VEL 10-Q Quarterly Report Sept. 30, 2023

VEL 10-Q Quarter ended Sept. 30, 2023

Exhibits

Exhibits

VELOCITY FINANCIAL, INC.

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2023


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

For the transition period from ______ to _____

Commission File Number: 001-39183

Velocity Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)


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

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

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

       
        Title of each class

       
        Trading
       
        Symbol(s)

       
        Name of each exchange on which registered

       
          Common stock, par value $0.01 per share

VEL

       
          The New York Stock Exchange

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

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

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

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

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

As of November 1, 2 023, the registrant had 32,781,966 shares of common stock outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	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	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	57

SIGNATURES		59

PART I—FINANCI AL INFORMATION

Item 1. Consolidated Financ ial Statements (Unaudited)

VELOCITY FINANCIAL, INC.

CONSOLIDATED B ALANCE SHEETS

($ in thousands, except par value amounts)


	September 30, 2023			December 31, 2022
	(Unaudited)
ASSETS
Cash and cash equivalents	$	29,393		$	45,248
Restricted cash		17,703			16,808
Loans held for sale, at fair value		19,536			—
Loans held for investment, net		2,945,840			3,272,390
Loans held for investment, at fair value		951,990			276,095
Total loans, net		3,917,366			3,548,485
Accrued interest receivables		24,756			20,463
Receivables due from servicers		70,139			65,644
Other receivables		236			1,075
Real estate owned, net		29,299			13,325
Property and equipment, net		2,861			3,356
Deferred tax asset		705			5,033
Mortgage servicing rights, at fair value		9,786			9,238
Derivative assets		1,261			—
Goodwill		6,775			6,775
Other assets		7,028			13,525
Total assets	$	4,117,308		$	3,748,975
LIABILITIES
Accounts payable and accrued expenses	$	97,869		$	91,525
Secured financing, net		210,774			209,846
Securitized debt, net		2,504,334			2,736,290
Securitized debt, at fair value		669,139			—
Warehouse and repurchase facilities, net		215,176			330,814
Total liabilities		3,697,292			3,368,475
Commitments and contingencies

EQUITY
Common stock ($ 0.01 par value, 100,000,000 shares authorized; 32,903,378 and 32,523,516 shares issued, 32,784,157 and 32,489,869 shares outstanding as of September 30, 2023 and December 31, 2022, respectively)		330			326
Treasury stock, at cost ( 119,221 and 33,647 common shares as of September 30, 2023 and December 31, 2022, respectively)		( 1,294	)		( 458	)
Additional paid-in capital		304,906			300,310
Retained earnings		111,551			76,633
Accumulated other comprehensive income, net of tax		905			—
Total Velocity Financial, Inc. stockholders' equity		416,398			376,811
Noncontrolling interest in subsidiary		3,618			3,689
Total equity		420,016			380,500
Total liabilities and equity	$	4,117,308		$	3,748,975

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

($ in thousands)

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


	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Restricted cash	$	11,737	$	2,968
Loans held for investment, net		3,577,093		3,108,316
Accrued interest and other receivables		87,308		77,191
Real estate owned, net		28,456		10,380
Other assets		15		15
Total assets	$	3,704,609	$	3,198,870
LIABILITIES
Accounts payable and accrued expenses	$	65,827	$	50,169
Securitized debt		3,173,473		2,736,290
Total liabilities	$	3,239,300	$	2,786,459

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STAT EMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023		2022
Interest income	$	79,088		$	63,419		$	224,506	$	174,711
Interest expense — portfolio related		47,583			34,561			135,062		86,869
Net interest income — portfolio related		31,505			28,858			89,444		87,842
Interest expense — corporate debt		4,138			4,011			12,417		25,333
Net interest income		27,367			24,847			77,027		62,509
Provision for loan losses		154			580			1,088		1,589
Net interest income after provision for loan losses		27,213			24,267			75,939		60,920
Other operating income
Gain on disposition of loans		3,606			399			6,756		6,716
Unrealized (loss) gain on fair value loans		( 1,284	)		453			8,483		469
Unrealized gain on fair value securitized debt		9,692			—			15,083		—
Origination income		3,323			518			8,469		1,704
Bank interest income		1,342			—			3,478		—
Other income		681			1,657			1,970		4,011
Total other operating income		17,360			3,027			44,239		12,900
Operating expenses
Compensation and employee benefits		12,523			6,788			33,200		18,664
Origination expenses		273			209			347		2,656
Securitization expenses		4,930			—			10,213		—
Loan servicing		4,901			3,314			12,996		9,055
Professional fees		854			664			2,865		3,087
Rent and occupancy		472			445			1,377		1,313
Real estate owned, net		1,239			( 195	)		4,085		( 621	)
Other operating expenses		2,142			2,020			6,276		6,806
Total operating expenses		27,334			13,245			71,359		40,960
Income before income taxes		17,239			14,049			48,819		32,860
Income tax expense		5,070			3,759			13,693		8,568
Net income		12,169			10,290			35,126		24,292
Net income attributable to noncontrolling interest		83			307			208		543
Net income attributable to Velocity Financial, Inc.	$	12,086		$	9,983		$	34,918	$	23,749
Less undistributed earnings attributable to unvested restricted stock awards		183			152			530		362
Net earnings attributable to common stockholders	$	11,903		$	9,831		$	34,388	$	23,387
Earnings per common share
Basic	$	0.37		$	0.31		$	1.07	$	0.73
Diluted	$	0.35		$	0.29		$	1.02	$	0.70
Weighted average common shares outstanding
Basic		32,275			31,922			32,166		31,910
Diluted		34,731			34,199			34,313		34,153

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

($ in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income attributable to Velocity Financial, Inc.	$	12,086	$	9,983	$	34,918	$	23,749
Other comprehensive income, net of tax:
Unrealized gain on cash flow hedges		905		—		905		—
Total comprehensive income attributable to Velocity Financial, Inc.	$	12,991	$	9,983	$	35,823	$	23,749

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLI DATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands)

(Unaudited)


	Common Stock								Treasury Stock
	Shares		Par Value		Additional Paid-in Capital		Retained Earnings		Shares			Amount			Accumulated Other Comprehensive Income, net of tax		Total Stockholders' Equity			Noncontrolling Interest			Total Equity
Balance – December 31, 2021		32,293,042	$	323	$	296,364	$	44,422		—		$	—		$	—	$	341,109		$	3,381		$	344,490
Purchase of treasury stock, at cost		—		—		—		—		( 33,647	)		( 458	)		—		( 458	)		—			( 458	)
Restricted stock awarded and earned stock compensation		125,250		2		416		—		—			—			—		418			—			418
Stock-based compensation - Options		—		—		251		—		—			—			—		251			—			251
Net income		—		—		—		3,121		—			—			—		3,121			110			3,231
Balance – March 31, 2022		32,418,292	$	325	$	297,031	$	47,543		( 33,647	)	$	( 458	)	$	—	$	344,441		$	3,491		$	347,932
Restricted stock awarded and earned stock compensation		31,215		—		555		—		—			—			—		555			—			555
Stock-based compensation - Options		—		—		254		—		—			—			—		254			—			254
Net income		—		—		—		10,645		—			—			—		10,645			126			10,771
Balance – June 30, 2022		32,449,507	$	325	$	297,840	$	58,188		( 33,647	)	$	( 458	)	$	—	$	355,895		$	3,617		$	359,512
Stock-based compensation expenses		—		—		932		—		—			—			—		932			—			932
Net income		—		—		—		9,983		—			—			—		9,983			307			10,290
Balance – September 30, 2022		32,449,507	$	325	$	298,772	$	68,171		( 33,647	)	$	( 458	)	$	—	$	366,810		$	3,924		$	370,734

Balance – December 31, 2022		32,523,516	$	326	$	300,310	$	76,633		( 33,647	)	$	( 458	)	$	—	$	376,811		$	3,689		$	380,500
Purchase of treasury stock, at cost		—		—		—		—		( 85,574	)		( 836	)		—		( 836	)		—			( 836	)
Restricted stock awarded and stock-based compensation expenses		198,137		2		998		—		—			—			—		1,000			—			1,000
Distribution to non-controlling interest		—		—		—		—		—			—			—		—			( 160	)		( 160	)
Net income		—		—		—		10,649		—			—			—		10,649			87			10,736
Balance – March 31, 2023		32,721,653	$	328	$	301,308	$	87,282		( 119,221	)	$	( 1,294	)	$	—	$	387,624		$	3,616		$	391,240
Issuance of common stock		107,567		1		874		—		—			—			—		875			—			875
Restricted stock awarded and stock-based compensation expenses		31,629		—		1,025		—		—			—			—		1,025			—			1,025
Distribution to non-controlling interest		—		—		—		—		—			—			—		—			( 120	)		( 120	)
Net income		—		—		—		12,183		—			—			—		12,183			39			12,222
Balance – June 30, 2023		32,860,849	$	329	$	303,207	$	99,465		( 119,221	)	$	( 1,294	)	$	—	$	401,707		$	3,535		$	405,242
Issuance of common stock		42,529		1		662		—		—			—			—		663			—			663
Stock-based compensation expenses		—		—		1,037		—		—			—			—		1,037			—			1,037
Net income		—		—		—		12,086		—			—			—		12,086			83			12,169
Other comprehensive income		—		—		—		—		—			—			905		905			—			905
Balance – September 30, 2023		32,903,378	$	330	$	304,906	$	111,551		( 119,221	)	$	( 1,294	)	$	905	$	416,398		$	3,618		$	420,016

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEM ENTS OF CASH FLOWS

($ in thousands)


	Nine Months Ended September 30,
	2023			2022
	(Unaudited)
Cash flows from operating activities:
Net income	$	35,126		$	24,292
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		567			605
Amortization of right-of-use assets		975			979
Provision for loan losses		1,088			1,589
Reversal of loan repurchase reserve		( 58	)		—
Origination of loans held for sale		( 38,036	)		( 16,119	)
Proceeds from sales of loans held for sale		19,816			—
Net accretion of discount on purchased loans and amortization of deferred loan origination costs		3,763			5,694
Provision for (reversal of) uncollectible borrower advances		443			( 232	)
Gain on disposition of loans		( 747	)		( 4,572	)
Real estate acquired through foreclosure in excess of recorded investment		( 6,009	)		( 2,144	)
Amortization of debt issuance discount and costs		15,184			22,527
Loss on disposal of property and equipment		—			3
Change in valuation of real estate owned		2,486			276
Change in valuation of fair value loans		( 8,483	)		( 469	)
Change in valuation of mortgage servicing rights		( 548	)		( 2,716	)
Change in valuation of fair value securitized debt		( 15,083	)		—
Gain on sale of real estate owned		( 112	)		( 2,799	)
Stock-based compensation		3,205			2,410
Deferred tax expense		4,328			12,266
Change in operating assets and liabilities:
Accrued interest and other receivables		( 4,902	)		( 4,953	)
Other assets		6,179			( 12,595	)
Accounts payable and accrued expenses		3,494			( 15,386	)
Net cash provided by operating activities		22,676			8,656
Cash flows from investing activities:
Purchase of loans held for investment		( 10,963	)		( 16,997	)
Origination of loans held for investment		( 728,167	)		( 1,475,694	)
Proceeds from sales of loans originally classified as held for investment		21,485			224,060
Payoffs of loans held for investment		334,246			434,945
Purchase of real estate owned		—			( 2,250	)
Proceeds from sale of real estate owned		18,978			18,568
Change in advances		2,308			1,253
Change in impounds and deposits		1,395			( 2,677	)
Purchase of property and equipment		( 72	)		( 273	)
Net cash used in investing activities		( 360,790	)		( 819,065	)
Cash flows from financing activities:
Warehouse repurchase facilities advances		753,270			1,344,528
Warehouse repurchase facilities repayments		( 868,657	)		( 1,305,914	)
Proceeds from secured financing		—			215,000
Repayment of secured financing		—			( 170,844	)
Proceeds of securitized debt, net		774,322			1,181,997
Repayment of securitized debt		( 333,936	)		( 437,499	)
Debt issuance costs		( 2,126	)		( 23,100	)
Proceeds from issuance of common stocks, net		1,398			—
Purchase of treasury stock		( 837	)		( 458	)
Distribution to non-controlling interest		( 280	)		—
Net cash provided by financing activities		323,154			803,710
Net decrease in cash, cash equivalents, and restricted cash		( 14,960	)		( 6,699	)
Cash, cash equivalents, and restricted cash at beginning of period		62,056			47,604
Cash, cash equivalents, and restricted cash at end of period	$	47,096		$	40,905

See accompanying Notes to Consolidated Financial Statements.

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

($ in thousands)


	Nine Months Ended September 30,
	2023		2022
	(Unaudited)
Supplemental cash flow information:
Cash paid during the period for interest	$	134,038	$	84,938
Cash paid during the period for income taxes, net		2,943		22,961
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to held for sale		25,075		206,319
Transfer of loans held for investment to real estate owned		31,318		7,283
Transfer of accrued interest to loans held for investment		1,182		933
Discount on issuance of securitized debt		—		22,632
Transfer of loans held for sale to held for investment		4,218		74,887
Recognition of new leases in exchange for lease obligations		656		—

See accompanying Notes to Consolidated Financial Statements

VELOCITY FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Finan cial Statements (Unaudited)

Note 1 — Organization and Description of Business

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

VCC, a California LLC formed on June 2, 2004, is a mortgage lender that originates and acquires 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 2016-1 Trust through and including the 2023-3 Trust, all of which are New York common law trusts, with the exception of the VCC 2022-MC1 Trust, VCC 2023-1R Trust, and VCC 2023-RTL1 Trust which are Delaware statutory trusts. The Trusts are bankruptcy remote, variable interest entities (VIE) formed for the purpose of providing secured borrowings to the Company and are consolidated with the accounts of the Company.

On December 28, 2021, the Company acquired an 80 % ownership interest in Century Health & Housing Capital, LLC (“Century”). Century is a licensed “Ginnie Mae” issuer/servicer that provides government-insured Federal Housing Administration (FHA) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century is a consolidated subsidiary of the Company as of completion of the acquisition. 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 September 30, 2023 .

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

The accompanying unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2023 and 2022 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, 2022.

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

(a)

Use of Estimates

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

(b)

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 — Basis of Presentation and Summary of Significant Accounting Policies , of its audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission.

There have been no significant changes to the Company’s significant accounting policies as described in its 2022 Annual Report, other than the election of fair value option accounting on securitized debt issued effective January 1, 2023, and hedge accounting for financial derivative instruments beginning the quarter ended September 30, 2023.

Certain amounts previously reported have been reclassified to conform to the current presentation.

