing our origination volume and believe that the large and highly fragmented
nature of our core market provides meaningful opportunity to achieve this. We
intend to grow originations by continuing to serve and build loyalty within our
existing network of brokers while expanding our network with new brokers through
targeted marketing and improved brand awareness.

Our future performance could be impacted to the extent that our origination
volumes decline as we rely on new loans to offset maturities and prepayments in
our existing portfolio. To augment our core origination business, we continually
assess opportunities to acquire portfolios of loans that meet our investment
criteria. In our experience, portfolio acquisition opportunities have generally
been more attractive and plentiful during market conditions when origination
opportunities are less favorable. Accordingly, we believe our acquisition
strategy not only expands our core business, but also provides a
counter-cyclical benefit.

Competition


The investor real estate loan market is highly competitive which could affect
our profitability and growth. We believe we compete favorably through
diversified borrower access driven by our extensive network of mortgage brokers
and by emphasizing a high level of real estate and financial expertise, customer
service, and flexibility in structuring transactions, as well as by attracting
and retaining experienced managerial and marketing personnel. However, some of
our competitors may be better positioned to market their services and financing
programs because of their ability to offer more favorable rates and terms and
other services.

Availability and Cost of Funding


Our primary funding sources have historically included cash from operations,
warehouse repurchase 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.

We used $75.7 million of the net proceeds from our IPO to lower our interest
expense through the repayment of $75.0 million in outstanding principal amount
on the 2019 Term Loans.

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

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borrowers making their payments and resolving delinquent loans as favorably as
possible. Macroeconomic conditions can, however, impact credit trends in our
core market and have an adverse impact on financial results.

Macroeconomic Conditions


The investor real estate loan market may be impacted by a wide range of
macroeconomic factors such as interest rates, residential and commercial real
estate prices, home ownership and unemployment rates, and availability of
credit, among others. We believe our prudent underwriting, conservative loan
structures and interest rate protections, and proven in-house asset management
capability leave us well positioned to manage changing macroeconomic conditions.

Operating Efficiency


We generate positive operating leverage to the extent that our revenue grows at
a faster rate than our expenses. We believe our platform is highly scalable and
that we can generate positive operating leverage in future periods, primarily
due to the technology and other investments we have made in our platform to date
and our focus on a scalable, cost-effective mortgage broker network to generate
new loan originations.

Portfolio and Asset Quality

Key Portfolio Statistics



                                                        December 31,
                                            2019            2018            2017
                                                      ($ in thousands)
      Total loans                        $ 2,059,344$ 1,631,326$ 1,295,567
      Loan count                               6,373           5,171        4,136.00
      Average loan balance               $       323$       315$       313
      Weighted average loan-to-value            65.8 %          63.8 %          64.4 %
      Weighted average coupon                   8.69 %          8.56 %          8.33 %
      Nonperforming loans (UPB)          $   141,607$    95,385$    74,943
      Nonperforming loans (% of total)          6.88 %          5.85 %          5.78 %



Total Loans. Total loans reflects the aggregate UPB at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for loan losses.

Loan Count. Loan count reflects the number of loans at the end of the period. It includes all loans with an outstanding principal balance.

Average Loan Balance. Average loan balance reflects the average UPB at the end of the period (i.e., total loans divided by loan count).


Weighted Average Loan-to-Value.   Loan-to-value, or LTV, reflects the ratio of
the original loan amount to the appraised value of the underlying property at
the time of origination. In instances where the LTV at origination is not
available for an acquired loan, the LTV reflects our best estimate of value at
the time of acquisition. Weighted average LTV is calculated for the population
of loans outstanding at the end of each specified period using the original loan
amounts and appraised LTVs at the time of origination of each loan. LTV is a key
statistic because requiring the borrower to invest more equity in the collateral
minimizes our exposure for future credit losses.

Nonperforming Loans.  Loans that are 90 or more days past due, in bankruptcy, or
in foreclosure are not accruing interest and 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:



                                                                                        Weighted       Weighted
                                                                         Average        Average        Average
($ in thousands)                    Loan Count       Loan Balance       Loan Size        Coupon          LTV
Year Ended December 31, 2019:
Loan originations - held for
investment                                1,881     $      673,877$       358            8.5 %         67.1 %
Loan originations - held for
sale                                      1,152     $      338,846$       294           10.0 %         68.4 %
Total loan originations                   3,033     $    1,012,723$       334            9.0 %         67.5 %
Loan acquisitions - held for
investment                                   35     $        9,062$       259            7.2 %         61.9 %
Total loans originated and
acquired                                  3,068     $    1,021,785
Year Ended December 31, 2018:
Loan originations - held for
investment                                1,708     $      587,241$       344            8.4 %         63.4 %
Loan originations - held for
sale                                        619     $      150,056$       242            9.9 %         65.1 %
Total loan originations                   2,327     $      737,297$       317            8.7 %         63.8 %
Loan acquisitions - held for
investment                                   19     $       16,243$       855            7.3 %         53.5 %
Total loans originated and
acquired                                  2,346     $      753,540
Year Ended December 31, 2017:
Loan originations - held for
investment                                1,630     $      511,284$       314            8.4 %         64.3 %
Loan originations - held for
sale                                        176     $       43,426$       247            9.6 %         69.7 %
Total loan originations                   1,806     $      554,710$       307            8.5 %         64.7 %
Loan acquisitions - held for
investment                                    6                985     $       164            6.9 %         64.4 %
Total loans originated and
acquired                                  1,812     $      555,695




Over the periods shown, we have increased our origination volume by executing
our strategy of continuing to serve and build loyalty within our network of
mortgage brokers, while also expanding our network with new mortgage brokers
through improved brand recognition. For the year ended December 31, 2019, we
originated $1.0 billion of loans, which was an increase of $275.4 million, or
37.4% from $737.3 million for the year ended December 31, 2018. For the year
ended December 31, 2018, we originated $737.3 million of loans, which was an
increase of $182.6 million, or 32.9%, from $554.7 million for the year ended
December 31, 2017.

Loans Held for Investment

Our total portfolio of loans held for investment consists of both loans held for
investment at cost, which are presented in the consolidated financial statements
as loans held for investment, net, and loans held for investment at fair value,
which are presented in the financial statements as loans held for investment at
fair value. The following tables show the various components of loans held for
investment as of the dates indicated:



                                                           December 31,
   (in thousands)                              2019            2018            2017
   Unpaid principal balance                 $ 1,843,290$ 1,551,866$ 1,289,739
   Discount on acquired loans                         -            (541 )          (911 )
   Valuation adjustments on FVO loans              (444 )          (586 )   

(841 )

   Deferred loan origination costs               25,714          21,812     

17,572

Total loans held for investment, gross 1,868,560 1,572,551

1,305,559

   Allowance for loan losses                     (2,240 )        (1,680 )   

(1,886 )

   Loans held for investment, net           $ 1,866,320$ 1,570,871$ 1,303,673




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The following table illustrates the contractual maturities for our loans held for investment in aggregate UPB and as a percentage of our total held for investment loan portfolio as of December 31, 2019:



             contractual maturities                 December 31, 2019
                                                     UPB            %
             ($ in thousands)
             Loans due in less than one year     $     2,170         0.1 %
             Loans due in one to five years            3,023         0.2 %
             Loans due in more than five years     1,838,097        99.7 %
             Total loans held for investment       1,843,290       100.0 %




Allowance for Loan Losses

Our allowance for loan losses increased to $2.2 million as of December 31, 2019,
compared to $1.7 million as of December 31, 2018. The increase in allowance is
primarily due to the increase in our loan portfolio from December 31, 2018 to
December 31, 2019.

Our allowance decreased to $1.7 million as of December 31, 2018, compared to
$1.9 million as of December 31, 2017. The decrease in the allowance for loan
losses is based on an analysis of historical loan loss data from January 1, 2012
through December 31, 2019. We strive to minimize actual credit losses through
our rigorous screening and underwriting process, life of loan portfolio
management and special servicing practices. Additionally, we believe borrower
equity of 25% to 40% provides significant protection against credit losses
should a loan become impaired.

To estimate the allowance for loan losses in our loans held for investment
portfolio, we follow a detailed internal process, considering a number of
different factors including, but not limited to, our ongoing analyses of loans,
historical loss rates, relevant environmental factors, relevant market research,
trends in delinquencies, effects and changes in credit concentrations, and
ongoing evaluation of fair values.

