# Velocity Financial, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Velocity Financial, Inc.](/companies/vel.md) (CIK 1692376)
- Form: 10-Q
- Filed: 2024-08-02
- Accepted by EDGAR: Aug 1, 2024, 18:41 ET
- Period: 2024-06-30
- Accession: 0000950170-24-089502
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1692376/000095017024089502/vel-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1692376/000095017024089502/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $5.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $11.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $14.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $32.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.90 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.97 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 35,600,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 35,519,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $22.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $125.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $1.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-06-30 | $47.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-06-30 | $4.87bn | us-gaap:Assets |
| Total liabilities | at 2024-06-30 | $4.40bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $471.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 82,359 characters.

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, 2023, as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”).

In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of federal securities laws. In particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond are forward-looking statements. For important information regarding these forward-looking statements, please see the discussion below under the caption “Forward-Looking Statements.”

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

### Business

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 19 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

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

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of June 30, 2024, has an average balance of approximately $387 thousand. As of June 30, 2024, our loan portfolio totaled $4.5 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 67.4% of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 54.1% of the UPB. For the three months ended June 30, 2024, the annualized yield on our total portfolio was 8.98%.

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, corporate debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed thirty-four securitized debt transactions, resulting in a total of over $7.1 billion in gross debt proceeds from May 2011 through June 30, 2024. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitized debt and excludes our corporate debt. For the three months ended June 30, 2024, our annualized portfolio related net interest margin increased to 3.54% compared to the 3.24% for the three months ended June 30, 2023. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for credit losses and operating expenses. For the three and six months ended June 30, 2024, including net income attributable to noncontrolling interest, we generated pre-tax income of $19.9 million and $43.1 million, and net income of $14.7 million and $32.0 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.

In February 2024, the Company issued $75.0 million principal amount of five-year Senior Secured Notes. The Notes bear interest at 9.875% and mature on February 15, 2029.

### Recent Developments

### Securitized Debt

In June 2024, we completed the securitization of $209.9 million of investor real estate loans, as measured by UPB.

### Continued Market Uncertainties

Our operational and financial performance will depend on certain market developments, including any lingering impact of the COVID-19 pandemic, the Russia/Ukraine war, the Israel-Gaza Conflict, a global recession, heightened stress in the real estate and corporate debt markets, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.

### Critical Accounting Policies and Use of Estimates

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

These polices and estimates relate to the allowance for credit losses, fair value option accounting, 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, 2023, 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 provision for credit losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitized debt. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.

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

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

### Credit Losses

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

### Operating Expenses

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

### Factors Affecting Our Results of Operations

Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by a number of factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, operating costs, the availability of funding sources and the underlying performance of the collateral supporting our loans. While we have been successful at managing these elements in the past, there are certain circumstances beyond our control, including any lingering impact of the COVID-19 pandemic, the Russia/Ukraine and Israel/Hamas wars, an expected recession, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.

### Competition

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

### Availability and Cost of Funding

Our primary funding sources have historically included cash from operations, warehouse facilities, term securitized debt, corporate debt, and equity. We believe we have an established brand in the term securitized debt market and that this market will continue to support our portfolio growth with long-term financing. Changes in macroeconomic conditions can adversely impact our ability to issue securitized debt and, thereby, limit our options for long-term financing. In consideration of this potential risk, we have entered into a credit facility for longer-term financing that will provide us with capital resources to fund loan growth in the event we are not able to issue securitized debt.

One of our seven warehouse repurchase facilities have interest payment obligations tied to the one-month American Interbank Offered Rate, (“AMERIBOR”). Six of our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate (“SOFR”).

### Loan Performance

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

### Macroeconomic Conditions

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

### Portfolio and Asset Quality

### Key Portfolio Statistics

*($ in thousands)*

|  | June 30, 2024 | March 31, 2024 | June 30, 2023 |
| --- | ---: | ---: | ---: |
| Total loans | $4,479,901 | $4,281,533 | $3,719,825 |
| Loan count | 11,582 | 11,013 | 9,541 |
| Average loan balance | $387 | $389 | $390 |
| Weighted average loan-to-value | 67.4% | 67.6% | 68.2% |
| Weighted average coupon | 9.3% | 9.1% | 8.4% |
| Nonperforming loans (UPB) (A) | $470,649 | $432,560 | $371,154 |
| Nonperforming loans (% of total) (A) | 10.5% | 10.1% | 10.0% |

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $40.7 million, $45.1 million, and $43.5 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of June 30, 2024, March 31, 2024, and June 30, 2023, respectively.

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

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

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

*Weighted Average Coupon.* Weighted average coupon reflects the weighted average loan rate at the end of the period.

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

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

### Originations and Acquisitions

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

*($ in thousands)*

| Three Months Ended June 30, 2024: | Loan Count | Loan Balance | Average Loan Size | Weighted Average Coupon | Weighted Average LTV |
| --- | ---: | ---: | ---: | ---: | ---: |
| Loan originations — held for investment | 1,109 | $422,226 | $381 | 11.03% | 64.7% |
| Loan originations — held for sale | — | — | — | —% | —% |
| Total loan originations | 1,109 | $422,226 | $381 | 11.03% | 64.7% |
| Loan acquisitions — held for investment | 3 | 3,371 | 1,124 | 8.76% | 53.5% |
| Total loans originated and acquired | 1,112 | $425,597 | $383 | 11.02% | 64.6% |
| **Three Months Ended March 31, 2024:** |  |  |  |  |  |
| Loan originations — held for investment | 958 | $378,671 | $395 | 11.06% | 63.8% |
| Loan originations — held for sale | — | — | — | —% | —% |
| Total loan originations | 958 | $378,671 | $395 | 11.06% | 63.8% |
| Loan acquisitions — held for investment | 31 | 12,270 | 396 | 11.48% | 59.2% |
| Total loans originated and acquired | 989 | $390,941 | $395 | 11.07% | 63.7% |
| **Three Months Ended June 30, 2023:** |  |  |  |  |  |
| Loan originations — held for investment | 722 | $258,646 | $358 | 11.00% | 67.7% |
| Loan originations — held for sale | — | — | — | —% | —% |
| Total loan originations | 722 | $258,646 | $358 | 11.00% | 67.7% |
| Loan acquisitions — held for investment | — | — | — | —% | —% |
| Total loans originated and acquired | 722 | $258,646 | $358 | 11.00% | 67.7% |

37

During the second quarter of 2024, loan originations increased $43.6 million and $163.6 million from the quarters ended March 31, 2024 and June 30, 2023, respectively.