(c)

Principles of Consolidation

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

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

The consolidated financial statements as of September 30, 2023 and December 31, 2022 include only those assets, liabilities, and results of operations related to the business of the Company, its subsidiaries, and VIEs.

(d)

Fair Value Option Accounting

The Company has elected to apply fair value option ("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 on a separate line item in the consolidated balance sheet. The Company reflects interest expense on the fair value option securitized debt as “interest” in the consolidated statements of income and presents the other fair value changes of the FVO securitized debt separately in the consolidated financial statements.

(e)

Derivative Instruments and Hedge Accounting

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 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 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 statement of cash flows. The Company uses hedge accounting based on the exposure being hedged as cash flow hedges in operations.

(f)

Other Comprehensive Income

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.

Note 3 — Current Accounting Developments

(a)

Recently Adopted Accounting Standards

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this ASU eliminate the recognition and measurement guidance for troubled debt restructuring by Creditors and require enhanced disclosures for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables. The Company adopted ASU 2022-02 effective January 1, 2023 on a prospective basis. The adoption of ASU 2022-02 did not have a significant impact on the Company’s consolidated financial statements.

Note 4 — Cash, Cash Equivalents, and Restricted Cash

The Company is required to hold cash for potential future advances due to certain borrowers. 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 $ 81.2 million as of September 30, 2023. This amount is not reflected on the consolidated balance sheet of the Company as of September 30, 2023.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated balance sheets to the total of the same such amounts shown in the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):


	Nine Months Ended September 30,
	2023		2022
Cash and cash equivalents	$	29,393	$	26,372
Restricted cash		17,703		14,533
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	47,096	$	40,905

Note 5 — Loans Held for Sale at Fair Value

The following table summarizes loans held for sale at fair value as of September 30, 2023 and December 31, 2022 (in thousands):


Loans held for sale, at fair value:	September 30, 2023		December 31, 2022
Unpaid principal balance	$	18,948	$	—
Valuation adjustments on FVO loans held for sale		588		—
Ending balance	$	19,536	$	—

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

The following tables summarize loans held for investment as of September 30, 2023, and December 31, 2022 (in thousands):


	September 30, 2023
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	2,921,146		$	936,633	$	3,857,779
Valuation adjustments on FVO loans		—			15,357		15,357
Deferred loan origination costs		29,379			—		29,379
		2,950,525			951,990		3,902,515
Allowance for loan losses		( 4,685	)		—		( 4,685	)
Total loans held for investment and loans held for investment at fair value, net	$	2,945,840		$	951,990	$	3,897,830


	December 31, 2022
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	3,243,854		$	268,632	$	3,512,486
Valuation adjustments on FVO loans		—			7,463		7,463
Deferred loan origination costs		33,429			—		33,429
		3,277,283			276,095		3,553,378
Allowance for loan losses		( 4,893	)		—		( 4,893	)
Total loans held for investment and loans held for investment at fair value, net	$	3,272,390		$	276,095	$	3,548,485

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 and nine months ended September 30, 2023, and the year ended December 31, 2022 ($ in thousands):


	Three Months Ended September 30, 2023								Nine Months Ended September 30, 2023
	UPB			%	Amortized Cost			%	UPB			%	Amortized Cost			%
Beginning balance	$	181,939			$	184,007			$	201,005			$	203,346
Foreclosures		( 333	)			( 333	)			( 432	)			( 433	)
Repayments		( 4,560	)			( 4,634	)			( 23,527	)			( 23,873	)
Ending balance	$	177,046			$	179,040			$	177,046			$	179,040

Performing/Accruing	$	135,719		76.7 %	$	137,173		76.6 %	$	135,719		76.7 %	$	137,173		76.6 %

Nonperforming/Nonaccrual	$	41,327		23.3 %	$	41,867		23.4 %	$	41,327		23.3 %	$	41,867		23.4 %


	December 31, 2022
	UPB			%	Amortized Cost			%
Beginning balance	$	292,429			$	295,990
Additions		—				—
Foreclosures		( 3,593	)			( 3,620	)
Repayments		( 87,831	)			( 89,024	)
Ending balance	$	201,005			$	203,346

Performing/Accruing	$	161,455		80.3 %	$	163,346		80.3 %

Nonperforming/Nonaccrual	$	39,550		19.7 %	$	40,000		19.7 %

Since April 1, 2020, the inception of the COVID-19 forbearance program, the Company has modified $ 410.8 million in UPB of loans, which includes capitalized interest of $ 12.6 million. As of September 30, 2023, $ 239.5 million in UPB of modified loans has been paid down, which includes $ 4.8 million of capitalized interest received. T he Company has not forgiven any capitalized interest.

Approximately 76.7 % and 80.3 % of the COVID forbearance loans in UPB were performing, and 23.3 % and 19.7 % were on nonaccrual status as of September 30, 2023, and December 31, 2022, respectively.

As of September 30, 2023, and December 31, 2022, 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 (in thousands):


	September 30, 2023		December 31, 2022
The 2013 repurchase agreement	$	108,834	$	170,185
The 2021 repurchase agreement		90,033		101,024
The Bank credit agreement		34,687		39,087
The 2021 term repurchase agreement		32,300		104,594
The July 2021 term repurchase agreement		18,760		3,859
Total pledged loans	$	284,614	$	418,749

2016-1 Trust	$	—	$	39,720
2017-2 Trust		53,046		67,048
2018-1 Trust		39,417		48,139
2018-2 Trust		88,773		104,791
2019-1 Trust		91,032		104,249
2019-2 Trust		76,091		91,025
2019-3 Trust		67,745		75,618
2020-1 Trust		122,479		144,913
2020-2 Trust		72,678		81,259
2021-1 Trust		187,743		208,875
2021-2 Trust		153,896		172,144
2021-3 Trust		164,120		178,861
2021-4 Trust		253,720		275,741
2022-1 Trust		249,184		262,526
2022-2 Trust		231,470		245,339
2022-MC1 Trust		75,338		97,246
2022-3 Trust		283,716		299,638
2022-4 Trust		312,002		326,627
2022-5 Trust		236,366		251,288
2023-1 Trust		223,410		—
2023-2 Trust		218,116		—
2023-3 Trust		260,389		—
2023-RTL1 Trust		77,922		—
Total	$	3,538,653	$	3,075,047

(a)

Nonaccrual Loans

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 September 30, 2023 and December 31, 2022. There were no loans accruing interest that were greater than 90 days past due as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Total Nonaccrual		Nonaccrual with No Allowance for Loan Loss		Nonaccrual with Allowance for Loan Loss		Allowance for Loans Individually Evaluated		% of Allowance to Total Nonaccrual Loans with Allowance
	($ in thousands)
Commercial - Purchase	$	24,013	$	23,077	$	936	$	137		1.6	%
Commercial - Refinance		93,080		89,247		3,833		415		4.8
Residential 1-4 Unit - Purchase		40,235		40,235		—		—		-
Residential 1-4 Unit - Refinance		138,951		137,249		1,702		171		2.0
Short Term 1-4 Unit - Purchase		7,804		7,644		160		23		0.3
Short Term 1-4 Unit - Refinance		43,217		41,135		2,082		108		1.2
Total	$	347,300	$	338,587	$	8,713	$	854		9.9	%


	December 31, 2022
	Total Nonaccrual		Nonaccrual with No Allowance for Loan Loss		Nonaccrual with Allowance for Loan Loss		Allowance for Loans Individually Evaluated		% of Allowance to Total Nonaccrual Loans with Allowance
	($ in thousands)
Commercial - Purchase	$	22,571	$	22,437	$	134	$	28		0.2	%
Commercial - Refinance		87,133		82,330		4,803		517		4.1
Residential 1-4 Unit - Purchase		27,984		27,516		468		118		0.9
Residential 1-4 Unit - Refinance		113,909		111,742		2,167		175		1.4
Short Term 1-4 Unit - Purchase		8,140		8,140		—		—		—
Short Term 1-4 Unit - Refinance		35,602		30,612		4,990		258		2.1
Total	$	295,339	$	282,777	$	12,562	$	1,096		8.7	%

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

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

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

The following tables present the amortized cost basis in the loans held for investment, excluding loans held for investment at fair value, as of September 30, 2023 and 2022, and the amount of accrued interest receivables written off by reversing interest income by portfolio segment for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,
	2023				2022
	Amortized Cost		Interest Reversal		Amortized Cost		Interest Reversal
Commercial - Purchase	$	647,124	$	174	$	722,868	$	207
Commercial - Refinance		828,037		515		933,486		328
Residential 1-4 Unit - Purchase		532,033		261		630,069		93
Residential 1-4 Unit - Refinance		845,640		642		1,013,626		326
Short Term 1-4 Unit - Purchase		44,616		109		73,005		134
Short Term 1-4 Unit - Refinance		53,075		8		77,839		67
Total	$	2,950,525	$	1,709	$	3,450,893	$	1,155


	Nine Months Ended September 30,
	2023				2022
	Amortized Cost		Interest Reversal		Amortized Cost		Interest Reversal
Commercial - Purchase	$	647,124	$	442	$	722,868	$	400
Commercial - Refinance		828,037		1,698		933,486		915
Residential 1-4 Unit - Purchase		532,033		1,035		630,069		374
Residential 1-4 Unit - Refinance		845,640		2,277		1,013,626		892
Short Term 1-4 Unit - Purchase		44,616		140		73,005		159
Short Term 1-4 Unit - Refinance		53,075		450		77,839		437
Total	$	2,950,525	$	6,042	$	3,450,893	$	3,177

The cash basis interest income recognized on nonaccrual loans was $ 7.9 million and $ 8.0 million for the three months ended September 30, 2023 and 2022, respectively. The cash basis interest income recognized on nonaccrual loans was $ 22.1 million and $ 24.0 million for the nine months ended September 30, 2023 and 2022, respectively. No accrued interest income was recognized on nonaccrual loans for the nine months ended September 30, 2023 and 2022. The average recorded investment of individually evaluated loans, computed using month-end balances, was $ 355.3 million and $ 252.3 million f or the three months ended September 30, 2023 and 2022 , and $ 329.7 million and $ 265.0 million for the nine months ended September 30, 2023 and 2022, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified in troubled debt restructuring as of September 30, 2023 and 2022.

(b)

Allowance for Credit Losses

The following tables present the activity in the allowance for credit losses for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30, 2023
						Residential			Residential			Short Term			Short Term
	Commercial		Commercial			1-4 Unit			1-4 Unit			1-4 Unit			1-4 Unit
	Purchase		Refinance			Purchase			Refinance			Purchase			Refinance			Total
Allowance for credit losses:
Beginning balance - July 1, 2023	$	732	$	2,026		$	403		$	1,264		$	59		$	142		$	4,626
Provision for loan losses		228		( 312	)		217			( 1	)		( 407	)		429			154
Recoveries (charge-offs)		—		—			( 59	)		—			393			( 429	)		( 95	)
Ending balance	$	960	$	1,714		$	561		$	1,263		$	45		$	142		$	4,685

Allowance related to:
Loans individually evaluated	$	137	$	415		$	—		$	171		$	23		$	108		$	854
Loans collectively evaluated	$	823	$	1,299		$	561		$	1,092		$	22		$	34		$	3,831
Amortized cost related to:
Loans individually evaluated	$	24,013	$	93,080		$	40,235		$	138,951		$	7,804		$	43,217		$	347,300
Loans collectively evaluated	$	623,111	$	734,957		$	491,798		$	706,689		$	36,812		$	9,858		$	2,603,225


	Three Months Ended September 30, 2022
					Residential			Residential		Short Term		Short Term
	Commercial		Commercial		1-4 Unit			1-4 Unit		1-4 Unit		1-4 Unit
	Purchase		Refinance		Purchase			Refinance		Purchase		Refinance			Total
Allowance for credit losses:
Beginning balance - July 1, 2022	$	612	$	1,996	$	440		$	1,270	$	34	$	553		$	4,905
Provision for loan losses		78		66		182			227		9		18			580
Charge-offs		—		—		( 7	)		—		—		( 148	)		( 155	)
Ending balance	$	690	$	2,062	$	615		$	1,497	$	43	$	423		$	5,330

Allowance related to:
Loans individually evaluated	$	6	$	369	$	118		$	176	$	—	$	205		$	874
Loans collectively evaluated	$	684	$	1,693	$	497		$	1,321	$	43	$	218		$	4,456
Amortized cost related to:
Loans individually evaluated	$	19,033	$	81,204	$	21,731		$	91,368	$	7,076	$	35,845		$	256,257
Loans collectively evaluated	$	703,835	$	852,282	$	608,338		$	922,258	$	65,929	$	41,994		$	3,194,636


	Nine Months Ended September 30, 2023
						Residential			Residential			Short Term			Short Term
	Commercial		Commercial			1-4 Unit			1-4 Unit			1-4 Unit			1-4 Unit
	Purchase		Refinance			Purchase			Refinance			Purchase			Refinance			Total
Allowance for credit losses:
Beginning balance - January 1, 2023	$	639	$	2,031		$	542		$	1,272		$	21		$	388		$	4,893
Provision for loan losses		321		( 238	)		104			2			410			489			1,088
Charge-offs		—		( 79	)		( 85	)		( 11	)		( 386	)		( 735	)		( 1,296	)
Ending balance	$	960	$	1,714		$	561		$	1,263		$	45		$	142		$	4,685

Allowance related to:
Loans individually evaluated	$	137	$	415		$	—		$	171		$	23		$	108		$	854
Loans collectively evaluated	$	823	$	1,299		$	561		$	1,092		$	22		$	34		$	3,831
Amortized cost related to:
Loans individually evaluated	$	24,013	$	93,080		$	40,235		$	138,951		$	7,804		$	43,217		$	347,300
Loans collectively evaluated	$	623,111	$	734,957		$	491,798		$	706,689		$	36,812		$	9,858		$	2,603,225


	Nine Months Ended September 30, 2022
							Residential			Residential			Short Term		Short Term
	Commercial			Commercial			1-4 Unit			1-4 Unit			1-4 Unit		1-4 Unit
	Purchase			Refinance			Purchase			Refinance			Purchase		Refinance			Total
Allowance for credit losses:
Beginning balance - January 1, 2022	$	385		$	2,144		$	400		$	948		$	43	$	342		$	4,262
Provision for loan losses		452			( 57	)		222			654			—		318			1,589
Charge-offs		( 147	)		( 25	)		( 7	)		( 105	)		—		( 237	)		( 521	)
Ending balance	$	690		$	2,062		$	615		$	1,497		$	43	$	423		$	5,330

Allowance related to:
Loans individually evaluated	$	6		$	369		$	118		$	176		$	—	$	205		$	874
Loans collectively evaluated	$	684		$	1,693		$	497		$	1,321		$	43	$	218		$	4,456
Amortized cost related to:
Loans individually evaluated	$	19,033		$	81,204		$	21,731		$	91,368		$	7,076	$	35,845		$	256,257
Loans collectively evaluated	$	703,835		$	852,282		$	608,338		$	922,258		$	65,929	$	41,994		$	3,194,636

(c)

Credit Quality Indicator

A credit quality indicator is a statistic used by the Company to monitor and assess the credit quality of loans held for investment, excluding loans held for investment at fair value. The Company monitors its charge-off rate in relation to its nonperforming loans as a credit quality indicator. 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 annualized charge-off rates were 0.53 % and 0.27 % of average nonperforming loans for the nine months ended September 30, 2023 and 2022, respectively.

