UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

OR

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

For the transition period from ______ to _____

Commission File Number: 001-39183

Velocity Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	VEL	The New York Stock Exchange

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

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

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

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

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

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

As of May 1, 2023, the registrant had 32,602,432 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 Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
SIGNATURES		52

i

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

VELOCITY FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except par value amounts)

	March 31, 2023			December 31, 2022
	(Unaudited)
ASSETS
Cash and cash equivalents	$	39,397		$	45,248
Restricted cash		16,636			16,808
Loans held for sale, at fair value		18,081			—
Loans held for investment, net		3,169,280			3,272,390
Loans held for investment, at fair value		450,732			276,095
Total loans, net		3,638,093			3,548,485
Accrued interest receivables		20,931			20,463
Receivables due from servicers		64,133			65,644
Other receivables		2,188			1,075
Real estate owned, net		21,778			13,325
Property and equipment, net		3,209			3,356
Deferred tax asset		2,543			5,033
Mortgage servicing rights, at fair value		9,143			9,238
Goodwill		6,775			6,775
Other assets		12,268			13,525
Total assets	$	3,837,094		$	3,748,975
LIABILITIES
Accounts payable and accrued expenses	$	84,976		$	91,525
Secured financing, net		210,155			209,846
Securitizations, net		2,657,469			2,736,290
Securitizations, at fair value		194,941			—
Warehouse and repurchase facilities, net		298,313			330,814
Total liabilities		3,445,854			3,368,475
Commitments and contingencies
EQUITY
Common stock ($0.01 par value, 100,000,000 shares authorized; 32,721,653 and 32,523,516 shares issued, 32,602,432 and 32,489,869 shares outstanding at March 31, 2023 and December 31, 2022, respectively)		328			326
Treasury stock, at cost (119,221 and 33,647 common shares at March 31, 2023 and December 31, 2022, respectively)		(1,294	)		(458	)
Additional paid-in capital		301,308			300,310
Retained earnings		87,282			76,633
Total Velocity Financial, Inc. stockholders' equity		387,624			376,811
Noncontrolling interest in subsidiary		3,616			3,689
Total equity		391,240			380,500
Total liabilities and equity	$	3,837,094		$	3,748,975

See accompanying Notes to Consolidated Financial Statements.

2

VELOCITY FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

($ in thousands)

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

	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Restricted cash	$	2,972	$	2,968
Loans held for investment, net		3,259,141		3,108,316
Accrued interest and other receivables		80,302		77,191
Real estate owned, net		18,471		10,380
Other assets		9		15
Total assets	$	3,360,895	$	3,198,870
LIABILITIES
Accounts payable and accrued expenses	$	52,585	$	50,169
Securitizations		2,852,410		2,736,290
Total liabilities	$	2,904,995	$	2,786,459

See accompanying Notes to Consolidated Financial Statements.

3

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2023			2022
Interest income	$	70,521		$	52,049
Interest expense — portfolio related		42,029			23,556
Net interest income — portfolio related		28,492			28,493
Interest expense — corporate debt		4,139			17,140
Net interest income		24,353			11,353
Provision for loan losses		636			730
Net interest income after provision for loan losses		23,717			10,623
Other operating income
Gain on disposition of loans		1,913			4,540
Unrealized gain on fair value loans		7,354			11
Unrealized loss on fair value securitizations		(170	)		—
Other income		3,461			1,097
Total other operating income		12,558			5,648
Operating expenses
Compensation and employee benefits		10,008			5,323
Origination (income) expenses		(334	)		310
Securitizations expenses		2,584			—
Loan servicing		3,828			2,450
Professional fees		955			1,362
Rent and occupancy		446			442
Real estate owned, net		1,829			(175	)
Other operating expenses		2,202			2,538
Total operating expenses		21,518			12,250
Income before income taxes		14,757			4,021
Income tax expense		4,021			790
Net income		10,736			3,231
Net income attributable to noncontrolling interest		87			110
Net income attributable to Velocity Financial, Inc.		10,649			3,121
Less undistributed earnings attributable to participating securities		160			48
Net earnings attributable to common stockholders	$	10,489		$	3,073
Earnings per common share
Basic	$	0.33		$	0.10
Diluted	$	0.31		$	0.09
Weighted average common shares outstanding
Basic		32,098			31,892
Diluted		34,052			34,204

See accompanying Notes to Consolidated Financial Statements.

4

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands)

(Unaudited)

	Common Stock								Treasury Stock
	Shares		Par Value		Additional Paid-in Capital		Retained Earnings		Shares			Amount			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
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

See accompanying Notes to Consolidated Financial Statements.

5

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Three Months Ended March 31,
	2023			2022
	(Unaudited)
Cash flows from operating activities:
Net income	$	10,736		$	3,231
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		195			206
Amortization of right-of-use assets		310			330
Provision for loan losses		636			730
Provision for repurchase of loans		39			228
Origination of loans held for sale		(19,088	)		—
Proceeds from sales of loans held for sale		1,735			—
Net accretion of discount on purchased loans and amortization of deferred loan origination costs		1,172			1,927
(Reversal of) provision for uncollectible borrower advances		(15	)		50
Gain on disposition of loans		(680	)		(4,254	)
Real estate acquired through foreclosure in excess of recorded investment		(1,233	)		(286	)
Amortization of debt issuance discount and costs		5,279			12,092
Change in valuation of real estate owned		1,178			(235	)
Change in valuation of fair value loans		(7,354	)		(10	)
Change in valuation of mortgage servicing rights		95			(510	)
Change in valuation of fair value securitizations		170			—
Gain on sale of real estate owned		(121	)		(320	)
Stock-based compensation		1,000			669
Deferred tax expense		2,490			127
Change in operating assets and liabilities:
Accrued interest and other receivables		(2,458	)		(1,870	)
Other assets		946			(858	)
Accounts payable and accrued expenses		(6,960	)		589
Net cash (used in) provided by operating activities		(11,928	)		11,836
Cash flows from investing activities:
Purchase of loans held for investment		—			(4,629	)
Origination of loans held for investment		(197,888	)		(585,713	)
Proceeds from sales of loans originally classified as held for investment		21,489			147,340
Payoffs of loans held for investment and loans at fair value		99,780			146,217
Proceeds from sale of real estate owned		2,121			4,630
Change in advances		2,596			(193	)
Change in impounds and deposits		372			(1,244	)
Purchase of property and equipment		(48	)		(66	)
Net cash used in investing activities		(71,578	)		(293,658	)
Cash flows from financing activities:
Warehouse repurchase facilities advances		246,792			607,760
Warehouse repurchase facilities repayments		(279,579	)		(483,600	)
Proceeds from secured financing		—			215,000
Repayment of secured financing		—			(170,844	)
Proceeds of securitizations, net		197,487			268,967
Repayment of securitizations		(86,221	)		(145,057	)
Debt issuance costs		—			(10,084	)
Purchase of treasury stock		(836	)		(458	)
Distribution to non-controlling interest		(160	)		—
Net cash provided by financing activities		77,483			281,684
Net decrease in cash, cash equivalents, and restricted cash		(6,023	)		(138	)
Cash, cash equivalents, and restricted cash at beginning of period		62,056			47,604
Cash, cash equivalents, and restricted cash at end of period	$	56,033		$	47,466

See accompanying Notes to Consolidated Financial Statements.

6

VELOCITY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

($ in thousands)

	Three Months Ended March 31,
	2023		2022
	(Unaudited)
Supplemental cash flow information:
Cash paid during the period for interest	$	44,181	$	27,316
Cash paid during the period for income taxes		264		277
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to held for sale		25,075		149,379
Transfer of loans held for investment to real estate owned		10,397		2,408
Transfer of accrued interest to loans held for investment		878		466
Discount on issuance of securitizations		—		4,627
Transfer of loans held for sale to held for investment		4,218		13,975
Recognition of new leases in exchange for lease obligations		377		—

See accompanying Notes to Consolidated Financial Statements

7

VELOCITY FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Organization and Description of Business

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

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

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 March 31, 2023.

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

The accompanying unaudited Consolidated Financial Statements as of and for the three months ended March 31, 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.

8

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 securitizations issued effective January 1, 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 March 31, 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 securitizations issued effective January 1, 2023 when the underlying collateral is also carried at fair value. The fair value option securitizations will be presented on a separate line item in the consolidated balance sheet. The Company will reflect interest expense on the fair value option securitizations as “interest” in the consolidated statements of income and will present the other fair value changes of these securitizations separately in the consolidated financial statements.
 