### 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)*

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Unpaid principal balance | $4,479,901 | $4,055,936 |
| Valuation adjustments on FVO loans | 90,798 | 54,677 |
| Deferred loan origination costs | 25,843 | 28,351 |
| Total loans held for investment, gross | 4,596,542 | 4,138,964 |
| Allowance for credit losses | (5,240) | (4,769) |
| Loans held for investment, net | $4,591,302 | $4,134,195 |

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:

*($ in thousands)*

|  | June 30, 2024 UPB% |  | March 31, 2024 UPB% |  | June 30, 2023 UPB% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans due in less than one year | $156,411 | 3.5% | $156,441 | 3.7% | $141,299 | 3.8% |
| Loans due in one to five years | 62,349 | 1.4 | 66,298 | 1.5 | 36,051 | 1.0 |
| Loans due in more than five years | 4,261,141 | 95.1 | 4,058,794 | 94.8 | 3,542,475 | 95.2 |
| Total loans held for investment | $4,479,901 | 100.0% | $4,281,533 | 100.0% | $3,719,825 | 100.0% |

### Allowance for Credit Losses

For the June 30, 2024 estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflects the uncertainties of a decelerating economy, persistent high inflation, and turmoil in the geopolitical markets with a wider Middle East Conflict growing and the continued war in Ukraine.

For the March 31, 2024 estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States, the increase in unemployment, concerns of a recession, and the continued geopolitical instability with a wider Middle East conflict, and the wars between Russia/Ukraine and Israel/Hamas.

For the December 31, 2023 current expected credit loss (“CECL”) estimate, we considered a severe stress scenario with an eight-quarter reasonable and supportable forecast period followed by a two-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate given the continued inflation in the United States, the wars between Russia/Ukraine and Israel/Hamas, continued disruption in the supply chain, and concerns of a recession.

Our allowance for credit losses as of June 30, 2024 was $5.2 million compared to $4.6 million as of June 30, 2023. The increase in allowance for credit losses from June 30, 2023 was primarily due to an increase in the individually-assessed component of the reserve. Our overall credit loss reserve for the periods was within our expected range of 0.15% to 0.20% of loans held for investment, excluding FVO loans. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and the Company’s ability to forecast economic events evolves.

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

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

*($ in thousands)*

| Allowance for credit losses: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Beginning balance | $5,267 | $5,045 | $4,769 | $4,893 |
| Provision for credit losses | 218 | 298 | 1,219 | 933 |
| Charge-offs | (245) | (717) | (748) | (1,200) |
| Ending balance | $5,240 | $4,626 | $5,240 | $4,626 |
| Total loans held for investment (UPB), excluding FVO | $2,599,016 | $3,031,725 | $2,599,016 | $3,031,725 |
| Allowance for credit losses / loans held for investment, excluding FVO | 0.20% | 0.15% | 0.20% | 0.15% |

### 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)*

| Performing/Accruing: | June 30, 2024 (A) |  | COVID-19 Forbearance | March 31, 2024 (A) |  | COVID-19 Forbearance | June 30, 2023 (A) |  | COVID-19 Forbearance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Current | $3,669,659 | 81.9% | $95,614 | $3,517,715 | 82.2% | $94,404 | $3,114,091 | 83.7% | $123,443 |
| 30-59 days past due | 247,100 | 5.5 | 17,598 | 239,493 | 5.6 | 21,886 | 164,586 | 4.4 | 9,995 |
| 60-89 days past due | 92,494 | 2.1 | 4,590 | 91,765 | 2.1 | 3,787 | 69,994 | 1.9 | 4,981 |
| 90+ days past due | — | — | — | — | — | — | — | — | — |
| Total Performing Loans | 4,009,253 | 89.5 | 117,802 | 3,848,973 | 89.9 | 120,077 | 3,348,671 | 90.0 | 138,419 |
| **Nonperforming/Nonaccrual:** |  |  |  |  |  |  |  |  |  |
| \<90 days past due | 19,347 | 0.5 | 746 | 20,473 | 0.5 | 909 | 23,125 | 0.6 | 5,066 |
| 90+ days past due | 37,161 | 0.8 | 710 | 27,919 | 0.7 | 1,587 | 39,536 | 1.1 | 2,088 |
| Bankruptcy | 47,011 | 1.0 | 7,472 | 45,471 | 1.1 | 4,046 | 20,256 | 0.5 | 1,130 |
| In foreclosure | 367,129 | 8.2 | 31,787 | 338,697 | 7.9 | 38,522 | 288,237 | 7.8 | 35,236 |
| Total nonperforming loans | 470,648 | 10.5 | 40,715 | 432,560 | 10.1 | 45,064 | 371,154 | 10.0 | 43,520 |
| Total loans held for investment | $4,479,901 | 100.0% | $158,517 | $4,281,533 | 100.0% | $165,141 | $3,719,825 | 100.0% | $181,939 |

(A) Balance includes $158.5 million UPB of loans held for investment as of June 30, 2024, $165.1 million as of March 31, 2024, and $181.9 million as of June 30, 2023 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 $470.6 million, or 10.5% of our held for investment loan portfolio as of June 30, 2024, compared to $432.6 million, or 10.1% as of March 31, 2024, and $371.2 million, or 10.0% of the held for investment loan portfolio as of June 30, 2023.The increase in total nonperforming loans as of June 30, 2024 compared to March 31, 2024 and June 30, 2023 is due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.

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 $68.6 million of long-term and short-term non-performing loans for the quarter ended June 30, 2024, which was higher, compared to $49.5 million and $43.6 million for the quarters ended March 31, 2024 and June 30, 2023, respectively. From these resolution activities, including the REO resolutions, we realized net gains of $1.0 million, $1.3 million, and $1.5 million for the quarters ended June 30, 2024, March 31, 2024, and June 30, 2023, 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 for the periods indicated:

*($ in thousands)*

| Long-Term Loans | Three Months Ended June 30, 2024 UPB | Gain / (Loss) | March 31, 2024 UPB | Gain / (Loss) | June 30, 2023 UPB | Gain / (Loss) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Resolved — paid in full | $26,119 | $793 | $16,563 | $798 | $13,485 | $965 |
| Resolved — paid current | 35,292 | 188 | 27,494 | 164 | 19,771 | 280 |
| Resolved — REO sold | 7,859 | (202) | 3,888 | 224 | 4,836 | (382) |
| Total resolutions | $69,270 | $779 | $47,945 | $1,186 | $38,092 | $863 |
| Recovery rate on resolved nonperforming UPB |  | 101.1% |  | 102.5% |  | 102.3% |

39

The short-term loans, or loans with a maturity of two-year or less, do not require prepayment fees and usually result in a lower gain when paid in full, as compared to long term loans. The table below includes resolutions for our short-term nonperforming loans and REO's, and also includes loans that were granted a COVID-19 forbearance in 2020:

*($ in thousands)*

| Short-Term and Forbearance Loans | Three Months Ended June 30, 2024 UPB | Gain / (Loss) | March 31, 2024 UPB | Gain / (Loss) | June 30, 2023 UPB | Gain / (Loss) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Resolved — paid in full | $4,545 | $93 | $2,496 | $— | $7,004 | $318 |
| Resolved — paid current | 2,689 | 1 | 2,927 | 25 | 3,290 | 89 |
| Resolved — REO sold | 4,176 | 165 | 1,161 | 62 | 1,672 | 222 |
| Total resolutions | $11,410 | $259 | $6,584 | $87 | $11,966 | $629 |
| Recovery rate on resolved nonperforming UPB |  | 102.3% |  | 101.3% |  | 105.3% |

### Real Estate Owned, net (“REO”)

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

As of June 30, 2024, our REO included 89 properties with a lower of cost or estimated fair value of $50.8 million compared to 76 properties with a lower of cost or estimated fair value of $46.3 million as of March 31, 2024, and 45 properties with a lower of cost or estimated fair value of $20.4 million as of June 30, 2023.

### Charge-offs, Gain (Loss) on REO

Our actual charge-offs have been minimal as a percentage of nonperforming loans held for investment. The valuation impact to our earnings from loans becoming REO or in REO is a combination of 1) loan charge-offs, 2) gain on transfer to REO included in “gain on disposition of loans” in the consolidated statements of income, 3) net gain or loss on sale of REO, and 4) net valuation adjustments on REO. The table below shows our actual charge-offs; gain on transfer of nonperforming loans to REO; gain on disposition of REO; and net valuation adjustments on REO; for the periods indicated:

*($ in thousands)*

|  | Six Months Ended June 30, 2024 |  | Three Months Ended March 31, 2024 |  | Six Months Ended June 30, 2023 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Average nonperforming loans for the period (1) | $320,392 |  | $321,442 |  | $313,800 |  |
| Charge-offs | 748 |  | 504 |  | 1,200 |  |
| Charge-offs / Average nonperforming loans for the period (1) | 0.47% | (2) | 0.63% | (2) | 0.76% | (2) |
| Gain on transfer to REO | 4,074 |  | 1,160 |  | 2,248 |  |
| Gain (loss) on sale of REO | 249 |  | 286 |  | (39) |  |
| REO valuations, net | (2,261) |  | (1,722) |  | (1,670) |  |
| Total gain (loss) on REO | 2,061 |  | (276) |  | 538 |  |

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

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

### Concentrations – Loans Held for Investment

As of June 30, 2024, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 54.1% of the UPB. Mixed used properties represented 11.4% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.3% in California, 17.2% in New York, 13.3% in Florida, 7.4% in New Jersey, and 5.1% in Texas.

*($ in thousands)*

| Property Type | June 30, 2024 Loan Count | UPB | % of Total UPB |
| --- | ---: | ---: | ---: |
| Investor 1-4 | 7,184 | $2,424,554 | 54.1% |
| Mixed use | 1,241 | 510,483 | 11.4 |
| Retail | 796 | 385,120 | 8.6 |
| Multifamily | 608 | 336,447 | 7.5 |
| Warehouse | 449 | 288,380 | 6.4 |
| Office | 589 | 254,836 | 5.7 |
| Other (1) | 715 | 280,081 | 6.3 |
| Total loans held for investment | 11,582 | $4,479,901 | 100.0% |

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

*($ in thousands)*

| Geography (State) | June 30, 2024 Loan Count | UPB | % of Total UPB |
| --- | ---: | ---: | ---: |
| California | 1,458 | $954,420 | 21.3% |
| New York | 1,414 | 769,027 | 17.2 |
| Florida | 1,490 | 594,684 | 13.3 |
| New Jersey | 963 | 329,932 | 7.4 |
| Texas | 656 | 228,990 | 5.1 |
| Other (1) | 5,601 | 1,602,848 | 35.7 |
| Total loans held for investment | 11,582 | $4,479,901 | 100.0% |

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

### Key Performance Metrics

*($ in thousands)*

|  | Three Months Ended June 30, 2024 (1) | March 31, 2024 (1) | June 30, 2023 (1) |
| --- | ---: | ---: | ---: |
| Average loans | $4,355,941 | $4,159,412 | $3,637,570 |
| Portfolio yield | 8.98% | 8.71% | 8.24% |
| Average debt — portfolio related | 3,941,507 | 3,753,732 | 3,258,651 |
| Average debt — total company | 4,231,507 | 4,015,283 | 3,473,651 |
| Cost of funds — portfolio related | 6.01% | 5.93% | 5.58% |
| Cost of funds — total company | 6.18% | 6.08% | 5.71% |
| Net interest margin — portfolio related | 3.54% | 3.35% | 3.24% |
| Net interest margin — total company | 2.98% | 2.83% | 2.78% |
| Charge-offs/Average loans held for investment, excluding FVO loans | 0.04% | 0.07% | 0.09% |
| Pre-tax return on equity | 16.95% | 20.77% | 16.81% |
| Return on equity | 12.54% | 15.49% | 12.21% |

(1) Percentages are annualized.

### Average Loans

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

### Portfolio Yield

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

### Average Debt — Portfolio Related and Total Company

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

### Cost of Funds — Portfolio Related and Total Company

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

Our portfolio related cost of funds increased to 6.01% for the three months ended June 30, 2024 from 5.93% for the prior quarter and increased from 5.58% for the three months ended June 30, 2023.

### 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 increased to 3.54% for the three months ended June 30, 2024 from 3.35% and 3.24% for the three months ended March 31, 2024 and June 30, 2023, respectively. The increase was primarily due to higher average yield on our loan portfolio.

Our total company net interest margin of 2.98% for the three months ended June 30, 2024 increased from 2.83% for the prior quarter, and increased from 2.78% for the three months ended June 30, 2023. The increase in total company net interest margin during the three months ended June 30, 2024 was primarily due to higher average yield on our loan portfolio.