Other credit quality indicators include aging status and accrual status. The following table presents the aging status of the amortized cost basis in the loans held for investment portfolio, which include $ 179.0 million and $ 203.3 million loans in the Company’s COVID-19 forbearance program, excluding loans held for investment at fair value, as of September 30, 2023 and December 31, 2022, respectively (in thousands):


	30–59 days		60–89 days		90+days		Total				Total
September 30, 2023	past due		past due		past due (1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	399	$	1,494	$	22,120	$	24,013	$	—	$	24,013
Commercial - Refinance		3,059		2,224		87,797		93,080				93,080
Residential 1-4 Unit - Purchase		2,615		1,757		35,863		40,235		—		40,235
Residential 1-4 Unit - Refinance		3,002		1,884		134,065		138,951		—		138,951
Short Term 1-4 Unit - Purchase		—		—		7,804		7,804		—		7,804
Short Term 1-4 Unit - Refinance		—		—		43,217		43,217		—		43,217
Total loans individually evaluated	$	9,075	$	7,359	$	330,866	$	347,300	$	—	$	347,300
Loans collectively evaluated
Commercial - Purchase	$	19,144	$	19,751	$	—	$	38,895	$	584,216	$	623,111
Commercial - Refinance		45,677		19,795		—		65,472		669,485		734,957
Residential 1-4 Unit - Purchase		20,095		6,733		—		26,828		464,970		491,798
Residential 1-4 Unit - Refinance		50,670		20,588		—		71,258		635,431		706,689
Short Term 1-4 Unit - Purchase		24,077		2,080		—		26,157		10,655		36,812
Short Term 1-4 Unit - Refinance		2,004		944		—		2,948		6,910		9,858
Total loans collectively evaluated	$	161,667	$	69,891	$	—	$	231,558	$	2,371,667	$	2,603,225
Ending balance	$	170,742	$	77,250	$	330,866	$	578,858	$	2,371,667	$	2,950,525


	30–59 days		60–89 days		90+days		Total				Total
December 31, 2022	past due		past due		past due (1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	865	$	—	$	21,706	$	22,571	$	—	$	22,571
Commercial - Refinance		4,415		5,943		76,619		86,977		156		87,133
Residential 1-4 Unit - Purchase		590		592		26,802		27,984		—		27,984
Residential 1-4 Unit - Refinance		1,715		2,728		109,466		113,909		—		113,909
Short Term 1-4 Unit - Purchase		176		—		7,964		8,140		—		8,140
Short Term 1-4 Unit - Refinance		657		—		34,945		35,602		—		35,602
Total loans individually evaluated	$	8,418	$	9,263	$	277,502	$	295,183	$	156	$	295,339
Loans collectively evaluated
Commercial - Purchase	$	24,899	$	5,096	$	—	$	29,995	$	648,842	$	678,837
Commercial - Refinance		41,711		20,561		—		62,272		757,692		819,964
Residential 1-4 Unit - Purchase		22,840		13,948		—		36,788		523,661		560,449
Residential 1-4 Unit - Refinance		64,925		23,224		—		88,149		737,247		825,396
Short Term 1-4 Unit - Purchase		21,273		294		—		21,567		40,177		61,744
Short Term 1-4 Unit - Refinance		5,550		1,191		—		6,741		28,814		35,555
Total loans collectively evaluated	$	181,198	$	64,314	$	—	$	245,512	$	2,736,433	$	2,981,945
Ending balance	$	189,616	$	73,577	$	277,502	$	540,695	$	2,736,589	$	3,277,284

(1)

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

In addition to the aging status, the Company also evaluates credit quality by accrual status. The following tables present the amortized cost in loans held for investment, excluding loans held for investment at fair value, based on accrual status and by loan origination year as of September 30, 2023 and December 31, 2022 (in thousands).


	Term Loans Amortized Cost Basis by Origination Year
September 30, 2023:	2022		2021			2020		2019		Pre-2019		Total
Commercial - Purchase
Payment performance
Performing	$	258,084	$	230,472		$	32,582	$	46,101	$	55,872	$	623,111
Nonperforming		6,485		6,241			532		4,273		6,482		24,013
Total Commercial - Purchase	$	264,569	$	236,713		$	33,114	$	50,374	$	62,354	$	647,124

Commercial - Refinance
Payment performance
Performing	$	240,627	$	195,968		$	50,490	$	92,007	$	155,865	$	734,957
Nonperforming		22,342		12,363			4,614		18,171		35,590		93,080
Total Commercial - Refinance	$	262,969	$	208,331		$	55,104	$	110,178	$	191,455	$	828,037

Residential 1-4 Unit - Purchase
Payment performance
Performing	$	217,835	$	203,026		$	9,775	$	25,710	$	35,452	$	491,798
Nonperforming		19,703		12,323			1,023		1,423		5,763		40,235
Total Residential 1-4 Unit - Purchase	$	237,538	$	215,349		$	10,798	$	27,133	$	41,215	$	532,033

Residential 1-4 Unit - Refinance
Payment performance
Performing	$	291,195	$	248,864		$	20,577	$	67,145	$	78,908	$	706,689
Nonperforming		45,631		33,741			7,273		28,362		23,944		138,951
Total Residential 1-4 Unit - Refinance	$	336,826	$	282,605		$	27,850	$	95,507	$	102,852	$	845,640

Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	14,760	$	180		$	17,466	$	4,406	$	—	$	36,812
Nonperforming		6,279		530			995		—		—		7,804
Total Short Term 1-4 Unit - Purchase	$	21,039	$	710		$	18,461	$	4,406	$	—	$	44,616

Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	9,858	$	—		$	—	$	—	$	—	$	9,858
Nonperforming		16,913		153			8,479		13,521		4,151		43,217
Total Short Term 1-4 Unit - Refinance	$	26,771	$	153		$	8,479	$	13,521	$	4,151	$	53,075

Total Portfolio	$	1,149,712	$	943,861		$	153,806	$	301,119	$	402,027	$	2,950,525

Gross charge-offs - quarter-ended September 30, 2023	$	365	$	( 270	)	$	—	$	—	$	—	$	95

Gross charge-offs - year-to-date September 30, 2023	$	376	$	473		$	—	$	447	$	—	$	1,296


	Term Loans Amortized Cost Basis by Origination Year
December 31, 2022	2022		2021		2020		2019		2018		Pre-2018		Total
Commercial - Purchase
Payment performance
Performing	$	273,950	$	249,100	$	36,064	$	56,322	$	33,193	$	30,208	$	678,837
Nonperforming		1,274		6,959		1,579		5,809		3,205		3,745		22,571
Total Commercial - Purchase	$	275,224	$	256,059	$	37,643	$	62,131	$	36,398	$	33,953	$	701,408

Commercial - Refinance
Payment performance
Performing	$	263,754	$	210,898	$	55,795	$	103,633	$	93,161	$	92,723	$	819,964
Nonperforming		9,012		11,801		3,855		23,423		20,408		18,634		87,133
Total Commercial - Refinance	$	272,766	$	222,699	$	59,650	$	127,056	$	113,569	$	111,357	$	907,097

Residential 1-4 Unit - Purchase
Payment performance
Performing	$	249,625	$	227,235	$	10,710	$	31,685	$	18,891	$	22,303	$	560,449
Nonperforming		7,281		10,107		2,165		2,313		1,553		4,565		27,984
Total Residential 1-4 Unit - Purchase	$	256,906	$	237,342	$	12,875	$	33,998	$	20,444	$	26,868	$	588,433

Residential 1-4 Unit - Refinance
Payment performance
Performing	$	338,959	$	285,195	$	24,703	$	84,208	$	39,870	$	52,461	$	825,396
Nonperforming		21,391		25,023		6,907		27,746		15,834		17,008		113,909
Total Residential 1-4 Unit - Refinance	$	360,350	$	310,218	$	31,610	$	111,954	$	55,704	$	69,469	$	939,305

Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	40,967	$	944	$	15,659	$	4,174	$	—	$	—	$	61,744
Nonperforming		1,287		5,212		995		542		104		—		8,140
Total Short Term 1-4 Unit - Purchase	$	42,254	$	6,156	$	16,654	$	4,716	$	104	$	—	$	69,884

Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	35,555	$	—	$	—	$	—	$	—	$	—	$	35,555
Nonperforming		786		1,221		10,545		18,245		4,805		—		35,602
Total Short Term 1-4 Unit - Refinance	$	36,341	$	1,221	$	10,545	$	18,245	$	4,805	$	—	$	71,157

Total Portfolio	$	1,243,841	$	1,033,695	$	168,977	$	358,100	$	231,024	$	241,647	$	3,277,284

(d)

Nonaccrual Loans - Loans Held for Investment at Fair Value

The following table presents 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 September 30, 2023 by loan segments (in thousands):


	Fair Value						Unpaid Principal Balance						Difference
	Current–89 days		90+days past due				Current–89 days		90+days past due				90+days past due
September 30, 2023	past due		or nonaccrual		Total		past due		or nonaccrual		Total		or nonaccrual
Commercial - Purchase	$	129,854	$	3,233	$	133,087	$	123,247	$	3,894	$	127,141	$	( 661	)
Commercial - Refinance		156,931		2,624		159,555		147,492		3,161		150,653		( 537	)
Residential 1-4 Unit - Purchase		189,247		8,153		197,400		190,128		9,761		199,889		( 1,608	)
Residential 1-4 Unit - Refinance		356,278		19,110		375,388		349,909		22,680		372,589		( 3,570	)
Short Term 1-4 Unit - Purchase		37,224		1,077		38,301		36,915		1,298		38,213		( 221	)
Short Term 1-4 Unit - Refinance		45,773		2,486		48,259		45,152		2,996		48,148		( 510	)
Ending balance	$	915,307	$	36,683	$	951,990	$	892,843	$	43,790	$	936,633	$	( 7,107	)

Note 7 — Receivables Due From Servicers

The following tables summarize receivables due from servicers as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023
	Securitized debt		Warehouse and repurchase facilities and other		Total
Loan principal payments due from servicers	$	31,763	$	75	$	31,838
Other loan servicing receivables		11,370		4,454		15,824
Loan servicing receivables		43,133		4,529		47,662
Corporate and escrow advances receivable		21,036		1,441		22,477
Total receivables due from servicers	$	64,169	$	5,970	$	70,139


	December 31, 2022
	Securitized debt		Warehouse and repurchase facilities and other		Total
Loan principal payments due from servicers	$	24,400	$	664	$	25,064
Other loan servicing receivables		13,095		2,521		15,616
Loan servicing receivables		37,495		3,185		40,680
Corporate and escrow advances receivable		21,995		2,969		24,964
Total receivables due from servicers	$	59,490	$	6,154	$	65,644

Note 8 — Mortgage Servicing Rights

Mortgage loans serviced are related to the Century business and not included in the consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others amounted to $ 495.8 million and $ 491.9 million as of September 30, 2023 and December 31, 2022, respectively. The Company has elected to record its mortgage servicing rights using the fair value measurement method. Significant assumptions used in determining the fair value of servicing rights as of September 30, 2023 and December 31, 2022 include: 1) Weighted average discount rate of 8.0 % and 8.1 %. 2) Weighted average conditional prepayment rate of 6.4 % and 6.3 %.

The following table presents the Company's mortgage servicing rights as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Balance at the beginning of year	$	9,238	$	7,152
Mortgage servicing rights acquired, at fair value		—		—
Additions		250		—
Fair value adjustments		298		2,086
Balance at end of period	$	9,786	$	9,238

Note 9 — Goodwill

The following table presents the activity for goodwill as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Balance at the beginning of period	$	6,775	$	6,775
Goodwill acquired		—		—
Balance at end of period	$	6,775	$	6,775

Note 10 — Securitized Debt and Securitized Debt at Fair Value

As of September 30, 2023, the Company is the sole beneficial interest holder of twenty-three 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 %– 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 April 2046 through July 2053 .

The following tables summarize securitized debt and securitized debt at fair value as of September 30, 2023 and December 31, 2022 ($ in thousands):


	September 30, 2023
(in thousands)	Securitized debt, net			Securitized debt at fair value			Total securitized debt
Securitized debt	$	2,546,709		$	690,371		$	3,237,080
Valuation adjustments on FVO securitized debt		—			( 21,232	)		( 21,232	)
Deferred issuance costs and discounts		( 42,375	)		—			( 42,375	)
Total securitized debt and securitized debt at fair value	$	2,504,334		$	669,139		$	3,173,473


	December 31, 2022
(in thousands)	Securitized debt, net			Securitized debt at fair value		Total securitized debt
Unpaid principal balance	$	2,788,908		$	—	$	2,788,908
Valuation adjustments on FVO securitized debt		—			—		—
Deferred issuance costs and discounts		( 52,618	)		—		( 52,618	)
Total securitized debt and securitized debt at fair value	$	2,736,290		$	—	$	2,736,290

The following table presents the effective interest rate of securitized debt and securitized debt at fair value for the nine months ended September 30, 2023 and 2022 ($ in thousands):


	Nine Months Ended September 30,
Securitized debt:	2023			2022
Interest expense	$	119,377		$	75,191
Average outstanding unpaid principal balance		3,044,511			2,331,672
Effective interest rate (1)		5.23	%		4.30	%

(1)

Effective interest rate represents annualized interest expense divided by average gross outstanding balance, which includes average rates of 4.67 % and 3.59 %, and debt issuance cost amortization of 0.56 % and 0.71 % for the nine months ended September 30, 2023 and 2022 , respectively.

Note 11 — 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.

(a)

Secured Financing, Net (Corporate Debt)

On March 15, 2022, the Company entered into a five-year $ 215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125 % and matures on March 15, 2027 . Interest on the 2022 Term Loan is paid every six months . A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to a term loan previously entered into during 2021 (the "2021 Term Loan"). The remaining portion of the net proceeds from the 2022 Term Loan is used for loan originations and general corporate purposes. As of September 30, 2023, the balance of the 2022 Term Loan was $ 215.0 m illion. The balance in the consolidated balance sheets is net of debt issuance costs of $ 4.2 million as of September 30, 2023. The 2022 Term Loan 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 September 30, 2023, the Company was in compliance with all covenants.

