UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission File Number: 001-39183
Velocity Financial, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
46-0659719
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
2945 Townsgate Road, Suite 110
Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (818) 532-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
VEL
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2025, the registrant had 36,491,520 shares of common stock outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)
2
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Changes in Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements (Unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
59
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
61
SIGNATURES
63
i
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
VELOCITY FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
March 31, 2025
December 31, 2024
(Unaudited)
ASSETS
Cash and cash equivalents
$
51,676
49,901
Restricted cash
22,785
20,929
Loans held for sale, at fair value
5,008
—
Loans held for investment, at amortized cost (net of allowance for credit losses of $5,017 and $4,174 as of March 31, 2025 and December 31, 2024, respectively)
2,322,009
2,420,116
Loans held for investment, at fair value
3,287,188
2,766,951
Total loans, net
5,614,205
5,187,067
Accrued interest receivables
38,460
35,235
Receivables due from servicers
120,016
123,494
Other receivables
3,599
1,359
Real estate owned, net
83,444
68,000
Property and equipment, net
1,592
1,650
Deferred tax asset
11,051
13,612
Mortgage servicing rights, at fair value
12,631
13,712
Goodwill
6,775
Other assets
5,296
5,674
Total assets
5,971,530
5,527,408
LIABILITIES
Accounts payable and accrued expenses
153,475
147,814
Secured financing, net
285,294
284,833
Securitized debt, at amortized cost
1,935,746
2,019,056
Securitized debt, at fair value
2,459,767
2,207,408
Warehouse and repurchase facilities, net
570,025
348,082
Derivative liability
1,004
Total liabilities
5,405,311
5,007,193
Commitments and contingencies
EQUITY
Common stock ($0.01 par value, 100,000,000 shares authorized; 35,715,905 and 33,761,147 shares issued, 35,384,747 and 33,545,585 shares outstanding as of March 31, 2025 and December 31, 2024, respectively)
359
339
Additional paid-in capital
353,446
322,954
Retained earnings
216,212
197,325
Treasury stock, at cost (331,158 and 215,562 common shares as of March 31, 2025 and December 31, 2024, respectively)
(5,031
)
(2,869
Accumulated other comprehensive loss
(1,799
(805
Total Velocity Financial, Inc. stockholders' equity
563,187
516,944
Noncontrolling interest in subsidiary
3,032
3,271
Total equity
566,219
520,215
Total liabilities and equity
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
The following table represents the assets and liabilities of consolidated variable interest entities as follows:
8,679
9,847
Loans held for investment, at amortized cost
2,300,612
2,395,394
2,507,591
2,264,641
Accrued interest and other receivables
143,884
145,891
74,483
57,838
382
272
5,035,631
4,873,883
101,662
96,895
Securitized debt
4,395,513
4,226,464
4,497,175
4,323,359
3
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended March 31,
2025
2024
Interest income
118,740
90,529
Interest expense — portfolio related
75,088
55,675
Net interest income — portfolio related
43,652
34,854
Interest expense — corporate debt
6,142
5,380
Net interest income
37,510
29,474
Provision for credit losses
1,872
1,002
Net interest income after provision for credit losses
35,638
28,472
Other operating income
Gain on disposition of loans
2,834
1,699
Unrealized gain on fair value loans
34,836
18,925
Unrealized loss on fair value securitized debt
(13,682
(2,318
Unrealized gain (loss) on mortgage servicing rights
(1,081
444
Origination fee income
4,986
Interest income on cash balance
1,339
1,631
Other income
521
408
Total other operating income
33,446
25,775
Operating expenses
Compensation and employee benefits
21,684
15,357
Origination expenses
838
646
Securitization expenses
4,043
2,874
Loan servicing
8,008
4,824
Professional fees
1,783
2,115
Rent and occupancy
275
498
3,029
2,455
Other operating expenses
2,530
2,242
Total operating expenses
42,190
31,011
Income before income taxes
26,894
23,236
Income tax expense
Federal
5,850
4,162
State
2,396
1,741
Total income tax expense
8,246
5,903
Net income
18,648
17,333
Net income (loss) attributable to noncontrolling interest
(239
82
Net income attributable to Velocity Financial, Inc.
18,887
17,251
Less undistributed earnings attributable to unvested restricted stock awards
233
217
Net earnings attributable to common stockholders
18,654
17,034
Earnings per common share
Basic
0.55
0.52
Diluted
0.51
0.49
Weighted average common shares outstanding
33,687
32,541
36,811
35,439
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on cash flow hedges arising during the period
(1,056
1,891
Reclassification adjustments included in net income
62
113
Total other comprehensive income (loss), net of tax
(994
2,004
Total comprehensive income attributable to Velocity Financial, Inc.
17,893
19,255
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in thousands, except share data)
Common Stock - Number of Shares
Shareholders' Equity
Shares Issued
Treasury Shares
Shares Outstanding
Common Stock
AdditionalPaid-inCapital
RetainedEarnings
Treasury Stock, at Cost
Accumulated Other Comprehensive Income (Loss), Net of Tax
TotalStockholders'Equity
Noncontrolling Interest
Total Equity
Balance – December 31, 2023
32,987,248
(121,412
32,865,836
331
306,736
128,906
(1,319
(1,210
433,444
3,429
436,873
Issuance of common stock
9,537
152
155
Shares surrendered for tax withholding on vested awards
(79,258
(1,284
Restricted stock awarded and stock-based compensation expenses
189,679
1,371
Other comprehensive income
Balance – March 31, 2024
33,186,464
(200,670
32,985,794
334
308,259
146,157
(2,603
794
452,941
3,511
456,452
Balance – December 31, 2024
33,761,147
(215,562
33,545,585
1,569,255
20
28,522
28,542
(115,596
(2,162
385,503
1,970
Net income (loss)
Other comprehensive loss
Balance – March 31, 2025
35,715,905
(331,158
35,384,747
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
138
182
Amortization of right-of-use assets
469
344
Origination of loans held for sale
(4,886
Net accretion of discount on purchased loans and amortization of deferred loan origination costs
954
1,082
Provision for (reversal of) uncollectible borrower advances
627
(4
(539
Real estate acquired through foreclosure in excess of recorded investment
(2,834
(1,160
Amortization of debt issuance discount and costs
2,894
3,284
Change in valuation of real estate owned
2,073
1,722
Change in valuation of fair value loans
(34,836
(18,925
Change in valuation of mortgage servicing rights
1,081
(444
Change in valuation of fair value securitized debt
13,682
2,318
Gain on sale of real estate owned
(300
(286
Stock-based compensation
Hedging activities
(1,552
675
Deferred tax expense
2,963
480
Change in operating assets and liabilities:
(5,004
407
430
(921
5,147
2,660
Net cash provided by operating activities
3,536
10,581
Cash flows from investing activities:
Purchase of loans held for investment
(11,591
Origination of loans held for investment
(635,537
(378,671
Proceeds from sales of loans originally classified as held for investment
15,072
Payoffs of loans held for investment and loans at fair value
228,322
158,549
Proceeds from sale of real estate owned
8,019
5,741
Capitalized improvement on real estate held for sale
(19
Change in advances
(1,859
(1,503
Change in impounds and deposits
(259
(640
Purchase of property and equipment
(80
(41
Proceeds from sale of property and equipment
640
Net cash used in investing activities
(401,413
(212,444
Cash flows from financing activities:
Warehouse repurchase facilities advances
819,529
329,011
Warehouse repurchase facilities repayments
(597,740
(303,686
Proceeds from secured financing
74,311
Proceeds of securitized debt, net
415,680
229,368
Repayment of securitized debt
(262,319
(126,568
Debt issuance costs
(253
(2,326
Proceeds from issuance of common stocks, net
28,797
Tax withholding related to vesting of equity awards
Deferred stock issuance costs
(24
Net cash provided by financing activities
401,508
198,981
Net increase (decrease) in cash, cash equivalents, and restricted cash
3,631
(2,882
Cash, cash equivalents, and restricted cash at beginning of period
70,830
61,927
Cash, cash equivalents, and restricted cash at end of period
74,461
59,045
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental cash flow information:
Cash paid during the period for interest
78,344
58,917
Cash paid during the period for income taxes, net
771
17
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to real estate owned
22,384
8,029
Transfer of accrued interest to loans held for investment
699
219
Transfer of loans held for sale to held for investment
2,481
Recognition of new leases in exchange for lease obligations
814
Deferred stock issuance costs charged against additional paid-in capital
255
1
8
VELOCITY FINANCIAL, INC. AND SUBSIDIARIES
Note 1 — Organization and Description of Business
Velocity Financial, LLC (“VF” or “the Company”) was a Delaware limited liability company formed on July 9, 2012, for the purpose of acquiring all membership units in Velocity Commercial Capital, LLC (“VCC”). On January 16, 2020, Velocity Financial, LLC converted from a Delaware limited liability company to a Delaware corporation and changed its name to Velocity Financial, Inc. Upon completion of the conversion, Velocity Financial, LLC’s Class A equity units of 97,513,533 and Class D equity units of 60,193,989 were converted to 11,749,994 shares of Velocity Financial, Inc. common stock. On January 22, 2020, the Company completed its initial public offering of 7,250,000 shares of common stock at a price of $13.00 per share to the public. On January 28, 2020, the Company completed the sale of an additional 1,087,500 shares of its common stock, representing the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $13.00 per share. The Company’s stock trades on The New York Stock Exchange under the symbol “VEL.”
VCC, a California LLC formed on June 2, 2004, is a mortgage lender that originates and acquires residential and commercial investor real estate loans, providing capital to the investor real estate loan market. The Company is licensed as a California Finance Lender and, as such, is required to maintain a minimum net worth of $250 thousand. The Company does not believe there is any potential risk of not being able to meet this regulatory requirement. The Company uses its equity capital and borrowed funds to originate and invest in investor real estate loans and seeks to generate income based primarily on the difference between the yield on its investor real estate loan portfolio and the cost of its borrowings. The Company may also sell loans from time to time. The Company does not originate or acquire investments outside of the United States of America.
The Company, through its wholly owned subsidiaries, is the sole beneficial owner of the Velocity Commercial Capital Loan Trusts, from the 2017-2 Trust through and including the 2025-1 Trust, all of which are New York common law trusts, with the exception of the VCC 2022-MC1 Trust, and VCC 2023-RTL1 Trust which are Delaware statutory trusts. The Trusts are bankruptcy remote, variable interest entities (“VIEs”) formed for the purpose of providing secured borrowings to the Company and are consolidated with the accounts of the Company.
On December 28, 2021, the Company acquired an 80% ownership interest in Century Health & Housing Capital, LLC (“Century”). Century is a licensed Government National Mortgage Association (“Ginnie Mae” or “GNMA”) issuer/servicer that provides government-insured Federal Housing Administration (“FHA”) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century is a consolidated subsidiary of the Company as of completion of the acquisition. In addition, as a servicer of Ginnie Mae loans, Century is required to maintain a minimum net worth, and Century is in compliance with this requirement as of March 31, 2025.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited Consolidated Financial Statements as of and for the three months ended March 31, 2025 and 2024 have been prepared on a basis that is substantially consistent with the accounting principles applied to the Company’s audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024.
The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company’s audited Consolidated Financial Statements.
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of consolidated income and expenses during the reporting period.
The Company’s significant accounting policies are described in Note 2 — Basis of Presentation and Summary of Significant Accounting Policies, of its audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2024 as filed with the Securities and Exchange Commission (“SEC”).
There have been no material changes to the Company’s significant accounting policies as described in its 2024 Annual Report.
The principles of consolidation require management to determine and reassess the requirement to consolidate VIEs each reporting period, and therefore, the determination may change based on new facts and circumstances pertaining to each VIE. This could result in a material impact to the Company’s consolidated financial statements in subsequent reporting periods.
The Company consolidates the assets, liabilities, and remainder interests of the Trusts as management determined that VCC is the primary beneficiary of these entities. The Company’s ongoing asset management responsibilities provide the Company with the power to direct the activities that most significantly impact the VIE’s economic performance, and the remainder interests provide the Company with the right to receive benefits and the obligation to absorb losses, limited to its investment in the remainder interest of the Trusts.
The consolidated financial statements as of March 31, 2025 and December 31, 2024 include only those assets, liabilities, and results of operations related to the business of the Company, its subsidiaries, and VIEs.
The Company elected to apply fair value option (“FVO”) accounting to mortgage loans originated effective October 1, 2022. The fair value option loans are presented as a separate line item in the Consolidated Balance Sheets. Interest income on FVO loans is recorded on an accrual basis in the Consolidated Statements of Income under the heading “Interest income.” Changes in the fair value of the loans are recorded as “Unrealized gain (loss) on fair value of loans” in the Consolidated Statements of Income. The Company does not record a current expected credit loss (“CECL”) reserve on fair value option loans.
The Company elected to apply FVO accounting to securitized debt issued effective January 1, 2023 when the underlying collateral is also carried at fair value. The FVO securitized debt is presented as a separate line item in the Consolidated Balance Sheets. The Company reflects interest expense on the FVO securitized debt as “Interest expense – portfolio related” and presents the other fair value changes of the FVO securitized debt separately as “Unrealized gain (loss) on fair value securitized debt” in the Consolidated Statements of Income.