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 $72.2 million at March 31, 2023. This amount is not reflected on the consolidated balance sheet of the Company at March 31, 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 three months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31,
	2023		2022
Cash and cash equivalents	$	39,397	$	36,629
Restricted cash		16,636		10,837
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	56,033	$	47,466

9

Note 5 — Loans Held for Sale at Fair Value

The following table summarizes loans held for sale as of March 31, 2023 and there were no loans held for sale as of December 31, 2022 (in thousands):

Loans held for sale, at fair value:	March 31, 2023
Unpaid principal balance	$	17,385
Valuation adjustments on FVO loans held for sale		696
Total loans held for sale and loans held for sale at    fair value, net	$	18,081

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

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

	March 31, 2023
	Loans held for investment, net			Loans held for investment, at fair value		Total loans held for investment
Unpaid principal balance	$	3,142,181		$	436,610	$	3,578,791
Valuation adjustments on FVO loans		—			14,122		14,122
Deferred loan origination costs		32,144			—		32,144
		3,174,325			450,732		3,625,057
Allowance for loan losses		(5,045	)		—		(5,045	)
Total loans held for investment and loans held for investment at    fair value, net	$	3,169,280		$	450,732	$	3,620,012

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

	March 31, 2023
	UPB			%	Amortized Cost			%
Beginning balance	$	201,005			$	203,346
Foreclosures		(99	)			(99	)
Repayments		(5,792	)			(5,897	)
Ending balance	$	195,114			$	197,350
Performing/Accruing	$	156,374		80.1%	$	158,169		80.1%
Nonperforming/Nonaccrual	$	38,740		19.9%	$	39,181		19.9%

	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%

10

Since April 1, 2020, the inception of the COVID-19 forbearance program, the Company has modified $410.5 million in UPB of loans, which includes capitalized interest of $12.3 million. As of March 31, 2023, $222.2 million in UPB of modified loans has been paid down, which includes $4.4 million of capitalized interest received. The Company has not forgiven any capitalized interest.

Approximately 80.1% and 80.3% of the COVID forbearance loans in UPB were performing, and 19.9% and 19.7% were on nonaccrual status as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 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 securitizations issued were as follows (in thousands):

	March 31, 2023		December 31, 2022
The 2013 repurchase agreement	$	112,159	$	170,185
The 2021 repurchase agreement		79,480		101,024
The Bank credit agreement		34,978		39,087
The 2021 term repurchase agreement		104,709		104,594
The July 2021 term repurchase agreement		16,693		3,859
Total pledged loans	$	348,019	$	418,749
2016-1 Trust		37,412		39,720
2017-2 Trust		62,799		67,048
2018-1 Trust		45,736		48,139
2018-2 Trust		99,382		104,791
2019-1 Trust		100,086		104,249
2019-2 Trust		88,328		91,025
2019-3 Trust		73,223		75,618
2020-1 Trust		136,303		144,913
2020-2 Trust		78,031		81,259
2021-1 Trust		199,700		208,875
2021-2 Trust		167,075		172,144
2021-3 Trust		173,883		178,861
2021-4 Trust		270,264		275,741
2022-1 Trust		256,507		262,526
2022-2 Trust		243,372		245,339
2022-MC1 Trust		91,122		97,246
2022-3 Trust		294,439		299,638
2022-4 Trust		321,416		326,627
2022-5 Trust		247,813		251,288
2023-1 Trust		236,142		—
Total	$	3,223,033	$	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 March 31, 2023 and December 31, 2022. There were no loans accruing interest that were greater than 90 days past due as of March 31, 2023 and December 31, 2022.

	March 31, 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	$	19,422	$	18,486	$	936	$	138		1.1	%
Commercial - Refinance		87,439		83,418		4,021		416		3.3
Residential 1-4 Unit - Purchase		34,171		34,171		—		—		—
Residential 1-4 Unit - Refinance		124,390		120,732		3,659		204		1.6
Short Term 1-4 Unit - Purchase		8,447		8,447		—		—		—
Short Term 1-4 Unit - Refinance		35,845		31,932		3,912		238		1.9
Total	$	309,714	$	297,186	$	12,528	$	996		7.9	%

11

	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 March 31, 2023 and 2022, and the amount of accrued interest receivables written off by reversing interest income by portfolio segment for the three months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31,
	2023					2022
	Amortized Cost		Interest Reversal			Amortized Cost		Interest Reversal
Commercial - Purchase	$	681,051	$	(132	)	$	609,232	$	(115	)
Commercial - Refinance		879,978		(517	)		889,829		(253	)
Residential 1-4 Unit - Purchase		574,320		(297	)		448,727		(219	)
Residential 1-4 Unit - Refinance		912,313		(717	)		782,105		(298	)
Short Term 1-4 Unit - Purchase		62,392		(24	)		38,683		(22	)
Short Term 1-4 Unit - Refinance		64,271		(96	)		64,390		(238	)
Total	$	3,174,325	$	(1,783	)	$	2,832,966	$	(1,145	)

The cash basis interest income recognized on nonaccrual loans was $6.2 million and $7.3 million for the three months ended March 31, 2023 and 2022, respectively. No accrued interest income was recognized on nonaccrual loans for the three months ended March 31, 2023. The average recorded investment of individually evaluated loans, computed using month-end balances, was $302.3 million and $281.9 million for the three months ended March 31, 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 March 31, 2023 and 2022.

12

(b)Allowance for Credit Losses

The following tables present the activity in the allowance for credit losses for the three months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31, 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		157		108			(48	)		102			66			251			636
Charge-offs		—		(79	)		(26	)		(11	)		(63	)		(305	)		(484	)
Ending balance	$	796	$	2,060		$	468		$	1,363		$	24		$	334		$	5,045
Allowance related to:
Loans individually evaluated	$	138	$	416		$	—		$	204		$	—		$	238		$	996
Loans collectively evaluated	$	659	$	1,644		$	467		$	1,159		$	24		$	96		$	4,049
Amortized cost related to:
Loans individually evaluated	$	19,422	$	87,439		$	34,171		$	124,390		$	8,447		$	35,845		$	309,714
Loans collectively evaluated	$	661,629	$	792,539		$	540,149		$	787,923		$	53,945		$	28,426		$	2,864,611

	Three Months Ended March 31, 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		281			1			(11	)		186			7		266			730
Charge-offs		(147	)		(5	)		—			(105	)		—		(71	)		(328	)
Ending balance	$	519		$	2,140		$	389		$	1,029		$	50	$	537		$	4,664
Allowance related to:
Loans individually evaluated	$	28		$	770		$	96		$	198		$	32	$	475		$	1,599
Loans collectively evaluated	$	490		$	1,370		$	293		$	832		$	17	$	62		$	3,064
Amortized cost related to:
Loans individually evaluated	$	16,712		$	83,695		$	24,934		$	107,362		$	2,869	$	43,231		$	278,803
Loans collectively evaluated	$	592,520		$	806,134		$	423,793		$	674,743		$	35,814	$	21,159		$	2,554,163

(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 0.65% and 0.47% of average nonperforming loans for the three months ended March 31, 2023 and 2022, respectively.

13

Other credit quality indicators include aging status and accrual status. The following table presents the aging status of the amortized cost basis in the loans held for investment portfolio, excluding loans held for investment at fair value, which include $197.3 million and $203.3 million loans in the Company’s COVID-19 forbearance program as of March 31, 2023 and December 31, 2022, respectively (in thousands):

	30–59 days		60–89 days		90+days		Total				Total
March 31, 2023	past due		past due		past due(1)		past due		Current		loans
Loans individually evaluated
Commercial - Purchase	$	762	$	317	$	18,343	$	19,422	$	—	$	19,422
Commercial - Refinance		4,223		8,249		74,814		87,286		153		87,439
Residential 1-4 Unit - Purchase		725		2,201		31,245		34,171		—		34,171
Residential 1-4 Unit - Refinance		1,215		5,863		117,312		124,390		—		124,390
Short Term 1-4 Unit - Purchase		175		—		8,272		8,447		—		8,447
Short Term 1-4 Unit - Refinance		—		—		35,845		35,845		—		35,845
Total loans individually evaluated	$	7,100	$	16,630	$	285,831	$	309,561	$	153	$	309,714
Loans collectively evaluated
Commercial - Purchase	$	14,414	$	7,385	$	—	$	21,799	$	639,830	$	661,629
Commercial - Refinance		37,560		21,189		—		58,749		733,790		792,539
Residential 1-4 Unit - Purchase		23,801		12,001		—		35,802		504,347		540,149
Residential 1-4 Unit - Refinance		50,130		27,805		—		77,935		709,988		787,923
Short Term 1-4 Unit - Purchase		1,805		2,098		—		3,903		50,042		53,945
Short Term 1-4 Unit - Refinance		2,346		3,362		—		5,708		22,718		28,426
Total loans collectively evaluated	$	130,056	$	73,840	$	—	$	203,896	$	2,660,715	$	2,864,611
Ending balance	$	137,156	$	90,470	$	285,831	$	513,457	$	2,660,868	$	3,174,325

	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.