(b)

Warehouse Repurchase and Revolving Loan Facilities, Net

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, 2024 , 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 Secured Overnight Financing Rate (“SOFR”) plus 1.60 % with a 0.25 % floor. There was no outstanding balance as of September 30, 2023 and December 31, 2022.

On August 8, 2016 , Century entered a Promissory Note Revolving Credit Line with a bank (“Revolving Credit Line”). The Revolving Credit Line matured on July 31, 2023 , and was a short-term unsecured borrowing line, with a maximum capacity of $ 3.0 million, and bears interest at SOFR plus 2.00 % with a 0.25 % floor. There were no outstanding balances as of September 30, 2023 and December 31, 2022.

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 26, 2024 , 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 3.25 %. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. The effective interest rates were 10.9 % and 5.7 % as of September 30, 2023 and December 31, 2022, respectively.

On September 12, 2018 , the Company entered into a three-year non-mark-to-market secured revolving loan facility agreement (“the Bank Credit Agreement”) with a bank. The Bank Credit Agreement has a current extended maturity date of November 10, 2025 . During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at SFOR plus 3.61 %, with a floor of 4.25 %. The maximum capacity under this facility is $ 50.0 million. The effective interest rates were 9.4 % and 5.8 % as of September 30, 2023 and December 31, 2022, respectively.

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 15, 2024 , and is a short-term borrowing facility, collateralized by a pool of loans, with a maximum capacity of $ 200.0 million, and bears 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 facility are first used to pay interest on the facility. The effective interest rates were 10.1 % and 6.4 % as of September 30, 2023 and December 31, 2022, respectively.

On April 16, 2021 , the Company entered into a non-mark-to-market Term Repurchase Agreement (“the 2021 Term Repurchase Agreement”) with a warehouse lender. The 2021 Term Repurchase Agreement has a maturity date of April 16, 2026 , with a borrowing period through April 14, 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. The effective interest rates were 9.3 % and 5.6 % as of September 30, 2023 and December 31, 2022, respectively.

On July 29, 2021, the Company entered into a non-mark-to-market Term Repurchase Agreement (“the July 2021 Term Repurchase Agreement”) with a warehouse lender. The July 2021 Term Repurchase Agreement has a maturity date of July 29, 2024 , with an option to extend the term to July 29, 2025 . During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at one-month American Interbank Offered Rate ("AMERIBOR") with a 0.5 % floor plus 4.50 % per annum. The maximum capacity under this facility is $ 100.0 million. The effective interest rates were 12.5 % and 10.0 % as of September 30, 2023 and December 31, 2022, respectively.

On October 7, 2022, the Company entered into a $ 10.2 million short-term repurchase agreement ("the October 2022 Repurchase Agreement) and bore interest at SOFR plus 1.58 %. The repurchase agreement was paid off in April 2023. The effective interest rate was 6.1 % as of December 31, 2022.

Certain loans are pledged as security under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of September 30, 2023 and December 31, 2022, the Company was in compliance with all covenants.

The following table summarizes the maximum borrowing capacity and current gross balances outstanding of the Company’s warehouse facilities and loan agreements as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023				December 31, 2022
	Period end balance (1)		Maximum borrowing capacity		Period end balance (1)		Maximum borrowing capacity
The 2021 term repurchase agreement	$	21,962	$	100,000	$	74,334	$	100,000
The 2021 repurchase agreement		70,465		200,000		79,504		200,000
The July 2021 term repurchase agreement		10,770		100,000		2,185		100,000
The 2013 repurchase agreement		87,014		300,000		136,165		300,000
The bank credit agreement		26,141		50,000		29,495		50,000
The October 2022 repurchase agreement		—		—		10,057		18,818
The September 2022 term repurchase agreement		—		60,000		—		60,000
Revolving credit line		—		—		—		3,000
Total	$	216,352	$	810,000	$	331,740	$	831,818

(1)

Warehouse repurchase facilities amounts in the consolidated balance sheets are net of debt issuance costs amounting to $ 1.2 million and $ 0.9 million as of September 30, 2023 and December 31, 2022 , respectively.

The following table provides an overview of the activity and effective interest rate for the three and nine months ended September 30, 2023 and 2022 ($ in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Warehouse and repurchase facilities:
Average outstanding balance	$	192,855		$	226,660		$	218,793		$	294,622
Highest outstanding balance at any month-end		302,630			341,412			320,544			426,959
Effective interest rate (1)		10.25	%		6.70	%		9.56	%		5.28	%

(1)

Effective interest rate represents annualized interest expense divided by average gross outstanding balance. The rate includes average rate of 9.01 % and 5.90 %, and debt issuance cost amortization of 1.24 % and 0.80 %, for the three months ended September 30, 2023 and 2022 , respectively, and includes average rate of 8.73 % and 4.66 %, and debt issuance cost amortization of 0.83 % and 0.62 %, for the nine months ended September 30, 2023 and 2022 , respectively.

The following table provides a summary of interest expense that includes interest, amortization of discount, and deal cost amortization for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Warehouse and repurchase facilities	$	4,943	$	3,798	$	15,685	$	11,678
Securitized debt		42,640		30,763		119,377		75,191
Interest expense — portfolio related		47,583		34,561		135,062		86,869
Interest expense — corporate debt		4,138		4,011		12,417		25,333
Total interest expense	$	51,721	$	38,572	$	147,479	$	112,202

Note 12 — Commitments and Contingencies

(a)

Repurchase Liability

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

The Company records a repurchase liability relating to representations and warranties and early payment defaults. The method used to estimate the liability for repurchase is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults. The Company establishes a liability at the time loans are sold and continually updates the estimated repurchase liability. The level of the repurchase liability for representations and warranties and early payment default requires considerable management judgment. As of September 30, 2023 and December 31, 2022, the balance of repurchase liabili ty was $ 66 thousand and $ 124 thousand, respectively, and it is included in accounts payable and accrued expenses in the consolidated balance sheets.

(b)

Legal Proceedings

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

(c)

Employee Retention Credit

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 September 30, 2023 .

Note 13 — Stock-Based Compensation

The Company’s Amended and Restated 2020 Omnibus Incentive Plan, or the 2020 Plan, authorizes grants of stock‑based compensation instruments to purchase or issue up to 2,770,000 shares of Company common stock.

In connection with its IPO in January 2020, the Company granted stock options to non-employee directors and certain employees, including named executive officers to purchase approximately 782,500 shares of common stock with an exercise price per share equal to the initial public offering price of $ 13.00 . On December 24, 2020, the Company granted stock options to a non-employee director to purchase 12,500 shares of common stock with an exercise price per share equal to the grant date market price of $ 6.28 . During the quarter ended September 30, 2023, 15,000 shares were exercised at the price per share of $ 13.00 . On September 8, 2023, the Company granted stock options to an employee to purchase 5,464 shares of common stock with an exercise price per share equal to the grant date market price of $ 11.68 .

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

In February 2022, the Company issued 125,250 shares of restricted stock awards and 102,750 shares of performance stock unit awards to certain employees, including named executive officers at no cost to employees. In May 2022, the Company issued 31,215 shares of restricted stock awards to certain non-employee directors.

In January 2023, the Company issued 198,137 shares of restricted stock awards and 153,637 shares of performance stock unit awards to certain employees, including named executive officers at no cost to employees. In May 2023, the Company issued 31,629 shares of restricted stock awards to certain non-employee directors.

Restricted stock-based awards vest ratably over a service period of three years from the date of the grant. Performance-based stock unit awards are linked to the average core net income annual growth over the three-year period from the year of grant. Settlement of vested performance-based stock units will be made on the date that the Compensation Committee certifies the average core net income annual growth for the three-year period. Compensation expense related to restricted stock-based awards is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. Compensation expense related to performance-based stock unit awards is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using an estimate of the probability of achieving the performance target. The estimates will be reviewed quarterly, and the expense adjusted accordingly.

The Company has an Employee Stock Purchase Plan ("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 beginning July 2022. 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 six-month offering period. Compensation expense 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.

The Company recognized a total of $ 1.1 million and $ 0.9 million compensation expense related to the outstanding stock options, unvested restricted stock awards, ESPP, and unvested performance-based stock unit awards granted to employees for the three months ended September 30, 2023 and 2022, respectively. Such amount is included in “Compensation and employee benefits” on the consolidated statements of income. The amount of unrecognized compensation expense related to unvested restricted stock awards, ESPP, and performance-based stock unit awards tota led $ 4.7 millio n and $ 4.6 million as of September 30, 2023 and 2022, respectively.

Treasury share purchases represent shares surrendered to the Company approximately equal in value to the statutory payroll tax withholding obligations and other estimated tax obligations arising from the vesting of employee restricted stock awards. During the three months ended March 31, 2023, the Company purchased 85,574 treasury shares at an average price of $ 9.78 per share . No shares were purchased during the quarters ended June 30, 2023 and September 30, 2023.

Note 14 — Earnings Per Share

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

The following table presents the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share data)				(In thousands, except per share data)
Basic EPS:
Net income attributable to common shareholders	$	12,086	$	9,983	$	34,918	$	23,749
Less: earnings attributable to participating securities		183		152		530		362
Net earnings attributable to common shareholders	$	11,903	$	9,831	$	34,388	$	23,387
Weighted average common shares outstanding		32,275		31,922		32,166		31,910
Basic earnings per common share	$	0.37	$	0.31	$	1.07	$	0.73
Diluted EPS:
Net income attributable to common stockholders	$	12,086	$	9,983	$	34,918	$	23,749
Weighted average common shares outstanding		32,275		31,922		32,166		31,910
Add dilutive effects for warrants		2,116		2,061		1,957		2,058
Add dilutive effects for stock options		9		6		6		5
Add dilutive effects of unvested restricted stock awards		230		210		135		180
Add dilutive effects of unvested performance-based stock units		101		—		49		—
Weighted average diluted common shares outstanding		34,731		34,199		34,313		34,153
Diluted earnings per common share	$	0.35	$	0.29	$	1.02	$	0.70

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Stock options		763		773		763		773
Share equivalents excluded from EPS		763		773		763		773

Note 15 — Warrants

On April 7, 2020, the Company issued and sold in a private placement warrants (the “Warrants”) to purchase additional 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 Warrants are exercisable at the warrant holder’s option at any time and from time to time, in whole or in part, until April 7, 2025 at an exercise price of $ 2.96 per share of common stock, with respect to 2,008,749 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 antidilution adjustments and certain issuances of common stock (or securities convertible into or exercisable for common stock) at a price (or having a conversion or exercise price) that is less than the then current exercise price. The Company is not required to affect an exercise of Warrants, if after giving effect to the issuance of common stock upon exercise of such Warrants such warrant holder together with its affiliates would beneficially own 49 % or more of the Company’s outstanding common stock.

Note 16 — Derivative Instruments

During the quarter ended September 30, 2023, the Company began utilizing forward starting interest rate swap derivative instruments designated as cash flow hedges to manage the exposure to interest rate volatility with regard to forecasted issuances of fixed-rate debt. 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. 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 issuance occurs and the related derivative instruments are terminated, the accumulated gains or losses are then reclassified into interest expense over the term of the related debt. For the three and nine months ended September 30, 2023, there were no reclassifications of net (gains) losses on derivative instruments from AOCI to interest expense. As of September 30, 2023, the Company had $ 0.9 million in after-tax unrealized gains associated with cash flow hedging instruments recorded in AOCI. As of September 30, 2023, the Company expects to reclassify an estimated $ 0.2 million of after-tax unrealized gains 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 September 30, 2023:

           
            September 30, 2023

           
            (in thousands)

           
            Derivatives designated as hedging instruments:

           
            Balance Sheet Location

           
            Notional Amount

           
            Derivative Assets

           
            Derivative Liabilities

           
            Cash flow hedges:

           
            Forward starting payer interest rate swaps

           
              Derivative assets

           
             155,000

           
             1,261

—

(1)

Fair value reported is exclusive of collateral held and pledged. As of September 30, 2023, collateral held related to derivative exposure between the Company and its derivative counterparty was $ 0.8 million and is recorded in accounts payable and accrued expenses .

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 17 — Accumulated Other Comprehensive Income

The following table presents the changes in the component of accumulated other comprehensive income balances for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Beginning balance	$	—	$	—	$	—	$	—
Net unrealized gain on cash flow hedges arising during the period, net of tax		905		—		905		—
Ending balance	$	905	$	—	$	905	$	—

The following table presents the component of other comprehensive income and the related tax effect for the quarter ended September 30, 2023:


	September 30, 2023
(in thousands)	Before-Tax		Tax Effect		Net-of-Tax
Cash flow hedges:
Forward starting payer interest rate swaps:
Net unrealized gain arising during the period	$	1,261	$	356	$	905
Other comprehensive income	$	1,261	$	356	$	905

Note 18 — Fair Value Measurements

Fair Value Determination

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

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

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

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

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

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

Cash and Cash Equivalents and Restricted Cash

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

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

The Company uses a third-party loan valuation model 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 yield, voluntary prepayments, severity, and foreclosure frequency. The Company uses an in-house 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, and constant default 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 a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

Loans Held for Sale

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

Loans Held for Sale, at Fair Value

The Company has elected to account for certain loans originated with the intent to sell at fair value (the FVO Loans held for sale) 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 of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

Real Estate Owned, Net (REO)

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

Mortgage Servicing Rights

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

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, Net, 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, bond structure and collateral characteristics and performance and pricing factors such as yield, spread, average life, prepayment speeds, default rate and severity, a Level 2 measurement. Significant changes in any of those inputs 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 September 30, 2023 and December 31, 2022, by level, in the fair value hierarchy (in thousands):


	Fair value measurements using						Total at
September 30, 2023	Level 1		Level 2		Level 3		fair value
Assets:
Recurring fair value measurements:
Loans held for sale, at fair value	$	—	$	19,536	$	—	$	19,536
Loans held for investment, at fair value		—		—		951,990		951,990
Mortgage servicing rights		—		—		9,786		9,786
Derivative assets		—		1,261		—		1,261
Total recurring fair value measurements		—		20,797		961,776		982,573
Nonrecurring fair value measurements:
Real estate owned, net		—		—		29,299		29,299
Individually evaluated loans requiring specific allowance, net		—		—		7,859		7,859
Total nonrecurring fair value measurements		—		—		37,158		37,158
Total assets	$	—	$	20,797	$	998,934	$	1,019,731

Liabilities:
Recurring fair value measurements:
Securitized debt, at fair value	$	—	$	669,139	$	—	$	669,139
Total recurring fair value measurements		—		669,139		—		669,139
Total liabilities	$	—	$	669,139	$	—	$	669,139