The following table illustrates the activity in our allowance for loan losses over the periods indicated:



                                                     December 31,
               ($ in thousands)             2019        2018         2017
               Beginning balance           $ 1,680       1,886        2,529
               Provision for loan losses     1,139         201          421
               Net charge-offs                (579 )      (407 )     (1,064 )
               Ending balance              $ 2,240       1,680        1,886



Credit Quality - Loans Held for Investment

The following table provides delinquency information on our held for investment loan portfolio as of the dates indicated:



                                     December 31, 2019             December 31, 2018             December 31, 2017
Current                           $ 1,559,373        84.6   %   $ 1,358,043       87.50   %   $ 1,138,749        88.3   %
30-59 days past due                   123,704         6.7            78,848         5.1            59,207         4.6
60-89 days past due                    48,062         2.6            23,881         1.5            18,467         1.4
Nonperforming loans:
90+ days past due                      24,790         1.3            16,181           1            22,114         1.7
Bankruptcy                              8,695         0.5             5,901         0.4             5,631         0.5
In foreclosure                         78,666         4.3            69,012         4.5            45,571         3.5
Total nonperforming loans             112,151         6.1            91,094         5.9            73,316         5.7

Total loans held for investment $ 1,843,290 100 % $ 1,551,866

        100   %   $ 1,289,739         100   %




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Loans that are 90+ days past due, in bankruptcy, or in foreclosure are not
accruing interest and are considered nonperforming loans. Nonperforming loans
were $112.2 million, or 6.1% of our held for investment loan portfolio as of
December 31, 2019, compared to $91.1 million, or 5.9% as of December 31, 2018,
and $73.3 million, or 5.7% of the loan portfolio as of December 31, 2017. 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 table summarizes the cumulative number and UPB of all
loans originated since January 1, 2013 that became nonperforming at some point
through December 31, 2019. We classify a loan as nonperforming when it becomes
90 days delinquent or when it enters bankruptcy or foreclosure. Of the 899 loans
totaling $334.6 million in UPB that became nonperforming over the specified
period, we have resolved 493 loans totaling $183.8 million in UPB, or 54.9% of
the cumulative nonperforming loans. We realized a net gain of $6.0 million, or
3.3% of the resolved principal balance, on these resolutions, which is largely
the result of collecting default interest and prepayment penalties in excess of
the contractual interest due and collected.



                                                                 % of Total
                                                                  Resolved            Gain /           Gain /
($ in thousands)                      Loan Count    UPB (1)          UPB            (Loss) ($)       (Loss) ($)
Resolved - paid in full                      347   $ 137,459            74.8   %   $      7,343              5.3   %
Resolved - paid current                      112      32,505            17.7                511              1.6   %
Resolved - REO sold                           34      13,862             7.5             (1,877 )          (13.5 ) %
Total resolutions                            493     183,826             100   %          5,977              3.3   %
Not yet resolved                             406     150,811
Cumulative nonperforming loans (2)           899   $ 334,637

(1) Reflects the unpaid principal balance at time of delinquency.

(2) Reflects all loans originated since 2013 that became nonperforming at some

point on or prior to December 31, 2019.



Our actual losses incurred are very small as a percentage of all loans that have
ever become nonperforming. The table below shows our actual loan losses from
January 1, 2013 through December 31, 2019, and through the years ended December
31, 2018, 2017 and 2016. Our average annual charge-off percentage since January
1, 2013 is approximately 0.02%. The table includes all loans originated over
those periods, the year-end UPB amounts, the amount of loans that were ever
nonperforming during those periods, and the actual losses for all loans that
were either liquidated or converted to REO (life of loan) during the periods.



                                     January 1,           January 1,           January 1,           January 1,
                                      2013 to              2013 to              2013 to              2013 to
                                    December 31,         December 31,         December 31,         December 31,
($ in thousands)                        2019                 2018                 2017                 2016
Loan originations                  $    3,046,257$    2,373,034$    1,786,023$    1,274,509
End of period UPB                       1,792,789            1,502,526            1,248,087              982,191
Nonperforming loans(1)                    334,637              227,469              152,209               76,449
Cumulative charge-offs(2)                   2,255                1,551                1,171                  326
Average annual charge-offs(3)                 322                  258                  234                   81
Cumulative charge-off
percentage(4)                                0.13   %             0.10   %             0.09   %             0.03   %
Average annual charge-off
percentage(5)                                0.02   %             0.02   %             0.02   %             0.01   %



(1) Reflects UPB of all loans originated since January 1, 2013 that became

nonperforming at some point during the period indicated.

(2) Reflects the total charge-offs on loans that were nonperforming and have

been liquidated or converted to REO from January 1, 2013 through the date

indicated.

(3) Reflects the average annual charge-offs on loans that were nonperforming and

have been liquidated or converted to REO from January 1, 2013 through the

date indicated.

(4) Reflects the cumulative charge-offs as a percent of the end of period UPB.

(5) Reflects the average annual charge-offs as a percent of the end of period

     UPB.


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Concentrations - Loans Held for Investment


As of December 31, 2019, our held for investment loan portfolio was concentrated
in investor 1-4 loans, representing 46.6% of the UPB. Mixed used properties
represented 13.6% of the UPB and multifamily properties represented 10.7% 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 23.7% in New York, 22.2% in California, 12.1%
in Florida, and 8.1% in New Jersey.



     Property Type                                  December 31, 2019
                                                                        % of Total
     ($ in thousands)                   Loan Count          UPB             UPB
     Investor 1-4                             3,245     $   859,417            46.6   %
     Mixed use                                  666         251,339            13.6
     Multifamily                                475         198,018            10.7
     Retail                                     417         179,778             9.8
     Office                                     281         117,018             6.4
     Warehouse                                  192         100,853             5.5
     Other(1)                                   364         136,867             7.4
     Total loans held for investment          5,640     $ 1,843,290             100   %



(1) All other properties individually comprise less than 5.0% of the total

     unpaid principal balance.




     Geography (State)                               December 31, 2019
                                                                         % of Total
     ($ in thousands)                   Loan Count          UPB             UPB
     New York                                   938     $   437,538             23.7   %
     California                                 923         409,557             22.2
     Florida                                    794         222,224             12.1
     New Jersey                                 605         148,484              8.1
     Other(1)                                 2,380         625,487             33.9
     Total loans held for investment          5,640     $ 1,843,290            100.0   %



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

     principal balance.


Loans Held for Sale

We started originating short-term, interest-only loans in March 2017, which we
have historically aggregated and sold at a premium to par to institutional
investors. During the year ended December 31, 2019 and 2018, we originated
$338.8 million and $150.1 million of loans held for sale and sold $179.6 million
and $72.9 million of held for sale loans, respectively. Given our increased
experience providing these loans, we are currently evaluating long-term
financing alternatives for these short-term, interest-only loans, and may elect
to retain these loans in the future to be more consistent with our investment
strategy of holding loans in our portfolio and earning a longer-term spread. As
of December 31, 2019, our portfolio of loans held for sale, which were carried
at the lower of cost or estimated fair value consisted of 733 loans with an
aggregate UPB of $216.1 million, and carried a weighted average original loan
term of 17.7 months, a weighted average coupon of 10.0%, and a weighted average
LTV at origination of 68.6%.

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



                                                          December 31,
         ($ in thousands)                        2019          2018        2017
         UPB                                   $ 216,054$ 79,335$ 5,701
         Valuation adjustments                      (396 )       (173 )         -
         Deferred loan origination fees, net      (1,191 )       (716 )       (50 )
         Total loans held for sale, net        $ 214,467$ 78,446$ 5,651




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Concentrations - Loans Held for Sale


As of December 31, 2019, our held for sale loan portfolio was entirely
concentrated in investor 1-4 loans, representing 100.0% of the UPB. By
geography, the principal balance of our loans held for sale were concentrated
25.2% in California, 11.5% in New York, 9.1% in Florida, 8.2% in New Jersey, and
5.2% in Massachusetts.