The Company issues fixed rate debt at regular intervals during the year through the securitization of its fixed rate mortgage assets. The Company is subject to interest rate risk on its forecasted debt issuances as these fixed rate debt issuances are priced at then-current market rates. The Company’s risk management objective is to hedge the risk of variability in its interest payment cash flows attributable to changes in the benchmark Secured Overnight Financing Rate (“SOFR”) between the time the fixed rate mortgages are originated and the fixed rate debt is issued. To accomplish this hedging strategy, the Company may from time to time enter into derivative instruments such as forward starting payer interest rate swaps or interest rate payer and receiver swaptions designated as cash flow hedges that are designed to be highly correlated to the underlying terms of the forecasted debt instruments. To qualify for hedge accounting, the Company formally documents its hedging relationships at inception, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. The Company also formally assesses effectiveness both at the hedge's inception and on an ongoing basis.
The Company's policy is to present all derivative balances on a gross basis, without regard to counterparty master netting agreements or similar arrangements. The fair value of the derivative instruments is recorded as a separate line item on the Consolidated Balance Sheets as an asset or liability with the related gains or losses reported as a component of Accumulated Other Comprehensive Income (“AOCI”). Beginning in the period in which the forecasted debt issuance occurs and the related derivative instruments are terminated, the gains or losses accumulated in AOCI are then reclassified into interest expense as a yield adjustment over the term of the related debt. If the Company determines it is not probable that the forecasted transaction will occur, gains and losses are reclassified immediately to earnings. The related cash flows are recognized on the cash flows from operating activities section on the Consolidated Statements of Cash Flows. The Company uses hedge accounting based on the exposure being hedged as cash flow hedges in operations.
Other comprehensive income (“OCI”) is reported in the Consolidated Statements of Comprehensive Income. OCI is comprised of net income and the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges, net of tax, less amounts reclassified into earnings.
Accumulated other comprehensive income represents the cumulative balance of OCI, net of tax, as of the end of the reporting period and relates to unrealized gains or losses on cash flow hedges, net of tax.
10
Note 3 — Current Accounting Developments
Recently Issued Accounting Standards
Debt with Conversion and Other Options
In November 2024, the FASB issued ASU 2024-04, “Debt - Debt With Conversion and Other Options (Subtopic 220-40),” which clarifies requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features or convertible debt instruments that are not currently convertible, should be accounted for as an induced conversion rather than as debt extinguishments. The accounting update is effective January 1, 2026 for the Company. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
Expense Disaggregation
In January 2025, the FASB issued ASU 2025-01, “Income Statement - Reporting Comprehensive Income (Subtopic 220-40) Expense Disaggregation Disclosures,” clarifies for non-calendar year end entities the interim effective date of ASU 2024-03. All public business entities are required to adopt the guidance in the annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income (Subtopic 220-40) Expense Disaggregation Disclosures,” which requires specific information about certain costs and expenses at each interim and annual reporting period. This includes disclosing amounts related to employee compensation, depreciation, and intangible asset amortization. In addition, qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively will need to be disclosed. The accounting update is effective January 1, 2027 for the Company. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Standards
Liabilities of Crypto-Assets
In March 2025, the FASB issued ASU 2025-02, “Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 122,” which rescinds the interpretive guidance in Staff Accounting Bulletin No. 121 regarding the accounting for obligations to safeguard crypto-assets that an entity holds for platform users. The amendments in this ASU were effective immediately and on a fully retrospective basis to annual periods beginning after December 15, 2024. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.
Codification Improvements
In March 2024, the FASB issued ASU 2024-02, “Codification Improvements—Amendments to Remove References to the Concepts Statements,” which amends the Codification to remove references to various concepts statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. ASU 2024-02 is effective January 1, 2025, for the Company. The Company adopted the provisions of ASU 2024-02 effective January 1, 2025, and the adoption of this standard did not have a material impact on the Company's consolidated financial statements and related disclosures.
Compensation
In March 2024, the FASB issued ASU 2024-01, “Compensation— Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards,” clarifies how an entity determines whether a profits interest or similar award is (1) within the scope of ASC 718 - Compensation - Stock Compensation or (2) not a share-based payment arrangement and therefore within the scope of other guidance. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services. ASU 2024-01 is effective January 1, 2025, for the Company. The Company adopted the provisions of ASU 2024-01 effective January 1, 2025, and the adoption of this standard did not have a material impact on the Company's consolidated financial statements and related disclosures.
Income Taxes
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 240): Improvements to Income Tax Disclosures,” which requires additional disclosure and disaggregated information in the Income Tax Rate reconciliation using both percentages and reporting currency amounts, with additional qualitative explanations of individually significant reconciling items. The updated guidance also requires disclosure of the amount of income taxes paid (net of refunds received) disaggregated by jurisdictional categories (federal (national), state, and foreign). The Company adopted the provisions of ASU 2023-09 effective January 1, 2025, and the adoption of this standard did not have a material impact on the Company's consolidated financial statements and related disclosures.
11
Note 4 — Cash, Cash Equivalents, and Restricted Cash
The Company is required to hold cash for potential future advances due to certain borrowers. In accordance with various mortgage servicing and related agreements, Century maintains escrow accounts for mortgage insurance premium, tax and insurance, working capital, sinking fund and other mortgage related escrows. The total escrow balances payable amounted to $85.5 million and $86.7 million as of March 31, 2025 and 2024, respectively. These amounts are not reflected on the Consolidated Balance Sheets of the Company.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s Consolidated Balance Sheets to the total of the same such amounts shown in the Consolidated Statements of Cash Flows for the three months ended March 31, 2025 and 2024:
34,829
24,216
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
Note 5 — Loans Held for Sale at Fair Value
The following table summarizes loans held for sale at fair value as of March 31, 2025 and December 31, 2024:
Loans Held for Sale, at Fair Value:
Unpaid principal balance
4,886
Valuation adjustments on FVO loans held for sale
122
Ending balance
Note 6 — Loans Held for Investment at Amortized Cost and Loans Held for Investment at Fair Value
The following tables summarize loans held for investment as of March 31, 2025 and December 31, 2024:
Loans Held for Investment, at Amortized Cost
Loans Held for Investment, at Fair Value
Total Loans Held for Investment
2,304,587
3,140,428
5,445,015
Valuation adjustments on FVO loans
146,760
Deferred loan origination costs
22,439
2,327,026
5,614,214
Allowance for credit losses
(5,017
Total loans held for investment
5,609,197
2,400,720
2,655,217
5,055,937
111,734
23,570
2,424,290
5,191,241
(4,174
12
The following tables summarize the Unpaid Principal Balance (“UPB”) and amortized cost basis of loans in the Company's COVID-19 forbearance program for the three months ended March 31, 2025 and the year ended December 31, 2024:
Three Months Ended March 31, 2025
UPB
%
Amortized Cost
($ in thousands)
Beginning balance
142,827
144,247
Foreclosures
(744
(752
Repayments
(5,941
(6,030
136,142
137,465
Performing/Accruing
99,448
73.0%
100,408
Nonperforming/Nonaccrual
36,694
27.0%
37,057
Year Ended December 31, 2024
174,571
176,515
(5,292
(5,416
(26,452
(26,852
102,769
72.0%
103,790
40,058
28.0%
40,457
Since April 1, 2020, the inception of the COVID-19 forbearance program, the Company has modified $413.6 million in UPB of loans, which includes capitalized interest of $15.5 million. As of March 31, 2025, $274.9 million in UPB of modified loans has been paid down, which includes $6.5 million of capitalized interest received.
Approximately 73.0% and 72.0% of the COVID forbearance loans in UPB were performing, and 27.0% and 28.0% were on nonaccrual status as of March 31, 2025 and December 31, 2024, respectively.
13
As of March 31, 2025 and December 31, 2024, the gross unpaid principal balances of loans held for investment pledged as collateral for the Company’s warehouse facilities and securitized debt issued were as follows:
The 2013 repurchase agreement
243,152
133,577
The 2021/2024 repurchase agreements
221,369
148,676
The 2021 term repurchase agreement
100,622
74,324
The 2023 repurchase agreement
103,221
42,613
The 2024 bank credit agreement
52,464
23,330
Total pledged loans
720,828
422,520
2017-2 Trust
37,715
39,231
2018-1 Trust
26,892
28,564
2018-2 Trust
59,260
62,845
2019-1 Trust
65,774
71,521
2019-2 Trust
49,227
52,417
2019-3 Trust
49,166
52,177
2020-1 Trust
94,390
98,858
2021-1 Trust
156,984
162,750
2021-2 Trust
126,698
130,363
2021-3 Trust
133,911
136,891
2021-4 Trust
210,538
219,907
2022-1 Trust
215,826
222,909
2022-2 Trust
195,006
201,363
2022-MC1 Trust
57,283
58,133
2022-3 Trust
243,444
253,621
2022-4 Trust
247,792
254,668
2022-5 Trust
177,873
187,078
2023-1 Trust
174,100
180,941
2023-2 Trust
149,189
165,155
2023-3 Trust
187,286
200,943
2023-RTL1 Trust
67,256
85,530
2023-4 Trust
173,773
185,013
2024-1 Trust
169,770
188,638
2024-2 Trust
250,069
271,542
2024-3 Trust
196,175
198,640
2024-4 Trust
237,549
248,788
2024-5 Trust
287,824
293,881
2024-6 Trust
291,344
299,216
2025-1 Trust
350,700
Total
4,682,814
4,551,583
14
The following tables present the amortized cost basis, or recorded investment, of the Company’s loans held for investment, excluding loans carried at fair value, that were nonperforming and on nonaccrual status as of March 31, 2025 and December 31, 2024.
Total Nonaccrual
Nonaccrual with No Allowance for Credit Losses
Nonaccrual with Allowance for Credit Losses
Allowance for Loans Individually Evaluated
Commercial - Purchase
33,954
32,958
996
85
Commercial - Refinance
96,686
90,394
6,292
1,105
Residential 1-4 Unit - Purchase
29,358
Residential 1-4 Unit - Refinance
115,903
110,962
4,941
193
Short Term 1-4 Unit - Purchase
2,595
Short Term 1-4 Unit - Refinance
17,465
17,327
46
295,961
283,594
12,367
1,429
33,290
32,294
99,683
96,155
3,528
421
29,573
122,439
114,265
8,174
450
4,754
23,556
23,341
215
73
313,295
300,382
12,913
1,029
The Company has made the accounting policy election not to measure an allowance for accrued interest receivables. The Company has also made the accounting policy election to write off accrued interest receivables by reversing interest income when loans are placed on nonaccrual status, or 90 days or more past due. Any future payments received for these loans will be recognized on a cash basis.
The following table presents the amortized cost basis in loans held for investment, excluding loans held for investment at fair value, as of March 31, 2025 and 2024, and the amount of accrued interest receivable written off by reversing interest income by portfolio segment of loans that have been placed on nonaccrual for the three months ended March 31, 2025 and 2024:
Interest Reversal
548,796
264
613,661
136
687,917
278
779,302
545
400,778
141
495,611
636,983
774,982
305
30,602
80
33,254
30
21,950
35,975
31
1,038
2,732,785
1,311
The cash basis interest income recognized on nonaccrual loans, including loans held for investment at fair value, was $8.5 million and $7.3 million for the three months ended March 31, 2025 and 2024, respectively. No accrued interest income was recognized on nonaccrual loans for the three months ended March 31, 2025 and 2024. The average recorded investment of individually evaluated loans, computed using month-end balances, was $300.6 million and $325.0 million for the three months ended March 31, 2025 and 2024, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified as of March 31, 2025 and 2024.
15
The following tables present the activity in the allowance for credit losses for the three months ended March 31, 2025 and 2024:
Commercial Purchase
Commercial Refinance
Residential 1-4 Unit Purchase
Residential 1-4 Unit Refinance
Short Term 1-4 Unit Purchase
Short Term 1-4 Unit Refinance
Allowance for credit losses:
Beginning balance - January 1, 2025
662
1,399
746
1,281
74
4,174
Provision for (reversal of) credit losses
(7
848
271
33
87
Charge-offs
(118
(177
(624
(103
(1,029
655
2,129
840
1,297
38
5,017
Allowance related to:
Loans individually evaluated
Loans collectively evaluated
570
1,024
1,104
3,589
Amortized cost related to:
514,842
591,231
371,420
521,080
28,007
4,485
2,031,065
Three Months Ended March 31, 2024
Beginning balance - January 1, 2024
935
1,805
585
1,256
23
165
4,769
(74
91
684
120
93
88
(2
(296
(107
(99
(504
861
1,894
973
1,269
253
5,267
130
642
185
221
1,431
731
1,252
788
1,016
32
3,836
28,127
97,571
38,090
130,052
5,584
28,140
327,564
585,534
681,731
457,521
644,930
27,670
7,835
2,405,221
A credit quality indicator is a statistic used by the Company to monitor and assess the credit quality of loans held for investment, excluding loans held for investment at fair value. The Company monitors its charge-offs rate in relation to its nonperforming loans as a credit quality indicator. The annualized charge-offs rates were 1.38% and 0.63% of average nonperforming loans for the three months ended March 31, 2025 and 2024, respectively.