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:

*($ in thousands)*

| Loan portfolio: | Three Months Ended June 30, 2024 Average Balance | Interest Income / Expense | Average Yield / Rate (1) | March 31, 2024 Average Balance | Interest Income / Expense | Average Yield / Rate (1) | June 30, 2023 Average Balance | Interest Income / Expense | Average Yield / Rate (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans held for sale | $9,979 |  |  | $9,661 |  |  | $3,477 |  |  |
| Loans held for investment | 4,345,962 |  |  | 4,149,750 |  |  | 3,634,093 |  |  |
| Total loans | $4,355,941 | $97,760 | 8.98% | $4,159,411 | $90,529 | 8.71% | $3,637,570 | $74,897 | 8.24% |
| **Debt:** |  |  |  |  |  |  |  |  |  |
| Warehouse facilities | $263,029 | $6,116 | 9.30% | $267,559 | $6,392 | 9.56% | $238,027 | $5,910 | 9.93% |
| Securitized debt | 3,678,478 | 53,072 | 5.77% | 3,486,173 | 49,283 | 5.65% | 3,020,624 | 39,541 | 5.24% |
| Total debt - portfolio related | 3,941,507 | 59,188 | 6.01% | 3,753,732 | 55,675 | 5.93% | 3,258,651 | 45,451 | 5.58% |
| Corporate debt | 290,000 | 6,155 | 8.49% | 261,552 | 5,380 | 8.23% | 215,000 | 4,139 | 7.70% |
| Total debt | $4,231,507 | $65,343 | 6.18% | $4,015,284 | $61,055 | 6.08% | $3,473,651 | $49,590 | 5.71% |
| Net interest spread - portfolio related (2) |  |  | 2.97% |  |  | 2.77% |  |  | 2.66% |
| Net interest margin - portfolio related |  |  | 3.54% |  |  | 3.35% |  |  | 3.24% |
| Net interest spread - total company (3) |  |  | 2.80% |  |  | 2.62% |  |  | 2.53% |
| Net interest margin - total company |  |  | 2.98% |  |  | 2.83% |  |  | 2.78% |

(1) Annualized.

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

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

### Charge-Offs

Our annualized charge-off rate over average loans held for investment carried at amortized cost for the three months ended June 30, 2024 decreased to 0.04% as compared to 0.07% and 0.09% for the three months ended March 31, 2024 and June 30, 2023, respectively. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment for the respective quarters. We do not record charge-offs on FVO loans which are carried at estimated fair value. We do not record charge-offs on our loans held for sale which are carried either at fair value, or at the lower of cost or estimated fair value.

### Pre-Tax Return on Equity and Return on Equity

Pre-tax return on equity and return on equity reflect income before income taxes and net income including income attributable to noncontrolling interest, respectively, as a percentage of the monthly average total stockholders’ equity including noncontrolling interest over the specified period. Pre-tax return on equity and return on equity decreased during the quarter ended June 30, 2024 compared to the quarter ended March 31, 2024 due to the decrease in income before income taxes and net income. Pre-tax return on equity and return on equity remained consistent compared to the quarter ended June 30, 2023.

*($ in thousands)*

|  | Three Months Ended June 30, 2024 | March 31, 2024 | June 30, 2023 |
| --- | ---: | ---: | ---: |
| Income before income taxes (A) | $19,873 | $23,236 | $16,824 |
| Net income (B) | 14,711 | 17,333 | 12,222 |
| Monthly average balance: |  |  |  |
| Stockholders' equity (C) | 469,071 | 447,613 | 400,441 |
| Pre-tax return on equity (A)/(C) (1) | 16.9% | 20.8% | 16.8% |
| Return on equity (B)/(C) (1) | 12.5% | 15.5% | 12.2% |

(1) Annualized.

### Components of Results of Operations

### Interest Income

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

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

### Interest Expense — Portfolio Related

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

### Net Interest Income — Portfolio Related

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

### Interest Expense — Corporate Debt

Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2022 Term Loan and the 2024 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 Credit 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 CECL approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loans position as of the balance sheet date, and assumptions from us. We do not record provision for credit losses on loans held for sale, or loans carried at fair value.

### Other Operating Income

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

*Unrealized Gain (Loss) on Fair Value Loans.* We have elected to apply the fair value option accounting to all our originated mortgage loans on a go-forward basis beginning October 1, 2022. We have elected to account for certain purchased distressed loans at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). We regularly estimate the fair value of these loans. Changes in fair value subsequent to initial recognition of fair value loans are reported as unrealized gain (loss) on fair value loans, a component of other operating income within the consolidated statements of income.

*Unrealized Gain (Loss) on 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.

*Unrealized Gain (Loss) on Fair Value Securitized Debt.* We have elected to apply the fair value option accounting to securitized debt issued effective January 1, 2023 when the underlying collateral is also carried at fair value. We regularly estimate the fair value of securitized debt. Changes in fair value subsequent to initial recognition of fair value securitized debt are reported as unrealized gain (loss) on fair value securitized debt, a component of other operating income within the consolidated statements of income.

*Origination Income.* Fee income related to our loan origination activities.

*Interest Income on Cash Balance.* Interest income on bank balances.

*Other Income.* Other income primarily consists of servicing fee income and other miscellaneous income. Century earns servicing fees for servicing mortgage loans for others.

### Operating Expenses

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

*Origination Expenses.* Costs related to our loan origination activities.

*Securitization Expenses.* Costs related to issuance of our securitized debt.

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

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

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

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

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

### Provision for Income Taxes

The provision for income taxes consists of the current and deferred U.S. federal and state income taxes we expect to pay, currently and in future years, with respect to the net income for the year. The amount of the provision is derived by adjusting our reported net income with various permanent differences. The tax-adjusted net income amount is then multiplied by the applicable federal and state income tax rates to arrive at the provision for income taxes.

### Consolidated Results of Operations

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

*(In thousands)*

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $97,760 | $74,897 | $188,289 | $145,418 |
| Interest expense - portfolio related | 59,188 | 45,451 | 114,863 | 87,480 |
| Net interest income - portfolio related | 38,572 | 29,446 | 73,426 | 57,938 |
| Interest expense - corporate debt | 6,155 | 4,139 | 11,535 | 8,278 |
| Net interest income | 32,417 | 25,307 | 61,891 | 49,660 |
| Provision for credit losses | 218 | 298 | 1,219 | 933 |
| Net interest income after provision for credit losses | 32,199 | 25,009 | 60,672 | 48,727 |
| Other operating income | 22,561 | 14,037 | 48,336 | 26,878 |
| Total operating expenses | 34,887 | 22,222 | 65,898 | 44,024 |
| Income before income taxes | 19,873 | 16,824 | 43,110 | 31,581 |
| Income tax expense | 5,162 | 4,602 | 11,066 | 8,623 |
| Net income | 14,711 | 12,222 | 32,044 | 22,958 |
| Net (loss) income attributable to noncontrolling interest | (67) | 39 | 15 | 126 |
| Net income attributable to Velocity Financial, Inc. | $14,778 | $12,183 | $32,029 | $22,832 |

45

#### Net Interest Income — Portfolio Related

*(In thousands)*

|  | Three Months Ended June 30, 2024 | 2023 | $ Change | Six Months Ended June 30, 2024 | 2023 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $97,760 | $74,897 | $22,863 | $188,289 | $145,418 | $42,871 |
| Interest expense - portfolio related | 59,188 | 45,451 | 13,737 | 114,863 | 87,480 | 27,383 |
| Net interest income - portfolio related | $38,572 | $29,446 | $9,126 | $73,426 | $57,938 | $15,488 |

Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $38.6 million from $29.4 million for the three months ended June 30, 2024 and 2023, respectively. Our portfolio related net interest income increased to $73.4 million for the six months ended June 30, 2024 from $57.9 million for the six months ended June 30, 2023.