          Geography (State)                      December 31, 2019
                                                                  % of Total
          ($ in thousands)            Loan Count      UPB            UPB
          California                          89   $  24,549             11.4   %
          New York                            56      55,103             25.5
          Florida                             87      19,668              9.1
          New Jersey                          75      17,479              8.1
          Massachusetts                       30      11,363              5.2
          Texas                               55      16,587              7.7
          Georgia                             51      12,538              5.8
          Other(1)                           290      58,767             27.2
          Total loans held for sale          733   $ 216,054            100.0   %



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

Real Estate Owned (REO)


REO includes real estate we acquire through foreclosure or by deed-in-lieu of
foreclosure. REO assets are initially recorded at fair value, less estimated
costs to sell, on the date of foreclosure. Adjustments that reduce the carrying
value of the loan to the fair value of the real estate at the time of
foreclosure are recognized as charge-offs in the allowance for loan losses.
Positive adjustments at the time of foreclosure are recognized in other
operating income. After foreclosure, we periodically obtain new valuations and
any subsequent changes to fair value, less estimated costs to sell, are
reflected as valuation adjustments.

As of December 31, 2019, our REO included 24 properties with an estimated fair
value of $13.1 million compared to 12 properties with an estimated fair value of
$7.2 million as of December 31, 2018.

Key Performance Metrics



                                                       Year Ended December 31,
 ($ in thousands)                             2019              2018              2017
 Average loans                             $ 1,782,558$ 1,429,877$ 1,167,999
 Portfolio yield                                  8.84   %          8.72   %          8.38   %
 Average debt - portfolio related            1,603,459         1,234,818    

965,987

 Average debt - total company                1,745,728         1,362,412    

1,090,532

 Cost of funds - portfolio related                5.23   %          5.07   

% 4.93 %

 Cost of funds - total company                    5.64   %          5.57   

% 5.62 %

Net interest margin - portfolio related 4.13 % 4.34 % 4.30 %

 Net interest margin - total company              3.31   %          3.41   %          3.13   %
 Charge-offs                                      0.03   %          0.03   %          0.09   %
 Pre-tax return on equity                        17.37   %         14.30   %         10.80   %
 Return on equity                                11.78   %          7.80   %         10.80   %




Average Loans

Average loans reflects the daily average of total outstanding loans, including
both loans held for investment and loans held for sale, as measured by UPB, over
the specified time period.

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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
increase in our portfolio yield over the periods shown was driven by higher
collections of contractual and default interest on nonperforming loans due to
the efficiency and expertise of our asset management area, and, to a lesser
extent, an increase in the weighted average coupon on the loans in our
portfolio.

Average Debt - Portfolio Related and Total Company


Portfolio-related debt consists of borrowings related directly to financing our
loan portfolio, which includes our warehouse repurchase facilities and
securitizations. Total company debt consists of portfolio- related debt and
corporate debt. The measures presented here reflects the monthly average of all
portfolio- related and total company debt, as measured by outstanding principal
balance, over the specified time period.

Cost of Funds - Portfolio Related and Total Company


Portfolio related cost of funds is an annualized measure of the interest expense
incurred on our portfolio-related debt as a percentage of average
portfolio-related debt outstanding over the given period. Total company cost of
funds is an annualized measure of the interest expense incurred on our
portfolio-related debt and corporate debt outstanding over the given period.
Interest expense includes the amortization of expenses incurred in connection
with our portfolio related financing activities and corporate debt. Through the
issuance of long-term securitizations, we have been able to fix a significant
portion of our borrowing costs over time. The strong credit performance on our
securitizations has allowed us to issue debt at attractive rates. Our portfolio
related cost of funds increased to 5.23% for the year ended December 31, 2019
from 5.07% and 4.93% for the years ended December 31, 2018 and 2017,
respectively. The increase in portfolio related cost of funds was the result of
the seasoning of older, more costly securitizations, and to a lesser extent, the
increasing LIBOR index rates, partially offset by lower spreads paid to
investors in our more recent securitizations. As we have continued to add more
of the lower-cost securitizations, our interest cost has started to decrease,
averaging 5.00% for the fourth quarter of 2019.

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, our portfolio
related net interest margin decreased as a result of the seasoning of older,
more costly securitizations and, to a lesser extent, the increasing LIBOR index
rates, partially offset by higher portfolio yields and lower spreads paid to
investors in our more recent securitizations. In addition to achieving lower
spreads in our more recent securitizations, we have also been able to utilize
more favorable structures that will result in a lower and more stable cost of
funds over the life of the securities.

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The following tables show the average outstanding balance of our loan portfolio
and portfolio-related debt, together with interest income and the corresponding
yield earned on our portfolio, and interest expense and the corresponding rate
paid on our portfolio-related debt for the periods indicated:



                                  Year Ended December 31, 2019                Year Ended December 31, 2018                   Year Ended December 31, 2017
                                             Interest       Average                      Interest       Average                        Interest         Average
                               Average       Income /       Yield /        Average       Income /       Yield /        Average         Income /         Yield /
($ in thousands)               Balance        Expense        Rate          

Balance Expense Rate Balance Expense

  Rate
Loan portfolio:
Loans held for sale          $   106,852$    26,306$      3,657
Loans held for
  investment                   1,675,706                                   1,403,571                                    1,164,342
Total loans                  $ 1,782,558$ 157,531          8.84 %   $

1,429,877 $ 124,722 8.72 % $ 1,167,999$ 97,830

8.38 %

Debt:

Warehouse and

repurchase facilities $ 240,608 13,583 5.65 % $

 171,637     $   9,213          5.37 %   $    145,878$     7,185            4.93 %
Securitizations                1,362,851        70,320          5.16 %     1,063,181        53,384          5.02 %        820,109          40,453            4.93 %
Total debt - portfolio
  related                      1,603,459        83,903          5.23 %     

1,234,818 62,597 5.07 % 965,987 47,638

       4.93 %
Corporate debt                   142,269        14,617         10.27 %      

127,594 13,322 10.44 % 124,545 13,654

     10.96 %
Total debt                   $ 1,745,728$  98,520          5.64 %   $ 

1,362,412 $ 75,919 5.57 % $ 1,090,532$ 61,292

5.62 %

Net interest spread -

  portfolio related (1)                                         3.60 %                                      3.65 %                                           3.45 %
Net interest margin -
  portfolio related                                             4.13 %                                      4.34 %                                           4.30 %

Net interest spread -
  total company (2)                                             3.19 %                                      3.15 %                                           2.76 %
Net interest margin -
  total company                                                 3.31 %                                      3.41 %                                           3.13 %



(1) Net interest spread - portfolio related is the difference between the rate

earned on our loan portfolio and the interest rates paid on our

portfolio-related debt.

(2) Net interest spread - total company is the difference between the rate

earned on our loan portfolio and the interest rates paid on our total debt.



Charge-Offs

The charge-offs ratio reflects charge-offs as a percentage of average loans held
for investment over the specified time period. We do not record charge-offs on
our loans held for sale which are carried at the lower of cost or estimated fair
value.

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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 members'
equity over the specified time period. The Company was not subject to income tax
prior to January 1, 2018 because prior to that time it elected to be treated as
a partnership for U.S. federal income tax purposes.



                                                   Year Ended December 31,
        ($ in thousands)                     2019            2018          2017

Income before income taxes (A) $ 25,398$ 19,249$ 13,989

        Net income (B)                        17,292           7,631        

13,989

Monthly average balance:

        Members' equity (C)                  146,236         134,913       

128,940

        Pre-tax return on equity (A / C)        17.4   %        14.3   %      10.8   %

        Return on equity (B / C)                11.8   %         5.7   %      10.8   %



Components of Results of Operations

Interest Income


We accrue interest on the UPB of our loans in accordance with the individual
terms and conditions of each loan, discontinuing interest and reversing
previously accrued interest once a loan becomes 90 days or more past due
(nonaccrual status). When a loan is placed on nonaccrual status, the accrued and
unpaid interest is reversed as a reduction to interest income and accrued
interest receivable. Interest income is subsequently recognized only to the
extent that cash payments are received or when the loan has returned to accrual
status. Payments received on nonaccrual loans are first applied to interest due,
then principal. Interest accrual resumes once a borrower has made all principal
and interest payments due, bringing the loan back to current status.

Interest income on loans held for investment is comprised of interest income on
loans and prepayment fees less the amortization of deferred net costs related to
the origination of loans. Interest income on loans held for sale is comprised of
interest income earned on loans prior to their sale. The net fees and costs
associated with loans held for sale are deferred as part of the carrying value
of the loan and recognized as a gain or loss on the sale of the loan.