16
Other credit quality indicators include aging status and accrual status. Nonperforming loans are loans that are 90 or more days past due, in bankruptcy, in foreclosure, or not accruing interest. Past due status is based on the contractual terms of the loan. The following tables present the aging status of the amortized cost basis in the loans held for investment portfolio, which include $137.5 million and $144.2 million loans in the Company’s COVID-19 forbearance program, excluding loans held for investment at fair value, as of March 31, 2025 and December 31, 2024, respectively:
30–59 Days Past Due
60–89 Days Past Due
90+ Days Past Due(1)
Total Past Due
Current
Total Loans
1,666
1,021
31,267
4,246
3,751
88,689
105
2,972
26,281
1,749
110,626
Total loans individually evaluated
9,545
9,493
276,923
25,245
8,648
33,893
480,949
34,802
14,938
49,740
541,491
17,269
5,898
23,167
348,253
26,126
15,226
41,352
479,728
Total loans collectively evaluated
103,442
44,710
148,152
1,882,913
112,987
54,203
444,113
387
555
32,348
3,903
3,326
92,454
606
957
28,010
4,784
708
116,947
203
23,353
9,680
5,749
297,866
19,633
12,027
31,660
500,865
532,525
37,480
12,132
49,612
565,675
615,287
16,040
7,479
23,519
367,015
390,534
32,398
14,302
46,700
499,730
546,430
10,073
15,989
26,062
157
115,624
45,940
161,564
1,949,431
2,110,995
125,304
51,689
474,859
In addition to the aging status, the Company also evaluates credit quality by accrual status. The following tables present the amortized cost in loans held for investment, excluding loans held for investment at fair value, based on accrual status and by loan origination year as of March 31, 2025 and December 31, 2024.
Term Loans Amortized Cost Basis by Origination Year
March 31, 2025:
2022
2021
2020
2019
Prior
Payment performance
Performing
217,595
201,152
23,848
32,344
39,903
Nonperforming
11,305
11,085
4,990
4,723
1,851
Total Commercial - Purchase
228,900
212,237
28,838
37,067
41,754
199,926
162,099
40,187
74,561
114,458
27,591
20,957
3,970
15,836
28,332
Total Commercial - Refinance
227,517
183,056
44,157
90,397
142,790
165,196
159,072
8,034
17,078
22,040
10,245
10,761
1,701
657
5,994
Total Residential 1-4 Unit - Purchase
175,441
169,833
9,735
17,735
28,034
212,846
198,025
15,662
44,014
50,533
45,313
31,433
7,461
14,989
16,707
Total Residential 1-4 Unit - Refinance
258,159
229,458
23,123
59,003
67,240
2,119
19,443
6,445
2,012
583
Total Short Term 1-4 Unit - Purchase
4,131
20,026
3,019
2,011
8,700
3,735
Total Short Term 1-4 Unit - Refinance
7,504
Total Portfolio
901,652
794,584
127,890
219,347
283,553
Gross charge-offs - quarter-ended March 31, 2025
566
241
28
75
119
Gross charge-offs - year-to-date March 31, 2025
18
223,564
210,742
24,253
33,505
40,461
13,046
6,524
4,994
5,758
2,968
236,610
217,266
29,247
39,263
43,429
565,815
207,766
167,568
40,772
76,886
122,295
26,624
19,172
4,305
18,708
30,874
234,390
186,740
45,077
95,594
153,169
714,970
173,252
167,804
8,166
17,740
23,572
9,724
12,384
1,704
5,104
182,976
180,188
9,870
18,397
28,676
420,107
226,187
201,247
16,116
46,487
56,393
46,873
34,974
7,560
15,176
17,856
273,060
236,221
23,676
61,663
74,249
668,869
2,044
17,985
6,033
4,170
584
6,214
18,569
30,816
8,293
2,186
9,042
4,035
8,450
23,713
941,700
820,415
128,625
229,992
303,558
Gross charge-offs - quarter-ended December 31, 2024
111
184
265
139
Gross charge-offs - year-ended December 31, 2024
1,132
1,768
19
Nonaccrual Loans - Loans Held for Investment at Fair Value
The following tables present the aggregate fair value of loans held for investment at fair value that are 90 days or more past due and/or in nonaccrual status, and the difference between the aggregate fair value and the aggregate unpaid principal balance as of March 31, 2025 and December 31, 2024 by loan segments:
Fair Value
Unpaid Principal Balance
Difference
Current–89 Days
90+ Days Past Due
Past Due
or Nonaccrual
587,772
22,078
609,850
541,038
26,117
567,155
(4,039
885,183
35,558
920,741
811,158
42,983
854,141
(7,425
413,102
32,346
445,448
394,026
39,258
433,284
(6,912
1,001,273
129,914
1,131,187
945,912
157,254
1,103,166
(27,340
82,427
5,921
88,348
81,572
7,092
88,664
(1,171
73,331
18,283
91,614
71,722
22,296
94,018
(4,013
3,043,088
244,100
2,845,428
295,000
(50,900
Current–89 days
past due
505,244
15,636
520,880
466,526
18,586
485,112
(2,950
672,504
24,129
696,633
620,332
29,195
649,527
(5,066
381,660
28,352
410,012
366,431
34,457
400,888
(6,105
862,971
103,985
966,956
819,633
126,340
945,973
(22,355
78,863
3,981
82,844
78,207
4,854
83,061
(873
76,277
13,349
89,626
74,620
16,036
90,656
(2,687
2,577,519
189,432
2,425,749
229,468
(40,036
Note 7 — Receivables Due From Servicers
The following tables summarize receivables due from servicers as of March 31, 2025 and December 31, 2024:
Securitized Debt
Warehouse and Repurchase Facilities and Other
Loan principal payments due from servicers
60,222
60,374
Other loan servicing receivables
14,831
6,337
21,168
Loan servicing receivables
75,053
6,489
81,542
Corporate and escrow advances receivable
34,417
4,057
38,474
Total receivables due from servicers
109,470
10,546
61,907
1,695
63,602
17,246
5,404
22,650
79,153
7,099
86,252
33,387
3,855
37,242
112,540
10,954
Note 8 — Real Estate Owned, Net
As of March 31, 2025, the carrying value of real estate owned was $83.4 million, of which $8.9 million were pledged as collateral under a warehouse repurchase agreement. As of December 31, 2024, the carrying value of real estate owned was $68.0 million, of which $10.2 million were pledged as collateral under a warehouse repurchase agreement.
Note 9 — Mortgage Servicing Rights
Mortgage loans serviced are related to the Century business and not included in the Consolidated Balance Sheets. The unpaid principal balance of mortgage loans serviced for others amounted to $798.7 million and $485.9 million as of March 31, 2025 and 2024, respectively. The Company has elected to record its mortgage servicing rights using the fair value measurement method. Fair value adjustments recorded at the end of the current period reflect valuation changes from the prior period-end. Significant assumptions used in determining the fair value of servicing rights as of March 31, 2025, December 31, 2024 and March 31, 2024 include: (1) Weighted average discount rate of 8.0% for all three periods, and (2) Weighted average conditional prepayment rate of 5.2%, 5.1% and 6.0%, respectively.
The following table presents the Company's mortgage servicing rights activity during the three months ended March 31, 2025 and 2024:
Balance at the beginning of period
8,578
Fair value adjustments
Balance at the end of period
9,022
Note 10 — Goodwill
The following table presents the activity for goodwill as of March 31, 2025 and December 31, 2024:
Note 11 — Securitized Debt at Amortized Cost and Securitized Debt at Fair Value
As of March 31, 2025, the Company is the sole beneficial interest holder of twenty-nine Trusts, which are variable interest entities included in the consolidated financial statements. The securitization transactions are accounted for as secured borrowings under U.S. GAAP. The securities are subject to redemption by the Company when the stated principal balance is less than a certain percentage, ranging from 10% to 30% of the original stated principal balance of loans at issuance. As a result, the actual maturity dates of the securities issued could be earlier than their respective stated maturity dates, ranging from July 2028 through February 2055.
The following tables summarize securitized debt at amortized cost and securitized debt at fair value as of March 31, 2025 and December 31, 2024:
Securitized Debt, at Amortized Cost
1,967,928
2,049,790
Deferred issuance costs and discounts
(32,182
(30,734
Total securitized debt, at amortized cost
21
Securitized Debt, at Fair Value
2,461,311
2,219,218
Adjustment at issuance to recognize fair value (1)
(21,647
(18,231
Fair value at issuance
2,439,664
2,200,987
Valuation adjustment subsequent to issuance (2)
20,103
6,421
Total securitized debt at fair value
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of securitized debt at fair value as of March 31, 2025 and December 31, 2024:
(1,544
(11,810
The following table presents the effective interest rate of securitized debt at amortized cost and securitized debt at fair value for the three months ended March 31, 2025 and 2024:
Interest expense
66,582
49,283
Average outstanding unpaid principal balance
4,387,277
3,486,173
Effective interest rate (1)
6.07
5.65
Note 12 — Other Debt
Secured financings and warehouse facilities are utilized to finance the origination and purchase of commercial real estate mortgage loans. Warehouse facilities are designated to fund mortgage loans that are purchased and originated within specified underwriting guidelines. Most of these lines of credit fund less than 100% of the principal balance of the mortgage loans originated and purchased, requiring the use of working capital to fund the remaining portion.
On March 15, 2022, the Company entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. Interest on the 2022 Term Loan is paid every six months. As of March 31, 2025 and December 31, 2024, the balance of the 2022 Term Loan was $215.0 million.
On February 5, 2024, the Company entered into a five-year $75.0 million syndicated corporate debt agreement, the (“the 2024 Term Loan”). The 2024 Term Loan bears interest at 9.875% and matures on February 15, 2029. Interest on the 2024 Term Loan is paid every six months. As of March 31, 2025 and December 31, 2024, the balance of the 2024 Term Loan was $75.0 million.
The total balance of the 2022 Term Loan and the 2024 Term Loan (“Corporate Debt”) in the Consolidated Balance Sheets is net of debt issuance costs and discount of $4.7 million and $5.2 million as of March 31, 2025 and December 31, 2024, respectively. The Corporate Debt is secured by substantially all assets of the Company not otherwise pledged under a securitized debt or warehouse facility and contains certain reporting and financial covenants. Should the Company fail to adhere to those covenants, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2025, the Company was in compliance with all covenants.
On January 4, 2011, Century entered into a Master Participation and Facility Agreement with a bank (“the September 2022 Term Repurchase Agreement”). The Facility Agreement has a current extended maturity date of July 31, 2025, and is a short-term borrowing facility, collateralized by performing loans, with a maximum capacity of $60.0 million, and bears interest at one-month SOFR plus 1.60% with a 0.25% floor.
22
On May 17, 2013, the Company entered into a Repurchase Agreement (“the 2013 Repurchase Agreement”) with a warehouse lender. The 2013 Repurchase Agreement is a modified mark-to-market agreement and has a current maturity date of September 25, 2025, and is a short-term borrowing facility, collateralized by a pool of performing loans, with a maximum capacity of $300.0 million, and bears interest at SOFR plus 3.00%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility.
On January 29, 2021, the Company entered into a non-mark-to-market Repurchase Agreement (“the 2021 Repurchase Agreement”) with a warehouse lender. The 2021 Repurchase Agreement has a current extended maturity date of May 20, 2025, and is a short-term borrowing facility, collateralized by a pool of loans. On July 25, 2024, the Company entered into a mark-to-market Repurchase Agreement (“the 2024 Repurchase Agreement”) with the same warehouse lender. The 2024 Repurchase Agreement also has a maturity date of May 20, 2025, and is a short-term borrowing facility, collateralized by a pool of loans. The maximum capacity under both agreements is $200.0 million individually and in the aggregate. The 2024 Repurchase Agreement includes a $75.0 million sublimit for nonperforming loans. Borrowings under these two facilities bear interest at SOFR plus a margin of 3.00% during the availability period and 4.00% during the amortization period. All borrower payments on loans financed under the warehouse repurchase facilities are first used to pay interest on the facilities.
On April 16, 2021, the Company entered into a non-mark-to-market Term Repurchase Agreement (“the 2021 Term Repurchase Agreement”) with a warehouse lender. The 2021 Term Repurchase Agreement has a maturity date of April 16, 2026, with an extended borrowing period through June 13, 2025. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at SOFR plus a margin of 3.10%. The maximum capacity under this facility is $100.0 million.
On December 27, 2023, the Company entered into a loan facility agreement (“the 2023 Repurchase Agreement”) with a bank. The 2023 Repurchase Agreement has a maturity date of December 27, 2026. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at SOFR plus 3.00%. The maximum loan amount under this facility is $75.0 million. During the quarter ended March 31, 2025, the bank temporarily increased the maximum loan amount to $100.0 million.