*Interest Income.* Interest income increased by $22.9 million to $97.8 million for the three months ended June 30, 2024, compared to $74.9 million for the three months ended June 30, 2023, primarily attributable to higher portfolio balances and higher average loan yield. For the three months ended June 30, 2024, the average loan yield was 8.98% compared to 8.24% for the three months ended June 30, 2023. Interest income increased by $42.9 million to $188.3 million for the six months ended June 30, 2024, compared to $145.4 million for the six months ended June 30, 2023. The increase in interest income for the six months ended June 30, 2024 was primarily attributable to higher portfolio balances due to loan originations and higher average loan yield.

The following tables distinguish between the change in interest income attributable to change in volume and the change in interest income attributable to a change in rate for the three and six months ended June 30, 2024 and 2023, respectively. The effect of changes in volume is determined by multiplying the change in average loan balance of $0.7 billion by the previous period’s average yield of 8.24%. The effect of rate changes is calculated by multiplying the change in average yield of 0.74% by the current period’s average loan balance of $4.4 billion.

*($ in thousands)*

|  | Three Months Ended June 30, 2024 and 2023 Average Loans | Interest Income | Average Yield (1) |
| --- | ---: | ---: | ---: |
| Three months ended June 30, 2024 | $4,355,941 | $97,760 | 8.98% |
| Three months ended June 30, 2023 | 3,637,570 | 74,897 | 8.24% |
| Volume variance | 718,371 | 14,798 |  |
| Rate variance |  | 8,065 | 0.74% |
| Total interest income variance |  | $22,863 |  |

(1) Annualized.

*($ in thousands)*

|  | Six Months Ended June 30, 2024 and 2023 Average Loans | Interest Income | Average Yield (1) |
| --- | ---: | ---: | ---: |
| Six Months Ended June 30, 2024 | $4,257,677 | $188,289 | 8.84% |
| Six Months Ended June 30, 2023 | 3,581,299 | 145,418 | 8.12% |
| Volume variance | 676,378 | 27,461 |  |
| Rate variance |  | 15,410 | 0.72% |
| Total interest income variance |  | $42,871 |  |

(1) Annualized.

*Interest Expense — Portfolio Related.* Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased to $59.2 million for the three months ended June 30, 2024 from $45.5 million for the three months ended June 30, 2023, and increased to $114.9 million for the six months ended June 30, 2024 from $87.5 million for the six months ended June 30, 2023, primarily attributable to a higher loan portfolio being financed and increased interest rates.

The following tables present the information regarding the portfolio related interest expense and distinguishes between the change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate) for the three and six months ended June 30, 2024 and 2023, respectively.

*($ in thousands)*

|  | Three Months Ended June 30, 2024 and 2023 Average Debt (1) | Interest Expense | Cost of Funds (2) |
| --- | ---: | ---: | ---: |
| Three months ended June 30, 2024 | $3,941,507 | $59,188 | 6.01% |
| Three months ended June 30, 2023 | 3,258,651 | 45,451 | 5.58% |
| Volume variance | 682,856 | 9,526 |  |
| Rate variance |  | 4,211 | 0.43% |
| Total interest expense variance |  | $13,737 |  |

(1) Includes securitized debt and warehouse agreements.

(2) Annualized.

*($ in thousands)*

|  | Six Months Ended June 30, 2024 and 2023 Average Debt (1) | Interest Expense | Cost of Funds (2) |
| --- | ---: | ---: | ---: |
| Six Months Ended June 30, 2024 | $3,847,619 | $114,863 | 5.97% |
| Six Months Ended June 30, 2023 | 3,205,150 | 87,480 | 5.46% |
| Volume variance | 642,469 | 17,539 |  |
| Rate variance |  | 9,844 | 0.51% |
| Total interest expense variance |  | $27,383 |  |

(1) Includes securitized debt and warehouse agreements.

(2) Annualized.

#### Net Interest Income After Provision for Credit Losses

*(In thousands)*

|  | Three Months Ended June 30, 2024 | 2023 | $ Change | Six Months Ended June 30, 2024 | 2023 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net interest income - portfolio related | $38,572 | $29,446 | $9,126 | $73,426 | $57,938 | $15,488 |
| Interest expense - corporate debt | 6,155 | 4,139 | 2,016 | 11,535 | 8,278 | 3,257 |
| Net interest income | 32,417 | 25,307 | 7,110 | 61,891 | 49,660 | 12,231 |
| Provision for credit losses | 218 | 298 | (80) | 1,219 | 933 | 286 |
| Net interest income after provision for credit losses | $32,199 | $25,009 | $7,190 | $60,672 | $48,727 | $11,945 |

*Interest Expense — Corporate Debt.* Corporate debt interest expense increased to $6.2 million for the three months ended June 30, 2024, compared to $4.1 million for the three months ended June 30, 2023, and increased to $11.5 million for the six months ended June 30, 2024, compared to $8.3 million for the six months ended June 30, 2023, primarily due to the issuance of $75.0 million of additional secured debt in February 2024.

*Provision for Credit Losses*. Our provision for credit losses remained relatively consistent at $0.2 million for the three months ended June 30, 2024 compared to $0.3 million for the three months ended June 30, 2023, and increased to $1.2 million for the six months ended June 30, 2024 from $0.9 million for the six months ended June 30, 2023. The increase is primarily due to the decrease in the valuation of underlying collateral for nonperforming loans.

#### Other Operating Income

The $8.5 million and $21.5 million increases in total other operating income for the three and six months ended June 30, 2024, respectively, were mainly due to the unrealized gains from new originations.