Interest Expense - Portfolio Related


Portfolio related interest expense is incurred on the debt we incur to fund our
loan origination and portfolio activities and consists of our warehouse
repurchase facilities and securitizations. Portfolio related interest expense
also includes the amortization of expenses incurred as a result of issuing the
debt, which are amortized using the level yield method. Key drivers of interest
expense include the debt amounts outstanding, interest rates, and the mix of our
securitizations and warehouse liabilities.

Net Interest Income - Portfolio Related

Portfolio related net interest income represents the difference between interest income and portfolio related interest expense.

Interest Expense - Corporate Debt


Through December 31, 2019, interest expense on corporate debt primarily consists
of interest expense paid with respect to the 2014 Senior Secured Notes and the
2019 Term Loans, as reflected on our consolidated statement of financial
condition, and the related amortization of deferred debt issuance costs.

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In August 2019, we redeemed the 2014 Senior Secured Notes and repurchased our
outstanding Class C preferred units with the proceeds of the 2019 Term Loans,
which bear interest at a rate equal to the one-month LIBOR plus 7.50% and mature
in August 2024, together with cash on hand. We used $75.7 million of the net
proceeds from our IPO to repay $75.0 million in outstanding principal amount on
the 2019 Term Loans.

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


Provision for loan losses consists of amounts charged to income during the
period to maintain an estimated allowance for loan and lease losses, or ALLL, to
provide for probable credit losses inherent in our existing portfolio of loans
held for investment (excluding those loans which we have elected to carry at
fair value). The ALLL consists of a specific valuation allowance on those loans
that are 90 days or more delinquent, in bankruptcy, or in foreclosure, and a
general reserve allowance for all other loans in our existing portfolio.

Other Operating Income


Gain on Disposition of Loans.  When we sell a loan held for sale, we record a
gain or loss that reflects the difference between the proceeds received for the
sale of the loans and their respective carrying values. The gain or loss that we
ultimately realize on the sale of our loans held for sale is primarily
determined by the terms of the originated loans, current market interest rates
and the sales price of the loans. In addition, when we transfer a loan to REO,
we record the REO at its fair value at the time of the transfer. The difference
between the fair value of the real estate and the carrying value of the loan is
recorded as a gain or loss. Lastly, when our acquired loans, which were
purchased at a discount, pay off, we record a gain related the write-off of the
remaining purchase discount.

Unrealized Gain/(Loss) on Fair Value Loans.   We have elected to account for
certain purchased distressed loans at fair value using FASB ASC Topic 825,
Financial Instruments (ASC 825). We regularly estimate the fair value of these
loans as discussed more fully in the notes to our consolidated financial
statements included elsewhere in this prospectus. Changes in fair value are
reported as a component of other operating income within our consolidated
statements of operations.

Other Income. Other income includes the following:


Unrealized Gains/(Losses) on Retained Interest Only Securities.   As part of the
proceeds received for the sale of our held for sale loans, we may receive an
interest only security that we mark to fair value at the end of each period.

Fee Income. In certain situations, we collect fee income by originating loans and realizing miscellaneous fees such as late fees.

Operating Expenses

Compensation and Employee Benefits. Costs related to employee compensation, commissions and related employee benefits, such as health, retirement, and payroll taxes.

Rent and Occupancy. Costs related to occupying our locations, including rent, maintenance and property taxes.

Loan Servicing. Costs related to our third-party servicers.

Professional Fees. Costs related to professional services, such as external audits, legal fees, tax, compliance and outside consultants.

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Real Estate Owned, Net.   Costs related to our real estate owned, net, including
gains/(losses) on disposition of REO, maintenance of REO properties, and taxes
and insurance.

Other Operating Expenses. Other operating expenses consist of general and administrative costs such as, travel and entertainment, marketing, data processing, insurance and office equipment.

Provision for Income Taxes


The provision for income taxes consists of the current and deferred U.S. federal
and state income taxes we expect to pay, currently and in future years, with
respect to the net income for the year. The amount of the provision is derived
by adjusting our reported net income with various permanent differences. The
tax- adjusted net income amount is then multiplied by the applicable federal and
state income tax rates to arrive at the provision for income taxes. Prior to
January 1, 2018, we had elected to be treated as a partnership for U.S. federal
income tax purposes and were, therefore, not required to pay income taxes
because of our treatment as a pass-through entity. Effective January 1, 2018, we
changed our election to be taxed as a corporation for U.S. federal income tax
purposes and are now recording provisions for income taxes.

                       Consolidated Results of Operations

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




Summary Consolidated Results of Operations                    Year Ended December 31,
($ in thousands)                                         2019           2018           2017
Interest income                                       $   157,531$ 124,722$   97,830
Interest expense - portfolio related                       83,903        62,597         47,638
Net interest income - portfolio related                    73,628        62,125         50,192
Interest expense - corporate debt                          14,618        13,322         13,654
Net interest income                                        59,010        48,803         36,538
Provision for loan losses                                   1,139           201            421
Net interest income after provision for loan losses        57,871        48,602         36,117
Other operating income                                      2,649         2,807          2,008
Total operating expenses                                   35,122        32,160         24,136
Income before income taxes                                 25,398        19,249         13,989
Income tax expense                                          8,106        11,618              -
Net income                                            $    17,292$   7,631$   13,989

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018


Our earnings increase is mainly attributable to significant growth in our loan
originations of 37.4% and the corresponding income earned from a higher balance
of loans under management. Net interest income increased 20.9% partially offset
by an increase in operating costs of 9.2%. Our net income increased 126.6% from
$7.6 million for the year ended December 31, 2018 to $17.3 million for the year
ended December 31, 2019.

Net Interest Income - Portfolio Related



                                             Year Ended December 31,
($ in thousands)                               2019             2018         $ Change       %Change
Interest income                            $    157,531$ 124,722$   32,809           26.3 %
Interest expense - portfolio related             83,903          62,597         21,306           34.0 %

Net interest income - portfolio related 73,628 62,125 $ 11,503

           18.5 %




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Interest Income.   Interest income increased by $32.8 million, or 26.3%, to
$157.5 million during the year ended December 31, 2019, compared to $124.7
million during the year ended December 31, 2018. The increase is primarily
attributable to an increase in average loans (volume), which increased $352.7
million, or 24.7%, from $1.4 billion for the year ended December 31, 2018 to
$1.8 billion for the year ended December 31, 2019. The average yield (rate) over
those same periods increased from 8.72% to 8.84%.

The following table distinguishes between the change in interest income
attributable to change in volume and the change in interest income attributable
to change in rate. The effect of changes in volume is determined by multiplying
the change in volume (i.e., $352.7 million) by the previous period's average
rate (i.e., 8.72%). Similarly, the effect of rate changes is calculated by
multiplying the change in average rate (i.e., 0.12%) by the current period's
volume (i.e., $1.8 billion).



                                           Average       Interest       Average
        ($ in thousands)                    Loans         Income         Yield
        Year ended December 31, 2019     $ 1,782,558$ 157,531          8.84   %
        Year ended December 31, 2018       1,429,877       124,722          8.72
        Volume variance                      352,681        30,763
        Rate variance                                        2,046          0.12
        Total interest income variance                   $  32,809




Interest Expense - Portfolio Related.   Interest expense related to our
warehouse repurchase facilities increased $4.4 million to approximately $13.6
million during the year ended December 31, 2019, compared to approximately $9.2
million during the year ended December 31, 2018. Interest expense related to our
securitizations increased by $16.9 million to approximately $70.3 million during
the year ended December 31, 2019, compared to approximately $53.4 million during
the year ended December 31, 2018. Our cost of funds increased to 5.23% during
the year ended December 31, 2019 from 5.07% during the year ended December 31,
2018. The increase in interest expense - portfolio related was primarily due to
the increase in borrowings for loan originations, as well as the impact of
increased seasoning of older securitizations. As we have continued to add more
of the lower-cost securitizations, our interest cost has started to decrease,
averaging 5.00% for the fourth quarter of 2019.

The following table presents information regarding the increase in portfolio
related interest expense and distinguishes between the dollar amount of change
in interest expense attributable to changes in the average outstanding debt
balance (volume) versus changes in cost of funds (rate).