On November 7, 2024, the Company entered into a non-mark-to-market secured revolving loan facility agreement (“the 2024 Bank Credit Agreement”) with a bank. The 2024 Bank Credit Agreement has a current maturity date of May 7, 2027. The eligible mortgage loan advance rate for performing loans is 82.5%, and the eligible past due loan and REO property advance rate is 55.0%. Each loan advance bears interest at SOFR plus 3.50%, with a floor of 2.00%. The maximum loan amount under this facility is $50.0 million.
Certain loans are pledged as collateral under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2025 and December 31, 2024, the Company was in compliance with all covenants.
The following table summarizes the maximum borrowing capacity, current gross balances outstanding, and effective interest rates of the Company’s warehouse facilities and loan agreements as of March 31, 2025 and December 31, 2024:
Contract Date
Maturity Date
Period EndBalance (1)
MaximumBorrowingCapacity
Effective Interest Rate
The September 2022 term repurchase agreement
01/04/11
07/31/25
60,000
6.1
6.5
05/17/13
09/25/25
195,523
300,000
7.7
106,675
9.0
1/29/20217/25/2024
05/20/25
179,585
200,000
7.8
126,815
04/16/21
04/16/26
71,756
100,000
7.6
52,408
8.5
12/27/23
12/27/26
76,800
8.3
44,900
75,000
9.7
11/07/24
05/07/27
43,284
50,000
8.9
19,248
9.2
571,834
810,000
350,046
785,000
The following table provides an overview of the activity and effective interest rates of the Company’s warehouse facilities and loan agreements for the three months ended March 31, 2025 and 2024:
Average outstanding balance
433,790
267,559
Highest outstanding balance at any month-end
361,677
7.84
9.56
The following table provides a summary of interest expense that includes interest, amortization of discount, and deal cost amortization of the Company’s warehouse facilities and loan agreements for the three months ended March 31, 2025 and 2024:
Warehouse and repurchase facilities
8,505
6,392
66,583
Total interest expense
81,230
61,055
Note 13 — Commitments and Contingencies
When the Company sells loans, it is required to make normal and customary representations and warranties about the loans to the purchaser. The loan sale agreements generally require the Company to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In addition, the Company may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a loan shortly after its sale.
The Company records a repurchase liability relating to representations and warranties and early payment defaults. The method used to estimate the liability for repurchase is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults. The Company establishes a liability at the time loans are sold and continually updates the estimated repurchase liability. The level of the repurchase liability for representations and warranties and early payment default requires considerable management judgment.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase, actual loss experience, estimated future loss exposure and other relevant factors including economic conditions. As of March 31, 2025 and December 31, 2024, the balance of repurchase liability was $144 thousand, and is included in “Accounts payable and accrued expenses” on the Consolidated Balance Sheets.
The Company is a party to various legal proceedings in the normal course of business. The Company, after consultation with legal counsel, believes the disposition of all pending litigation will not have a material effect on the Company’s consolidated financial condition or results of operations as of March 31, 2025.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company, with the guidance from a third-party specialist, determined it was eligible for a refundable employee retention credit (“ERC”) subject to certain criteria.
The Company applied for ERC for the first three quarters’ wages paid in calendar year 2021. During the second quarter of 2023, the Company received approximately $4.2 million of ERC. Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain analogizing to ASC 450-30, Gain Contingencies. Accordingly, the $4.2 million ERC, net of the third-party specialist fees of $0.6 million, are deferred until the uncertainty surrounding them is resolved. The net amount is included in “Accounts payable and accrued expenses” on the Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 .
24
Note 14 — Stock-Based Compensation
The Company’s Amended and Restated 2020 Omnibus Incentive Plan, or “the 2020 Plan,” authorizes grants of stock‑based compensation instruments including but not limited to non-qualified stock options, restricted stock awards (“RSAs”) and performance stock unit awards (“PSUs”) to certain employees and non-employee directors of the Company, to purchase or issue up to 2,770,000 shares of the Company's common stock.
Expenses related to the stock-based compensation instruments and Employee Stock Purchase Plan (“ESPP”) are included in “Compensation and employee benefits” and “Other operating expenses” on the Consolidated Statements of Income.
Below are summaries of the recognized and unrecognized stock-based compensation expense by instrument for the periods indicated:
Recognized compensation expense:
Options
129
RSAs
747
577
PSUs
907
547
ESPP
187
245
Total recognized compensation expense
Unrecognized compensation expense:
1,234
5,836
4,617
6,058
4,801
189
210
Total unrecognized compensation expense
13,317
9,649
Weighted average period expected to be recognized (in years)
2.4
2.5
2.3
Stock Options
Stock option awards provide for the option to purchase the Company's common stock. From the date of the grant, the stock options generally vest ratably over a service period of three years and are exercisable for a period up to ten years.
The Company uses the Black-Scholes option pricing model to value stock options in determining the stock-based compensation expense. Compensation expense is recognized over the three-year vesting period using the straight-line method. Forfeitures are recognized as they occur. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The expected dividend yield is zero as the Company does not expect to pay dividends in the foreseeable future. Expected volatility is based on historical volatilities of the Company’s common stock.
25
The table below summarizes stock option activity for the three months ended March 31, 2025 and 2024:
($ in thousands, except per share amounts)
Number of shares:
Options outstanding at beginning of period
1,065,772
752,964
Granted
100
Options outstanding at end of period
753,064
Options exercisable at end of period
749,344
747,500
Options expected to vest (1)
316,428
5,564
Weighted average exercise price per share:
14.46
12.88
15.86
12.89
18.19
Aggregate Intrinsic value (2):
4,538
3,857
4,365
3,822
173
35
Weighted average remaining contractual life (in years):
6.2
5.8
4.8
9.4
9.5
The fair value of RSAs is determined based on the fair market value of the Company's common shares on the grant date. The estimated fair value of RSA awards is amortized as an expense over the three-year requisite service period. The Company has elected to recognize forfeitures as they occur rather than estimating service-based forfeitures over the requisite service period.
The table below summarizes RSA activity for the three months ended March 31, 2025 and 2024:
Employee
Non-Employee Director
Unvested at beginning of period
355,505
47,430
402,935
409,137
61,276
470,413
180,003
Vested
(163,779
(248,796
Unvested at end of period
371,729
419,159
350,020
411,296
Weighted average grant date fair value per share:
13.52
12.03
13.34
9.39
9.31
9.38
18.82
12.92
8.61
16.35
13.45
12.83
26
In February 2022, the Company began granting PSUs to certain employees, including named executive officers under the 2020 Plan. PSUs are linked to the average core net income annual growth over the three-year period from the year of grant. Settlement of vested PSUs will be made on the date that the Compensation Committee certifies the average core net income annual growth for the three-year period. PSUs are subject to forfeiture until predetermined performance conditions have been achieved. The number of shares issued at the end of any performance period could range between 0% and 200% of the original target award amount. Compensation expense related to PSUs is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using an estimate of the probability of achieving the performance target. Adjustments to compensation expense are made each year based on changes in estimate of the number of PSUs that are probable of vesting.
The table below summarizes PSU activity for the three months ended March 31, 2025 and 2024:
Number of Shares
Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of period, unvested
517,131
256,387
(1)
11.05
155,165
157,994
Performance adjustment
153,637
10.00
(205,500
12.63
Outstanding at end of period, unvested
620,433
13.69
414,381
In July 2022, the Company initiated an ESPP which allows permitted eligible employees to purchase shares of the Company's common stock through payroll deductions of up to 15% of their eligible compensation, subject to certain limitations. The purchase price of the shares under the ESPP equals 85% of the lower of the fair market value of the Company's common stock on either the first or last day of each offering period. Compensation expense for the ESPP is calculated as of the beginning of the offering period as the fair value of the employees’ purchase rights utilizing the Black-Scholes option valuation model and is recognized as a compensation expense over the offering period.
Treasury Stock
Treasury stock represents shares surrendered to the Company to satisfy tax withholding obligations in connection with the vesting or exercise of stock-based awards. During the quarters ended March 31, 2025 and 2024, shares withheld were 115,596 and 79,258, at an average price of $18.70 and $16.20 per share, respectively.
Note 15 — Earnings Per Share
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that shared in earnings.
27
The following table presents the basic and diluted earnings per share calculations for the three months ended March 31, 2025 and 2024:
(In thousands, except per share data)
Basic EPS:
Net income attributable to common shareholders
Less: undistributed earnings attributable to unvested restricted stock awards
Net earnings attributable to common shareholders
Basic earnings per common share
Diluted EPS:
Net income attributable to common stockholders
Add dilutive effects for warrants
2,434
2,344
Add dilutive effects for stock options
237
Add dilutive effects of unvested restricted stock awards
128
151
Add dilutive effects of unvested performance-based stock units
322
246
Add dilutive effects of employee stock purchase plan
Weighted average diluted common shares outstanding
Diluted earnings per common share
The following table sets forth the number of shares excluded from the computation of diluted earnings per share, as their inclusion would have been anti-dilutive:
2025(1)
Stock options
313
108
Unvested restricted stock awards
180
190
Share equivalents excluded from EPS
493
298
Note 16 — Warrants and Related Party Transactions
On April 7, 2020, the Company issued and sold in a private placement 45,000 newly issued shares of Series A Convertible Preferred Stock, par value $0.01 per share (the “Preferred”), at a price per share of $1,000, plus warrants (the “Warrants”) to purchase an aggregate of 3,013,125 shares of the Company’s common stock to funds affiliated with TruArc Partners (“TruArc”), formerly Snow Phipps, and a fund affiliated with Pacific Investment Management Company LLC (“TOBI”). TruArc and TOBI are considered affiliates and, therefore, are related parties to the Company. The awards were treated as equity awards at the date of issuance.
On October 8, 2021, the Company exercised its option to convert all of its 45,000 outstanding shares of Series A Convertible Preferred Stock into 11,688,310 shares of its common stock.
The Warrants are exercisable at the warrant holder’s option at any time and from time to time, in whole or in part, until the extended date of May 7, 2025 at an exercise price of $2.96 per share of common stock, with respect to 2,008,749 of the Warrants, and at an exercise price of $4.94 per share of common stock, with respect to 1,004,375 of the Warrants. The exercise price and the number of shares of common stock issuable upon exercise of the Warrants are subject to customary anti-dilution adjustments and certain issuances of common stock (or securities convertible into or exercisable for common stock) at a price (or having a conversion or exercise price) that is less than the then current exercise price. The Company is not required to effect an exercise of the Warrants, if after giving effect to the issuance of common stock upon exercise of such Warrants, such warrant holder together with its affiliates would beneficially own 49% or more of the Company’s outstanding common stock. The Company’s related parties have not exercised any warrants as of March 31, 2025. See Note 21 – Subsequent Events.
In the ordinary course of business, the Company sells held for sale loans, and issues securitized debt to various financial institutions and investors through a market bidding process. As a result of this process, the Company may sell held for sale loans and/or issue securitized debt to an affiliate. No loans were sold nor securitized debt issued to any affiliate for the three months ended March 31, 2025 and 2024.
Note 17 — Derivative Instruments
In September 2023, the Company began utilizing derivative instruments designated as cash flow hedges to manage the exposure to interest rate volatility related to its forecasted issuances of fixed-rate debt through its securitization process. The derivative instruments include forward starting interest rate swaps or interest rate payer and receiver swaptions. The Company’s risk management objective is to hedge the risk of variability in its interest payment cash flows attributable to changes in the benchmark SOFR between the time the fixed rate mortgages are originated and the fixed rate debt is issued. As of March 31, 2025, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed four years.
The gains or losses on the derivative instruments that are designated and qualify as cash flow hedges are reported as a component of AOCI. Beginning in the period in which the forecasted debt is issued and the related derivative instruments are terminated, the accumulated gains or losses associated with the terminated derivatives are then reclassified into interest expense as a yield adjustment over the term of the related debt. For the quarters ended March 31, 2025 and 2024, $62 thousand and $113 thousand, respectively, of after-tax net losses on terminated derivative instruments were reclassified from AOCI to interest expense. As of March 31, 2025 and 2024, the Company had $1.8 million in after-tax net unrealized loss and $0.8 million in after-tax net unrealized gain, respectively, associated with cash flow hedging instruments recorded in AOCI. As of March 31, 2025, the Company expects to reclassify an estimated $0.3 million of after-tax net unrealized loss on derivative instruments designated as cash flow hedges from AOCI into earnings over the next 12 months.
The following table presents the fair value of the Company’s derivative financial instruments on a gross basis, as well as its classification on the Company’s Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024:
Derivatives designated as hedging instruments:
Balance Sheet Location
Notional Amount
Fair Value (1)
Cash flow hedges:
Interest rate payer and receiver swaptions
341,000
Forward starting payer interest rate swaps
The counterparty to the financial derivatives that the Company enters into is a major institution. The Company is exposed to credit-related losses in the event of non-performance by the counterparty. This credit risk is generally limited to the unrealized gains in such contracts, less collateral held, should the counterparty fail to perform as contracted.