	Fair value measurements using						Total at
December 31, 2022	Level 1		Level 2		Level 3		fair value
Assets:
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	276,095	$	276,095
Mortgage servicing rights		—		—		9,238		9,238
Total recurring fair value measurements		—		—		285,333		285,333
Nonrecurring fair value measurements:
Real estate owned, net		—		—		13,325		13,325
Individually evaluated loans requiring specific allowance, net		—		—		11,466		11,466
Total nonrecurring fair value measurements		—		—		24,791		24,791
Total assets	$	—	$	—	$	310,124	$	310,124

The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
Gain (loss) on assets measured on a nonrecurring basis	2023			2022			2023			2022
Real estate held for sale, net	$	( 817	)	$	( 369	)	$	( 2,486	)	$	( 276	)
Individually evaluated loans requiring specific allowance, net		189			290			242			532
Total net (loss) gain	$	( 628	)	$	( 79	)	$	( 2,244	)	$	256

The following table presents the primary valuation techniques and unobservable inputs related to Level 3 assets that are recorded on a recurring and nonrecurring basis as of September 30, 2023 ($ in thousands):


	September 30, 2023
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Recurring:
Loans held for investment, at fair value	$	951,990	Discounted cash flow	Discount rate	10.1 %	10.1 %
				Prepayment rate	0.7 % to 30.0 %	19.0 %
				Default rate	0.0 % to 1.7 %	0.4 %
				Loss severity rate	0.0 % to 15.0 %	3.3 %
				Recovery lag (performing loans, in months)	17	17
Mortgage servicing rights		9,786	Discounted cash flow	Discount rate	8.0 %	8.0 %
				Prepayment rate	5.8 % to 12.5 %	6.4 %
Nonrecurring:
Individually evaluated loans requiring specific allowance, net	$	7,859	Market comparables	Selling costs	8.0 %	8.0 %
Real estate owned, net		29,299	Market comparables	Selling costs	8.0 %	8.0 %

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

           
            December 31, 2022

           
            Asset category

           
            Fair value

           
            Primary
            
            valuation
            
            technique

           
            Unobservable
            
            input

           
            Range

           
            Weighted
            
            average

           
            Individually evaluated
            
            loans requiring specific
            
            allowance, net

           
             11,466

           
            Market comparables

           
            Selling costs

           
            Real estate owned, net

           
             13,325

           
            Market comparables

           
            Selling costs

           
            Loans held for investment,
            
            at fair value

           
             276,095

           
            Discounted cash flow

           
            Discount rate

           
            Prepayment rate

           
            Default rate

           
            Loss severity rate

           
            Mortgage servicing rights

           
             9,238

           
            Discounted cash flow

           
            Discount rate

           
            Prepayment rate

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 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Beginning balance	$	705,330		$	1,351		$	276,095		$	1,359
Originations		271,633			—			728,167			—
Loans liquidated		( 22,527	)		( 12	)		( 44,012	)		( 36	)
Principal paydowns		( 2,479	)		( 416	)		( 5,275	)		( 416	)
Total unrealized (loss) gain included in net income		( 1,872	)		3			7,895			19
Loans transferred to held for sale		—			—			( 20,857	)		—
REO transfer		( 362	)		—			( 362	)		—
Loans repurchased		2,267			—			10,339			—
Ending balance	$	951,990		$	926		$	951,990		$	926

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 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023			2022
Beginning balance	$	—	$	—	$	—		$	—
Originations		18,948		16,119		38,036			16,119
Loans liquidated		—		—		( 39,945	)		—
Total unrealized gain included in net income		588		450		588			450
Loans transferred from held for investment		—		—		20,857			—
Ending balance	$	19,536	$	16,569	$	19,536		$	16,569

The following is a roll-forward of mortgage servicing rights that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Beginning balance	$	9,445	$	8,438	$	9,238	$	7,152
Additions		—		—		250		—
Total unrealized gain included in net income		341		1,430		298		2,716
Ending balance	$	9,786	$	9,868	$	9,786	$	9,868

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of September 30, 2023 and December 31, 2022, financial assets and liabilities measured at fair value include loans held for investment at fair value, loans held for sale, mortgage servicing rights, derivative instruments, and securitized debt at fair value. Financial assets measured at the lower of cost or fair value include certain individually evaluated loans held for investment and REO, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximatel y $ 7.9 million and $ 11.5 million as of September 30, 2023 and December 31, 2022 , net of specific allowance for credit losses of approximately $ 0.9 million and $ 1.1 million, respectively.

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

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


	September 30, 2023
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	29,393	$	29,393	$	—	$	—	$	29,393
Restricted cash		17,703		17,703		—		—		17,703
Loans held for sale, at fair value		19,536		—		19,536		—		19,536
Loans held for investment, net		2,945,840		—		—		2,720,452		2,720,452
Loans held for investment, at fair value		951,990		—		—		951,990		951,990
Accrued interest receivables		24,756		24,756		—		—		24,756
Mortgage servicing rights		9,786		—		—		9,786		9,786
Derivative assets		1,261		—		1,261		—		1,261

Liabilities:
Secured financing, net	$	210,774	$	—	$	—	$	211,655	$	211,655
Warehouse repurchase facilities, net		215,176		—		215,176		—		215,176
Securitized debt, net		2,504,334		—		2,167,848		—		2,167,848
Securitized debt, at fair value		669,139		—		669,139		—		669,139
Accrued interest payable		14,627		14,627		—		—		14,627


	December 31, 2022
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	45,248	$	45,248	$	—	$	—	$	45,248
Restricted cash		16,808		16,808		—		—		16,808
Loans held for investment, net		3,272,390		—		—		3,201,850		3,201,850
Loans held for investment, at fair value		276,095		—		—		276,095		276,095
Accrued interest receivable		20,463		20,463		—		—		20,463
Mortgage servicing rights		9,238		—		—		9,238		9,238

Liabilities:
Secured financing, net	$	209,846	$	—	$	—	$	211,854	$	211,854
Warehouse repurchase facilities, net		330,814		—		330,814		—		330,814
Securitized debt net		2,736,290		—		—		2,522,010		2,522,010
Accrued interest payable		16,369		16,369		—		—		16,369

Note 19 — Subsequent Events

On October 10, 13 and 26, 2023, the Company entered into forward starting interest rate swaps with notional amounts of $ 15.0 million, $ 14.0 million and $ 15.0 million, respectively, (the "Forward Starting Swaps"), which were designated as a cash flow hedges. These Forward Starting Swaps are one type of derivative instrument available to hedge the exposure to the risk of variability in the interest payment cash flows of the Company’s fixed rate debt attributable to changes in the benchmark overnight SOFR between the time the fixed rate mortgages are originated and the fixed rate debt is issued. These Forward Starting Swaps are designated to hedge forecasted fixed rate debt.

The Company has evaluated events that have occurred subsequent to September 30, 2023 through the issuance of the accompanying consolidated financial statements and has concluded there are no other subsequent events that would require recognition or disclosure in the accompanying consolidated financial statements.

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

The following discussion should be read in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2022, 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 19 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 September 30, 2023, has an average balance of approximately $390 thousand. As of September 30, 2023, our loan portfolio totaled $3.9 billion of UPB on properties in 45 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 68.0%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 54.7% of the UPB. For the three months ended September 30, 2023, the annualized yield on our total portfolio was 8.38%.

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 thirty securitized debt transactions, resulting in a total of over $6.2 billion in gross debt proceeds from May 2011 through September 2023. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitized debt and excludes our corporate debt. For the three months ended September 30, 2023, our annualized portfolio related net interest margin increased to 3.34% compared to the 3.24% for the quarter ended June 30, 2023. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for loan losses and operating expenses. For the three and nine months ended September 30, 2023, including net income attributable to noncontrolling interest, we generated pre-tax income of $17.2 million and $48.8 million, and net income of $12.2 million and $35.1 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.

We have made an election to apply the fair value option ("FVO") accounting to all our originated mortgage loans on a go-forward basis beginning October 1, 2022. The fair value option loans are presented on a separate line item in the consolidated balance sheet. We will not record a CECL loan loss reserve on fair value option loans.

The fair value option ("FVO") accounting to our securitized debt is on a case-by-case basis effective January 1, 2023. The fair value option securitized debt is presented on a separate line item in the consolidated balance sheet.

Recent Developments

Securitized Debt

During the quarter ended September 30, 2023, we completed two securitizations, VCC 2023-RTL1 and VCC 2023-3. Securities of $81.6 million were issued by VCC 2023-RTL1, and $234.7 million were issued by VCC 2023-3. VCC 2023-RTL1 is the Company’s first securitization of our short-term mortgage loans. The VCC 2023-RTL1 includes a Reinvestment Period whereby additional short term mortgage loans may be added to the security through January 2025. The VCC 2023-3 security is collateralized by long term mortgage loans.

During the quarter ended September 30, 2023, the Company began utilizing forward starting interest rate derivative instruments designated as cash flow hedges to manage the exposure to interest rate volatility with regard to future issuances of fixed-rate debt. The gains or losses on forward starting interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of accumulated other comprehensive income.

Continued Market Uncertainties

Our operational and financial performance will depend on certain market developments, including any lingering impact of the COVID-19 pandemic, the Russia/Ukraine war, the Israel-Gaza Conflict, a global recession, heightened stress in the real estate and corporate debt markets, recent bank failures, 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 polices and estimates relate to the allowance for loan losses and deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC.

How We Assess Our Business Performance

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

Net Interest Income

Net interest income is the largest contributor to our net income and is monitored on both an absolute basis and relative to provisions for loan losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term 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 provisions for loan losses.

Credit Losses

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

Operating Expenses

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

Factors Affecting Our Results of Operations

Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by a number of factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, 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 any lingering impact of the COVID-19 pandemic, the Russia/Ukraine and Israel/Hamas wars, 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.

One of our six warehouse repurchase and revolving loan facilities have interest payment obligations tied to the one-month American Interbank Offered Rate, ("AMERIBOR"). Five of 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 have an adverse impact on financial results.

Macroeconomic Conditions

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

Portfolio and Asset Quality

Key Portfolio Statistics


	September 30, 2023			June 30, 2023			September 30, 2022
	($ in thousands)
Total loans	$	3,876,726		$	3,719,825		$	3,432,540
Loan count		9,953			9,541			8,476
Average loan balance	$	390		$	390		$	405
Weighted average loan-to-value		68.0	%		68.2	%		68.7	%
Weighted average coupon		8.6	%		8.4	%		7.7	%
Nonperforming loans (UPB) (A)	$	387,725		$	371,154		$	253,341
Nonperforming loans (% of total) (A)		10.0	%		10.0	%		7.4	%

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $41.3 million, $43.5 million, and $42.4 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of September 30, 2023, June 30, 2023, and September 30, 2022, 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 Coupon. Weighted average coupon reflects the weighted average loan rate at the end of the period.

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

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

Originations and Acquisitions

The following table presents new loan originations and acquisitions and includes average loan size, weighted average coupon and weighted average loan-to-value for the periods indicated:


($ in thousands)	Loan Count		Loan Balance		Average Loan Size		Weighted Average Coupon			Weighted Average LTV
Three Months Ended September 30, 2023:
Loan originations — held for investment		765	$	271,633	$	355		11.08	%		66.5	%
Loan originations — held for sale		8		18,948		2,369		10.46	%		48.9	%
Total loan originations		773	$	290,581	$	376		11.04	%		65.3	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated		773	$	290,581	$	376		11.04	%		65.3	%
Three Months Ended June 30, 2023:
Loan originations — held for investment		722	$	258,646	$	358		11.00	%		67.7	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		722	$	258,646	$	358		11.00	%		67.7	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated		722	$	258,646	$	358		11.00	%		67.7	%
Three Months Ended September 30, 2022:
Loan originations — held for investment		1,063	$	441,080	$	415		8.89	%		69.2	%
Loan originations — held for sale		1		16,192		16,192		4.15	%		68.6	%
Total loan originations		1,064	$	457,272	$	430		8.58	%		66.8	%
Loan acquisitions — held for investment		11		10,009		910		9.85	%		64.4	%
Total loans originated and acquired		1,075	$	467,281	$	435		8.75	%		66.7	%

During the third quarter of 2023, we originated $290.6 million of loans, which is an increase of $31.9 million from $258.6 million for the three months ended June 30, 2023 and a decrease of $166.7 million from $457.3 million for the quarter ended September 30, 2022. The decrease from September 2022 is primarily as a result of increased interest rates and our decision to strategically reduce originations given general economic uncertainties.

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

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


(in thousands)	September 30, 2023			December 31, 2022
Unpaid principal balance	$	3,857,779		$	3,512,486
Valuation adjustments on FVO loans		15,357			7,463
Deferred loan origination costs		29,379			33,429
Total loans held for investment, gross		3,902,515			3,553,378
Allowance for credit losses		(4,685	)		(4,893	)
Loans held for investment, net	$	3,897,830		$	3,548,485

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


	September 30, 2023					December 31, 2022					September 30, 2022
($ in thousands)	UPB		%			UPB		%			UPB		%
Loans due in less than one year	$	147,180		3.8	%	$	146,916		4.2	%	$	125,250		3.7	%
Loans due in one to five years		49,272		1.3			31,777		0.9			36,649		1.1
Loans due in more than five years		3,661,327		94.9			3,333,793		94.9			3,254,449		95.2
Total loans held for investment	$	3,857,779		100.0	%	$	3,512,486		100.0	%	$	3,416,348		100.0	%

Allowance for Loan Losses

For the December 31, 2022 CECL estimate, we used a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. We considered the potential impact of the Omicron variant and the effect of the variant on further supply chain disruptions. We also considered lower than forecasted employment numbers, expiring unemployment benefits, and an upcoming flu season.

For the March 31, 2023 estimate, we considered a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the uncertainty around future COVID cases, the war between Russia and Ukraine, spike in inflation, continued disruption in the supply chain, and concerns of a recession.

For the June 30, 2023 estimate, we considered a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States, the war between Russia and Ukraine, continued disruption in the supply chain, and concerns of a recession.

For the September 30, 2023 estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States , the wars between Russia/Ukraine and Israel/Hamas, continued disruption in the supply chain, and concerns of a recession.

Our allowance for loan losses as of September 30, 2023 was $4.7 million compared to $4.9 million as of December 31, 2022 and $5.3 million as of September 30, 2022. The decrease in allowance for credit losses from December 31, 2022 and from September 30, 2022 was primarily due to loan payoffs decreasing our portfolio of loans held for investment carried at amortized cost. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and the Company’s ability to forecast economic events evolves.