14

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

	Term Loans Amortized Cost Basis by Origination Year
March 31, 2023:	2022		2021		2020		2019		Pre-2019		Total
Commercial - Purchase
Payment performance
Performing	$	269,878	$	243,383	$	34,723	$	53,188	$	60,457	$	661,629
Nonperforming		2,023		5,056		533		4,377		7,433		19,422
Total Commercial - Purchase	$	271,901	$	248,439	$	35,256	$	57,565	$	67,890	$	681,051
Commercial - Refinance
Payment performance
Performing	$	255,280	$	203,305	$	54,202	$	101,057	$	178,695	$	792,539
Nonperforming		16,822		12,242		4,422		19,529		34,424		87,439
Total Commercial - Refinance	$	272,102	$	215,547	$	58,624	$	120,586	$	213,119	$	879,978
Residential 1-4 Unit - Purchase
Payment performance
Performing	$	238,003	$	222,115	$	10,803	$	30,910	$	38,318	$	540,149
Nonperforming		11,189		11,683		1,809		2,850		6,640		34,171
Total Residential 1-4    Unit - Purchase	$	249,192	$	233,798	$	12,612	$	33,760	$	44,958	$	574,320
Residential 1-4 Unit - Refinance
Payment performance
Performing	$	324,890	$	266,570	$	24,050	$	81,982	$	90,431	$	787,923
Nonperforming		30,768		33,180		6,639		25,477		28,326		124,390
Total Residential 1-4    Unit - Purchase	$	355,658	$	299,750	$	30,689	$	107,459	$	118,757	$	912,313
Short Term 1-4 Unit - Purchase
Payment performance
Performing	$	32,004	$	945	$	16,641	$	4,355	$	—	$	53,945
Nonperforming		2,171		4,999		995		282		—		8,447
Total Short Term 1-4    Unit - Purchase	$	34,175	$	5,944	$	17,636	$	4,637	$	—	$	62,392
Short Term 1-4 Unit - Refinance
Payment performance
Performing	$	28,426	$	—	$	—	$	—	$	—	$	28,426
Nonperforming		3,840		1,023		9,807		16,391		4,784		35,845
Total Short Term 1-4    Unit - Refinance	$	32,266	$	1,023	$	9,807	$	16,391	$	4,784	$	64,271
Total Portfolio	$	1,215,294	$	1,004,501	$	164,624	$	340,398	$	449,508	$	3,174,325
Gross charge-offs - quarter-ended March 31, 2023	$	11	$	26	$	—	$	447	$	—	$	484

15

	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 - Purchase	$	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

16

(d)Nonaccrual Loans for 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 March 31, 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
March 31, 2023	past due		or nonaccrual		Total		past due		or nonaccrual		Total		or nonaccrual
Commercial - Purchase	$	69,565	$	—	$	69,565	$	66,046	$	—	$	66,046	$	—
Commercial - Refinance		66,651		1,121		67,772		62,793		1,067		63,860		54
Residential 1-4 Unit - Purchase		110,742		—		110,742		109,625		—		109,625		—
Residential 1-4 Unit - Refinance		157,747		2,070		159,817		152,933		2,008		154,941		62
Short Term 1-4 Unit - Purchase		18,909		856		19,765		18,634		839		19,473		17
Short Term 1-4 Unit - Refinance		23,071		—		23,071		22,665		—		22,665		—
Ending balance	$	446,685	$	4,047	$	450,732	$	432,696	$	3,914	$	436,610	$	133

Note 7 — Receivables Due From Servicers

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

	March 31, 2023
	Securitizations		Warehouse and repurchase facilities and other		Total
Loan principal payments due from servicers	$	26,856	$	88	$	26,944
Other loan servicing receivables		12,545		2,264		14,809
Loan servicing receivables		39,401		2,352		41,753
Corporate and escrow advances receivable		22,110		270		22,380
Total receivables due from servicers	$	61,511	$	2,622	$	64,133

	December 31, 2022
	Securitizations		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 $487.7 million and $491.9 million as of March 31, 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 March 31, 2023 and December 31, 2022 include: 1) Weighted average discount rate of 8.1%. 2) Weighted average conditional prepayment rate of 6.3%.

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

	March 31, 2023			December 31, 2022
Balance at the beginning of year	$	9,238		$	7,152
Mortgage servicing rights acquired, at fair value		—			—
Additions		15			—
Fair value adjustments		(110	)		2,086
Balance at end of period	$	9,143		$	9,238

17

Note 9 — Goodwill

The following table presents the activity for goodwill (in thousands):

	March 31, 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 — Securitizations and Securitizations at Fair Value

As of March 31, 2023, the Company is the sole beneficial interest holder of twenty 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 July 2045 through December 2052.

The following tables summarize securitizations and securitizations at fair value as of March 31, 2023 and December 31, 2022 ($ in thousands):

	March 31, 2023
(in thousands)	Securitizations, net			Securitizations at fair value		Total securitizations
Securitizations	$	2,705,404		$	194,771	$	2,900,175
Valuation adjustments on FVO securitizations		—			170		170
Deferred issuance costs and discounts		(47,935	)		—		(47,935	)
Total securitizations and securitizations at fair value	$	2,657,469		$	194,941	$	2,852,410

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

The following table presents the effective interest rate of securitizations and securitizations at fair value for the three months ended March 31, 2023 and 2022 ($ in thousands):

	Three Months Ended March 31,
Securitizations:	2023			2022
Interest expense	$	37,196		$	19,791
Average outstanding unpaid principal balance		2,926,153			2,018,186
Effective interest rate (1)		5.08	%		3.92	%

(1)Effective interest rate represents annualized interest expense divided by average gross outstanding balance, which includes average rates of 4.44% and 3.22%, and debt issuance cost amortization of 0.64% and 0.70% for the three months ended March 31, 2023 and 2022, respectively.

18

Note 11 — Other Debt

Secured financings and warehouse facilities were utilized to finance the origination and purchase of commercial real estate mortgage loans. Warehouse facilities are designated to fund mortgage loans that are purchased and originated within specified underwriting guidelines. 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 March 31, 2023, the balance of the 2022 Term Loan was $210.2 million. The balance in the consolidated balance sheets is net of debt issuance costs of $4.8 million as of March 31, 2023. The 2022 Term Loan is secured by substantially all assets of the Company not otherwise pledged under a securitization or warehouse facility and contains certain reporting and financial covenants. Should the Company fail to adhere to those covenants, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 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 2011 Facility Agreement”). The Facility Agreement has a current extended maturity date of July 31, 2023, 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. The effective interest rate was 4.7% at March 31, 2023. There was no outstanding balance at 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 has a current extended maturity date of July 31, 2023, and is 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 at March 31, 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 29, 2023, 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 3.50%. 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 9.0% and 5.7% at March 31, 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 8.7% and 5.8% at March 31, 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, 2023, 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 3.50% during the availability period and 4.50% during the amortization period. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. The effective interest rates were 10.2% and 6.4% at March 31, 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 7.6% and 5.6% at March 31, 2023 and December 31, 2022, respectively.

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On July 29, 2021, the Company entered into a non-mark-to-market Term Repurchase Agreement (“the July 2021 Term Repurchase Agreement”) with a warehouse lender. The July 2021 Term Repurchase Agreement has a maturity date of July 29, 2024, with an option to extend the term to July 29, 2025. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at one-month LIBOR with a 0.5% floor plus 4.5% per annum. The maximum capacity under this facility is $100.0 million. The effective interest rates were 11.8% and 10.0% at March 31, 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) with the 2013 Repurchase Agreement warehouse lender. The October Repurchase Agreement had a maturity date of January 5, 2023 and bore interest at SOFR plus 1.58%. The maturity date has been extended to June 30, 2023 and the borrowing amount has increased to $15.0 million. The maximum capacity under this agreement was $18.8 million. The effective interest rates were 6.4% and 6.1% at March 31, 2023 and December 31, 2022, respectively. The repurchase agreement was paid off in April 2023 with proceeds from a new securitization.

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 March 31, 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 March 31, 2023 and December 31, 2022 (in thousands):

	March 31, 2023				December 31, 2022
	Period end balance (1)		Maximum borrowing capacity		Period end balance (1)		Maximum borrowing capacity
The 2021 term repurchase agreement	$	78,444	$	100,000	$	74,334	$	100,000
The 2021 repurchase agreement		62,008		200,000		79,504		200,000
The July 2021 term repurchase agreement		10,006		100,000		2,185		100,000
The 2013 repurchase agreement		89,863		300,000		136,165		300,000
The bank credit agreement		26,248		50,000		29,495		50,000
The October 2022 repurchase agreement		15,000		18,818		10,057		18,818
The September 2022 term repurchase agreement		17,385		60,000		—		60,000
Revolving credit line		—		3,000		—		3,000
Total	$	298,954	$	831,818	$	331,740	$	831,818

(1)Warehouse repurchase facilities amounts in the consolidated balance sheets are net of debt issuance costs amounting to $0.6 million and $0.9 million as of March 31, 2023 and December 31, 2022, respectively.

The following table provides an overview of the activity and effective interest rate for the three months ended March 31, 2023 and 2022 ($ in thousands):

	Three Months Ended March 31,
	2023			2022
Warehouse and repurchase facilities:
Average outstanding balance	$	225,497		$	338,247
Highest outstanding balance at any month-end		298,954			426,959
Effective interest rate (1)		8.57	%		4.45	%

(1)Effective interest rate represents annualized interest expense divided by average gross outstanding balance. The rate includes average rate of 8.07% and 3.89%, and debt issuance cost amortization of 0.50% and 0.56%, for the three months ended March 31, 2023 and 2022, respectively.