Note 18 — Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in the components of accumulated other comprehensive income (loss) balances for the three months ended March 31, 2025 and 2024:
Net unrealized gain (loss) on cash flow hedges arising during the period, net of tax
29
The following table presents the components of other comprehensive income (loss) and the related tax effect for the three months ended March 31, 2025 and 2024:
Before-Tax
Tax Effect
Net-of-Tax
Interest rate swaps/swaptions:
Net unrealized gain (loss) arising during the period
(1,488
432
2,627
(736
(26
(42
Other comprehensive income (loss)
(1,400
406
2,782
(778
Note 19 — Fair Value Measurements
Fair Value Determination
ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.
Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.
Cash and Cash Equivalents and Restricted Cash
Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.
Loans Held for Investment, at Amortized Cost and Loans Held for Investment, at Fair Value
The Company uses a third-party loan valuation specialist to estimate the fair value of its nonperforming mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s nonperforming mortgage loans are interest rates, market yield requirements, the probability of default, loss given default, voluntary prepayment speed and loss timing. The Company uses a third-party loan valuation model to estimate the fair value of its performing mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s performing mortgage loans are discount rate, constant prepayment rate, constant default rate, and loss severity rate. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.
Collateral Dependent or Loans Individually Evaluated
Nonaccrual loans held for investment are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. To the extent such a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.
Loans Held for Sale, at Fair Value
The Company elected to account for certain loans originated with the intent to sell at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans held for sale are measured based a discounted cash flow model, or on the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value, including the value attributable to mortgage servicing and credit risk, and current commitments to purchase loans, a Level 2 measurement. Management identified all loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.
Real Estate Owned, Net (“REO”)
Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell at acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.
Mortgage Servicing Rights
The Company determined the fair values based on a third-party valuation specialist using a model that calculates the present value of estimated future net servicing income, a Level 3 measurement.
Derivative Instruments
Derivative financial instruments are measured at fair value using readily observable market inputs and the overall fair value measurement is classified as Level 2.
Secured Financing, Net (“Corporate Debt”)
The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.
Warehouse Repurchase Facilities, Net
Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.
Securitized Debt, at Amortized Cost and Securitized Debt, at Fair Value
The Company obtains the fair value estimates at instrument level from a third-party broker dealer based on trader input on benchmark securities. The fair values take into consideration input factors such as bond structure and collateral characteristics, and performance and pricing factors such as yield, spread, average life, prepayment speeds, default rate, and severity. The fair values are considered a Level 2 measurement. Significant changes in any of the input factors in isolation could result in a significant change to securitized debt’s fair value measurement.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.
The Company does not have any off-balance sheet financial instruments.
Receivables Due From Servicers
The carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.
Fair Value Disclosures
The following tables present information on assets and liabilities measured and recorded at fair value as of March 31, 2025 and December 31, 2024, by level, in the fair value hierarchy:
Fair Value Measurements Using
Total at
Level 1
Level 2
Level 3
Assets:
Nonrecurring fair value measurements:
Individually evaluated loans requiring specific allowance, net
10,938
Total nonrecurring fair value measurements
94,382
Recurring fair value measurements:
Mortgage servicing rights
Total recurring fair value measurements
3,299,819
3,304,827
3,394,201
3,399,209
Liabilities:
2,460,771
11,884
79,884
2,780,663
2,860,547
The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2025 and 2024:
Gain (Loss) on Assets Measured on a Nonrecurring Basis
(2,073
(1,722
(400
(457
Total net loss
(2,473
(2,179
The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets that are recorded on a recurring and nonrecurring basis as of March 31, 2025 and December 31, 2024:
Asset Category
PrimaryValuationTechnique
UnobservableInput
Range
WeightedAverage (1)
Nonrecurring:
Market comparables
Selling costs
8.0%
Recurring:
Discounted cash flow
Discount rate
Prepayment rate
0.0% to 50.0%
8.6%
Default rate
0.1% to 2.2%
0.7%
Loss severity rate
0.0% to 11.7%
2.9%
2.2% to 11.9%
5.2%
8.4%
0.0% to 30.0%
9.0%
0.1% to 2.8%
1.0%
0% to 10.5%
2.2% to 11.7%
5.1%
The following is a roll-forward of loans held for investment that are measured at estimated fair value on a recurring basis for the periods indicated:
1,306,072
Originations
635,537
378,671
Loans liquidated
(132,710
(61,753
Acquisition
11,591
REO transfer
(6,529
(925
Principal paydowns
(10,775
(6,069
Total unrealized gain included in net income
34,714
19,472
Loans transferred from held for sale
1,649,540
The following is a roll-forward of loans held for sale that are measured at estimated fair value on a recurring basis for the periods indicated:
17,590
(14,533
(29
Total unrealized gain (loss) included in net income
(547
Loans transferred to held for investment
(2,481
The following is a roll-forward of securitized debt measured and recorded at estimated fair value on a recurring basis for the periods indicated:
877,417
Additions
374,360
Paydowns and payoffs
(135,683
(35,260
Total unrealized loss included in net income
1,073,843
The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value using a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of March 31, 2025 and December 31, 2024, financial assets and liabilities measured at fair value include loans held for investment at fair value, loans held for sale at fair value, mortgage servicing rights, derivative instruments, and securitized debt at fair value. Financial assets measured at the lower of cost or estimated fair value include certain individually evaluated loans held for investment and REO, which are measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $10.9 million and $11.9 million as of March 31, 2025 and December 31, 2024, respectively, net of specific allowance for credit losses of approximately $1.4 million and $1.0 million, respectively.
A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.
34
The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
Carrying
Estimated
Value
Cash
2,242,198
289,075
1,775,083
Accrued interest payable
27,929
2,321,141
Accrued interest receivable
287,970
Warehouse repurchase facilities, net
1,820,945
28,028
Note 20 — Segment Information
The Company operates as a single reportable segment, conducting its business activities within the United States. The Company's chief operating decision maker (“CODM”) is its Chief Executive Officer, who reviews financial information presented on a consolidated basis.
The CODM regularly reviews net income as presented on the Company’s Consolidated Statements of Income for purposes of assessing performance and making decisions about resource allocation. Items regularly reviewed by the CODM include those line items reported on the Company’s Consolidated Statements of Income, the most significant of which include net interest income, unrealized gain (loss) on fair value loans, unrealized gain (loss) on fair value securitized debt, origination fee income, and compensation and benefits. See Consolidated Statements of Income.
Note 21 — Subsequent Events
On April 2, 2025, three funds affiliated with a related party of the Company completed the exercise of their Warrants to purchase an aggregate 1,339,166 shares of the Company's common stock, resulting in the Company issuing net shares of 1,080,338 common stock after the withholding and transfer of an aggregate of 258,828 shares of common stock into the Company’s treasury account.
The Company has evaluated events that have occurred subsequent to March 31, 2025 through the issuance of the accompanying consolidated financial statements and has concluded there are no other subsequent events that would require recognition or disclosure in the accompanying consolidated financial statements.
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2024, as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”).
In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of federal securities laws. In particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond are forward-looking statements. For important information regarding these forward-looking statements, please see the discussion below under the caption “Forward-Looking Statements.”
References to “the Company,” “Velocity,” “we,” “us” and “our” refer to Velocity Financial, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.
Business
We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 21 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.
We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating attractive risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.
Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee, and based on all loans in our portfolio as of March 31, 2025, has an average balance of approximately $393.0 thousand. As of March 31, 2025, our loan portfolio totaled $5.4 billion of UPB on properties in 47 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 66.1%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 51.4% of the UPB. For the three months ended March 31, 2025, the annualized yield on our total portfolio was 9.11%.
We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, corporate debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed 38 securitized debt transactions, resulting in a total of over $8.3 billion in gross debt proceeds from May 2011 through March 2025. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.
One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on loans and interest expense paid on portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of warehouse facilities and securitized debt and excludes corporate debt. For both the three months ended March 31, 2025 and 2024, our annualized portfolio related net interest margin was 3.35%. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for credit losses and operating expenses. For the three months ended March 31, 2025 and 2024, including net income attributable to noncontrolling interest, we generated pre-tax income of $26.9 million and $23.2 million, and net income of $18.6 million and $17.3 million, respectively.
On December 28, 2021, the Company acquired an 80% ownership interest in Century Health & Housing Capital, LLC (“Century”). Century is a licensed Ginnie Mae issuer/servicer that provides government-insured Federal Housing Administration (“FHA”) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century earns origination fees and servicing fees from the mortgage servicing rights on its servicing portfolio.
Items Affecting Comparability of Results
Due to a number of factors, our historical financial results may not be comparable, either from period to period, or to our financial results in future periods. We have summarized the key factors affecting the comparability of our financial results below.
Recent Developments
In March 2025, we collapsed the 2023-1R Trust and redeemed the remaining outstanding balance of securitized debt.
Continued Market Uncertainties
Our operational and financial performance will depend on certain market developments, including the impact of tariffs, the actions of the Federal Reserve, the Russia/Ukraine war, the ongoing conflicts in the Middle East, a possible global recession, heightened stress in the real estate and corporate debt markets, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.
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 the decisions and assessments used to prepare our financial statements are based upon reasonable assumptions given the information available at that time.
These policies and estimates relate to the allowance for credit losses and fair value option accounting. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC.
How We Assess Our Business Performance
Net income is the primary metric by which we assess our business performance. Accordingly, we closely monitor the primary drivers of net income which consist of the following:
Net Interest Income
Net interest income is the largest contributor to our net income and is monitored both on an absolute basis and relative to provision for credit 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 securitized debt. 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 provision for credit 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, and securitization expenses, among other items. We monitor and strive to prudently manage operating expenses and to balance current period profitability with investment in the continued development of our platform. Because volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume along with all key terms of new loan originations, such as interest rates, loan-to-value ratios, estimated credit losses and expected duration.
Factors Affecting Our Results of Operations
Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by various 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, operating costs, the availability of funding sources and the underlying performance of the collateral supporting our loans. While we have been successful at managing these elements in the past, there are certain circumstances beyond our control, including the ongoing Russia/Ukraine war and conflicts in the Middle East, an expected recession, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.
Competition
The investor real estate loan market is highly competitive which could affect our profitability and growth. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services.
Availability and Cost of Funding
Our primary funding sources have historically included cash from operations, warehouse facilities, term securitized debt, corporate debt, and equity. We believe we have an established brand in the term securitized debt 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 securitized debt 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 securitized debt.
All our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate (“SOFR”).
Loan Performance
We underwrite and structure our loans to minimize potential losses. We believe our fully amortizing loan structures and avoidance of large balloon payments, coupled with meaningful borrower equity in properties, limit the probability of losses and that our proven in-house asset management capability allows us to minimize potential losses in situations where there is insufficient equity in the property. Our income is highly dependent upon borrowers making their payments and resolving delinquent loans as favorably as possible. Macroeconomic conditions can, however, impact credit trends in our core market and adversely affect 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.
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Portfolio and Asset Quality
Key Portfolio Statistics
March 31, 2024
Total loans
5,449,901
4,281,533
Loan count
13,858
12,932
11,013
Average loan balance
393
391
389
Weighted average loan-to-value
66.1
66.6
67.6
Weighted average coupon
9.6
9.1
Nonperforming loans (UPB) (A)
587,811
539,438
432,560
Nonperforming loans (% of total) (A)
10.8
10.7
10.1
(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $36.7 million, $40.1 million, and $45.1million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of March 31, 2025, December 31, 2024, and March 31, 2024, respectively.
Total Loans. Total loans reflects the aggregate UPB at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for credit losses.
Loan Count. Loan count reflects the number of loans at the end of the period. It includes all loans with an outstanding principal balance.
Average Loan Balance. Average loan balance reflects the average UPB at the end of the period (i.e., total loans divided by loan count).
Weighted Average Loan-to-Value. Loan-to-value, or LTV, reflects the ratio of the original loan amount to the appraised value of the underlying property at the time of origination. In instances where the LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at the time of acquisition. Weighted average LTV is calculated for the population of loans outstanding at the end of each specified period using the original loan amounts and appraised LTVs at the time of origination of each loan. LTV is a key statistic because requiring the borrower to invest more equity in the collateral minimizes our exposure for future credit losses.
Weighted Average Coupon. Weighted average coupon reflects the weighted average loan rate at the end of the period.
Nonperforming Loans. Loans that are 90 or more days past due, in bankruptcy, in foreclosure, or not accruing interest, are considered nonperforming loans. The dollar amount of nonperforming loans presented in the table above reflects the UPB of all loans that meet this definition.
Originations and Acquisitions
The following table presents new loan originations and acquisitions and includes average loan size, weighted average coupon and weighted average loan-to-value for the periods indicated:
Loan Count
Loan Balance
AverageLoan Size
WeightedAverageCoupon
WeightedAverageLTV
Three Months Ended March 31, 2025:
Loan originations — held for investment
1,513
420
10.51
62.6
Loan originations — held for sale
5.70
19.9
Total loan originations
1,514
640,423
423
10.47
62.3
Three Months Ended December 31, 2024:
1,285
558,876
435
10.78
62.9
4,607
4.99
57.9
1,286
563,483
438
10.73
Three Months Ended March 31, 2024:
958
395
11.06
63.8
Loan acquisitions — held for investment
12,270
396
11.48
59.2
Total loans originated and acquired
989
390,941
11.07
63.7
During the first quarter of 2025, loan originations increased $76.9 million and $261.8 million from the quarters ended December 31, 2024 and March 31, 2024, respectively.