*(In thousands)*

|  | Three Months Ended June 30, 2024 | 2023 | $ Change | Six Months Ended June 30, 2024 | 2023 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Gain on disposition of loans | $3,168 | $1,237 | $1,931 | $4,865 | $3,149 | $1,716 |
| Unrealized gain on fair value loans | 17,123 | 2,413 | 14,710 | 36,049 | 9,767 | 26,282 |
| Unrealized (loss) gain on fair value securitized debt | (4,643) | 5,560 | (10,203) | (6,961) | 5,391 | (12,352) |
| Origination fee income | 5,072 | 2,735 | 2,337 | 10,058 | 5,145 | 4,913 |
| Interest income on cash balance | 1,731 | 1,189 | 542 | 3,362 | 2,136 | 1,226 |
| Other income | 110 | 903 | (793) | 963 | 1,290 | (327) |
| Total other operating income | $22,561 | $14,037 | $8,524 | $48,336 | $26,878 | $21,458 |

#### Operating Expenses

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

*(In thousands)*

|  | Three Months Ended June 30, 2024 | 2023 | $ Change | Six Months Ended June 30, 2024 | 2023 | $ Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Compensation and employee benefits | $16,562 | $10,670 | $5,892 | $31,919 | $20,678 | $11,241 |
| Origination expenses | 749 | 123 | 626 | 1,395 | 72 | 1,323 |
| Securitization expenses | 6,232 | 2,699 | 3,533 | 9,106 | 5,284 | 3,822 |
| Loan servicing | 5,160 | 4,267 | 893 | 9,984 | 8,095 | 1,889 |
| Professional fees | 1,718 | 1,056 | 662 | 3,833 | 2,011 | 1,822 |
| Rent and occupancy | 617 | 458 | 159 | 1,115 | 905 | 210 |
| Real estate owned, net | 1,355 | 1,018 | 337 | 3,811 | 2,846 | 965 |
| Other operating expenses | 2,494 | 1,931 | 563 | 4,735 | 4,133 | 602 |
| Total operating expenses | $34,887 | $22,222 | $12,665 | $65,898 | $44,024 | $21,874 |

*Compensation and Employee Benefits.* Compensation and employee benefits increased by $5.9 million to $16.6 million for the three months ended June 30, 2024 compared to $10.7 million for the three months ended June 30, 2023, and increased by $11.2 million to $31.9 million for the six months ended June 30, 2024 compared to $20.7 million for the six months ended June 30, 2023. The increase was mainly driven by the increase in headcount and higher commissions expense over the last twelve months.

*Origination Expenses.* Origination expenses increased by $0.6 million to $0.7 million for the three months ended June 30, 2024, compared $0.1 million for the three months ended June 30, 2023, and increased by $1.3 million to $1.4 million for the six months ended June 30, 2024, compared to $0.1 million for the six months ended June 30, 2023. The increase in origination expenses was due to an increase in loan originations as compared to prior year.

*Securitization Expenses.* Securitization expenses were $6.2 million for the three months ended June 30, 2024 compared to $2.7 million for the three months ended June 30, 2023, and $9.1 million for the six months ended June 30, 2024 compared to $5.3 million for the six months ended June 30, 2023. The increase was a result of issuing two securitizations in the second quarter of 2024 as compared to issuing one securitization in the same period prior year.

*Loan Servicing.* Loan servicing expenses increased to $5.2 million for the three months ended June 30, 2024 from $4.3 million for the three months ended June 30, 2023, and increased to $10.0 million for the six months ended June 30, 2024 from $8.1 million for the six months ended June 30, 2023 primarily due to the increase in our total loan portfolio from prior year.

*Professional Fees.* Professional fees increased to $1.7 million for the three months ended June 30, 2024 compared to $1.1 million for the three months ended June 30, 2023, and increased by $1.8 million to $3.8 million for the six months ended June 30, 2024 as compared to $2.0 million for the six months ended June 30, 2023. The increase was primarily due to an increase in legal expenses.

*Rent and Occupancy.* Rent and occupancy expenses remained consistent at $0.6 million and $0.5 million for the three months ended June 30, 2024 and 2023, respectively, and were $1.1 million and $0.9 million for the six months ended June 30, 2024 and 2023, respectively.

*Net Expenses of Real Estate Owned.* Net expenses of real estate owned increased to $1.4 million for the three months ended June 30, 2024 from $1.0 million for the three months ended June 30, 2023, and increased to $3.8 million for the six months ended June 30, 2024 from $2.8 million for the six months ended June 30, 2023, mainly due to an increase in valuation adjustments taken on underlying collateral values.

*Other Operating Expenses.* Other operating expenses increased to $2.5 million for the three months ended June 30, 2024 from $1.9 million for the three months ended June 30, 2023, and increased to $4.7 million for the six months ended June 30, 2024 from $4.1 million for the six months ended June 30, 2023. The increase is mainly due to an increase in data processing costs.

*Income Tax Expense.* Income tax expense was $5.2 million and $4.6 million for the three months ended June 30, 2024 and 2023, respectively, and $11.1 million and $8.6 million for the six months ended June 30, 2024 and 2023, respectively. Our annual consolidated effective tax rates were 27.3% and 27.6% for the years 2024 and 2023, respectively.

### Quarterly Results of Operations

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

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

*($ in thousands)*

*(Unaudited)*

|  | Three Months Ended June 30, 2024 | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $97,760 | $90,529 | $86,269 | $79,088 | $74,897 | $70,521 | $65,632 | $63,419 |
| Interest expense - portfolio related | 59,188 | 55,675 | 51,405 | 47,583 | 45,451 | 42,029 | 40,854 | 34,561 |
| Net interest income - portfolio related | 38,572 | 34,854 | 34,864 | 31,505 | 29,446 | 28,492 | 24,778 | 28,858 |
| **Net interest margin - portfolio related** | **3.54%** | **3.35%** | **3.52%** | **3.34%** | **3.24%** | **3.23%** | **2.84%** | **3.59%** |
| Interest expense - corporate debt | 6,155 | 5,380 | 4,140 | 4,138 | 4,139 | 4,139 | 4,139 | 4,011 |
| Net interest income | 32,417 | 29,474 | 30,724 | 27,367 | 25,307 | 24,353 | 20,639 | 24,847 |
| **Net interest margin - total company** | **2.98%** | **2.83%** | **3.10%** | **2.90%** | **2.78%** | **2.76%** | **2.36%** | **3.09%** |
| Provision for (reversal of) credit losses | 218 | 1,002 | 827 | 154 | 298 | 636 | (437) | 580 |
| Net interest income after provision for credit losses | 32,199 | 28,472 | 29,897 | 27,213 | 25,009 | 23,717 | 21,076 | 24,267 |
| Other operating income | 22,561 | 25,775 | 21,670 | 17,360 | 14,037 | 12,843 | 11,420 | 3,027 |
| Operating expenses | 34,887 | 31,011 | 29,260 | 27,334 | 22,222 | 21,803 | 20,804 | 13,245 |
| Income before income taxes | 19,873 | 23,236 | 22,307 | 17,239 | 16,824 | 14,757 | 11,692 | 14,049 |
| Less (loss) income attributable to noncontrolling interest | (67) | 82 | (189) | 83 | 39 | 87 | (235) | 307 |
| Income tax expense | 5,162 | 5,903 | 5,141 | 5,070 | 4,602 | 4,021 | 3,465 | 3,759 |
| Net income | $14,778 | $17,251 | $17,355 | $12,086 | $12,183 | $10,649 | $8,462 | $9,983 |

### Liquidity and Capital Resources

### Sources and Uses of Liquidity

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

### Cash and Cash Equivalents

Our total liquidity plus available warehouse capacity, including Century's revolving credit line, was $730.2 million as of June 30, 2024, comprised of $646.5 million of available warehouse capacity, $47.4 million in cash, and $36.4 million available borrowings for unencumbered loans.