The following table provides a summary of interest expense that includes debt issuance cost amortization, interest, amortization of discount, and deal cost amortization for the three months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31,
	2023		2022
Warehouse and repurchase facilities	$	4,833	$	3,765
Securitizations		37,196		19,791
Interest expense — portfolio related		42,029		23,556
Interest expense — corporate debt		4,139		17,140
Total interest expense	$	46,168	$	40,696

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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 March 31, 2023 and December 31, 2022, the balance of repurchase liability was $163 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.

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.

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.

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.

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The Company recognized a total of $1.0 million and $0.6 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 March 31, 2023 and 2022, respectively. Such amount is included in “Compensation and employee benefits” on the Consolidated Statement of Income. The amount of unrecognized compensation expense related to unvested restricted stock awards, ESPP, and performance-based stock unit awards totaled $6.4 million and $5.8 million as of March 31, 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, 2022, the Company purchased treasury shares of 33,647 at an average price of $13.61 per share. An additional 85,574 treasury shares were purchased at an average price of $9.78 during the three months ended March 31, 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 months ended March 31, 2023 and 2022:

	Three Months Ended March 31,
	2023		2022
	(In thousands, except per share data)
Basic EPS:
Net income attributable to common shareholders	$	10,649	$	3,121
Less: earnings attributable to participating securities		160		48
Net earnings attributable to common shareholders	$	10,489	$	3,073
Weighted average common shares outstanding		32,098		31,892
Basic earnings per common share	$	0.33	$	0.10
Diluted EPS:
Net income attributable to common stockholders	$	10,649	$	3,121
Weighted average common shares outstanding		32,098		31,892
Add dilutive effects for warrants		1,871		2,127
Add dilutive effects for stock options		5		5
Add dilutive effects of unvested restricted stock awards		66		180
Add dilutive effects of unvested performance-based stock units		12		—
Weighted average diluted common shares outstanding		34,052		34,204
Diluted earnings per common share	$	0.31	$	0.09

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 March 31,
	2023		2022
Stock options		773		773
Unvested restricted stock awards		282		—
Unvested performance-based stock units		154		—
Share equivalents excluded from EPS		1,209		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 Snow Phipps and a fund affiliated with Pacific Investment Management Company LLC (TOBI). Snow Phipps and TOBI are considered affiliates and, therefore, are related parties to the Company.

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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 — 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:

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

oLevel 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.

oLevel 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

Loans held for investment originated prior to October 1, 2022 are recorded at amortized cost, which is their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for credit losses. Effective October 1, 2022, the Company elected to carry its newly originated loans at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825).

The Company determined the fair value estimate of loans held for investment using a third-party loan valuation model, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are discount rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

Loans Held for Investment, at Fair Value

The Company has elected to account for certain purchased distressed loans held for investment, and loans originated subsequent to September 30, 2022, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

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The Company uses a third-party loan valuation model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

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 to Ginnie Mae 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 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.

Secured Financing, Net (Corporate Debt)

The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Warehouse Repurchase Facilities, Net

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.

Securitizations, Net

The fair value estimate of securities issued is based on third-party valuation models that calculate estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Securitizations, at Fair Value

The Company has elected to apply fair value option accounting to securitizations issued effective January 1, 2023 using FASB ASC Topic 825, Financial Instruments (ASC 825), when the underlying collateral is also carried at fair value. The securitizations at fair value are measured based on their estimated fair values. Management identified all of these securitizations to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company 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 severities, a Level 3 measurement. Significant changes in any of those inputs in isolation could result in a significant change to securitizations’ fair value measurement.

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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 measured and recorded at fair value as of March 31, 2023 and December 31, 2022, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at
March 31, 2023	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for sale, at fair value	$	—	$	18,081	$	—	$	18,081
Loans held for investment, at fair value		—		—		450,732		450,732
Mortgage servicing rights		—		—		9,143		9,143
Total recurring fair value measurements		—		18,081		459,875		477,956
Nonrecurring fair value measurements:
Real estate owned, net		—		—		21,778		21,778
Individually evaluated loans requiring specific allowance, net		—		—		11,532		11,532
Total nonrecurring fair value measurements		—		—		33,310		33,310
Total assets	$	—	$	18,081	$	493,185	$	511,266

	Fair value measurements using						Total at
December 31, 2022	Level 1		Level 2		Level 3		fair value
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:
Loans held for sale, net		—		—		—		—
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 months ended March 31, 2023 and 2022 (in thousands):

	Three Months Ended March 31,
Gain (loss) on assets measured on a nonrecurring basis	2023			2022
Real estate held for sale, net	$	(1,178	)	$	235
Individually evaluated loans requiring specific allowance, net		101			(192	)
Total net gain (loss)	$	(1,077	)	$	43

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The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of March 31, 2023 and December 31, 2022 ($ in thousands):

	March 31, 2023
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Individually evaluated    loans requiring specific    allowance, net	$	11,532	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		21,778	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment, net		3,169,280	Discounted cash flow	Discount rate	9.7%	9.7%
				Prepayment rate	1.0% - 50.0%	25.3%
				Default rate	0.1% to 5.5%	0.7%
				Loss severity rate	0.0% to 18.5%	3.5%
Loans held for investment,    at fair value		450,732	Discounted cash flow	Discount rate	9.7%	9.7%
				Prepayment rate	1.0% - 50.0%	25.3%
				Default rate	0.3% to 8.1%	2.8%
				Loss severity rate	0.0% to 18.5%	3.1%
Mortgage servicing rights		9,143	Discounted cash flow	Discount rate	8.0% to 12.0%	8.1%
				Prepayment rate	5.6% to 16.8%	6.3%

	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	8.0%	8.0%
Real estate owned, net	13,325	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment,    at fair value	276,095	Discounted cash flow	Discount rate	8.35% to 9.35%	8.9%
			Prepayment rate	1.0% to 30.0%	15.1%
			Default rate	0.12% to 6.99%	0.6%
			Loss severity rate	0.00% to 18.45%	3.5%
Mortgage servicing rights	9,238	Discounted cash flow	Discount rate	8.0% to 12.0%	8.1%
			Prepayment rate	5.6% to 16.8%	6.3%

The following is a rollforward 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 March 31,
	2023			2022
Beginning balance	$	276,095		$	1,359
Originations		197,888			—
Loans liquidated		(8,020	)		—
Principal paydowns		(1,032	)		(17	)
Total unrealized gain included in net income		6,658			10
Loans transferred to held for sale		(20,857	)		—
Ending balance	$	450,732		$	1,352

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The following is a rollforward 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 March 31,
	2023			2022
Beginning balance
Originations	$	19,088		$	—
Loans liquidated		(22,560	)
Total unrealized gain included in net income		696			—
Loans transferred from held for investment		20,857
Ending balance	$	18,081		$	—

The following is a rollforward of securitizations that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):

	Three Months Ended March 31,
	2023			2022
Beginning balance	$	—		$	—
Securitization additions		(197,487	)		—
Securitization paydowns		2,716			—
Total unrealized (loss) gain included in net income		(170	)		—
Ending balance	$	(194,941	)	$	—

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 March 31, 2023 and December 31, 2022, the only financial assets measured at fair value, or lower of cost or fair value, were certain individually evaluated loans held for investment, loans held for sale, mortgage servicing rights, REO, FVO loans, and securitizations at fair value, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $10.3 million and $11.5 million as of March 31, 2023 and December 31, 2022, net of specific allowance for credit losses of approximately $1.0 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):

	March 31, 2023
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	39,397	$	39,397	$	—	$	—	$	39,397
Restricted cash		16,636		16,636		—		—		16,636
Loans held for sale, at fair value		18,081		—		18,081		—		18,081
Loans held for investment, net		3,169,280		—		—		3,039,847		3,039,847
Loans held for investment, at fair value		450,732		—		—		450,732		450,732
Accrued interest receivables		20,931		20,931		—		—		20,931
Mortgage servicing rights		9,143		—		—		9,143		9,143
Liabilities:
Secured financing, net	$	210,155	$	—	$	—	$	212,475	$	212,475
Warehouse repurchase facilities, net		298,313		—		298,313		—		298,313
Securitizations, net		2,657,469		—		—		2,422,432		2,422,432
Securitizations, at fair value		194,941		—		—		194,941		194,941
Accrued interest payable		13,078		13,078		—		—		13,078

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	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 sale, net		—		—		—		—		—
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
Securitizations, net		2,736,290		—		—		2,522,010		2,522,010
Accrued interest payable		16,369		16,369		—		—		16,369

Note 17 — Subsequent Events

On April 28, 2023, the Company completed the securitization of $64.8 million of retained certificates from prior securitizations, which will be accounted for as secured borrowings during the quarter ended June 30, 2023.

The Company has evaluated events that have occurred subsequent to March 31, 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.

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

The following discussion should be read in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 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 “Cautionary Note on Forward-Looking Statements.”

References to “the Company,” “Velocity,” “we,” “us” and “our” refer to Velocity Financial, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.

Business

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and 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 March 31, 2023, has an average balance of approximately $393,000. As of March 31, 2023, our loan portfolio totaled $3.6 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 68.1%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 53.0% of the UPB. For the three months ended March 31, 2023, the annualized yield on our total portfolio was 8.00%.