To estimate the allowance for loan 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 loan losses over the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2023			2022			2023			2022
Allowance for credit losses:
Beginning balance	$	4,626		$	4,905		$	4,893		$	4,262
Provision for loan losses		154			580			1,088			1,589
Charge-offs		(95	)		(155	)		(1,296	)		(521	)
Ending balance	$	4,685		$	5,330		$	4,685		$	5,330
Total loans held for investment (UPB), excluding FVO (1)	$	2,921,146		$	3,415,468		$	2,921,146		$	3,415,468
Allowance for credit losses / loans held for investment, excluding FVO		0.16	%		0.16	%		0.16	%		0.16	%

(1)

Reflects the UPB of loans held for investment excluding loans held for investment at fair value (FVO).

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

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


($ in thousands)	September 30, 2023 (A)				COVID-19 Forbearance		December 31, 2022 (A)				COVID-19 Forbearance		September 30, 2022 (A)				COVID-19 Forbearance
Performing/Accruing:
Current	$	3,188,015	82.6	%	$	99,680	$	2,969,989	84.6	%	$	120,884	$	2,966,765	86.8	%	$	140,160
30-59 days past due		197,242	5.1			32,652		186,051	5.3			33,668		121,528	3.6			11,471
60-89 days past due		84,797	2.2			3,387		63,657	1.8			6,902		74,714	2.2			23,529
90+ days past due		—	—			—		—	—			—		—	—			—
Total Performing Loans		3,470,054	89.9			135,719		3,219,697	91.7			161,454		3,163,007	92.6			175,160
Nonperforming/Nonaccrual:
<90 days past due		17,969	0.5			284		17,852	0.5			1,116		18,291	0.5			3,186
90+ days past due		36,426	0.9			2,917		32,566	0.9			1,681		26,705	0.8			2,114
Bankruptcy		19,323	0.5			3,278		22,435	0.6			7,272		15,899	0.5			3,451
In foreclosure		314,007	8.2			34,848		219,936	6.3			29,482		192,446	5.6			33,607
Total nonperforming loans		387,725	10.1			41,327		292,789	8.3			39,551		253,341	7.4			42,358
Total loans held for investment	$	3,857,779	100.0	%	$	177,046	$	3,512,486	100.0	%	$	201,005	$	3,416,348	100.0	%	$	217,518

(A)

Balance includes $177.0 million UPB of loans held for investment as of September 30, 2023 , $201.0 million as of December 31, 2022, and $217.5 million as of September 30, 2022 in our COVID-19 forbearance program.

Other than loans in the COVID-19 forbearance program, loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $387.7 million, or 10.1% of our held for investment loan portfolio as of September 30, 2023, compared to $292.8 million, or 8.3% as of December 31, 2022, and $253.3 million, or 7.4% of the held for investment loan portfolio as of September 30, 2022. We believe the significant equity cushion at origination and the active management of loans will continue to minimize credit losses on the resolution of defaulted loans and disposition of REO properties.

Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $56.9 million of long-term and short-term non-performing loans during the quarter ended September 30, 2023, which was higher compared to $43.6 million during the quarter ended June 30, 2023 and higher compared to $38.4 million during the quarter ended September 30, 2022. From these resolution activities, including the REO resolutions, we realized net gains of $1.2 million, $1.5 million, and $2.7 million during the quarters ended September 30, 2023, June 30, 2023, and September 30, 2022, 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 for our long-term nonperforming loans and REO's.


	Three Months Ended
Long-Term Loans	September 30, 2023					June 30, 2023					September 30, 2022
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	20,668	$	758		$	13,485	$	965		$	16,175	$	967
Resolved — paid current		26,950		206			19,771		280			11,410		182
Resolved — REO sold		6,341		162			4,836		(382	)		3,171		250
Total resolutions	$	53,959	$	1,126		$	38,092	$	863		$	30,756	$	1,399
Recovery rate on resolved nonperforming UPB				102.1	%				102.3	%				104.5	%

The table below includes resolutions for our short-term nonperforming loans and REO's, and also includes loans that were granted a COVID-19 forbearance in 2020. The 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.


	Three Months Ended
Short-Term and Forbearance Loans	September 30, 2023					June 30, 2023					September 30, 2022
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	2,967	$	38		$	7,004	$	318		$	8,691	$	396
Resolved — paid current		6,292		—			3,290		89			2,075		—
Resolved — REO sold		2,434		(11	)		1,672		222			3,672		865
Total resolutions	$	11,693	$	27		$	11,966	$	629		$	14,438	$	1,261
Recovery rate on resolved nonperforming UPB				100.2	%				105.3	%				108.7	%

Our charge-offs incurred have been small as a percentage of nonperforming loans held for investment and carried at amortized cost. The table below shows our actual loan losses for the periods indicated.


	Nine Months Ended				Six Months Ended				Nine Months Ended
($ in thousands)	September 30, 2023				June 30, 2023				September 30, 2022
Average nonperforming loans for the period (1)	$	326,483			$	313,800			$	261,764
Charge-offs		1,296				1,200				521
Charge-offs / Average nonperforming loans for the period (1)		0.53	%	(2)		0.76	%	(2)		0.27	%	(2)

(1)

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

(2)

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

Concentrations – Loans Held for Investment

As of September 30, 2023, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 55.0% of the UPB. Mixed used properties represented 11.8% 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 21.5% in California, 18.7% in New York, 13.9% in Florida, and 7.5% in New Jersey.


Property Type	September 30, 2023
($ in thousands)	Loan Count		UPB		% of Total UPB
Investor 1-4		6,151	$	2,120,179		55.0	%
Mixed use		1,103		457,130		11.8
Retail		685		327,771		8.5
Multifamily		562		305,013		7.9
Warehouse		380		246,614		6.4
Office		484		199,847		5.2
Other(1)		580		201,225		5.2
Total loans held for investment		9,945	$	3,857,779		100.0	%

(1)

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


Geography (State)	September 30, 2023
($ in thousands)	Loan Count		UPB		% of Total UPB
California		1,281	$	829,110		21.5	%
New York		1,313		723,574		18.7
Florida		1,357		536,061		13.9
New Jersey		894		288,389		7.5
Other(1)		5,100		1,480,645		38.4
Total loans held for investment		9,945	$	3,857,779		100.0	%

(1)

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

Real Estate Owned (REO)

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

As of September 30, 2023, our REO included 61 properties with a lower of cost or estimated fair value of $29.3 million compared to 45 properties with a lower of cost or estimated fair value of $20.4 million as of June 30, 2023.

Key Performance Metrics


	Three Months Ended
($ in thousands)	September 30, 2023 (1)			June 30, 2023 (1)			September 30, 2022 (1)
Average loans	$	3,773,631		$	3,637,570		$	3,217,264
Portfolio yield		8.38	%		8.24	%		7.88	%
Average debt — portfolio related		3,379,610			3,258,651			2,871,149
Average debt — total company		3,594,610			3,473,651			3,086,149
Cost of funds — portfolio related		5.63	%		5.58	%		4.81	%
Cost of funds — total company		5.76	%		5.71	%		5.00	%
Net interest margin — portfolio related		3.34	%		3.24	%		3.59	%
Net interest margin — total company		2.90	%		2.78	%		3.09	%
Charge-offs/Average loans held for investment, excluding FVO loans		0.01	%		0.09	%		0.02	%
Pre-tax return on equity		16.82	%		16.81	%		15.26	%
Return on equity		11.87	%		12.21	%		11.18	%

(1)

Percentages are annualized.

Average Loans

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

Portfolio Yield

Portfolio yield is an annualized measure of the total interest income earned on our loan portfolio as a percentage of average loans over the given period. Interest income includes interest earned on performing loans, cash interest received on nonperforming loans, default interest and prepayment fees. The fluctuations in our portfolio yield over the periods shown was primarily driven by loans placed on non-accrual status during the periods.

Average Debt — Portfolio Related and Total Company

Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse facilities and 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 5.63% for the three months ended September 30, 2023 from 5.58% for the three months ended June 30, 2023 and increased from 4.81% for the three months ended September 30, 2022.

Net Interest Margin — Portfolio Related and Total Company

Portfolio related net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt as a percentage of average loans over the specified time period. Total company net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt and corporate debt as a percentage of average loans over the specified time period.

Over the periods shown below, our portfolio related net interest margin remained relatively consistent at 3.34% for the three months ended September 30, 2023 compared to the 3.24% for the three months ended June 30, 2023, and decreased from 3.59% for the three months ended September 30, 2022. The decrease from September 30, 2022 was primarily due to higher debt cost caused by an overall increase in interest rates.

Our total company net interest margin of 2.90% for the three months ended September 30, 2023 remained relatively consistent compared to 2.78% for the three months ended June 30, 2023, and decreased from 3.09% for the three months ended September 30, 2022. The decrease in total company net interest margin during the three months ended September 30, 2023 from the three months ended September 30, 2022 was primarily due to higher interest rates as compared to the same period in 2022.

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


	Three Months Ended
	September 30, 2023							June 30, 2023							September 30, 2022
			Interest		Average					Interest		Average					Interest		Average
	Average		Income /		Yield /			Average		Income /		Yield /			Average		Income /		Yield /
($ in thousands)	Balance		Expense		Rate (1)			Balance		Expense		Rate (1)			Balance		Expense		Rate (1)
Loan portfolio:
Loans held for sale	$	3,170						$	3,477						$	176
Loans held for investment		3,770,460							3,634,093							3,217,264
Total loans	$	3,773,631	$	79,088		8.38	%	$	3,637,570	$	74,897		8.24	%	$	3,217,440	$	63,419		7.88	%

Debt:
Warehouse facilities	$	192,855	$	4,943		10.25	%	$	238,027	$	5,910		9.93	%	$	226,660	$	3,798		6.70	%
Securitized debt		3,186,756		42,640		5.35	%		3,020,624		39,541		5.24	%		2,644,489		30,763		4.65	%
Total debt - portfolio related		3,379,610		47,583		5.63	%		3,258,651		45,451		5.58	%		2,871,149		34,561		4.81	%
Corporate debt		215,000		4,138		7.70	%		215,000		4,139		7.70	%		215,000		4,011		7.46	%
Total debt	$	3,594,610	$	51,721		5.76	%	$	3,473,651	$	49,590		5.71	%	$	3,086,149	$	38,572		5.00	%

Net interest spread - portfolio related (2)						2.75	%						2.66	%						3.07	%
Net interest margin - portfolio related						3.34	%						3.24	%						3.59	%

Net interest spread - total company (3)						2.63	%						2.53	%						2.88	%
Net interest margin - total company						2.90	%						2.78	%						3.09	%

(1)

Annualized.

(2)

Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

(3)

Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

Charge-Offs

Our annualized charge-off rate over average loans held for investment carried at amortized cost for the three months ended September 30, 2023 decreased to 0.01% as compared to 0.09% for the three months ended June 30, 2023 and 0.02% for the three months ended September 30, 2022. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarters. We do not record charge-offs on FVO loans which are carried at estimated fair value. We do not record charge-offs on our loans held for sale which are carried either at fair value, or at the lower of cost or estimated fair value.

Pre-Tax Return on Equity and Return on Equity

Pre-tax return on equity and return on equity reflect income before income taxes and net income 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 equity and return on equity remained the same during the quarter ended September 30, 2023 compared to the quarter ended June 30, 2023, and higher compared to the quarter ended September 30, 2022 due to the increase in income before income taxes and net income.


	Three Months Ended
($ in thousands)	September 30, 2023			June 30, 2023			September 30, 2022
Income before income taxes (A)	$	17,239		$	16,824		$	14,049
Net income (B)		12,169			12,222			10,290

Monthly average balance:
Stockholders' equity (C)		409,954			400,441			368,270

Pre-tax return on equity (A)/(C) (1)		16.8	%		16.8	%		15.3	%

Return on equity (B)/(C) (1)		11.9	%		12.2	%		11.2	%

(1)

Annualized.

Components of Results of Operations

Interest Income

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

Interest income on loans held for investment is comprised of interest income on loans and prepayment fees less the amortization of deferred net costs related to the origination of loans. Interest income on loans held for sale is comprised of interest income earned on loans prior to their sale. The net fees and costs associated with loans held for sale 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 held for sale carried at fair value are recognized and expensed as incurred.

Interest Expense — Portfolio Related

Portfolio related interest expense is incurred on the debt we incur to fund our loan origination and portfolio activities and consists of our warehouse facilities and securitized debt. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our 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 2021 Term Loan and the 2022 Term Loan, as reflected on our consolidated balance sheets, and the related amortization of deferred debt issuance costs.

Net Interest Income

Net interest income represents the difference between portfolio related net interest income and interest expense on corporate debt.

Provision for Loan Losses

Effective January 1, 2020 , we adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replacing the incurred loss accounting approach with the current expected credit loss (CECL) approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loans position as of the balance sheet date, and assumptions from us. We do not record provision for loan 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 sales 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 the 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 Fair Value Securitized Debt. We have elected to apply the 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.

Bank Interest Income. Interest income on bank balances.

Other Income. Other income includes the following:

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 gains/(losses) on mortgage servicing rights.

Servicing Fee Income . Century earns servicing fees for servicing mortgage loans for others.

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

Operating Expenses

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.

Consolidated Results of Operations

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
Interest income	$	79,088	$	63,419	$	224,506	$	174,711
Interest expense - portfolio related		47,583		34,561		135,062		86,869
Net interest income - portfolio related		31,505		28,858		89,444		87,842
Interest expense - corporate debt		4,138		4,011		12,417		25,333
Net interest income		27,367		24,847		77,027		62,509
Provision for loan losses		154		580		1,088		1,589
Net interest income after provision for loan losses		27,213		24,267		75,939		60,920
Other operating income		17,360		3,027		44,239		12,900
Total operating expenses		27,334		13,245		71,359		40,960
Income before income taxes		17,239		14,049		48,819		32,860
Income tax expense		5,070		3,759		13,693		8,568
Net income		12,169		10,290		35,126		24,292
Net income attributable to noncontrolling interest		83		307		208		543
Net income attributable to Velocity Financial, Inc.	$	12,086	$	9,983	$	34,918	$	23,749

Net Interest Income — Portfolio Related


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2023		2022		$ Change		2023		2022		$ Change
Interest income	$	79,088	$	63,419	$	15,669	$	224,506	$	174,711	$	49,795
Interest expense - portfolio related		47,583		34,561		13,022		135,062		86,869		48,193
Net interest income - portfolio related	$	31,505	$	28,858	$	2,647	$	89,444	$	87,842	$	1,602

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $31.5 million from $28.9 million for the three months ended September 30, 2023 and 2022. Our portfolio related net interest income increased from $87.8 million for the nine months ended September 30, 2022 to $89.4 million for the nine months ended September 30, 2023.