        ($ in thousands)                    Average       Interest       Cost of
                                           Debt (1)        Expense        Funds
        Year ended December 31, 2019      $ 1,603,459$  83,903          5.23   %
        Year ended December 31, 2018        1,234,818        62,597          5.07
        Volume variance                       368,641        18,688
        Rate variance                                         2,618          0.16
        Total interest expense variance                   $  21,306

(1)Includes securitizations and warehouse repurchase agreements.

Net Interest Income After Provision for Loan Losses



                                             Year Ended December 31,
($ in thousands)                              2019              2018       

$ Change % Change Net interest income - portfolio related $ 73,628$ 62,125$ 11,503

           18.5   %
Interest expense - corporate debt               14,618           13,322          1,296            9.7   %
Net interest income                             59,010           48,803         10,207           20.9   %
Provision for loan losses                        1,139              201            938          466.7   %
Net interest income after provision for
loan losses                               $     57,871$   48,602$    9,269           19.1   %




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Interest Expense - Corporate Debt.   Corporate debt interest expense increased
by $1.3 million from $13.3 million for the year ended December 31, 2018 to $14.6
million for the year ended December 31, 2019 primarily due to the increase in
the corporate debt balance. In August 2019, we refinanced the 2014 Senior
Secured Notes with a portion of the net proceeds from the 2019 Term Loans - a
five-year $153.0 million corporate debt agreement with a new lender. The
corporate debt balance was $153.0 million as of December 31, 2019 compared to
$127.6 million as of December 31, 2018.

Provision for Loan Losses.   Our provision for loan losses increased by $0.9
million from $0.2 million during the year ended December 31, 2018 to $1.1
million during the year ended December 31, 2019 primarily due to the increase in
the loan portfolio.

Other Operating Income

The table below presents the various components of other operating income for
the year ended December 31, 2019 compared to the year ended December 31, 2018.
The $0.2 million net decrease is primarily due to the increase in gain on
disposition of loans, offset by the valuation adjustments on interest-only
strips included within other (expense) income.



                                             Year Ended December 31,
($ in thousands)                              2019               2018         $ Change       % Change
Gain on disposition of loans              $       4,410$    1,201$    3,209          267.2   %
Unrealized gain on fair value loans                  (9 )            241           (250 )       (103.7 )
Other (expense) income                           (1,752 )          1,365         (3,117 )       (228.4 )
Total other operating income              $       2,649$    2,807$     (158 )         (5.6 ) %




Operating Expenses

Total operating expenses increased by $3.0 million, or 9.2%, to $35.1 million
during the year ended December 31, 2019 from $32.2 million during the year ended
December 31, 2018. This increase is primarily the result of loan servicing costs
associated with higher loan origination volumes and the increase in REO expense.



                                             Year Ended December 31,
($ in thousands)                              2019              2018         $ Change       % Change
Compensation and employee benefits        $     15,511$   15,105$      406            2.7   %
Rent and occupancy                               1,531            1,320            211           16.0   %
Loan servicing                                   7,396            6,009          1,387           23.1   %
Professional fees                                2,056            3,040           (984 )        (32.4 )
Real estate owned, net                           2,647            1,373          1,274           92.8   %
Other operating expenses                         5,981            5,313            668           12.6   %
Total operating expenses                  $     35,122$   32,160$    2,962            9.2   %




Compensation and Employee Benefits.  Compensation and employee benefits
increased from $15.1 million during the year ended December 31, 2018 to $15.5
million during year ended December 31, 2019, mainly due to higher commission
expenses and increased operations and sales staff to support our growth in loan
origination volume.

Rent and Occupancy.  Rent and occupancy expenses increased from $1.3 million
during the year ended December 31, 2018 to $1.5 million during the year ended
December 31, 2019, due to the increase in office space.

Loan Servicing.   Loan servicing expenses increased from $6.0 million during the
year ended December 31, 2018 to $7.4 million during the year ended December 31,
2019. The $1.4 million increase during the year ended December 31, 2019 is
mainly due to the increase in our loan portfolio.

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Professional Fees.   Professional fees decreased from $3.0 million for the year
ended December 31, 2018 to $2.1 million for the year ended December 31, 2019,
mainly due to the timing of legal and external audit services rendered related
to our public offering initiative.

Net Expenses of Real Estate Owned.   Net expenses of real estate owned increased
from $1.3 million during the year ended December 31, 2018 to $2.6 million during
the year ended December 31, 2019, mainly due to the increase in valuation
adjustment expense during the year ended December 31, 2019.

Other Operating Expenses.   Other operating expenses increased from $5.3 million
for the year ended December 31, 2018 to $6.0 million for the year ended December
31, 2019, mainly due to increased data processing costs related to technology
investments.

Income Tax Expense.  Income tax expense was $8.1 million for the year ended
December 31, 2019, compared to $11.6 million for the year ended December 31,
2018. Our consolidated effective tax rate as a percentage of pre-tax income for
2019 was 31.9%, compared to 60.4% for 2018. The 2019 effective tax rate differed
from the federal statutory rate of 21.0% principally because of state taxes.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017


Our income before income taxes increased 37.6% from $14.0 million for the year
ended December 31, 2017 to $19.2 million for the year ended December 31, 2018.
Our strong earnings growth is mainly attributable to significant growth in our
loan originations and a slight increase in our net interest margin. Net interest
margin expansion was attributable to an increase in portfolio yield, partially
offset by increasing portfolio related cost of funds.

Net Interest Income - Portfolio Related



                                                Year Ended
                                               December 31,
($ in thousands)                            2018          2017       $ Change       % Change
Interest income                           $ 124,722$ 97,830$  26,892           27.5 %

Interest expense - portfolio related 62,597 47,638 14,959

           31.4 %

Net interest income - portfolio related $ 62,125$ 50,192$ 11,933

           23.8 %




Interest Income.  Interest income increased by $26.9 million, or 27.5%, to
$124.7 million during the year ended December 31, 2018, compared to $97.8
million during the year ended December 31, 2017. The increase is attributable to
a combination of an increase in average loans (volume) and an increase in
average yield (rate). Average loans increased $261.9 million, or 22.4%, from
$1.2 billion during the year ended December 31, 2017 to $1.4 billion during the
year ended December 31, 2018. The average yield over those same periods
increased from 8.38% to 8.72%.

The following table distinguishes between the change in interest income
attributable to change in volume and the change in interest income attributable
to change in rate. The effect of changes in volume is determined by multiplying
the change in volume (i.e., $261.9 million) by the previous period's average
rate (i.e., 8.38%). Similarly, the effect of rate changes is calculated by
multiplying the change in average rate (i.e., 0.34%) by the current period's
volume (i.e., $1.4 billion).



                                            Average       Interest       Average
         ($ in thousands)                    Loans         Income         Yield
         Year ended December 31, 2018     $ 1,429,877$ 124,722          8.72 %
         Year ended December 31, 2017       1,167,999        97,830          8.38
         Volume variance                  $   261,878$  21,929
         Rate variance                                        4,963          0.34 %
         Total interest income variance                   $  26,892


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Interest Expense - Portfolio Related.   Interest expense related to our
warehouse repurchase facilities increased $2.0 million, or 28.2%, to
approximately $9.2 million during the year ended December 31, 2018, compared to
approximately $7.2 million during the year ended December 31, 2017. Interest
expense related to our securitizations increased by $12.9 million to
approximately $53.4 million during the year ended December 31, 2018, compared to
approximately $40.5 million during the year ended December 31, 2017. The
increase in interest expense - portfolio related was primarily due to the
increase in borrowings for loan originations. Our average cost of funds
increased slightly to 5.07% during the year ended December 31, 2018 from 4.93%
during the year ended December 31, 2017.

The following table presents information regarding the increase in portfolio
related interest expense and distinguishes between the dollar amount of change
in interest expense attributable to changes in the average outstanding debt
balance (volume) versus changes in cost of funds (rate).



                                            Average       Interest       Cost of
        ($ in thousands)                    Debt(1)        Expense        Funds

Year ended December 31, 2018$ 1,234,818$ 62,597

5.07 %

Year ended December 31, 2017 965,987 47,638

4.93

        Volume variance                   $   268,831$  13,257
        Rate variance                                         1,702         

0.14 %

        Total interest expense variance                   $  14,959

(1) Includes securitizations and warehouse repurchase agreements.