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitizations, corporate debt, and equity. The securitization market is our primary source of long-term financing. We have successfully executed twenty-six securitizations, resulting in a total of over $5.6 billion in gross debt proceeds from May 2011 through March 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 securitizations and excludes our corporate debt. For the three months ended March 31, 2023, our annualized portfolio related net interest margin was 3.23%, an increase compared to the 2.84% for the quarter ended December 31, 2022, mainly as a result of higher loan yield during the three months ended March 31, 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 months ended March 31, 2023, including net income attributable to noncontrolling interest, we generated pre-tax income and net income of $14.8 million and $10.7 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.

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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.

We have also made an election to apply the fair value option ("FVO") accounting to all our securitizations effective January 1, 2023. The fair value option securitizations are presented on a separate line item in the consolidated balance sheet.

Recent Developments

Securitizations

During the quarter ended March 31, 2023, we completed one securitization totaling $198.7 million in UPB of investor real estate loans.

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, 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 of the decisions and assessments used to prepare our financial statements are based upon reasonable assumptions given the information available at that time.

These polices and estimates relate to the allowance for loan losses and deferred income tax assets and liabilities. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 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 securitizations. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.

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

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

Credit Losses

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

Operating Expenses

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

Factors Affecting Our Results of Operations

Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by a number of factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, 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 war, 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 securitizations, corporate debt and equity. We believe we have an established brand in the term securitization market and that this market will continue to support our portfolio growth with long-term financing. Changes in macroeconomic conditions can adversely impact our ability to issue securitizations and, thereby, limit our options for long-term financing. In consideration of this potential risk, we have entered into a credit facility for longer-term financing that will provide us with capital resources to fund loan growth in the event we are not able to issue securitizations.

One of our six warehouse repurchase and revolving loan facilities have interest payment obligations tied to the one-month USD London Interbank Offered Rate, or LIBOR. Five of our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate ("SOFR"). The authorized administrator of LIBOR confirmed during March 2021 that it intended to cease the publication or loss of representativeness of LIBOR. In particular, the last date of publication or representativeness of one-month USD LIBOR will be June 30, 2023. We expect that the index used in the calculation of the interest rate for our warehouse facilities and corporate debt will transition from LIBOR to a Secured Overnight Financing Rate (“SOFR”) or a suitable replacement index prior to June 30, 2023. As we renew our financing agreements with our warehouse facilities, we are working with our warehouse facilities to include language on the transition to SOFR. We do not expect the cessation of LIBOR nor the transition to a replacement index to have a material adverse effect on our cost of funding, results of operations or financial condition.

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Loan Performance

We underwrite and structure our loans to minimize potential losses. We believe our fully amortizing loan structures and avoidance of large balloon payments, coupled with meaningful borrower equity in properties, limit the probability of losses and that our proven in-house asset management capability allows us to minimize potential losses in situations where there is insufficient equity in the property. Our income is highly dependent upon borrowers making their payments and resolving delinquent loans as favorably as possible. Macroeconomic conditions can, however, impact credit trends in our core market and have an adverse impact on financial results.

Macroeconomic Conditions

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

Portfolio and Asset Quality

Key Portfolio Statistics

	March 31, 2023			December 31, 2022			March 31, 2022
	($ in thousands)
Total loans	$	3,596,176		$	3,512,486		$	2,876,816
Loan count		9,147			8,893			7,365
Average loan balance	$	393		$	395		$	391
Weighted average loan-to-value		68.1	%		68.2	%		67.9	%
Weighted average coupon		8.15	%		7.95	%		7.50	%
Nonperforming loans (UPB) (A)	$	309,937		$	292,789		$	275,487
Nonperforming loans (% of total) (A)		8.62	%		8.34	%		9.58	%

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $38.7 million, $39.6 million, and $54.2 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of March 31, 2023, December 31,2022, and March 31, 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.

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Originations and Acquisitions

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

($ in thousands)	Loan Count		Loan Balance		Average Loan Size		Weighted Average Coupon			Weighted Average LTV
Three Months Ended March 31, 2023:
Loan originations — held for investment		587	$	197,888	$	337		11.08	%		66.6	%
Loan originations — held for sale		2		19,088		9,544		5.34	%		47.5	%
Total loan originations		589	$	216,976	$	368		10.58	%		65.0	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated		589	$	216,976	$	368		10.58	%		65.0	%
Three Months Ended December 31, 2022:
Loan originations — held for investment		831	$	262,653	$	316		10.34	%		68.3	%
Loan originations — held for sale		1		15,135		15,135		5.85	%		60.5	%
Total loan originations		832	$	277,788	$	334		10.10	%		67.9	%
Loan acquisitions — held for investment		—		—		—		(—	)%		(—	)%
Total loans originated		832	$	277,788	$	334		10.10	%		67.9	%
Three Months Ended March 31, 2022:
Loan originations — held for investment		1,167	$	581,369	$	498		6.29	%		69.2	%
Loan originations — held for sale		—		—		—		(—	)%		(—	)%
Total loan originations		1,167	$	581,369	$	498		6.29	%		69.2	%
Loan acquisitions — held for investment		2		3,954		1,977		6.34	%		57.0	%
Total loans originated and acquired		1,169	$	585,323	$	501		6.30	%		69.1	%

During the first quarter of 2023, we originated $217.0 million of loans, which was a decrease of $364.4 million from $581.4 million for the quarter ended March 31, 2022, primarily as a result of strategically reducing originations.

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)	March 31, 2023			December 31, 2022
Unpaid principal balance	$	3,578,791		$	3,512,486
Valuation adjustments on FVO loans		14,122			7,463
Deferred loan origination costs		32,144			33,429
Total loans held for investment, gross		3,625,057			3,553,378
Allowance for credit losses		(5,045	)		(4,893	)
Loans held for investment, net	$	3,620,012		$	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:

	March 31, 2023					December 31, 2022					March 31, 2022
($ in thousands)	UPB		%			UPB		%			UPB		%
Loans due in less than one year	$	150,013		4.2	%	$	146,916		4.2	%	$	88,820		3.2	%
Loans due in one to five years		28,862		0.8			31,777		0.9			15,847		0.6
Loans due in more than five years		3,399,916		95.0			3,333,793		94.9			2,695,280		96.3
Total loans held for investment	$	3,578,791		100.0	%	$	3,512,486		100.0	%	$	2,799,947		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.

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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.

Our allowance for loan losses as of March 31, 2023 was $5.0 million compared to $4.9 million as of December 31, 2022 and $4.7 million as of March 31, 2022. The increase in allowance for credit losses from December 31, 2022 and from March 31, 2022 was primarily due to a less optimistic outlook for the macroeconomy. 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 non-FVO loans held for investment portfolio, we follow a detailed internal review process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.

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

	Three Months Ended
($ in thousands)	March 31, 2023			December 31, 2022			March 31, 2022
Allowance for credit losses:
Beginning balance	$	4,893		$	5,330		$	4,262
Provision for loan losses		636			(437	)		730
Charge-offs		(484	)		—			(328	)
Ending balance	$	5,045		$	4,893		$	4,664
Total loans held for investment (UPB), excluding FVO (1)	$	3,142,181		$	3,243,854		$	2,798,632
Allowance for credit losses / loans held for investment, excluding FVO		0.16	%		0.15	%		0.17	%

(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)	March 31, 2023 (A)				COVID-19 Forbearance		December 31, 2022 (A)				COVID-19 Forbearance		March 31, 2022 (A)				COVID-19 Forbearance
Performing/Accruing:
Current	$	3,049,110	85.2	%	$	132,688	$	2,969,989	84.6	%	$	120,884	$	2,388,442	85.3	%	$	186,569
30-59 days past due		141,253	3.9			13,529		186,051	5.3			33,668		94,058	3.4			12,698
60-89 days past due		78,491	2.2			10,157		63,657	1.8			6,902		41,960	1.5			7,228
90+ days past due		—	—			—		—	—			—		—	—			—
Total Performing Loans		3,268,854	91.3			156,374		3,219,697	91.7			161,454		2,524,460	90.2			206,495
Nonperforming/Nonaccrual:
<90 days past due		23,544	0.7			1,480		17,852	0.5			1,116		26,044	0.9			7,354
90+ days past due		40,947	1.1			2,344		32,566	0.9			1,681		27,472	1.0			3,794
Bankruptcy		15,132	0.4			6,014		22,435	0.6			7,272		18,334	0.7			4,380
In foreclosure		230,314	6.5			28,902		219,936	6.3			29,482		203,637	7.3			38,686
Total nonperforming loans		309,937	8.7			38,740		292,789	8.3			39,551		275,487	9.8			54,214
Total loans held for investment	$	3,578,791	100.0	%	$	195,114	$	3,512,486	100.0	%	$	201,005	$	2,799,947	100.0	%	$	260,709

(A)Balance includes $195.1 million UPB of loans held for investment as of March 31, 2023, $201.0 million as of December 31, 2022, and $260.7 million as of March 31, 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 $309.9 million, or 8.7% of our held for investment loan portfolio as of March 31, 2023, compared to $292.8 million, or 8.3% as of December 31, 2022, and $275.5 million, or 9.8% of the held for investment loan portfolio as of March 31, 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.