Interest Income. Interest income increased by $15.7 million to $79.1 million for the three months ended September 30, 2023, compared to $63.4 million for the three months ended September 30, 2022. The increase was primarily attributable to higher portfolio balances and an increase in the average loan yield, which increased from 7.88% for the three months ended September 30, 2022 to 8.38% for the three months ended September 30, 2023. Interest income increased by $49.8 million to $224.5 million for the nine months ended September 30, 2023, compared to $174.7 million for the nine months ended September 30, 2022. The increase in interest income for the nine months ended September 30, 2023 was primarily attributable to higher portfolio balances due to loan originations and higher average loan yield.

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to a change in rate for the three and nine months ended September 30, 2023 and 2022, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance (i.e., $0.6 billion) by the previous period’s average yield (i.e., 7.88%). The effect of rate changes is calculated by multiplying the change in average yield (i.e., 0.50%) by the current period’s average loan balance (i.e., $3.8 billion).


	Three Months Ended September 30, 2023 and 2022
($ in thousands)	Average Loans		Interest Income		Average Yield (1)
Three months ended September 30, 2023	$	3,773,631	$	79,088		8.38	%
Three months ended September 30, 2022		3,217,264		63,419		7.88	%
Volume variance		556,367		10,960
Rate variance				4,709		0.50	%
Total interest income variance			$	15,669
(1) Annualized.


	Nine Months Ended September 30, 2023 and 2022
($ in thousands)	Average Loans		Interest Income		Average Yield (1)
Nine Months Ended September 30, 2023	$	3,645,410	$	224,506		8.21	%
Nine Months Ended September 30, 2022		2,957,932		174,711		7.88	%
Volume variance		687,478		40,630
Rate variance				9,165		0.33	%
Total interest income variance			$	49,795
(1) Annualized.

Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased from $34.6 million for the three months ended September 30, 2022 to $47.6 million for the three months ended September 30, 2023, and increased from $86.9 million for the nine months ended September 30, 2022 to $135.1 million for the nine months ended September 30, 2023, primarily attributable to a higher loan portfolio being financed and increased interest rates.

The following tables present the information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three and nine months ended September 30, 2023 and 2022, respectively.


	Three Months Ended September 30, 2023 and 2022
($ in thousands)	Average Debt (1)		Interest Expense		Cost of Funds (2)
Three months ended September 30, 2023	$	3,379,610	$	47,583		5.63	%
Three months ended September 30, 2022		2,871,149		34,561		4.81	%
Volume variance		508,461		6,114
Rate variance				6,908		0.82	%
Total interest expense variance			$	13,022

(1)

Includes securitized debt and warehouse agreements.

(2)

Annualized.


	Nine Months Ended September 30, 2023 and 2022
($ in thousands)	Average Debt (1)		Interest Expense		Cost of Funds (2)
Nine Months Ended September 30, 2023	$	3,263,304	$	135,063		5.52	%
Nine Months Ended September 30, 2022		2,626,294		86,869		4.41	%
Volume variance		637,010		21,069
Rate variance				27,125		1.11	%
Total interest expense variance			$	48,194

(1)

Includes securitized debt and warehouse agreements.

(2)

Annualized.

Net Interest Income After Provision for Loan Losses


	Three Months Ended September 30,							Nine Months Ended September 30,
($ in thousands)	2023		2022		$ Change			2023		2022		$ Change
Net interest income - portfolio related	$	31,505	$	28,858	$	2,647		$	89,444	$	87,842	$	1,602
Interest expense - corporate debt		4,138		4,011		127			12,417		25,333		(12,916	)
Net interest income		27,367		24,847		2,520			77,027		62,509		14,518
Provision for loan losses		154		580		(426	)		1,088		1,589		(501	)
Net interest income after provision for loan losses	$	27,213	$	24,267	$	2,946		$	75,939	$	60,920	$	15,019

Interest Expense — Corporate Debt . Corporate debt interest expense remained consistent at $4.1 million for the three months ended September 30, 2023, compared to $4.0 million for the three months ended September 30, 2022, and decreased to $12.4 million for the nine months ended September 30, 2023, compared to $25.3 million for the nine months ended September 30, 2022, primarily due to the $12.8 million prepayment fee and write-off of unamortized debt issuance costs associate with the payoff of our previous corporate debt in March 2022.

Provision for Loan Losses . Our provision for loan losses decreased to $0.2 million for the three months ended September 30, 2023 compared to $0.6 million for the three months ended September 30, 2022, and decreased from $1.6 million for the nine months ended September 30, 2022 to $1.1 million for the nine months ended September 30, 2023, primarily due to paydown on our existing loans held for investment portfolio carried at amortized cost. New loan originations beginning October 1, 2022.are carried at estimated fair value, which are excluded from provision for loan losses assessment.

Other Operating Income

The $14.3 million increase in total other operating income during the three months ended September 30, 2023 and $31.3 million increase for the nine months ended September 30, 2023 was mainly due to the election of fair value option accounting on new loan originations beginning October 1,2022, and the election of fair value option accounting on certain securitized debt effective January 1, 2023.


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023	2022		$ Change	2023	2022		$ Change
Gain on disposition of loans	$3,606	$399		$3,207	$6,756	$6,716		$40
Unrealized gain on fair value loans	(1,284)	453		(1,737)	8,483	469		8,014
Unrealized gain on fair value securitized debt	9,692	—		9,692	15,083	—		15,083
Origination income	3,323	518	(1)	2,805	8,469	1,704	(1)	6,765
Bank interest income	1,342	—		1,342	3,478	—		3,478
Other income	681	1,657	(2)	(976)	1,970	4,011	(2)	(2,041)
Total other operating income	$17,360	$3,027		$14,333	$44,239	$12,900		$31,339

(1)

Origination income included in other income for the three and nine months ended September 30, 2022, respectively have been reclassified to conform to current period presentation.

(2)

$0.5 million and $1.7 million of origination income originally included in other operating expenses for the three and nine months ended September 30, 2022, respectively have been reclassified as a separate line item, "origination income", under other operating income to conform to current period presentation.

Operating Expenses

Operating expenses are presented in the following table. Changes in operating expenses comparing to the same periods prior year are discussed below.


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023	2022		$ Change	2023	2022		$ Change
Compensation and employee benefits	$12,523	$6,788		$5,735	$33,200	$18,664		$14,536
Origination expenses	273	209	(1)	64	347	2,656	(1)	(2,309)
Securitization expenses	4,930	—		4,930	10,213	—		10,213
Loan servicing	4,901	3,314		1,587	12,996	9,055		3,941
Professional fees	854	664		190	2,865	3,087		(222)
Rent and occupancy	472	445		27	1,377	1,313		64
Real estate owned, net	1,239	(195)		1,434	4,085	(621)		4,706
Other operating expenses	2,142	2,020	(1)	122	6,276	6,806	(1)	(530)
Total operating expenses	$27,334	$13,245		$14,089	$71,359	$40,960		$30,399

(1)

$0.2 million and $2.7 million origination expenses included in other operating expenses for the three and nine months ended September 30, 2022 , respectively, have been reclassified to origination expenses to conform to current period presentation. $0.5 million and $1.7 million of origination income originally included in other operating expenses for the three and nine months ended September 30, 2022, respectively, have been reclassified as a separate line item, "origination income", under other operating income to conform to current period presentation.

Compensation and Employee Benefits . Compensation and employee benefits increased by $5.7 million to $12.5 million for the three months ended September 30, 2023 compared to $6.8 million for the three months ended September 30, 2022, and increased by $14.5 million to $33.2 million for the nine months ended September 30, 2023 compared to $18.7 million for the nine months ended September 30, 2022. The increase was mainly driven by the FVO accounting on all new loan originations beginning October 1, 2022, as all origination costs on FVO loans are expensed as incurred as opposed to being deferred and amortized prior to October 1, 2022.

Origination Expenses . Origination expenses remained consistent at an expense of $0.3 million for the three months ended September 30, 2023, compared to an expense of $0.2 million for the three months ended September 30, 2022, and decreased to an expense of $0.3 million for the nine months ended September 30, 2023, compared to an expense of $2.7 million for the nine months ended September 30, 2022. The decrease in origination expenses was due to a decrease in loan funding activity compared to prior year.

Securitization Expenses . The increase in securitization expenses of $4.9 million and $10.2 million for the three and nine months ended September 30, 2023, respectively, was due to the election of fair value option accounting on securitized debt issued in 2023. Securitization expenses on FVO securitized debt are expensed as incurred as opposed to being deferred and amortized for securitized debt carried at amortized cost.

Loan Servicing . Loan servicing expenses increased from $3.3 million for the three months ended September 30, 2022 to $4.9 million for the three months ended September 30, 2023, and increased from $9.1 million for the nine months ended September 30, 2022 to $13.0 million for the nine months ended September 30, 2023 primarily due to the increase in our total loan portfolio from prior year.

Professional Fees . Professional fees increased to $0.9 million for the three months ended September 30, 2023 compared to $0.7 million for the three months ended September 30, 2022, and decreased by $0.2 million to $2.9 million for the nine months ended September 30, 2023 as compared to $3.1 million for the nine months ended September 30, 2022.

Rent and Occupancy . Rent and occupancy expenses remained consistent at $0.5 million and $0.4 million for the three months ended September 30, 2023 and three months ended September 30, 2022. Rent and occupancy remained consistent at $1.4 million for the nine months ended September 30, 2023 and $1.3 million for the nine months ended September 30, 2022.

Net Expenses of Real Estate Owned . Net expenses of real estate owned increased from income of $0.2 million for the three months ended September 30, 2022 to expense of $1.2 million for the three months ended September 30, 2023, and increased from income of $0.6 million for the nine months ended September 30, 2022 to expense of $4.1 million for the nine months ended September 30, 2023, mainly due to the decrease in realized gain on REO disposition and the increase in valuation adjustments taken on the underlying collateral values.

Other Operating Expenses. Other operating expenses increased from $2.0 million for the three months ended September 30, 2022 to $2.1 million for the three months ended September 30, 2023, and decreased from $6.8 million for the nine months ended September 30, 2022 to $6.3 million for the nine months ended September 30, 2023. The $0.5 million decrease from the nine months ended September 30, 2022 was primarily attributable to the decrease in advertising expense and property insurance premiums paid.

Income Tax Expense. Income tax expense was $5.1 million and $3.8 million for the three months ended September 30, 2023 and 2022, respectively, and $13.7 million and $8.6 million for the nine months ended September 30, 2023 and 2022, respectively. Our annual consolidated effective tax rates were 28.3% and 27.4% for the years 2023 and 2022 respectively.

Quarterly Results of Operations

The following table sets forth certain financial information for each completed fiscal quarter since the quarter ended December 31, 2021. The quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.

The following table sets forth our unaudited quarterly results for the periods indicated:


	Three Months Ended
	September 30, 2023			June 30, 2023			March 31, 2023			December 31, 2022			September 30, 2022			June 30, 2022			March 31, 2022				December 31, 2021
($ in thousands)	(unaudited)
Interest income	$	79,088		$	74,897		$	70,521		$	65,632		$	63,419		$	59,243		$	52,049			$	49,360
Interest expense - portfolio related		47,583			45,451			42,029			40,854			34,561			28,752			23,556				23,666
Net interest income - portfolio related		31,505			29,446			28,492			24,778			28,858			30,491			28,493				25,694
Net interest margin - portfolio related		3.34	%		3.24	%		3.23	%		2.84	%		3.59	%		4.10	%		4.25	%			4.27	%
Interest expense - corporate debt		4,138			4,139			4,139			4,139			4,011			4,182			17,140				4,462
Net interest income		27,367			25,307			24,353			20,639			24,847			26,309			11,353				21,232
Net interest margin - total company		2.90	%		2.78	%		2.76	%		2.36	%		3.09	%		3.54	%		1.69	%			3.53	%
Provision for (reversal of) loan losses		154			298			636			(437	)		580			279			730				377
Net interest income after provision for loan losses		27,213			25,009			23,717			21,076			24,267			26,030			10,623				20,855
Other operating income		17,360			14,037			12,843			11,420			3,027			3,592			6,281				3,190
Operating expenses		27,334			22,222			21,803			20,804			13,245			14,832			12,883				12,668
Income before income taxes		17,239			16,824			14,757			11,692			14,049			14,790			4,021				11,377
Less income attributable to noncontrolling interest		83			39			87			(235	)		307			126			110				—
Income tax expense		5,070			4,602			4,021			3,465			3,759			4,019			790				3,024
Net income	$	12,086		$	12,183		$	10,649		$	8,462		$	9,983		$	10,645		$	3,121		(1)	$	8,353

(1)

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

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 $654.0 million as of September 30, 2023, comprised of $29.4 million in cash, $30.9 million of available borrowings for unencumbered loans, and $593.6 million of available warehouse capacity.

We had cash of $29.4 million and $26.4 million, excluding restricted cash of $17.7 million and $14.5 million as of September 30, 2023 and 2022, respectively. The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities as of the periods indicated:


	Nine Months Ended
($ in thousands)	September 30, 2023			September 30, 2022
Cash provided by (used in):
Operating activities	$	22,676		$	8,656
Investing activities		(360,790	)		(819,065	)
Financing activities		323,154			803,710
Net change in cash, cash equivalents, and restricted cash	$	(14,960	)	$	(6,699	)

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

For the nine months ended September 30, 2023, our net cash used in operating activities consisted mainly of $35.1 million in net income, $19.8 million in proceeds from sales of loans held for sale, partially offset by $38.0 million in origination of loans held for sale.

For the nine months ended September 30, 2023, our net cash used in investing activities consisted mainly of $728.2 million in cash used to originate held for investment loans, partially offset by $334.2 million in cash received in payoffs of loans held for investment.

For the nine months ended September 30, 2023, our net cash provided by financing activities consisted mainly of $753.3 million in borrowings from our warehouse and repurchase facilities and $774.3 million in proceeds of asset-backed securities issued. The cash generated was offset by repayments of $868.7 million on our warehouse and repurchase facilities and repayments of $333.9 million on asset-backed securities issued.

During the nine months ended September 30, 2023, we used approximately $15.0 million of net cash and cash equivalents on operating, investing and financing activities. During the nine months ended September 30, 2022, we used approximately $6.7 million of net cash and cash equivalents on operating, investing and financing activities.

Warehouse Facilities

As of September 30, 2023, we had five non-mark-to-market warehouse facilities and one modified mark-to-market warehouse facility to support our loan origination and acquisition facilities. One agreement is a two-year warehouse repurchase facility, three agreements are one-year warehouse repurchase facilities and two agreements are three-year warehouse facilities. The borrowings are collateralized by primarily performing loans, one of the warehouse facilities bear interest at one-month AMERIBOR and five warehouse facilities at SOFR, all at margins that range from 1.60% to 4.50%. Borrowing under these facilities was $216.4 million with $593.6 million of available capacity under our warehouse and repurchase facilities as of September 30, 2023.