Net Interest Income After Provision for Loan Losses



                                              Year Ended December 31,
($ in thousands)                               2018              2017         $ Change       % Change
Net interest income - portfolio related    $     62,125$   50,192$   11,933           23.8 %
Interest expense - corporate debt                13,322           13,654           (332 )         (2.4 )
Net interest income                              48,803           36,538         12,265           33.6
Provision for loan losses                           201              421           (220 )        (52.3 )
Net interest income after provision for
loan losses                                $     48,602$   36,117$   12,485           34.6 %




Interest Expense - Corporate Debt.   Under the 2014 Senior Secured Notes,
interest paid-in-kind accrues at an 11.0% interest rate and interest paid in
cash accrues at a 10.0% interest rate. During the first half of 2017, the
interest due on the 2014 Senior Secured Notes was paid-in-kind. During the
second half of 2017, and during the year ended 2018, the interest due was paid
in cash. The change in interest payments resulted in a 2.4% decrease in
corporate debt interest expense from $13.7 million during the year ended
December 31, 2017 to $13.3 million during the year ended December 31, 2018. We
used $75.7 million of the net proceeds from our IPO to reduce interest expense
through the repayment of $75.0 million in outstanding principal amount on the
2019 Term Loans, which refinanced the 2014 Senior Secured Notes in August 2019.

Provision for Loan Losses. Our provision for loan losses decreased $0.2 million from $0.4 million during the year ended December 31, 2017 to $0.2 million during the year ended December 31, 2018 as a result of an improvement in incurred losses, as the Company experienced fewer losses in 2018.

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Other Operating Income


The table below presents the various components of other operating income for
the year ended December 31, 2018 compared to the year ended December 31, 2017.
The $0.8 million increase is primarily the result of the increased gain on sale
of loans.



                                              Year Ended
                                             December 31,
    ($ in thousands)                       2018        2017       $ Change       % Change
    Gain on disposition of loans          $ 1,200$   984$     216           22.0 %
    Unrealized gain on fair value loans       241          39           202              -
    Other income                            1,366         985           381           38.7 %
    Total other operating income          $ 2,807$ 2,008$     799           39.8 %




Operating Expenses

Total operating expenses increased $8.0 million, or 33.2%, to $32.2 million
during the year ended December 31, 2018 from $24.1 million during the year ended
December 31, 2017. This increase is primarily the result of additional personnel
and loan servicing costs associated with higher loan origination volumes.



                                             Year Ended
                                            December 31,
   ($ in thousands)                       2018         2017        $ Change       % Change
   Compensation and employee benefits   $ 15,105$ 11,904$    3,201           26.9 %
   Rent and occupancy                      1,320        1,115            205           18.4 %
   Loan servicing                          6,009        4,907          1,102           22.5 %
   Professional fees                       3,040        1,661          1,379           83.0 %
   Real estate owned, net                  1,373          603            770          127.7 %
   Other operating expenses                5,313        3,946          1,367           34.6 %
   Total operating expenses             $ 32,160$ 24,136$    8,024           33.2 %




Compensation and Employee Benefits.   Compensation and employee benefits
increased from $11.9 million during the year ended December 31, 2017 to $15.1
million during the year ended December 31, 2018 mainly due to higher commission
expenses and increased operations and sales staff to support our growth in loan
origination volume.

Rent and Occupancy.   Rent and occupancy expenses increased from $1.1 million
during the year ended December 31, 2017 to $1.3 million during the year ended
December 31, 2018 due to the opening of two new sales offices.

Loan Servicing.   Loan servicing expenses increased from $4.9 million during the
year ended December 31, 2017 to $6.0 million during the year ended December 31,
2018. The $1.1 million increase during 2018 is primarily related to the increase
in our loan portfolio.

Professional Fees.   Professional fees increased from $1.7 million for the year
ended December 31, 2017 to $3.0 million for the year ended December 31, 2018
mainly due to increased legal and external audit fees related to our public
offering initiative.

Net Expenses of Real Estate Owned.   Net expenses of real estate owned increased
from $0.6 million during the year ended December 31, 2017 to $1.4 million during
the year ended December 31, 2018, mainly as a result of a $0.7 million increase
in REO valuation adjustments.

Other Operating Expenses.   Other operating expenses increased from $3.9 million
for the year ended December 31, 2017 to $5.3 million for the year ended December
31, 2018 mainly due to increased data processing costs related to technology
investments.

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Income Tax Expense.   Income tax expense was $11.6 million, and our consolidated
effective tax rate was 60.4% for the year ended December 31, 2018. The Company
elected to be treated as a corporation for U.S. federal and state income tax
purposes effective January 1, 2018. Prior to January 1, 2018, the Company was a
limited liability company and it was not subject to U.S. federal and state
income tax.

                        Liquidity and Capital Resources

Sources and Uses of Liquidity

We fund our lending activities primarily through borrowings under our warehouse repurchase facilities, securitizations, members' equity and other corporate-level debt, equity and debt securities, and net cash provided by operating activities to manage our business. We use cash to originate and acquire investor real estate loans, repay principal and interest on our borrowings, fund our operations and meet other general business needs.


As a result of the spread of the COVID-19, economic uncertainties have arisen
which are likely to negatively impact our financial condition, results of
operations and cash flows. We have recently executed a number of business
initiatives to strengthen our liquidity and capital resources position in light
of the impact of COVID-19. As part of these initiatives, on April 6, 2020, we
entered into amendments to our warehouse repurchase agreements and issued and
sold $45.0 million in gross proceeds of Preferred Stock and Warrants. See below
under "-Warehouse Repurchase Facilities" and "-April 2020 Preferred Stock and
Warrants."

Cash and Cash Equivalents

As of December 31, 2019, we had liquidity of approximately $26.4 million in cash
and eligible collateral borrowings under our warehouse facilities. Cash
comprised $21.5 million of our liquidity and eligible collateral borrowings
under our warehouse facilities comprised $4.9 million of our liquidity. As of
December 31, 2019, we had $80.3 million of uncommitted available capacity under
our warehouse facilities.

As of December 31, 2018, we had liquidity of approximately $60.0 million in cash
and eligible collateral borrowings under our warehouse facilities. Cash
comprised $15.0 million of our liquidity and eligible collateral borrowings
under our warehouse facilities comprised $45.0 million of our liquidity. As of
December 31, 2018, we had $283.3 million of uncommitted available capacity under
our warehouse facilities.

During the year ended December 31, 2019, we generated approximately $10.9 million of net cash and cash equivalents from operations, investing and financing activities. During the year ended December 31, 2018, we generated approximately $1.0 million of net cash and cash equivalents from operations, investing and financing activities.

Warehouse Repurchase Facilities


As of December 31, 2019, we had two warehouse repurchase agreements to support
our loan origination and acquisition activities. Both agreements are short-term
borrowing facilities. The borrowings are collateralized by pools of primarily
performing loans, bearing interest at one-month LIBOR plus a margin that ranges
from 2.75% to 3.00%. As of December 31, 2019, these two agreements had an
aggregated maximum borrowing capacity of $450.0 million, of which $200.0 million
were committed amounts and $250.0 million were uncommitted amounts. The maximum
capacity increased from $450.0 million to $500.0 million effective March 11,
2020. Borrowings under these repurchase facilities as of December 31, 2019 were
$417.2 million.

As of December 31, 2018, we had two warehouse repurchase agreements to support
our loan origination and acquisition activities. Both agreements are short-term
borrowing facilities. The borrowings are collateralized by pools of primarily
performing loans, bearing interest at one-month LIBOR plus a margin that ranges
from 2.75% to 3.00%. As of December 31, 2018, these two agreements had an
aggregated maximum borrowing capacity of $450.0 million, of which $200.0 million
were committed amounts and $250.0 million were uncommitted amounts. Borrowings
under these repurchase facilities as of December 31, 2018 were $216.4
million.

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In addition to the two warehouse repurchase agreements, we also have a longer
term warehouse agreement, which was added in September 2018. The borrowings are
collateralized by pools of primarily performing loans, with a maximum borrowing
capacity of $50 million, bearing interest at one-month LIBOR plus a margin of
3.50%. The warehouse repurchase facility has a maturity date of September 12,
2021 and allows loans to be financed for a period of up to three years.
Borrowings under this warehouse agreement as of December 31, 2019 were $2.5
million.