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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 $36.9 million of long-term and short-term non-performing loans during the quarter ended March 31, 2023 as compared to $34.3 million during the quarter ended March 31, 2022. We also resolved $1.8 million of nonperforming loans transferred to REO during the quarter ended March 31, 2023 as compared to $3.0 million during the quarter ended March 31, 2022. From these resolution activities, we realized net gains of $1.3 million and $1.8 million during the quarter ended March 31, 2023 and 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	March 31, 2023					December 31, 2022					March 31, 2022
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	11,274	$	632		$	8,188	$	329		$	9,144	$	474
Resolved — paid current		18,477		233			9,648		21			7,597		117
Resolved — REO sold		570		137			2,404		67			2,522		469
Total resolutions	$	30,321	$	1,002		$	20,240	$	417		$	19,263	$	1,060
Recovery rate on resolved    nonperforming UPB				103.3	%				102.1	%				105.5	%

The table below includes resolutions for our short-term nonperforming loans and REO's, now being held for investment, and also includes loans that were granted a COVID-19 forbearance in 2020. Prior to January 1, 2021, nonperforming loan resolutions presented only consisted of long-term nonperforming loans held for investment since the short-term loans, or loans with a maturity of two-year or less, were being held for sale until later in 2020. The short-term loans do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans.

	Three Months Ended
Short-Term and Forbearance Loans	March 31, 2023					December 31, 2022					March 31, 2022
($ in thousands)	UPB		Gain / (Loss)			UPB		Gain / (Loss)			UPB		Gain / (Loss)
Resolved — paid in full	$	5,560	$	348		$	4,092	$	82		$	13,820	$	646
Resolved — paid current		1,633		9			457		—			3,783		39
Resolved — REO sold		1,209		(21	)		529		74			503		35
Total resolutions	$	8,402	$	336		$	5,078	$	156		$	18,106	$	720
Recovery rate on resolved    nonperforming UPB				104.0	%				103.1	%				104.0	%

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

	Three Months Ended
($ in thousands)	March 31, 2023				December 31, 2022				March 31, 2022
Average nonperforming loans for the period (1)	$	298,703			$	279,224			$	278,349
Charge-offs		484				—				328
Charge-offs / Average nonperforming loans for the period (1)		0.65	%	(2)		0.00	%	(2)		0.47	%	(2)

(1)Reflects the monthly average of nonperforming loans held for investment during the period.

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

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Concentrations – Loans Held for Investment

As of March 31, 2023, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 53.2% of the UPB. Mixed used properties represented 12.6% 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 22.0% in California, 19.9% in New York, 13.7% in Florida, and 7.5% in New Jersey.

Property Type	March 31, 2023
($ in thousands)	Loan Count		UPB		% of Total UPB
Investor 1-4		5,518	$	1,904,535		53.2	%
Mixed use		1,075		449,811		12.6
Retail		644		308,131		8.6
Multifamily		552		304,281		8.5
Warehouse		346		221,238		6.2
Office		457		197,696		5.5
Other(1)		554		193,099		5.4
Total loans held for investment		9,146	$	3,578,791		100.0	%

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

Geography (State)	March 31, 2023
($ in thousands)	Loan Count		UPB		% of Total UPB
California		1,239	$	786,462		22.0	%
New York		1,278		712,156		19.9
Florida		1,267		489,268		13.7
New Jersey		849		269,070		7.5
Other(1)		4,513		1,321,835		36.9
Total loans held for investment		9,146	$	3,578,791		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, reductions in fair value are reflected as valuation adjustments.

As of March 31, 2023, our REO included 39 properties with a lower of cost or estimated fair value of $21.8 million compared to 27 properties with a lower of cost or estimated fair value of $13.3 million as of December 31, 2022.

Key Performance Metrics

	Three Months Ended
($ in thousands)	March 31, 2023 (1)			December 31, 2022 (1)			March 31, 2022 (1)
Average loans	$	3,525,028		$	3,494,995		$	2,682,851
Portfolio yield		8.00	%		7.51	%		7.76	%
Average debt — portfolio related		3,151,650			3,124,409			2,356,433
Average debt — total company		3,366,650			3,339,409			2,535,348
Cost of funds — portfolio related		5.33	%		5.23	%		4.00	%
Cost of funds — total company		5.49	%		5.39	%		6.42	%
Net interest margin — portfolio related		3.23	%		2.84	%		4.25	%
Net interest margin — total company		2.76	%		2.36	%		1.69	%
Charge-offs/Average loans held for investment		0.06	%		0.00	%		0.05	%
Pre-tax return on equity		15.26	%		12.37	%		4.42	%
Return on equity		11.10	%		8.71	%		3.65	%

(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.

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Portfolio Yield

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

Average Debt — Portfolio Related and Total Company

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

Cost of Funds — Portfolio Related and Total Company

Portfolio related cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt as a percentage of average portfolio-related debt outstanding over the given period. Total company cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt and corporate debt outstanding over the given period. Interest expense includes the amortization of expenses incurred in connection with our portfolio related financing activities and corporate debt. Through the issuance of long-term securitizations, we have been able to fix a significant portion of our borrowing costs over time. The strong credit performance on our securitizations has allowed us to issue debt at attractive rates.

Our portfolio related cost of funds increased to 5.33% for the three months ended March 31, 2023 from 5.23% for the three months ended December 31, 2022 and increased from 4.00% for the three months ended March 31, 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 of 3.23% for the three months ended March 31, 2023 increased from 2.84% for the three months ended December 31, 2022, and decreased from 4.25% for the three months ended March 31, 2022. The increase from December 31, 2022 was primarily due to higher loan yields. The decrease from March 31, 2022 was primarily due to higher debt cost caused by an overall increase in interest rates.

Our total company net interest margin increased to 2.76% for the three months ended March 31, 2023 from 1.69% for the three months ended March 31, 2022 and increased from 2.36% for the three months ended December 31, 2022, respectively. The increase in total company net interest margin during the three months ended March 31, 2023 from the three months ended March 31, 2022 and December 31, 2022 was primarily due to higher loan yields and lower corporate interest expense as compared to March 2022.

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

	Three Months Ended
	March 31, 2023							December 31, 2022							March 31, 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	$	12,896						$	64,699						$	69,092
Loans held for investment		3,512,133							3,430,296							2,613,759
Total loans	$	3,525,029	$	70,521		8.00	%	$	3,494,995	$	65,632		7.51	%	$	2,682,851	$	52,049		7.76	%
Debt:
Warehouse facilities	$	225,497	$	4,833		8.57	%	$	286,094	$	5,776		8.08	%	$	338,247	$	3,765		4.45	%
Securitizations		2,926,153		37,196		5.08	%		2,838,315		35,078		4.94	%		2,018,186		19,791		3.92	%
Total debt - portfolio related		3,151,650		42,029		5.33	%		3,124,409		40,854		5.23	%		2,356,433		23,556		4.00	%
Corporate debt		215,000		4,139		7.70	%		215,000		4,139		7.70	%		178,915		17,140		38.32	%
Total debt	$	3,366,650	$	46,168		5.49	%	$	3,339,409	$	44,993		5.39	%	$	2,535,348	$	40,696		6.42	%
Net interest spread -    portfolio related (2)						2.67	%						2.28	%						3.76	%
Net interest margin -    portfolio related						3.23	%						2.84	%						4.25	%
Net interest spread -    total company (3)						2.52	%						2.12	%						1.34	%
Net interest margin -    total company						2.76	%						2.36	%						1.69	%

(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 the average loans held for investment for the three months ended March 31, 2023 remained low at 0.06% compared to 0.00% for the three months ended December 31, 2022 and 0.05% for the three months ended March 31, 2022. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarter. We do not record charge-offs on 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 carried 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 were higher during the quarter ended March 31, 2023 compared to the quarters ended December 31, 2022 and March 31, 2023 due to the increase in income before income taxes and net income.

	Three Months Ended
($ in thousands)	March 31, 2023			December 31, 2022			March 31, 2022
Income before income taxes (A)	$	14,757		$	11,693		$	3,911		(2)
Net income (B)		10,736			8,227			3,231
Monthly average balance:
Stockholders' equity (C)		386,935			378,005			353,635
Pre-tax return on equity (A)/(C) (1)		15.3	%		12.4	%		4.4	%
Return on equity (B)/(C) (1)		11.1	%		8.7	%		3.7	%

(1)Annualized.

(2)Excluded $110 thousand of net income attributable to noncontrolling interest for the quarter ended March 31, 2022.

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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 securitizations. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our securitizations and warehouse liabilities.

Net Interest Income — Portfolio Related

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

Interest Expense — Corporate Debt

Interest expense on corporate debt primarily consists of interest expense paid with respect to the 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.

Other Operating Income

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

Unrealized Gain/(Loss) on Fair Value Loans. We have elected to apply the fair value option accounting to all of 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 as discussed more fully in the notes to our consolidated financial statements. Changes in fair value subsequent to initial recognition of fair value loans are reported as unrealized gain/(loss) on fair value loans, a component of other operating income within the consolidated statements of income.