All warehouse facilities fund less than 100% of the principal balance of the mortgage loans we own requiring us to use working capital to fund the remaining portion. We may need to use additional working capital if loans become delinquent, because the amount permitted to be financed by the facilities may change based on the delinquency performance of the pledged collateral.

All borrower payments on loans financed under the warehouse 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 September 30, 2023, we were in compliance with these covenants.

Securitized debt

From May 2011 through September 2023, we have completed thirty securitized debts, issuing $6.2 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 September 30, 2023 and December 31, 2022, 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%—30%, of the original stated principal balance of loans at issuance. As a result, the actual maturity date of the securities issued will likely be earlier than their respective stated maturity date.


($ in thousands)			Securities Retained as of
Trusts	Securities Issued		Issuance Date		September 30, 2023		December 31, 2022		Stated Maturity Date
2016-1 Trust	$	319,809	$	38,792	$	—	$	17,541	April 2046
2017-2 Trust		245,601		12,927		2,416		2,697	October 2047
2018-1 Trust		176,816		9,308		1,626		2,065	April 2048
2018-2 Trust		307,988		16,210		3,781		4,352	October 2048
2019-1 Trust		235,580		12,399		—		4,178	March 2049
2019-2 Trust		207,020		10,901		—		4,007	July 2049
2019-3 Trust		154,419		8,127		—		3,281	October 2049
2020-1 Trust		248,700		13,159		—		6,746	February 2050
2020-2 Trust		96,352		32,118		12,847		12,847	June 2050
2021-1 Trust		251,301		13,227		—		10,120	May 2051
2021-2 Trust		194,918		10,260		—		—	August 2051
2021-3 Trust		204,205		—		—		—	October 2051
2021-4 Trust		319,116		—		—		—	December 2051
2022-1 Trust		273,594		5,015		4,451		4,718	February 2052
2022-2 Trust		241,388		11,202		11,170		11,170	March 2052
2022-MC1 Trust		84,967		40,911		44,926		44,038	May 2047
2022-3 Trust		296,323		18,914		15,489		18,587	May 2052
2022-4 Trust		308,357		25,190		13,414		25,027	July 2052
2022-5 Trust		188,754		65,459		12,649		65,141	October 2052
2023-1 Trust		198,715		41,593		4,042		—	December 2052
2023-1R Trust		64,833		66,228		66,228		—	October 2025
2023-2 Trust		202,210		24,229		23,948		—	April 2053
2023-RTL1 Trust		81,608		4,296		4,296		—	July 2028
2023-3 Trust		234,741		28,718		28,481		—	July 2053
Total	$	5,137,315	$	509,183	$	249,764	$	236,515

The following table summarizes outstanding bond balances for each securitized debt as of September 30, 2023 and December 31, 2022:


($ in thousands)	September 30, 2023		December 31, 2022
2016-1 Trust	$	—	$	22,369
2017-2 Trust		48,206		59,183
2018-1 Trust		35,010		43,596
2018-2 Trust		80,409		93,792
2019-1 Trust		79,215		91,167
2019-2 Trust		69,216		82,508
2019-3 Trust		60,482		67,899
2020-1 Trust		110,958		136,643
2020-2 Trust		49,528		60,445
2021-1 Trust		176,529		196,969
2021-2 Trust		149,431		170,072
2021-3 Trust		161,467		178,038
2021-4 Trust		250,941		273,489
2022-1 Trust		240,733		256,667
2022-2 Trust		221,631		233,045
2022-MC1 Trust		35,677		54,528
2022-3 Trust		262,308		280,066
2022-4 Trust		283,270		301,856
2022-5 Trust		171,183		186,577
2023-1 Trust		181,006		—
2023-1R Trust		60,515		—
2023-2 Trust		194,955		—
2023-RTL1 Trust		81,608		—
2023-3 Trust		232,802		—
	$	3,237,080	$	2,788,909

As of September 30, 2023 and December 31, 2022, the weighted average rates on the securities and certificates for the Trusts are as follows:


	September 30, 2023			December 31, 2022
2016-1 Trust (1)	NA				8.59	%
2017-2 Trust		3.95	%		3.92	%
2018-1 Trust		3.99	%		4.05	%
2018-2 Trust		4.43	%		4.46	%
2019-1 Trust		4.06	%		4.06	%
2019-2 Trust		3.40	%		3.46	%
2019-3 Trust		3.29	%		3.25	%
2020-1 Trust		2.89	%		2.89	%
2020-2 Trust		4.59	%		4.60	%
2021-1 Trust		1.76	%		1.73	%
2021-2 Trust		2.02	%		2.02	%
2021-3 Trust		2.47	%		2.44	%
2021-4 Trust		3.24	%		3.20	%
2022-1 Trust		3.94	%		3.93	%
2022-2 Trust		5.08	%		5.07	%
2022-MC1 Trust		6.90	%		6.91	%
2022-3 Trust		5.71	%		5.67	%
2022-4 Trust		6.23	%		6.23	%
2022-5 Trust		7.05	%		7.10	%
2023-1 Trust		7.01	%		—
2023-1R Trust		7.69	%		—
2023-2 Trust		7.19	%		—
2023-RTL1 Trust		8.23	%		—
2023-3 Trust		7.80	%		—

(1)

The 2016-1 Trust was collapsed in August 2023.

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. A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to a term loan previously entered into during 2021. The remaining portion of the net proceeds from the 2022 Term Loan is used for loan originations and general corporate purposes.

At-The-Market Equity Offering Program

On September 3, 2021, we entered into separate Equity Distribution Agreements with 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 5,000,000. For the three months ended September 30, 2023, 27,529 shares of common stock were sold under our ATM Program for net proceeds of $327.2 thousand.

Contractual Obligations and Commitments

As of September 30, 2023, we maintained warehouse facilities to finance our investor real estate loans and had approximately $216.4 million in outstanding borrowings with $593.6 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:

•

the description of our business contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and filed with the Securities and Exchange Commission (“SEC”) on March 13, 2023

•

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

•

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

•

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

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

Item 3. Quantitative and Qualitat ive Disclosures About Market Risk.

Interest Rate Risk

Our primary market risk is interest rate volatility. Because we fund a portion of our investments with borrowings, fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. To manage our exposure to interest rate risk, we may utilize financial instruments, including forward starting payer interest rate swaps, and interest rate swaption structure. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates may carry additional risks, such as counterparty credit risk and the legal enforceability of hedge agreements. As of September 30, 2023, we have forward starting payer interest rate swaps with a total notional amount of $155.0 million, hedging the variability in interest payment cash flows attributable to changes in the benchmark overnight SOFR, on a debt forecasted to issue during the fourth quarter of 2023.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures .

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the our management, including the our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

Changes in Internal Control over Financial Reporting .

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

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, in the ordinary course of business, we are involved in various judicial, regulatory or administrative claims, proceedings and investigations. These proceedings and actions may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. Although occasional adverse decisions or settlements may occur, our management does not believe that the final disposition of any currently pending or threatened matter will have a material adverse effect on our business, financial position, results of operations or cash flows.

Item 1A. Ri sk Factors.

Intentionally omitted pursuant to smaller reporting company reduced disclosure requirements.

Item 2. Unregistered Sales of Equi ty Securities and Use of Proceeds.

No common stock purchases were made by us during the three months ended September 30, 2023.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safe ty Disclosures.

Not applicable.

Item 5. Other Information.

Insider Trading Arrangements and Policies

None of our officers or directors had any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c ) or any “non-Rule 10b5-1 trading arrangement” in effect at any time during the three months ended September 30, 2023.

Item 6. E xhibits.

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


		Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File No.	Exhibit	Filing Date

3.1	Certificate of Conversion	8-K	001-39183	3.1	1/22/2020

3.2	Restated Certificate of Incorporation of Velocity Financial, Inc.	8-K	001-39183	3	5/23/2022

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

4.1	Form of Stock Certificate for Common Stock	S-1	333-234250	4.1	10/18/2019

4.2	Form of Warrant to Purchase Common Stock	8-K	001-39183	4.1	4/7/2020

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

10.1	Stockholders Agreement, dated as of January 16, 2020	10-K	001-39183	10.1	4/7/2020

10.2	Registration Rights Agreement, dated as of January 16, 2020	10-K	001-39183	10.2	4/7/2020

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

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

10.5	Velocity Financial, Inc. Employee Stock Purchase Plan*	DEF 14A	001-39183	AII	4/8/2022

10.6	Amended and Restated Velocity Financial, Inc. 2020 Omnibus Incentive Plan*	DEF 14A	001-39183	AI	4/8/2022

10.7	Form of Nonqualified Stock Option Award Notice and Agreement under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.6	1/6/2020

10.8	Form of Nonqualified Stock Option Award Notice and Agreement (Director Grant-IPO) under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.7	1/6/2020

10.9	Form of Nonqualified Stock Option Award Notice and Agreement (Executive Officer Grant-IPO) under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.8	1/6/2020

10.10	Form of Restricted Stock Unit Grant and Agreement (Director Grant) under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.9	1/6/2020

10.11	Form of Restricted Stock Unit Grant and Agreement (Standard Grant) under the 2020 Omnibus Incentive Plan*	S-1/A	333-234250	10.10	1/6/2020

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

10.13	Velocity Financial 2023 Annual Cash Incentive and Performance Stock Units Programs for Messrs. Farrar, Szczepaniak and Taylor*	8-K	001-39183	-	1/17/2023

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

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

10.16	Form of Performance Stock Unit Grant and Agreement*	-	-	-	-

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

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

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


31.2		Certification of Principal Financial 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 September 30, 2023 and December 31, 2022 (ii) the Consolidated Statements of Income for the quarter ended September 30, 2023 and September 30, 2022, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended September 30, 2023 and September 30, 2022, (iv) the Consolidated Statements of Cash Flows for the quarter ended September 30, 2023 and September 30, 2022 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 Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

* Management contract or compensatory plan or arrangement.

+ This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act

SIGNA TURES

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


	VELOCITY FINANCIAL, INC.

Date: November 2, 2023	By:	/s/ Christopher D. Farrar
		Christopher D. Farrar
		Chief Executive Officer

Date: November 2, 2023	By:	/s/ Mark R. Szczepaniak
		Mark R. Szczepaniak
		Chief Financial Officer

TABLE OF CONTENTS

Part I Financi Item 1. Consolidated Financial Statements (unaudited)Item 1. Consolidated Financ Note 1 Organization and Description Of Business Note 2 Basis Of Presentation and Summary Of Significant Accounting Policies Note 3 Current Accounting Developments Note 4 Cash, Cash Equivalents, and Restricted Cash Note 5 Loans Held For Sale At Fair Value Note 6 Loans Held For Investment and Loans Held For Investment At Fair Value Note 7 Receivables Due From Servicers Note 8 Mortgage Servicing Rights Note 9 Goodwill Note 10 Securitized Debt and Securitized Debt At Fair Value Note 11 Other Debt Note 12 Commitments and Contingencies Note 13 Stock-based Compensation Note 14 Earnings Per Share Note 15 Warrants Note 16 Derivative Instruments Note 17 Accumulated Other Comprehensive Income Note 18 Fair Value Measurements Note 19 Subsequent Events Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management S Discussion and Analysis Of Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 3. Quantitative and Qualitat Item 4. Controls and Procedures Item 4. Controls Part II Other Information Part II Other Item 1. Legal Proceedings Item 1. Legal Item 1A. Risk Factors Item 1A. Ri Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 2. Unregistered Sales Of Equi Item 3. Defaults Upon Senior Securities Item 3. Defaults Upon Item 4. Mine Safety Disclosures Item 4. Mine Safe Item 5. Other Information Item 5. Other Item 6. Exhibits

3.1 Certificate of Conversion 8-K 001-39183 3.1 1/22/2020 3.2 Restated Certificate of Incorporation of Velocity Financial, Inc. 8-K 001-39183 3 5/23/2022 3.3 Amended and Restated Bylaws of Velocity Financial, Inc. 8-K 001-39183 3.2 3/25/2022 4.1 Form of Stock Certificate for Common Stock S-1 333-234250 4.1 10/18/2019 4.2 Form of Warrant to Purchase Common Stock 8-K 001-39183 4.1 4/7/2020 4.3 Description of the Registrants Securities 10K 001-39183 4.3 4/7/2020 10.1 Stockholders Agreement, dated as of January 16, 2020 10-K 001-39183 10.1 4/7/2020 10.2 Registration Rights Agreement, dated as of January 16, 2020 10-K 001-39183 10.2 4/7/2020 10.3 Registration Rights Agreement, dated as of April 7, 2020 8-K 333-234250 10.1 4/7/2020 10.4 Securities Purchase Agreement among Velocity Financial, Inc. and the Purchasers Party thereto dated April 5, 2020 8-K 001-39183 10.1 4/6/2020 10.5 Velocity Financial, Inc. Employee Stock Purchase Plan* DEF 14A 001-39183 AII 4/8/2022 10.6 Amended and Restated Velocity Financial, Inc. 2020 Omnibus Incentive Plan* DEF 14A 001-39183 AI 4/8/2022 10.7 Form of Nonqualified Stock Option Award Notice and Agreement under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.6 1/6/2020 10.8 Form of Nonqualified Stock Option Award Notice and Agreement (Director Grant-IPO) under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.7 1/6/2020 10.9 Form of Nonqualified Stock Option Award Notice and Agreement (Executive Officer Grant-IPO) under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.8 1/6/2020 10.10 Form of Restricted Stock Unit Grant and Agreement (Director Grant) under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.9 1/6/2020 10.11 Form of Restricted Stock Unit Grant and Agreement (Standard Grant) under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.10 1/6/2020 10.12 Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan* S-1/A 333-234250 10.11 1/6/2020 10.13 Velocity Financial 2023 Annual Cash Incentive and Performance Stock Units Programs for Messrs. Farrar, Szczepaniak and Taylor* 8-K 001-39183 - 1/17/2023 10.14 Form of Equity Distribution Agreement, dated September 3, 2021 8-K 001-39183 1.1 9/7/2021 10.15 Form of Officer and Director Indemnity Agreement* S-1/A 333-234250 10.37 11/6/2019 10.16 Form of Performance Stock Unit Grant and Agreement* - - - - 10.17 Note Purchase Agreement Dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC, U.S. Bank Trust Company, National Association, as collateral agent, and the respective purchasers of the Notes. 8-K 001-39183 10.1 3/16/2022 10.18 Security Agreement, dated as of March 15, 2022, among Velocity Financial, Inc., Velocity Commercial Capital, LLC and U.S. Bank Trust Company, National Association, as collateral agent. 8-K 001-39183 10.2 3/16/2022 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial 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+

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