All warehouse repurchase 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 repurchase facilities, which then allows us to draw
additional funds on a revolving basis under the facilities. The revolving
warehouse repurchase facilities also contain customary covenants, including
financial covenants that require us to maintain a minimum net worth, a maximum
debt-to- net worth ratio and a ratio of a minimum earnings before interest,
taxes, depreciation and amortization to interest expense. If we fail to meet any
of the covenants or otherwise default under the facilities, the lenders have the
right to terminate their facility and require immediate repayment, which may
require us to sell our loans at less than optimal terms. As of December 31,
2019, we were in compliance with these covenants.

In response to the dislocations in the markets related to the COVID-19 pandemic
and its unknown future impact on the value of our financed collateral, on April
6, 2020, we entered into amendments to the master repurchase agreements on both
of our warehouse repurchase agreements with the lenders under such agreements.
We believe that the amended warehouse repurchase agreements provide us with a
flexible and more stabilized financing solution that will allow us to better
operate our business under the current market conditions. Pursuant to the terms
of the warehouse repurchase amendments, (i) we must maintain unrestricted cash
and cash equivalents of at least $7.5 million, (ii) we were required to make
aggregate payments of $20.0 million to reduce our obligations under the
warehouse repurchase agreements on April 6, 2020, and (iii) we must ensure that
payments of at least $3.0 million per month are made to each lender, from the
cash flow of the underlying financed loans and/or corporate cash each month from
April 6 through August 3, 2020, in reduction of its obligations thereunder. In
addition, the interest rate under each warehouse repurchase facility was
increased by 25 basis points, effective as of April 6, 2020.

Securitizations


From May 2011 through October 2019, we have completed twelve securitizations of
$2.7 billion of investor real estate loans, issuing $2.5 billion in principal
amount of securities to third parties through twelve respective transactions. In
February 2020, we completed our thirteenth securitization issuing $248.7million
in principal amount of securities for $261.9 million of mortgage loans. All
borrower payments are segregated into remittance accounts at the primary
servicer and remitted to the trustee of each trust monthly. We are the sole
beneficial interest holder of the applicable trusts, which are variable interest
entities included in our consolidated financial statements. The transactions are
accounted for as a secured borrowings under U.S. GAAP. Table summarizing the
investor real estate loans securitized, securities issued, securities retained
by the Company at the time of the securitization, and as of December 31, 2019
and 2018, the stated maturity for each securitization, the outstanding bond
balances, and the weighted average on the securities for the Trusts as of
December 31, 2019 and 2018, are included in Item 15. Exhibits, Financial
Statement Schedules. The securities are callable by us when the stated principal
balance is less than a certain percentage, ranging from 5%-30%, of the original
stated principal balance of loans at issuance. As a result, the actual maturity
date of the securities issued will likely be earlier than their respective
stated maturity date.

Our intent is to use the proceeds from the issuance of new securities primarily
to repay our warehouse borrowings and originate new investor real estate loans
in accordance with our underwriting guidelines, as well as for general corporate
purposes. Our financing sources may include borrowings in the form of additional
bank credit facilities (including term loans and revolving credit facilities),
repurchase agreements, warehouse repurchase facilities and other sources of
private financing. We also plan to continue using securitization as long-term
financing for our portfolio, and we do not plan to structure any securitizations
as sales or utilize off-balance-sheet vehicles.

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We believe any financing of assets and/or securitizations we may undertake will be sufficient to fund our working capital requirements.

Cash Flows


The following table summarizes the net cash provided by (used in) operating
activities, investing activities and financing activities as of the periods
indicated:



                                                       Year Ended December 31,
   ($ in thousands)                               2019           2018           2017

Cash provided by (used in):

   Operating activities                        $ (105,336 )$  (72,485 )$   37,644
   Investing activities                          (305,934 )     (270,196 )     (274,779 )
   Financing activities                           422,145        343,631        201,118

Net change in cash, cash equivalents, and $ 10,875$ 950

 $  (36,017 )
     restricted cash




Operating Activities

Cash flows from operating activities primarily includes net income adjusted for (1) cash used for origination of held for sale loans and the related cash proceeds from the sales of such loans, (2) non-cash items including depreciation, provision for loan loss, discount accretion, and valuation changes, and (3) changes in the balances of operating assets and liabilities.


For the year ended December 31, 2019, our net cash used in operating activities
of $105.3 million consisted mainly of $336.9 million cash used to originate held
for sale loans, offset by $179.6 million proceeds from sale of loans held for
sale, $25.1 million in repayments on loans held for sale, and net income of
$17.3 million.

For the year ended December 31, 2018, our net cash used in operating activities
of $72.5 million consisted mainly of net income of $7.6 million, offset by
$148.8 million in cash used to originate held for sale loans, less proceeds from
the sale and repayments of loans held for sale of $72.9 million and $3.5
million, respectively. Changes in operating assets and liabilities resulted in
cash used of $18.9 million, mainly as a result of a $16.2 million increase in
interest receivable due to portfolio growth.

For the year ended December 31, 2017, our net cash provided by operating
activities of $37.6 million consisted mainly of net income of $14.0 million,
offset by $42.9 million in cash used to originate held for sale loans, less
proceeds from the sale of such loans of $46.3 million. Changes in operating
assets and liabilities resulted in cash provided of $4.8 million. Interest paid
in kind on our corporate debt resulted in a positive non-cash adjustment to net
income of $6.7 million.

Investing Activities

For the year ended December 31, 2019, our net cash used in investing activities
of $305.9 million consisted mainly of $682.9 million in cash used to originate
held for investment loans, offset by $379.3 million in cash received in payments
on held for investment loans. We also used cash to purchase $9.3 million of
loans for investment. We also received cash of $4.5 million from proceeds of the
sale of REO.

For the year ended December 31, 2018, our net cash used in investing activities
of $270.2 million consisted mainly of $595.7 million in cash used to originate
held for investment loans, less $334.7 million in cash received in payments on
held for investment loans. We also received cash of $6.2 million from proceeds
of the sale of REO.

For the year ended December 31, 2017, our net cash used in investing activities
of $274.8 million consisted mainly of $518.9 million in cash used to originate
held for investment loans, less $240.9 million in cash received in payments on
held for investment loans. We also received cash of $6.3 million from proceeds
of the sale of loans and $2.5 million from proceeds on the sale of REO.

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Financing Activities


For the year ended December 31, 2019, our net cash provided by financing
activities of $422.1 million consisted mainly of $961.7 million and $608.1
million in cash from borrowings from our warehouse repurchase facilities and
securitizations issued, respectively. This cash generated was partially offset
by payments we made of $756.0 million and $371.4 million on our warehouse
repurchase facilities and securitizations issued, respectively. The 2019 Term
Loans generated $153.0 million of cash, of which $127.6 million was used to
redeem the 2014 Secured Notes, and $27.7 million was used to repurchase the
Class C preferred units as return of capital. We used cash of $17.9 million for
debt issuance costs.

For the year ended December 31, 2018, our net cash provided by financing
activities of $343.6 million consisted mainly of $658.5 million and $535.5
million in cash from borrowings from our warehouse repurchase facilities and
securitizations issued, respectively. This cash generated was partially offset
by payments we made of $527.9 million and $314.7 million on our warehouse
repurchase facilities and securitizations issued, respectively. We used cash of
$7.8 million for debt issuance costs.

For the year ended December 31, 2017, our net cash provided by financing
activities of $201.1 million consisted mainly of $420.5 million and $455.3
million in cash from borrowings from our warehouse repurchase facilities and
securitizations issued, respectively. This cash generated was partially offset
by payments we made of $445.7 million and $214.4 million on our warehouse
repurchase facilities and securitizations issued, respectively. We used cash of
$7.8 million for debt issuance costs and $6.9 million for tax distributions.

April 2020 Preferred Stocks and Warrants


On April 5, 2020, we sold 45,000 shares of Preferred Stock and Warrants to
purchase 3,013,125 shares of our common stock in a private placement to two of
our largest stockholders. These offerings resulted in aggregate gross proceeds
of $45.0 million, before expenses payable by us of approximately $1.0 million.
The proceeds will be used for general corporate purposes and to strengthen our
liquidity position during this current economic crisis.