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Loans Held for Investment
Our total portfolio of loans held for investment consists of both loans held for investment carried at amortized cost and loans held for investment at fair value, which are presented in the Consolidated Balance Sheets as “Loans held for investment, at amortized cost” and “Loans held for investment, at fair value,” respectively. The following tables show the various components of loans held for investment as of the dates indicated:
Total loans held for investment, gross
Loans held for investment, net
The following table illustrates the contractual maturities of our loans held for investment in aggregate UPB and as a percentage of total held for investment loan portfolio as of the dates indicated:
Loans due in less than one year
162,661
3.0
157,521
3.1
Loans due in one to five years
85,600
1.6
83,993
1.7
Loans due in more than five years
5,196,754
95.4
4,814,423
95.2
100.0
Charge-offs, Gain (Loss) on REO
Our actual charge-offs have been minimal as a percentage of nonperforming loans held for investment. The valuation impact to our earnings from loans becoming REO or in REO is a combination of: (1) loan charge-offs, (2) gain on transfer to REO included in “Gain on disposition of loans” in the Consolidated Statements of Income, (3) net valuation adjustments on REO, and (4) net gain or loss on sale of REO.
The table below shows our actual charge-offs, gain on transfer of nonperforming loans to REO, net valuation adjustments on REO, and gain on sale of REO, for the periods indicated:
Three Months Ended
Average nonperforming loans for the period (1)
297,380
314,511
321,442
504
Charge-offs / Average nonperforming loans for the period (1)
1.38
(2)
0.89
0.63
Gain on REO:
Gain on transfer to REO
2,382
1,160
REO valuation gain (loss), net
(2,217
286
Gain (loss) on sale of REO
300
3,411
Total gain (loss) on REO
1,061
3,576
(276
Allowance for Credit Losses
For the March 31, 2025 current expected credit loss (“CECL”) estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflected the uncertainties of a volatile market in light of the announced tariffs and federal government layoffs, contributing to a forecasted decreasing GDP and rising unemployment.
For the December 31, 2024 CECL estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflected the uncertainties of a decreasing forecasted GDP, unstable labor market, and geopolitical risk.
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Our allowance for credit losses as of March 31, 2025 was $5.0 million compared to $5.3 million as of March 31, 2024. The decrease in allowance for credit losses from March 31, 2024 was primarily due to a decrease in the baseline allowance component of the reserve. Our overall expected credit loss reserves range from 0.15% to 0.20% of loans held for investment, excluding FVO loans. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and our ability to forecast as economic events evolve.
To estimate the allowance for credit losses in our portfolio of loans held for investment carried at amortized cost, we follow a detailed internal review process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.
The following table illustrates the activity in our allowance for credit losses of loans held for investment, excluding loans held for investment, at fair value over the periods indicated:
4,851
(699
Total UPB(1)
2,705,612
Nonperforming loans UPB
292,811
309,970
324,106
Nonperforming loans UPB / Total UPB(1)
12.7
12.9
11.98
Allowance for credit losses / Total UPB(1)
0.22
0.17
0.19
Charge-offs / Total UPB(1)
0.18
0.12
0.07
The allowance for credit losses was 0.22% of total UPB of loans held for investment carried at amortized cost as of March 31, 2025. Although slightly higher than our expected range of 0.15% to 0.20%, the 0.22% reserve is reasonable given the current market uncertainty. Nonperforming loans were 12.71% of total UPB of loans held for investment carried at amortized cost as of March 31, 2025. We believe the allowance for credit losses is adequate because 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. Historically, our actual annual charge-offs rate is 0.06% over the last seven years.
Credit Quality – Loans Held for Investment
The following table provides delinquency information on our loans held for investment by UPB as of the dates indicated:
March 31, 2025 (A)
COVID-19Forbearance
December 31, 2024 (A)
March 31, 2024 (A)
Performing/Accruing:
4,504,854
82.7
88,462
4,169,830
82.5
82,459
3,517,715
82.2
94,404
30-59 days past due
239,547
4.4
9,186
241,300
4.7
19,452
239,493
5.6
21,886
60-89 days past due
112,803
2.1
1,800
105,369
858
91,765
3,787
Total Performing Loans
4,857,204
89.2
4,516,499
89.3
3,848,973
89.9
120,077
Nonperforming/Nonaccrual:
<90 days past due
33,488
0.6
3,189
23,697
0.5
2,787
20,473
909
90+ days past due
46,545
0.9
205
51,144
1.0
2,237
27,919
0.7
1,587
Bankruptcy
76,606
1.4
3,688
60,042
1.2
3,895
45,471
1.1
4,046
In foreclosure
431,172
7.9
29,612
404,555
8.0
31,139
338,697
38,522
Total nonperforming loans
45,064
165,141
Loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $587.8 million, or 10.8% of our held for investment loan portfolio as of March 31, 2025, compared to $539.4 million, or 10.7% as of December 31, 2024, and $432.6 million, or 10.1% as of March 31, 2024. The increase in total nonperforming loans as of March 31, 2025 compared to December 31, 2024 and March 31, 2024 was due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.
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Resolutions of Nonperforming Assets
Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $76.4 million of long-term and short-term nonperforming assets for the quarter ended March 31, 2025, which was lower compared to $79.4 million for the quarter ended December 31, 2024, and higher compared to $54.5 million for the quarter ended March 31, 2024. From these resolution activities, we realized net gains of $1.9 million, $5.6 million, and $1.3 million for the quarters ended March 31, 2025, December 31, 2024, and March 31, 2024, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual principal and interest due on loans.
The table below includes resolutions of our long-term nonperforming loans and REOs for the periods indicated:
Long-Term Nonperforming Assets
Gain /(Loss)
Resolved — loans paid in full
20,589
32,078
1,810
16,563
798
Resolved — loans paid current
30,563
375
19,830
27,494
164
Resolved — REO sold
4,541
337
4,822
3,243
3,888
224
Total resolutions
55,693
56,730
5,235
47,945
1,186
Recovery rate on resolved nonperforming assets
103.1
109.2
102.5
Short-term loans, or loans with a maturity of two-year or less, do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans. The table below includes resolutions of our short-term nonperforming loans and REOs, and loans granted a COVID-19 forbearance in 2020, for the periods indicated:
Short-Term and Forbearance Nonperforming Assets
5,341
9,858
171
2,496
11,845
7,536
2,927
3,558
(37
5,233
168
1,161
20,744
159
22,627
340
6,584
100.8
101.5
101.3
Real Estate Owned, net (“REO”)
REO includes real estate we acquire through foreclosure or by deed-in-lieu of foreclosure. REO assets are initially recorded at fair value, less estimated costs to sell on the date of foreclosure. Adjustments that reduce the carrying value of the loan to the fair value of the real estate at the time of foreclosure are recognized as charge-offs in the allowance for credit losses. Positive adjustments at the time of foreclosure are recognized in other operating income. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments, included in “Real estate owned, net” in the Consolidated Statements of Income.
As of March 31, 2025, our REO included 157 properties with a lower of cost or estimated fair value of $83.4 million compared to 129 properties with a lower of cost or estimated fair value of $68.0 million as of December 31, 2024, and 76 properties with a lower of cost or estimated fair value of $46.3 million as of March 31, 2024.
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Concentrations – Loans Held for Investment
As of March 31, 2025, our held for investment loan portfolio was concentrated in Investor 1-4 loans, representing 51.4% of the UPB. Mixed use properties represented 11.1% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.2% in California, 15.3% in New York, 12.8% in Florida, 7.4% in New Jersey, and 5.6% in Texas.
Property Type
% of Total UPB
Investor 1-4
8,600
2,799,451
51.4
Mixed use
1,425
605,722
11.1
Retail
522,400
Office
975
421,389
Multifamily
682
397,842
7.3
Warehouse
605
367,289
6.8
Other (1)
532
330,922
13,857
Geography (State)
California
1,673
1,154,551
21.2
New York
1,572
834,106
15.3
Florida
1,713
697,072
12.8
New Jersey
1,085
401,524
7.4
Texas
847
305,671
6,967
2,052,091
37.7
Key Performance Metrics
March 31, 2025 (1)
December 31, 2024 (1)
March 31, 2024 (1)
Average loans
5,214,186
4,858,939
4,159,412
Portfolio yield
9.11
9.34
8.71
Average debt — portfolio related
4,821,067
4,459,108
3,753,732
Average debt — total company
5,111,067
4,749,108
4,015,283
Cost of funds — portfolio related
6.23
6.14
5.93
Cost of funds — total company
6.36
6.29
6.08
Net interest margin — portfolio related
3.35
3.70
Net interest margin — total company
2.88
3.20
2.83
Charge-offs/Average loans held for investment at amortized cost
0.11
Pre-tax return on average equity
20.11
25.69
20.77
Return on average equity
13.94
16.68
15.49
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 for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024 was primarily driven by the increase in weighted average loan coupons. Our portfolio yield for the three months ended March 31, 2025 decreased as compared to the three months ended December 31, 2024, primarily due to less default interest and cash interest received on nonperforming loans.
Average Debt — Portfolio Related and Total Company
Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse facilities and securitized debt. Total company debt consists of portfolio-related debt and corporate debt. The measures presented here reflect the monthly average of all portfolio-related and total company debt, as measured by outstanding principal balance, over the specified time period.
Cost of Funds — Portfolio Related and Total Company
Portfolio related cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt as a percentage of average portfolio-related debt outstanding over the given period. Total company cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt and corporate debt outstanding over the given period. Interest expense includes the amortization of expenses incurred in connection with our portfolio related financing activities and corporate debt. Through the issuance of long-term securitized debt, we have been able to fix a significant portion of our borrowing costs over time. The strong credit performance on our securitized debt has allowed us to issue debt at attractive rates.
Our portfolio related cost of funds increased to 6.23% for the three months ended March 31, 2025 from 6.14% for the prior quarter and increased from 5.93% for the three months ended March 31, 2024. The increase was primarily due to higher securitized debt interest expense.
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 in the table below, portfolio related net interest margin remained consistent at 3.35% for the three months ended March 31, 2025 and 2024, but decreased from 3.70% for the three months ended December 31, 2024 primarily due to less cash interest received on nonperforming loans during the three months ended March 31, 2025 and higher securitized debt interest expense.
Total company net interest margin of 2.88% for the three months ended March 31, 2025 increased from 2.83% for the three months ended March 31, 2024. The increase in total company net interest margin was primarily due to a higher increase in the average yield on our loan portfolio than the increase in our average cost of funds. Total company net interest margin for the three months ended March 31, 2025 decreased from 3.20% for the three months ended December 31, 2024 primarily due to less cash interest received on nonperforming loans during the three months ended March 31, 2025 and higher securitized debt interest expense.
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The following table shows 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:
Interest
Average
Income /
Yield /
Balance
Expense
Rate (1)
Loan portfolio:
Loans held for sale
998
3,145
9,662
Loans held for investment
5,213,188
4,855,794
4,149,750
113,484
Debt:
Warehouse facilities
341,596
7,178
8.41
4,117,512
61,306
5.96
Total debt - portfolio related
68,484
Corporate debt
290,000
8.47
6,143
261,552
8.23
Total debt
74,627
4,015,284
Net interest spread - portfolio related (2)
2.77
Net interest margin - portfolio related
Net interest spread - total company (3)
2.75
3.06
2.62
Net interest margin - total company
Charge-Offs
Our annualized charge-offs rate over average loans held for investment carried at amortized cost for the three months ended March 31, 2025 remained minimal at 0.18% as compared to 0.11% and 0.07% for the three months ended December 31, 2024 and March 31, 2024, respectively. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment at amortized cost, for the respective quarters. We do not record charge-offs on loans carried at estimated fair value and loans held for sale.
Return on Average Equity
Pre-tax return on average equity and return on average equity reflect income before income taxes and net income including income attributable to noncontrolling interest, respectively, as a percentage of the monthly average total stockholders’ equity including noncontrolling interest over the specified period. Pre-tax return on average equity and return on average equity decreased during the quarter ended March 31, 2025 as compared to the quarters ended December 31, 2024 and March 31, 2024 and was impacted by the increase in average stockholders' equity resulting from 1,569,255 shares issued under the ATM program for net proceeds of $28.8 million during the quarter ended March 31, 2025.
Income before income taxes (A)
26,893
32,038
Net income (B)
20,805
Monthly average balance:
Stockholders' equity (C)
534,940
498,887
447,613
Pre-tax return on average equity (A)/(C) (1)
20.1
25.7
20.8
Return on average equity (B)/(C) (1)
13.9
16.7
15.5
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 carried at amortized cost. 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 carried at the lower of cost or fair value, are deferred as part of the carrying value of the loan and recognized as a gain or loss on the sale of the loan. The fees and costs associated with loans carried at fair value are recognized and expensed as incurred.