Other Income. Other income includes the following:

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.

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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.

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

Operating Expenses

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

Origination Expenses. Costs related to our loan origination activities.

Securitizations Expenses. Costs related to issuance of our securitizations.

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 March 31,
($ in thousands)	2023		2022
Interest income	$	70,521	$	52,049
Interest expense - portfolio related		42,029		23,556
Net interest income - portfolio related		28,492		28,493
Interest expense - corporate debt		4,139		17,140
Net interest income		24,353		11,353
Provision for loan losses		636		730
Net interest income after provision for loan losses		23,717		10,623
Other operating income		12,558		5,648
Total operating expenses		21,518		12,250
Income before income taxes		14,757		4,021
Income tax expense		4,021		790
Net income		10,736		3,231
Net income attributable to noncontrolling interest		87		110
Net income attributable to Velocity Financial, Inc.		10,649		3,121

Net Interest Income — Portfolio Related

	Three Months Ended March 31,
($ in thousands)	2023		2022		$ Change
Interest income	$	70,521	$	52,049	$	18,472
Interest expense - portfolio related		42,029		23,556		18,473
Net interest income - portfolio related	$	28,492	$	28,493	$	(1	)

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income remained relatively consistent at $28.5 million for three months ended March 31, 2023 and 2022.

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Interest Income. Interest income increased by $18.5 million to $70.5 million for the three months ended March 31, 2023, compared to $52.0 million for the three months ended March 31, 2022. The increase was primarily attributable to higher portfolio balances and an increase in the average loan yield, which increased from 7.76% for the three months ended March 31, 2022 to 8.00% for the three months ended March 31, 2023.

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate for the three months ended March 31, 2023 and 2022, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance (i.e., $0.8 billion) by the previous period’s average yield (i.e., 7.76%). The effect of rate changes is calculated by multiplying the change in average yield (i.e., (0.24%) by the current period’s average loan balance (i.e., $3.5 billion).

	Three Months Ended March 31, 2023 and 2022
($ in thousands)	Average Loans		Interest Income		Average Yield (1)
Three months ended March 31, 2023	$	3,525,028	$	70,521		8.00	%
Three months ended March 31, 2022		2,682,851		52,049		7.76	%
Volume variance		842,177		16,338
Rate variance				2,134		0.24	%
Total interest income variance			$	18,472
(1) Annualized.

	Three Months Ended March 31, 2023 and December 31, 2022
($ in thousands)	Average Loans		Interest Income		Average Yield (1)
Three months ended March 31, 2023	$	3,525,028	$	70,521		8.00	%
Three months ended December 31, 2022		3,494,995		65,632		7.51	%
Volume variance		30,033		564
Rate variance				4,326		0.49	%
Total interest income variance			$	4,890
(1) Annualized.

Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitizations, increased from $23.6 million for the three months ended March 31, 2022 to $42.0 million for the three months ended March 31, 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 months ended March 31, 2023 and 2022, respectively.

	Three Months Ended March 31, 2023 and 2022
($ in thousands)	Average Debt (1)		Interest Expense		Cost of Funds (2)
Three months ended March 31, 2023	$	3,151,650	$	42,029		5.33	%
Three months ended March 31, 2022		2,356,433		23,556		4.00	%
Volume variance		795,217		7,952
Rate variance				10,521		1.33	%
Total interest expense variance			$	18,473

(1)Includes securitizations and warehouse agreements.

(2)Annualized.

	Three Months Ended March 31, 2023 and December 31, 2022
($ in thousands)	Average Debt (1)		Interest Expense		Cost of Funds (2)
Three months ended March 31, 2023	$	3,151,650	$	42,029		5.33	%
Three months ended December 31, 2022		3,124,409		40,853		5.23	%
Volume variance		27,241		356
Rate variance				820		0.10	%
Total interest expense variance			$	1,176

(1)Includes securitizations and warehouse agreements.

(2)Annualized.

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Net Interest Income After Provision for Loan Losses

	Three Months Ended March 31,
($ in thousands)	2023		2022		$ Change
Net interest income - portfolio related	$	28,492	$	28,493	$	(1	)
Interest expense - corporate debt		4,139		17,140		(13,001	)
Net interest income		24,353		11,353		13,000
Provision for loan losses		636		730		(94	)
Net interest income after provision for loan losses	$	23,717	$	10,623	$	13,094

Interest Expense — Corporate Debt. Corporate debt interest expense decreased to $4.1 million for the three months ended March 31, 2023, compared to $17.1 million for the three months ended March 31, 2022, primarily due to the $12.8 million prepayment fee and unamortized debt issuance costs associate with the payoff of our corporate debt in March 2022.

Provision for Loan Losses. Our provision for loan losses decreased from $0.7 million for the three months ended March 31, 2022 to $0.6 million for the three months ended March 31, 2023, primarily due to a slight decrease in our loans held for investment portfolio carried at amortized cost. The loans held for investment portfolio decreased due to paydowns on our existing amortized cost portfolio and the election of fair value option accounting on all new loan originations effective October 1, 2022.

Other Operating Income

The $6.9 million increase in total other operating income during the three months ended March 31, 2023 was mainly due to the election of fair value option accounting on new loan originations beginning October 1,2022.

	Three Months Ended March 31,
($ in thousands)	2023			2022		$ Change
Gain on disposition of loans	$	1,913		$	4,540	$	(2,627	)
Unrealized gain on fair value loans		7,354			11		7,343
Unrealized loss on fair value securitizations		(170	)		—		(170	)
Other income		3,461			1,097		2,364
Total other operating income	$	12,558		$	5,648	$	6,910

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 March 31,
($ in thousands)	2023			2022				$ Change
Compensation and employee benefits	$	10,008		$	5,323			$	4,685
Origination (income) expenses		(334	)		310		(1)		(644	)
Securitizations expenses		2,584			—				2,584
Loan servicing		3,828			2,450				1,378
Professional fees		955			1,362				(407	)
Rent and occupancy		446			442				4
Real estate owned, net		1,829			(175	)			2,004
Other operating expenses		2,202			2,538		(1)		(336	)
Total operating expenses	$	21,518		$	12,250			$	9,268

(1)The $310 thousand of origination expenses included in other operating expenses for the three months ended March 31, 2022 has been reclassified to conform to the current period presentation.

Compensation and Employee Benefits. Compensation and employee benefits increased by $4.7 million to $10.0 million for the three months ended March 31, 2023 compared to $5.3 million for the three months ended March 31, 2022. The increase was mainly driven by the FVO accounting on all new loan originations beginning October 1, 2022 as all origination costs are expensed as incurred as opposed to being deferred and amortized in the March 31, 2022 period.

Origination (Income) Expenses. Origination income was at $0.3 million for the three months ended March 31, 2023, compared to origination expenses of $0.3 million for the three months ended March 31, 2022. The increase in origination income was due to our FVO election for newly originated loans which recognize all origination fees in the current period.

Securitizations Expenses. The increase in securitization expenses of $2.6 million for the three months ended March 31, 2023 was due to the election of fair value option accounting on securitizations issued beginning January 1, 2023.

Loan Servicing. Loan servicing expenses increased from $2.5 million for the three months ended March 31, 2022 to $3.8 million for the three months ended March 31, 2023, primarily attributable to the increase in our loan portfolio.

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Professional Fees. Professional fees decreased to $1.0 million for the three months ended March 31, 2023 as compared to $1.4 million for the three months ended March 31, 2022, mainly due to an overall decrease in consulting fees in 2023.

Rent and Occupancy. Rent and occupancy expenses remained consistent at $0.4 million for the three months ended March 31, 2023 and 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 March 31, 2022 to expense of $1.8 million for the three months ended March 31, 2023, mainly due to the increase in valuation adjustments taken on the underlying collateral values.

Other Operating Expenses. Other operating expenses decreased from $2.5 million for the three months ended March 31, 2022 to $2.2 million for the three months ended March 31, 2023, mainly attributable to the decrease in reserve for repurchase of loans as we sold fewer loans in the first quarter of 2023.