We had cash of $47.4 million and $34.0 million, excluding restricted cash of $32.3 million and $16.8 million as of June 30, 2024 and 2023, respectively. The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities for the periods indicated:

*(In thousands)*

| Cash provided by (used in): | Six Months Ended June 30, 2024 | June 30, 2023 |
| --- | ---: | ---: |
| Operating activities | $22,053 | $32,429 |
| Investing activities | (409,281) | (212,609) |
| Financing activities | 404,960 | 168,897 |
| Net change in cash, cash equivalents, and restricted cash | $17,732 | $(11,283) |

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 credit losses, discount accretion, and valuation changes, and (3) changes in the balances of operating assets and liabilities.

For the six months ended June 30, 2024, our net cash provided by operating activities consisted mainly of $32.0 million in net income, $14.7 million in accounts payable and accrued expenses, offset by $36.0 million in the change in valuation of fair value loans.

For the six months ended June 30, 2024, our net cash used in investing activities consisted mainly of $800.9 million in cash used to originate loans held for investment, partially offset by $346.4 million in cash received in payoffs of loans held for investment.

For the six months ended June 30, 2024, our net cash provided by financing activities consisted mainly of $733.8 million in borrowings from our warehouse and repurchase facilities and $718.1 million in proceeds from asset-backed securities issued. The cash generated was offset by repayments of $831.6 million and $287.0 million, on our warehouse and repurchase facilities and asset-backed securities issued, respectively.

During the six months ended June 30, 2024 and 2023, we generated approximately $17.7 million and used $11.3 million, respectively, of net cash and cash equivalents on operating, investing and financing activities.

### Warehouse Facilities

As of June 30, 2024, we had six 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 three agreements are three-year warehouse facilities. The borrowings are collateralized primarily by performing loans. One of the warehouse facilities bear interest at one-month AMERIBOR and six warehouse facilities at SOFR, all at margins ranging from 1.60% to 4.50%. Borrowing under these facilities was $238.5 million with $646.5 million of available capacity as of June 30, 2024.

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

All borrower payments on loans financed under the warehouse facilities are segregated into pledged accounts with the loan servicer. All principal amounts in excess of the interest due are applied to reduce the outstanding borrowings under the warehouse facilities. The warehouse facilities also contain customary covenants, including financial covenants that require us to maintain minimum liquidity, a minimum net worth, a maximum debt-to-net worth ratio and a ratio of a minimum earnings before interest, taxes, depreciation and amortization of interest expense. If we fail to meet any of the covenants, or otherwise default under the facilities, the lenders have the right to terminate their facility and require immediate repayment, which may require us to sell our loans at less than optimal terms. As of June 30, 2024, we were in compliance with these covenants.

### Securitized debt

From May 2011 through June 2024, we have completed 34 securitized debts, issuing $7.1 billion in principal amount of securities to third parties. All borrower payments are segregated into remittance accounts at the primary servicer and remitted to the trustee of each trust monthly. We are the sole beneficial interest holder of the applicable trusts, which are variable interest entities included in our consolidated financial statements. The transactions are accounted for as secured borrowings under U.S. GAAP. The following table summarizes the securities issued, securities retained by us at the time of the securitization, and as of June 30, 2024 and December 31, 2023, and the stated maturity for each securitized debt. The securities are callable by us when the stated principal balance is less than a certain percentage, ranging from 10% to 30%, of the original stated principal balance of loans at issuance. As a result, the actual maturity date of the securities issued will likely be earlier than their respective stated maturity date.

*(In thousands)*

| Trusts | Securities Issued | Securities Retained as of Issuance Date | June 30, 2024 | December 31, 2023 | Stated Maturity Date |
| --- | ---: | ---: | ---: | ---: | --- |
| 2017-2 Trust | $245,601 | $12,927 | $2,416 | $2,416 | October 2047 |
| 2018-1 Trust | 176,816 | 9,308 | 1,602 | 1,602 | April 2048 |
| 2018-2 Trust | 307,988 | 16,210 | 3,122 | 3,614 | October 2048 |
| 2019-1 Trust | 235,580 | 12,399 | — | — | March 2049 |
| 2019-2 Trust | 207,020 | 10,901 | — | — | July 2049 |
| 2019-3 Trust | 154,419 | 8,127 | — | — | October 2049 |
| 2020-1 Trust | 248,700 | 13,159 | — | — | February 2050 |
| 2020-2 Trust | 96,352 | 32,118 | 12,847 | 12,847 | June 2050 |
| 2021-1 Trust | 251,301 | 13,227 | — | — | 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 | 4,077 | 4,206 | February 2052 |
| 2022-2 Trust | 241,388 | 11,202 | 10,282 | 10,971 | March 2052 |
| 2022-MC1 Trust | 84,967 | 40,911 | 46,862 | 45,026 | May 2047 |
| 2022-3 Trust | 296,323 | 18,914 | 15,489 | 15,489 | May 2052 |
| 2022-4 Trust | 308,357 | 25,190 | 13,336 | 13,414 | July 2052 |
| 2022-5 Trust | 188,754 | 65,459 | 12,649 | 12,649 | October 2052 |
| 2023-1 Trust | 198,715 | 41,593 | 4,043 | 4,043 | December 2052 |
| 2023-1R Trust | 64,833 | 66,228 | 66,228 | 66,228 | October 2025 |
| 2023-2 Trust | 202,210 | 24,229 | 23,839 | 23,948 | April 2053 |
| 2023-RTL1 Trust | 81,608 | 4,296 | 4,296 | 4,296 | July 2028 |
| 2023-3 Trust | 234,741 | 28,718 | 28,480 | 28,480 | July 2053 |
| 2023-4 Trust | 202,890 | 26,623 | 3,995 | 26,482 | November 2053 |
| 2024-1 Trust | 209,862 | 11,278 | 11,229 | — | January 2054 |
| 2024-2 Trust | 286,235 | 8,853 | 8,767 | — | April 2054 |
| 2024-3 Trust | 204,599 | 5,255 | 5,231 | — | June 2054 |
| Total | $5,721,092 | $522,400 | $278,790 | $275,711 |  |