Interest Expense — Portfolio Related
Portfolio related interest expense is incurred on the debt we obtained to fund our loan origination and portfolio activities and consists of our warehouse facilities and securitized debt. Portfolio related interest expense also includes the amortization of other comprehensive income or loss from terminated derivative instruments, amortization of expenses incurred as a result of issuing the debt when the debt is carried at amortized cost. Other comprehensive income or loss, and deferred debt issuance costs are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, other comprehensive income or loss from terminated derivative instruments, and the mix of our securitized debt and warehouse liabilities.
Net Interest Income — Portfolio Related
Portfolio related net interest income represents the difference between interest income and portfolio related interest expense.
Interest Expense — Corporate Debt
Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2022 Term Loan and the 2024 Term Loan, as reflected in “Secured financing, net” on our Consolidated Balance Sheets, and the related amortization of deferred debt issuance costs.
Net interest income represents the difference between portfolio related net interest income and interest expense on corporate debt.
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Provision for Credit Losses
Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loan position as of the balance sheet date, and assumptions from us. We do not record provision for credit losses on loans held for sale, or loans carried at fair value.
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 sale price of the loans. In addition, when we transfer a loan to REO, we record the REO at its fair value, less estimated costs to sell, at the time of the transfer. The difference between the fair value of the real estate and the carrying value of the loan is recorded as a gain or a loan charge-off.
Unrealized Gain (Loss) on Fair Value Loans. We have elected to apply fair value option accounting to all our originated mortgage loans on a go-forward basis beginning October 1, 2022. 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. Changes in fair value, subsequent to initial recognition of fair value loans are reported as “Unrealized gain (loss) on fair value loans,” a component of other operating income within the Consolidated Statements of Income.
Unrealized Gain (Loss) on Mortgage Servicing Rights. The Company has elected to record its mortgage servicing rights using the fair value measurement method. Changes in fair value are reported as “Unrealized gain (loss) on mortgage servicing rights,” a component of other operating income within the Consolidated Statements of Income.
Unrealized Gain (Loss) on Fair Value Securitized Debt. We have elected to apply fair value option accounting to securitized debt issued effective January 1, 2023 when the underlying collateral is also carried at fair value. We regularly estimate the fair value of securitized debt. Changes in fair value subsequent to initial recognition of fair value securitized debt are reported as “Unrealized gain (loss) on fair value securitized debt,” a component of other operating income within the Consolidated Statements of Income.
Origination Income. Fee income related to our loan origination activities.
Interest Income on Cash Balance. Interest income on bank balances.
Other Income. Other income primarily consists of servicing fee income and other miscellaneous income. Century earns servicing fees for servicing mortgage loans for others.
Compensation and Employee Benefits. Costs related to employee compensation, commissions and related employee benefits, such as health, retirement, and payroll taxes.
Origination Expenses. Costs related to our loan origination activities.
Securitization Expenses. Costs related to issuance of our securitized debt.
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.
Rent and Occupancy. Costs related to occupying our locations, including rent, maintenance and property taxes.
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.
48
Consolidated Results of Operations
The following table summarizes our consolidated results of operations for the periods indicated:
Interest expense - portfolio related
Net interest income - portfolio related
Interest expense - corporate debt
$ Change
28,211
19,413
8,798
Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $43.7 million from $34.9 million for the three months ended March 31, 2025 and 2024, respectively.
Interest Income. Interest income increased by $28.2 million to $118.7 million for the three months ended March 31, 2025, compared to $90.5 million for the three months ended March 31, 2024, attributable to higher average loan portfolio balances and yield. For the three months ended March 31, 2025, the average loan yield was 9.11% compared to 8.71% for the three months ended March 31, 2024.
The following table distinguishes between the change in interest income attributable to change in average loan balance (volume) and the change in interest income attributable to a change in annualized yield (rate) for the three months ended March 31, 2025 and 2024.
Average Yield(1)
Three months ended March 31, 2025
Three months ended March 31, 2024
Volume variance
1,054,774
22,957
Rate variance
5,254
0.40
Total interest income variance
Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased to $75.1 million for the three months ended March 31, 2025 from $55.7 million for the three months ended March 31, 2024, primarily attributable to a higher loan portfolio being financed and increased interest rates.
49
The following table presents information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) and change in cost of funds (rate) for the three months ended March 31, 2025 and 2024.
Average Debt(1)
Interest Expense
Cost of Funds(2)
1,067,335
15,831
3,582
0.30
Total interest expense variance
Net Interest Income After Provision for Credit Losses
762
8,036
870
7,166
Interest Expense — Corporate Debt. Corporate debt interest expense increased to $6.1 million for the three months ended March 31, 2025, compared to $5.4 million for the three months ended March 31, 2024, primarily due to the issuance of $75.0 million of additional secured debt in February 2024.
Provision for Credit Losses. Our provision for credit losses increased to $1.9 million for the three months ended March 31, 2025 from $1.0 million for the three months ended March 31, 2024 primarily due to higher reserves for nonperforming loans and an increase in macroeconomic reserves.
The $7.7 million increase in total other operating income for the three months ended March 31, 2025 was mainly due to increased origination fee income and the net increase in unrealized gains from fair value marks.
1,135
15,911
(11,364
(1,525
3,693
(292
7,671
Gain on Disposition of Loans. Gain on disposition of loans increased by $1.1 million to $2.8 million for the three months ended March 31, 2025 compared to $1.7 million for the three months ended March 31, 2024 primarily due to an increase in gain on transfer to REO upon foreclosure.
Unrealized Gain on Fair Value Loans. Unrealized gain on fair value loans increased by $15.9 million to $34.8 million for the three months ended March 31, 2025 compared to $18.9 million for the three months ended March 31, 2024. The increase was mainly driven by new loan originations.
Unrealized Loss on Fair Value Securitized Debt. Unrealized loss on fair value securitized debt increased by $11.4 million to $13.7 million for the three months ended March 31, 2025 from $2.3 million for the three months ended March 31, 2024. The increase in unrealized loss on fair value securitized debt was primarily attributable to a decrease in market interest rates.
50
Unrealized Gain (Loss) on Mortgage Servicing Rights. Unrealized loss on mortgage servicing rights was $1.1 million for the three months ended March 31, 2025 as compared to an unrealized gain of $0.4 million for the three months ended March 31, 2024. The increase in unrealized loss on mortgage servicing rights was mainly driven by a decrease in the loan servicing portfolio resulting from loan payoffs and paydowns, and an increase in prepayment rate from December 31, 2024.
Origination Fee Income. Origination fee income increased by $3.7 million to $8.7 million for the three months ended March 31, 2025 compared to $5.0 million for the three months ended March 31, 2024. The increase was primarily due to higher loan originations.
Interest Income on Cash Balance. Interest income on cash balance decreased by $0.3 million to $1.3 million for the three months ended March 31, 2025 compared to $1.6 million for the three months ended March 31, 2024. The decrease was primarily attributable to a decrease in interest rates.
Other Income. Other income increased to $0.5 million for the three months ended March 31, 2025 compared to $0.4 million for the three months ended March 31, 2024. The increase was driven by higher servicing fee income from an increase in our loan servicing portfolio.
Operating expenses are presented in the following table. Changes in operating expenses comparing to the same period prior year are discussed below.
6,327
192
1,169
3,184
(332
(223
574
288
11,179
Compensation and Employee Benefits. Compensation and employee benefits increased by $6.3 million to $21.7 million for the three months ended March 31, 2025 compared to $15.4 million for the three months ended March 31, 2024. The increase was mainly driven by higher commissions expense as our loan originations increased.
Origination Expenses. Origination expenses increased by $0.2 million to $0.8 million for the three months ended March 31, 2025 from $0.6 million for the three months ended March 31, 2024. The increase in origination expenses was due to higher loan originations in the three months ended March 31, 2025.
Securitization Expenses. Securitization expenses were $4.0 million for the three months ended March 31, 2025 compared to $2.9 million for the three months ended March 31, 2024. The increase in securitization expenses resulted from higher issuance costs associated with a larger securitization in the first quarter of 2025 as compared to the same period prior year.
Loan Servicing. Loan servicing expenses increased to $8.0 million for the three months ended March 31, 2025 from $4.8 million for the three months ended March 31, 2024 primarily due to servicing advance expenses and the growth in our portfolio.
Professional Fees. Professional fees decreased to $1.8 million for the three months ended March 31, 2025 compared to $2.1 million for the three months ended March 31, 2024 primarily due to a decrease in legal expenses.
Rent and Occupancy. Rent and occupancy expenses decreased to $0.3 million for the three months ended March 31, 2025 compared to $0.5 million for the three months ended March 31, 2024 as a result of new leases.
Real Estate Owned, Net. Net expenses of real estate owned increased to $3.0 million for the three months ended March 31, 2025 from $2.5 million for the three months ended March 31, 2024, mainly due to the increase in REOs and higher valuation adjustments.
Other Operating Expenses. Other operating expenses increased to $2.5 million for the three months ended March 31, 2025 from $2.2 million for the three months ended March 31, 2024 mainly due to increases in information technology maintenance, marketing, and travel expenses.
Income Tax Expense. Income tax expense was $8.2 million and $5.9 million for the three months ended March 31, 2025 and 2024, respectively. Our annual consolidated effective tax rates were 30.4% and 28.4% for the years 2025 and 2024, respectively.
51
Quarterly Results of Operations
The following table sets forth certain unaudited financial information for each of the last eight completed fiscal quarters. The quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
March 31,2025
December 31,2024
September 30,2024
June 30,2024
March 31,2024
December 31,2023
September 30,2023
June 30,2023
105,070
97,760
86,269
79,088
74,897
63,871
59,188
51,405
47,583
45,451
45,000
41,199
38,572
34,864
31,505
29,446
3.60
3.54
3.52
3.34
3.24
6,155
4,140
4,138
4,139
38,857
35,056
32,417
30,724
27,367
25,307
2.98
3.10
2.90
2.78
(69
218
827
154
Net interest income after provision for (reversal of) credit losses
38,835
35,125
32,199
29,897
27,213
25,009
32,330
20,732
22,561
21,670
17,360
14,037
39,127
34,613
34,887
29,260
27,334
22,222
21,244
19,873
22,307
17,239
16,824
11,233
5,627
5,162
5,141
5,070
4,602
15,617
14,711
17,166
12,169
12,222
(186
(67
(189
83
20,587
15,803
14,778
17,355
12,086
12,183
Liquidity and Capital Resources
Sources and Uses of Liquidity
We fund our lending activities primarily through borrowings under our warehouse repurchase facilities, securitized debt, other corporate-level debt, equity and debt securities, and net cash provided by operating activities to manage our business. We use cash to originate and acquire investor real estate loans, repay principal and interest on our borrowings, fund our operations and meet other general business needs.
Cash and Cash Equivalents
Our total liquidity plus available warehouse capacity, including Century's revolving credit line, was $313.8 million as of March 31, 2025, comprised of $238.2 million in available warehouse capacity, $51.7 million in cash, and $23.9 million in available borrowings from unencumbered loans.
We had cash of $51.7 million and $34.8 million, excluding restricted cash of $22.8 million and $24.2 million as of March 31, 2025 and 2024, respectively.
52
Cash Flows
The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities for the periods indicated:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash, cash equivalents, and restricted cash
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 valuation changes, provision for credit losses, discount accretion, and amortization of debt issuance discount and costs, and (3) changes in the balances of operating assets and liabilities.
For the three months ended March 31, 2025, our net cash provided by operating activities consisted mainly of $18.6 million in net income and $13.7 million change in valuation of securitized debt at fair value, offset by $34.8 million change in valuation of loans carried at fair value.
For the three months ended March 31, 2025, our net cash used in investing activities consisted mainly of $635.5 million in cash used to originate loans held for investment at fair value, partially offset by $228.3 million in cash received from payoffs of loans held for investment.
For the three months ended March 31, 2025, our net cash provided by financing activities consisted mainly of $819.5 million in borrowings from our warehouse and repurchase facilities, $415.7 million in proceeds from issuing securitized debt and $28.8 million in net proceeds from issuance of common stocks. The cash generated was offset by repayments of $597.7 million and $262.3 million, on our warehouse and repurchase facilities and securitized debt, respectively.
During the three months ended March 31, 2025 and 2024, we generated approximately $3.6 million and used $2.9 million, respectively, of net cash and cash equivalents on operating, investing and financing activities.
Warehouse Facilities
As of March 31, 2025, we had five non-mark-to-market warehouse facilities, one mark-to-market warehouse facility, and one modified mark-to-market warehouse facility to support our loan origination and acquisition facilities. The maturity of our warehouse facilities ranges from one to three years. The borrowings are collateralized primarily by performing loans. All warehouse facilities are based on SOFR, plus margins ranging from 1.60% to 4.50%. Borrowing under these facilities was $571.8 million with $238.2 million of available capacity as of March 31, 2025.
Six warehouse facilities fund less than 100% and one warehouse facility funds at 100% of the principal balance of the mortgage loans we own, requiring us to use working capital to fund the remaining portion. We may need to use additional working capital if loans become delinquent, because the amount permitted to be financed by the facilities may change based on the delinquency performance of the pledged collateral.