Income Tax Expense. Income tax expense was $4.0 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. Our annual consolidated effective tax rates were 27.9% and 27.4% for the three months ended March 31, 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 June 30, 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
	March 31, 2023			December 31, 2022			September 30, 2022			June 30, 2022			March 31, 2022				December 31, 2021			September 30, 2021			June 30, 2021
($ in thousands)	(unaudited)
Interest income	$	70,521		$	65,632		$	63,419		$	59,243		$	52,049			$	49,360		$	46,923		$	44,978
Interest expense - portfolio related		42,029			40,854			34,561			28,752			23,556				23,666			20,321			20,566
Net interest income - portfolio related		28,492			24,778			28,858			30,491			28,493				25,694			26,602			24,412
Net interest margin - portfolio related		3.23	%		2.84	%		3.59	%		4.10	%		4.25	%			4.27	%		4.97	%		4.83	%
Interest expense - corporate debt		4,139			4,139			4,011			4,182			17,140				4,462			4,488			4,309
Net interest income		24,353			20,639			24,847			26,309			11,353				21,232			22,114			20,103
Net interest margin - total company		2.76	%		2.36	%		3.09	%		3.54	%		1.69	%			3.53	%		4.13	%		3.98	%
Provision for (reversal of) loan losses		636			(437	)		580			279			730				377			228			(1,000	)
Net interest income after provision    for loan losses		23,717			21,076			24,267			26,030			10,623				20,855			21,886			21,103
Other operating income		12,558			11,029			2,509			3,039			5,648				2,617			339			2,432
Operating expenses		21,518			20,413			12,727			14,279			12,250				12,095			11,298			10,650
Income before income taxes		14,757			11,692			14,049			14,790			4,021				11,377			10,927			12,885
Less income attributable to noncontrolling interest		87			(235	)		307			126			110				—			—			—
Income tax expense		4,021			3,465			3,759			4,019			790				3,024			2,905			3,432
Net income	$	10,649		$	8,462		$	9,983		$	10,645		$	3,121		(1)	$	8,353		$	8,022		$	9,453

(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 is $12.4 million.

43

Liquidity and Capital Resources

Sources and Uses of Liquidity

We fund our lending activities primarily through borrowings under our warehouse repurchase facilities, securitizations, 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 was $578.2 million as of March 31, 2023 comprised of $39.4 million in cash, $5.9 million of available borrowings for unencumbered loans and $532.9 million of available warehouse capacity.

We had cash of $39.4 million and $36.3 million, excluding restricted cash of $16.6 million and $10.8 million as of March 31, 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:

	Three Months Ended
($ in thousands)	March 31, 2023			March 31, 2022
Cash provided by (used in):
Operating activities	$	(11,928	)	$	11,836
Investing activities		(71,578	)		(293,658	)
Financing activities		77,483			281,684
Net change in cash, cash equivalents, and restricted cash	$	(6,023	)	$	(138	)

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 three months ended March 31, 2023, our net cash used in operating activities consisted mainly of $19.1 million in origination of loans held for sale, $7.4 million change in value of fair value loans, partially offset by $10.7 million in net income.

For the three months ended March 31, 2023, our net cash used in investing activities consisted mainly of $197.9 million in cash used to originate held for investment loans, partially offset by $21.5 million proceeds from sales of loans and $99.8 million in cash received in payoffs of loans held for investment.

For the three months ended March 31, 2023, our net cash provided by financing activities consisted mainly of $246.8 million in borrowings from our warehouse and repurchase facilities and $197.5 million in proceeds of asset-backed securities issued. The cash generated was offset by repayments of $279.6 million on our warehouse and repurchase facilities and repayments of $86.2 million on asset-backed securities issued.

During the three months ended March 31, 2023, we used approximately $6.0 million of net cash and cash equivalents from operations, investing and financing activities. During the three months ended March 31, 2022, we used approximately $0.1 million of net cash and cash equivalents from operations, investing and financing activities.

Warehouse Facilities

As of March 31, 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 LIBOR and five warehouse facilities at SOFR, all at margins that range from 2.75% to 4.50%. Borrowing under these facilities was $299.0 million with $532.9 million of available capacity under our warehouse and repurchase facilities as of March 31, 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 March 31, 2023, we were in compliance with these covenants.

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Securitizations

From May 2011 through March 2023, we have completed twenty-six securitizations, issuing $5.6 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 investor real estate loans securitized, securities issued, securities retained by us at the time of the securitization, and as of March 31, 2023 and December 31, 2022, and the stated maturity for each securitization. The securities are callable by us when the stated principal balance is less than a certain percentage, ranging from 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		March 31, 2023		December 31, 2022		Stated Maturity Date
2016-1 Trust	$	319,809	$	38,792	$	17,624	$	17,541	April 2046
2017-2 Trust		245,601		12,927		2,558		2,697	October 2047
2018-1 Trust		176,816		9,308		1,978		2,065	April 2048
2018-2 Trust		307,988		16,210		4,218		4,352	October 2048
2019-1 Trust		235,580		12,399		4,052		4,178	March 2049
2019-2 Trust		207,020		10,901		3,962		4,007	July 2049
2019-3 Trust		154,419		8,127		3,256		3,281	October 2049
2020-1 Trust		248,700		13,159		6,320		6,746	February 2050
2020-2 Trust		96,352		32,118		12,847		12,847	June 2050
2021-1 Trust		251,301		13,227		9,546		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		4,531		4,718	February 2052
2022-2 Trust		241,388		11,202		11,170		11,170	March 2052
2022-MC1 Trust		84,967		40,911		44,395		44,038	May 2047
2022-3 Trust		296,323		18,914		18,587		18,587	May 2052
2022-4 Trust		308,357		25,190		25,027		25,027	July 2052
2022-5 Trust		188,754		65,459		65,141		65,141	October 2052
2023-1 Trust		198,715		41,593		41,103		—	December 2052
Total	$	4,553,923	$	385,712	$	276,315	$	236,515

The following table summarizes outstanding bond balances for each securitization as of March 31, 2023 and December 31, 2022:

($ in thousands)	March 31, 2023		December 31, 2022
2016-1 Trust	$	19,896	$	22,369
2017-2 Trust		55,981		59,183
2018-1 Trust		41,239		43,596
2018-2 Trust		91,189		93,792
2019-1 Trust		87,832		91,167
2019-2 Trust		81,096		82,508
2019-3 Trust		65,757		67,899
2020-1 Trust		128,280		136,643
2020-2 Trust		57,239		60,445
2021-1 Trust		186,986		196,969
2021-2 Trust		161,511		170,072
2021-3 Trust		172,915		178,038
2021-4 Trust		266,076		273,489
2022-1 Trust		250,986		256,667
2022-2 Trust		231,171		233,045
2022-MC1 Trust		48,298		54,528
2022-3 Trust		277,038		280,066
2022-4 Trust		297,702		301,856
2022-5 Trust		184,213		186,577
2023-1 Trust		195,999		—
	$	2,901,403	$	2,788,909

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

	March 31, 2023			December 31, 2022
2016-1 Trust		8.85	%		8.59	%
2017-2 Trust		3.95	%		3.92	%
2018-1 Trust		4.01	%		4.05	%
2018-2 Trust		4.50	%		4.46	%
2019-1 Trust		4.08	%		4.06	%
2019-2 Trust		3.41	%		3.46	%
2019-3 Trust		3.28	%		3.25	%
2020-1 Trust		2.84	%		2.89	%
2020-2 Trust		4.60	%		4.60	%
2021-1 Trust		1.75	%		1.73	%
2021-2 Trust		2.01	%		2.02	%
2021-3 Trust		2.45	%		2.44	%
2021-4 Trust		3.19	%		3.20	%
2022-1 Trust		3.93	%		3.93	%
2022-2 Trust		5.09	%		5.07	%
2022-MC1 Trust		6.88	%		6.91	%
2022-3 Trust		5.67	%		5.67	%
2022-4 Trust		6.24	%		6.23	%
2022-5 Trust		7.08	%		7.10	%
2023-1 Trust		7.01	%		—

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

Secured Financing (Corporate Debt)

On 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 JMP Securities LLC and Virtu Americas LLC to establish an at-the-market equity offering program (“ATM Program”) where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for aggregate gross sales of our common stock of up to $50,000,000 provided that the number of shares sold under the ATM Program does not exceed 4,000,000. For the three months ended March 31, 2023, no common stock was issued under our ATM Program.

Contractual Obligations and Commitments

On March 15, 2022, we entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. Interest on the 2022 Term Loan is paid every six months.

As of March 31, 2023, we maintained warehouse facilities to finance our investor real estate loans and had approximately $299.0 million in outstanding borrowings with $532.9 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.

46

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.

47

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

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

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

Changes in Internal Control over Financial Reporting.

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

48

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Intentionally omitted pursuant to smaller reporting company reduced disclosure requirements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides the information with respect to purchases made by us of shares of our common stock during the three months ended March 31, 2023.

Period	Total Number of Shares Purchased (1)(2)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 2023		54,538	$	10.00		—	$	—
February 2023		8,681		10.03		—		—
March 2023		22,355		9.13		—		—
Total		85,574	$	9.78		—	$	—

(1)Shares purchased during the period were transferred to the Company from employees in satisfaction of tax withholding obligations and estimated taxes associated with the vesting of restricted stock awards during the period.

(2)The Company currently does not have a common stock repurchase program.
 

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

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

		Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File No.	Exhibit	Filing Date
3.1	Certificate of Conversion	8-K	001-39183	3.1	1/22/2020
3.2	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

50

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002+
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (ii) the Consolidated Statements of Income for the quarter ended March 31, 2023 and March 31, 2022, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended March 31, 2023 and March 31, 2022, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2023 and March 31, 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

51

SIGNATURES

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

	VELOCITY FINANCIAL, INC.
Date: May 4, 2023	By:	/s/ Christopher D. Farrar
		Christopher D. Farrar
		Chief Executive Officer
Date: May 4, 2023	By:	/s/ Mark R. Szczepaniak
		Mark R. Szczepaniak
		Chief Financial Officer

52