51

The following table summarizes outstanding bond balances for each securitized debt as of June 30, 2024 and December 31, 2023:

*(In thousands)*

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| 2017-2 Trust | $39,444 | $45,869 |
| 2018-1 Trust | 29,170 | 33,505 |
| 2018-2 Trust | 67,437 | 76,871 |
| 2019-1 Trust | 69,189 | 76,391 |
| 2019-2 Trust | 54,005 | 66,340 |
| 2019-3 Trust | 53,431 | 58,089 |
| 2020-1 Trust | 99,102 | 106,976 |
| 2020-2 Trust | 40,293 | 45,180 |
| 2021-1 Trust | 160,668 | 171,748 |
| 2021-2 Trust | 133,508 | 143,797 |
| 2021-3 Trust | 146,569 | 158,043 |
| 2021-4 Trust | 223,950 | 244,919 |
| 2022-1 Trust | 227,222 | 236,358 |
| 2022-2 Trust | 200,677 | 210,217 |
| 2022-MC1 Trust | 20,213 | 31,508 |
| 2022-3 Trust | 244,398 | 257,047 |
| 2022-4 Trust | 255,922 | 274,419 |
| 2022-5 Trust | 147,377 | 162,925 |
| 2023-1 Trust | 161,344 | 177,250 |
| 2023-1R Trust | 51,383 | 58,237 |
| 2023-2 Trust | 162,932 | 188,805 |
| 2023-RTL1 Trust | 81,608 | 81,608 |
| 2023-3 Trust | 213,787 | 227,228 |
| 2023-4 Trust | 208,449 | 201,813 |
| 2024-1 Trust | 195,460 | — |
| 2024-2 Trust | 280,139 | — |
| 2024-3 Trust | 203,662 | — |
| Total | $3,771,339 | $3,335,143 |

52

As of June 30, 2024 and December 31, 2023, the weighted average rates on the securities and certificates for the Trusts are as follows:

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| 2017-2 Trust | 4.08% | 3.97% |
| 2018-1 Trust | 4.09% | 4.03% |
| 2018-2 Trust | 4.41% | 4.48% |
| 2019-1 Trust | 4.09% | 4.07% |
| 2019-2 Trust | 3.40% | 3.42% |
| 2019-3 Trust | 3.32% | 3.29% |
| 2020-1 Trust | 2.87% | 2.85% |
| 2020-2 Trust | 4.67% | 4.61% |
| 2021-1 Trust | 1.76% | 1.76% |
| 2021-2 Trust | 2.02% | 2.02% |
| 2021-3 Trust | 2.47% | 2.46% |
| 2021-4 Trust | 3.26% | 3.22% |
| 2022-1 Trust | 3.93% | 3.93% |
| 2022-2 Trust | 5.06% | 5.07% |
| 2022-MC1 Trust | 6.87% | 6.90% |
| 2022-3 Trust | 5.73% | 5.70% |
| 2022-4 Trust | 6.25% | 6.24% |
| 2022-5 Trust | 7.05% | 7.06% |
| 2023-1 Trust | 7.01% | 7.02% |
| 2023-1R Trust | 7.61% | 7.68% |
| 2023-2 Trust | 7.25% | 7.19% |
| 2023-RTL1 Trust | 8.24% | 8.24% |
| 2023-3 Trust | 7.86% | 7.82% |
| 2023-4 Trust | 8.35% | 8.38% |
| 2024-1 Trust | 7.64% | —% |
| 2024-2 Trust | 7.15% | —% |
| 2024-3 Trust | 7.24% | —% |

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

### Secured Financing (Corporate Debt)

On March 15, 2022, we entered into a five-year $215.0 million syndicated corporate debt agreement, the (“the 2022 Term Loan”). The 2022 Term Loan bears interest at a fixed rate of 7.125% and matures on March 15, 2027. A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to a term loan previously entered into during 2021. The remaining portion of the net proceeds from the 2022 Term Loan was used for loan originations and general corporate purposes.

On February 5, 2024, the Company entered into a five-year $75.0 million syndicated corporate debt agreement, (“the 2024 Term Loan”). The 2024 Term Loan bears interest at 9.875% and matures on February 15, 2029. Interest on the 2024 Term Loan is paid every six months.

### At-The-Market Equity Offering Program

On September 3, 2021, we entered into separate Equity Distribution Agreements with counterparties to establish an at-the-market equity offering program (“ATM Program”) where we may issue and sell, from time to time, shares of our common stock. Our ATM Program allows for aggregate gross sales of our common stock of up to $50,000,000 provided that the number of shares sold under the ATM Program does not exceed 5,000,000. For the three months ended March 31, 2024, 9,537 shares of common stock were sold under the ATM Program for net proceeds of $154.1 thousand. No shares were sold under the ATM program for the three months ended June 30, 2024.

### 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.

On February 5, 2024, the Company entered into a five-year $75.0 million syndicated corporate debt agreement, (“the 2024 Term Loan”). The 2024 Term Loan bears interest at 9.875% and matures on February 15, 2029. Interest on the 2024 Term Loan is paid every six months.

As of June 30, 2024, we maintained warehouse facilities to finance our investor real estate loans and had approximately $238.5 million in outstanding borrowings with $646.5 million of available capacity under our warehouse and repurchase facilities.

### Off-Balance-Sheet Arrangements

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

### Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. All statements (other than statements of historical facts) in this Quarterly Report regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Forward-looking statements may contain expectations regarding our operations, including our loan originations, our ability to resolve non-performing loans and avoid losses on non-performing loans and the disposition of REOs and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future funding and development of our business and products, including the future results of our at-the-market equity offering program. Although we believe that the expectations reflected in these forward-looking statements have a reasonable basis, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this Quarterly Report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:

- the description of our business contained in our Annual Report on Form 10-K for the year ended December 31, 2023 and filed with the Securities and Exchange Commission on March 15, 2024
- 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.

## Market risk

As filed, 996 characters.

### Interest Rate Risk

Our primary market risk is interest rate volatility. Because we fund a portion of our investments with borrowings, fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. To manage our exposure to interest rate risk, we may utilize financial instruments, including forward starting payer interest rate swaps, and interest rate swaption structure. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates may carry additional risks, such as counterparty credit risk and the legal enforceability of hedge agreements.

## Controls and procedures

As filed, 2,271 characters.

#### Evaluation of Disclosure Controls and Procedures.

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

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

#### Changes in Internal Control over Financial Reporting.

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

Filed Aug 2, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-089502. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.