All borrower payments on loans financed under the warehouse facilities are segregated into pledged accounts with the loan servicer. All principal amounts in excess of the interest due are applied to reduce the outstanding borrowings under the warehouse facilities. The warehouse facilities also contain customary covenants, including financial covenants that require us to maintain minimum liquidity, a minimum net worth, a maximum debt-to-net worth ratio and a ratio of a minimum earnings before interest, taxes, depreciation and amortization of interest expense. If we fail to meet any of the covenants, or otherwise default under the facilities, the lenders have the right to terminate their facility and require immediate repayment, which may require us to sell our loans at less than optimal terms. As of March 31, 2025, we were in compliance with these covenants.
53
From May 2011 through March 2025, we have completed 38 transactions, issuing $8.3 billion in principal amount of securities to third parties. All borrower payments are segregated into remittance accounts at the primary servicer and remitted to the trustee of each trust monthly. We are the sole beneficial interest holder of the applicable trusts, which are variable interest entities included in our consolidated financial statements. The transactions are accounted for as secured borrowings under U.S. GAAP. The following table summarizes the securities issued, securities retained by us at the time of the securitization, and as of March 31, 2025 and December 31, 2024, and the stated maturity for each securitized debt. The securities are callable by us when the stated principal balance is less than a certain percentage, ranging from 10% to 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.
Securities Retained as of
Trusts
SecuritiesIssued
IssuanceDate
Stated MaturityDate
245,601
12,927
2,416
October 2047
176,816
9,308
1,602
April 2048
307,988
16,210
2,656
2,698
October 2048
235,580
12,399
2,482
March 2049
207,020
10,901
2,109
July 2049
154,419
8,127
2,091
October 2049
248,700
13,159
4,252
February 2050
251,301
13,227
7,594
May 2051
194,918
10,260
August 2051
204,205
October 2051
319,116
December 2051
273,594
5,015
3,691
3,876
February 2052
241,388
11,202
9,246
March 2052
84,967
40,911
48,899
47,936
May 2047
296,323
18,914
18,379
15,489
May 2052
308,357
25,190
19,744
10,362
July 2052
188,754
65,459
16,443
12,649
October 2052
198,715
41,593
22,589
December 2052
2023-1R Trust (1)
64,833
66,228
October 2025
202,210
24,229
3,357
6,714
April 2053
81,608
4,296
July 2028
234,741
28,718
9,146
July 2053
202,890
26,623
3,995
November 2053
209,862
11,278
11,229
January 2054
286,235
8,853
8,767
April 2054
204,599
5,255
5,211
June 2054
253,612
3,080
3,064
July 2054
292,880
7,510
7,481
October 2054
293,895
7,690
7,627
7,687
December 2054
342,791
8,790
8,779
February 2055
6,807,918
517,352
216,770
244,135
54
The following table summarizes outstanding bond balances for each securitized debt as of March 31, 2025 and December 31, 2024:
31,786
33,012
23,452
24,482
55,604
59,091
57,696
60,459
44,334
46,872
44,746
46,827
88,265
91,135
146,536
152,995
120,071
125,391
132,082
136,510
204,304
214,284
207,933
217,190
188,190
191,764
6,031
12,041
226,040
234,647
221,499
232,064
169,359
132,519
148,803
144,724
38,508
150,964
157,198
63,163
186,260
195,799
168,737
181,307
172,104
178,234
244,591
260,500
187,913
191,583
231,625
243,945
279,527
290,552
285,272
293,767
342,353
4,429,240
4,269,008
55
As of March 31, 2025 and December 31, 2024, the weighted average rates on the securities and certificates for the Trusts were as follows:
4.14
4.09
4.28
4.13
4.49
4.47
4.07
3.45
3.41
3.27
3.30
1.76
2.03
2.04
2.47
3.25
3.93
3.94
5.07
5.06
6.85
6.90
5.72
6.21
7.11
7.04
7.08
7.02
13.75
7.57
7.64
7.33
8.29
8.24
8.04
7.94
8.30
8.33
7.93
7.75
7.22
7.20
7.29
6.15
5.92
6.73
Our intent is to use the proceeds from the issuance of new securities primarily to repay our warehouse borrowings and originate new investor real estate loans in accordance with our underwriting guidelines, as well as for general corporate purposes. Our financing sources may include borrowings in the form of additional bank credit facilities (including term loans and revolving credit facilities), agreements, warehouse facilities and other sources of private financing. We also plan to continue using securitized debt as long-term financing for our portfolio, and we do not plan to structure any securitized debt as sales or utilize off-balance-sheet vehicles. We believe any financing of assets and/or securitized debt we may undertake will be sufficient to fund our working capital requirements.
Secured Financing (Corporate Debt)
On March 15, 2022, we entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. Interest on the 2022 Term Loan is paid every six months.
On February 5, 2024, the Company entered into a five-year $75.0 million syndicated corporate debt agreement, (“the 2024 Term Loan”). The 2024 Term Loan bears interest at 9.875% and matures on February 15, 2029. Interest on the 2024 Term Loan is paid every six months.
56
At-The-Market Equity Offering Program
On September 3, 2021, we entered into separate Equity Distribution Agreements with counterparties to establish an at-the-market equity offering program (“ATM Program”) where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for aggregate gross sales of our common stock of up to $50,000,000 provided that the number of shares sold under the ATM Program does not exceed 4,000,000. On May 3, 2024, we entered into separate Equity Distribution Agreements, each as amended by Amendment No. 1 to such agreement, dated December 12, 2024, with counterparties to establish a successor ATM Program, with substantially the same terms as the prior Equity Distribution Agreements noted above, under which we may issue and sell, from time to time, shares of our common stock up to $50,000,000 provided that the number of shares sold under the ATM Program does not exceed 4,000,000.
For the three months ended March 31, 2025 and 2024, 1,569,255 and 9,537 shares of common stock were sold under the ATM Program for net proceeds of $28.8 million and $154.1 thousand, respectively.
Contractual Obligations and Commitments
As of March 31, 2025, we maintained warehouse facilities to finance our investor real estate loans and had approximately $571.8 million in outstanding borrowings with $238.2 million of available capacity under our warehouse and repurchase facilities.
Off-Balance-Sheet Arrangements
At no time have we maintained any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance, or special-purpose or variable interest entities, established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. Further, we have never guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.
Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. All statements (other than statements of historical facts) in this Quarterly Report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Forward-looking statements may contain expectations regarding our operations, including our loan originations, our ability to resolve non-performing loans and avoid losses on non-performing loans and the disposition of REOs and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future funding and development of our business and products, including the future results of our at-the-market equity offering program. Although we believe that the expectations reflected in these forward-looking statements have a reasonable basis, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this Quarterly Report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:
57
Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Intentionally omitted pursuant to smaller reporting company reduced disclosure requirements.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In accordance with Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report and has concluded that our disclosure controls and procedures, as of such date, were effective to accomplish their objectives at a reasonable assurance level. Management concluded that the consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting.
During the period to which this report relates, there have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or that are reasonably likely to materially affect, such controls.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, in the ordinary course of business, we are involved in various judicial, regulatory or administrative claims, proceedings and investigations. These proceedings and actions may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. Although occasional adverse decisions or settlements may occur, our management does not believe that the final disposition of any currently pending or threatened matter will have a material adverse effect on our business, financial position, results of operations or cash flows.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On March 27, 2025, warrants to purchase an aggregate of 1,339,166 shares of our common stock were exercised on a net settlement basis, and settled on April 2, 2025, resulting in a net issuance of 1,080,338 shares of our common stock after the withholding and transfer of an aggregate of 258,828 shares of our common stock into our treasury account. The number of shares of our common stock netted was determined using the last sale price of our common stock on March 27, 2025 pursuant to the terms of such warrants. Of such exercised warrants, 892,777 had an exercise price of $2.96 per share and 446,389 had an exercise price of $4.94 per share. The issuance of common stock upon exercise of the warrants was conducted in reliance upon exemptions from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) and Section 4(a)(2) thereof, based on the terms of the exercise and other relevant facts.
The following table provides information on common stock purchases made by us during the three months ended March 31, 2025.
Period
Total Number of Shares Purchased (1)(2)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 2025
99,355
18.72
February 2025
16,241
18.56
March 2025
115,596
18.70
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Insider Trading Arrangements and Policies
On March 18, 2025, Jeffrey T. Taylor, our Executive Vice President, Capital Markets, adopted a Rule 10b5-1 trading arrangement (as such term is defined in Item 408(a) of Regulation S-K) intended to satisfy the affirmative defense of Rule 10b5-1(c) with respect to the sale of up to an aggregate of 21,250 shares of our common stock. The plan will expire June 30, 2026, subject to early termination for certain specified events as set forth in the plan.
On March 20, 2025, Mark R. Szczepaniak, our Chief Financial Officer, adopted a Rule 10b5-1 trading arrangement (as such term is defined in Item 408(a) of Regulation S-K) intended to satisfy the affirmative defense of Rule 10b5-1(c) with respect to the sale of up to an aggregate of 18,870 shares of our common stock. The plan will expire June 30, 2026, subject to early termination for certain specified events as set forth in the plan.
60
Item 6. Exhibits.
The exhibits below are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Incorporated by Reference
Exhibit
Number
Exhibit Title
Form
File No.
Filing Date
Certificate of Conversion
8-K
001-39183
1/22/2020
3.2
Restated Certificate of Incorporation of Velocity Financial, Inc.
5/23/2022
3.3
Amended and Restated Bylaws of Velocity Financial, Inc.
3/25/2022
4.1
Form of Stock Certificate for Common Stock
S-1
333-234250
10/18/2019
4.2
Form of Warrant to Purchase Common Stock
4/7/2020
4.3
Description of the Registrant’s Securities
10K
Stockholders Agreement, dated as of January 16, 2020
10-K
10.2
Registration Rights Agreement, dated as of January 16, 2020
10.3
Registration Rights Agreement, dated as of April 7, 2020
10.4
Securities Purchase Agreement among Velocity Financial, Inc. and the Purchasers Party thereto dated April 5, 2020
4/6/2020
10.5
Velocity Financial, Inc. Employee Stock Purchase Plan*
DEF 14A
AII
4/8/2022
10.6
Amended and Restated Velocity Financial, Inc. 2020 Omnibus Incentive Plan*
AI
Form of Nonqualified Stock Option Award Notice and Agreement under the 2020 Omnibus Incentive Plan*
S-1/A
1/6/2020
Form of Nonqualified Stock Option Award Notice and Agreement (Director Grant-IPO) under the 2020 Omnibus Incentive Plan*
10.9
Form of Nonqualified Stock Option Award Notice and Agreement (Executive Officer Grant-IPO) under the 2020 Omnibus Incentive Plan*
10.10
Form of Restricted Stock Unit Grant and Agreement (Director Grant) under the 2020 Omnibus Incentive Plan*
10.11
Form of Restricted Stock Unit Grant and Agreement (Standard Grant) under the 2020 Omnibus Incentive Plan*
10.12
Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan*
10.13
Velocity Financial 2025 Annual Cash Incentive and Performance Stock Units Programs for Messrs. Farrar, Szczepaniak and Taylor*
-
1/22/2025
10.14
Form of Equity Distribution Agreement, dated May 3, 2024
5/3/2024
10.15
Form of Amendment No. 1 to Equity Distribution Agreement, dated December 12, 2024
3/12/2025
10.16
Form of Officer and Director Indemnity Agreement*
10.37
11/6/2019
10.17
Form of Performance Stock Unit Grant and Agreement*
3/15/2024
10.18
Note Purchase Agreement Dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC, U.S. Bank Trust Company, National Association, as collateral agent, and the respective purchasers of the Notes.
3/16/2022
10.19
Security Agreement, dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC and U.S. Bank Trust Company, National Association, as collateral agent.
10.20
Velocity Financial, Inc. Incentive Compensation Clawback Policy*
99
2/7/2024
10.21
Form of Note Purchase Agreement, dated as of February 5, 2024, among Velocity Financial, Inc., Velocity Commercial Capital, LLC, U.S. Bank Trust Company, National Association, as Collateral Agent and the respective purchasers of the Notes.
2/6/2024
10.22
Security Agreement, dated as of February 5, 2024, among Velocity Financial, Inc., Velocity Commercial Capital, LLC and U.S. Bank Trust Company, National Association.
10.23
Equal Priority Intercreditor Agreement, dated as of February 5, 2024, among Velocity Financial, Inc., Velocity Commercial Capital, LLC, U.S. Bank Trust Company, National Association as the 2027 Notes Collateral Agent and U.S. Bank Trust Company, National Association as the 2029 Notes Collateral Agent.
10.24
Form of Amendment No. 2 to Equity Distribution Agreement, dated April 11, 2025
19.1
Securities Trading Policy
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
32.2
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 (ii) the Consolidated Statements of Income for the three months ended March 31, 2025 and 2024, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2025 and 2024, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2025 and 2024 and (v) the Notes to unaudited Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema with Embedded Linkbases Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
* Management contract or compensatory plan or arrangement.
+ This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 1, 2025
By:
/s/ Christopher D. Farrar
Christopher D. Farrar
Chief Executive Officer
/s/ Mark R. Szczepaniak
Mark R. Szczepaniak
Chief Financial Officer