Beginning on October 5, 2022, but in no event later than November 28, 2024, each
holder of Preferred Stock has the option to cause us to repurchase all or a
portion of such holder's shares of Preferred Stock, for an amount in cash equal
to the liquidation preference of each share repurchased. The Preferred Stock has
a liquidation preference equal to the greater of (i) $2,000 per share from April
5, 2020 through October 5, 2022, which amount increases ratably to $3,000 per
share between October 6, 2022 and November 28, 2024 and to $3,000 per share from
and after November 28, 2024 and (ii) the amount such Preferred Stock holder
would have received if the Preferred Stock had converted into common stock
immediately prior to such liquidation. We also have an obligation to repurchase
the Preferred Stock for cash at a price per share equal to the liquidation
preference in the event of a change of control (as defined in the certificate of
designation governing the Preferred Stock).

The Warrants are exercisable at the warrantholder's option at any time and from
time to time, in whole or in part, until April 5, 2025 at an exercise price of
$2.96 per share of common stock with respect to 2,008,750 of the Warrants, and
at an exercise price of $4.94 per share of common stock with respect to
1,004,374 of the Warrants. For more information about the Preferred Stock and
the Warrants, see "Note 24 - Subsequent Events" in the footnotes to the
consolidated financial statements included in this Annual Report.

                    Contractual Obligations and Commitments

In 2014, we entered into a five-year, $100.0 million corporate debt agreement
with the owners of the Class C preferred units, pursuant to which we issued at
par senior secured notes that mature on December 16, 2019, the 2014 Senior
Secured Notes. The 2014 Senior Secured Notes bear interest at either 10%
annually paid in cash or 11% annually paid-in-kind on June 15 and December 15 of
each year. All principal and paid-in-kind interests are due at maturity. In
August 2019, we entered into a five-year $153.0 million corporate debt agreement
with Owl Rock Capital Corporation. The 2019 Term Loans under this agreement bear
interest a rate equal to one-month LIBOR plus 7.50% and mature in August 2024. A
portion of the net proceeds from the 2019 Term Loans was used to redeem the 2014
Senior Secured Notes. As of December 31, 2019, 2018, and 2017, including
paid-in-kind interest, the aggregate outstanding principal amount of the 2014
Senior Secured Notes was zero, $127.6 million and$127.6

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million, respectively. As of December 31, 2019, the outstanding principal amount
of the 2019 Term Notes was $153.0 million. Another portion of the net proceeds
from the 2019 Term Loans, together with cash on hand, was used to repurchase our
outstanding Class C preferred units. The 2019 Term Loans mature in August 2024
and are subject to a 0.25% quarterly amortization beginning on the fifth full
fiscal quarter after August 2019. Velocity Commercial Capital, LLC is the
borrower of the 2019 Term Loans, which are secured by substantially all of the
borrower's non-warehoused assets, with a guarantee from Velocity Financial,
Inc., formerly Velocity Financial LLC, that is secured by the equity interests
of the borrower. The corporate debt agreement contains customary affirmative and
negative covenants, including financial maintenance covenants and limitations on
dividends by the borrower.

As of December 31, 2019, we maintained warehouse and repurchase facilities to
finance our investor real estate loans and had approximately $417.2 million in
outstanding borrowings with $80.3 million of available capacity under our
warehouse and repurchase facilities.

The following table illustrates our contractual obligations existing as of
December 31, 2019:



                             January 1, 2020 -       January 1, 2021 -       January 1, 2023 -
($ in thousands)             December 31, 2020       December 31, 2022       December 31, 2024       Thereafter        Total
Warehouse repurchase        $           417,188     $             5,499     $                 -     $          -     $ 422,687
  facilities                                                                                                                     (1)
Notes payable (corporate                    382                   3,060                 149,558                -       153,000
  debt) (2)
Leases payments under
  noncancelable operating                 1,526                   3,184                   2,460               55         7,225
  leases
Total                       $           419,096     $            11,743     $           152,018     $         55     $ 582,912




(1)  Amount represents gross warehouse and repurchase borrowing. Balance of
     $421.5 million in the consolidated statement of financial condition as of

December 31, 2019 is net of $1.1 million debt issuance costs. In August

2019, the Citibank Repurchase Agreement was amended to be due in August

2020. In October 2019, the Barclays Repurchase Agreement was amended to be

due in October 2020. In April 2020, the Barclays Repurchase Agreement was

further amended to be due August 2020.

(2) In August 2019, we entered into a five-year $153.0 million corporate debt

agreement and a portion of the proceeds of the 2019 Term Loans under this

agreement were used to redeem the then outstanding corporate debt. The 2019

Term Loans mature in August 2024 and are subject to a 0.25% quarterly

amortization beginning on the fifth full fiscal quarter after August 2019.

In January 2020, we repaid $75.0 million of our existing corporate debt with

     a portion of the net proceeds from our IPO.


                         Off-Balance-Sheet Arrangements

At no time have we maintained any relationships with unconsolidated entities or
financial partnerships, such as entities referred to as structured finance, or
special-purpose or variable interest entities, established for the purpose of
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes. Further, we have never guaranteed any obligations of
unconsolidated entities or entered into any commitment or intent to provide
funding to any such entities.

New Accounting Standards


In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, which significantly changes the way entities recognize
credit losses and impairment of financial assets recorded at amortized cost.
Currently, the credit loss and impairment model for loans and leases is based on
incurred losses, and investments are recognized as impaired when there is no
longer an assumption that future cash flows will be collected in full under the
originally contracted terms. Under the new current expected credit loss ("CECL")
model, the standard requires immediate recognition of estimated credit losses
expected to occur over the remaining life of the asset. This standard also
expands the disclosure requirements regarding an entity's assumptions, models
and methods for estimating the allowance for loan and lease losses, and requires
disclosure of the amortized cost balance for each class of financial asset by
credit quality indicator, disaggregated by the year of origination (i.e., by
vintage year). ASU 2016-13 is effective for interim and annual periods in fiscal
years beginning after December 15, 2019, with earlier adoption permitted.
Entities are required to use a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is
adopted (modified-retrospective approach). The Company has developed a detailed
implementation plan, selected a new software solution, reached accounting

                                       66

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decisions on various matters, developed econometric models for our reasonable
and supportable forecast period, selected key assumptions used in the model, and
performed preliminary calculations. The Company continues to test and refine the
CECL models, including its qualitative methodology to estimate losses that
are not expected to be captured in the quantitative models. The Company is in
the final stage of the independent third-party model validation. Based on
multiple parallel testing performed using the Company's portfolio data, we
expect the impact from the adoption of this standard to be immaterial to the
Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other -
Internal-Use Software (Subtopic 350-40): Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service
Contract, which aligns the requirements for capitalizing implementation costs in
a cloud computing arrangement service contract with the requirements for
capitalizing implementation costs incurred for an internal-use software license.
Specifically, if a cloud computing arrangement is deemed to be a service
contract, certain implementation costs are eligible for capitalization. The new
guidance prescribes the balance sheet and income statement presentation and cash
flow classification for the capitalized costs and related amortization expense.
The amendments in this ASU should be applied either retrospectively or
prospectively to all implementation costs incurred after the date of adoption.
The Company adopted this standard on a prospective basis on January 1, 2020. The
adoption of ASU 2018-15 did not have a material impact on the Company's
consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic
820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value
Measurements", which modified the disclosure requirements in ASC Topic 820 to
add disclosures regarding changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements and the narrative description of measurement uncertainty.
Certain disclosure requirements in ASC Topic 820 are also removed or modified.
Certain disclosures in ASU 2018-13 would need to be applied on a retrospective
basis and others on a prospective basis and early adoption is permitted. The
Company has early adopted those provisions of the standard that permitted the
removal or modification of certain disclosures effective January 1, 2019 but
deferred adoption of the additional new disclosures until January 1, 2020. The
adoption of this standard will modify disclosures in 2020 but will not have an
impact on the Company's consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to
Topic 326, Financial Instruments Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments," which clarifies and improves
areas of guidance related to the recently issued standards on credit losses (ASU
2016-13), hedging (ASU 2017-12), and recognition of financial instruments (ASU
2016-01). The amendments generally have the same effective dates as their
related standards. Impacts from the adoption of 2019-04 have been considered in
the Company's overall CECL implementation and will be adopted concurrent with
the adoption of ASU 2016-13. ASU 2017-12 and ASU 2016-01 are not applicable to
the Company and therefore had no impact on the Company's consolidated financial
statements.

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