Velocity Financial, Inc.

Previous wording

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 20 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.

Current wording

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 21 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

Previous wording

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on all loans in our portfolio as of September 30, 2024, has an average balance of approximately $388.5 thousand. As of September 30, 2024, our loan portfolio totaled $4.8 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 67.0% of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 54.0% of the UPB. For the three months ended September 30, 2024, the annualized yield on our total portfolio was 9.18%.

Current wording

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee, and based on all loans in our portfolio as of March 31, 2025, has an average balance of approximately $393.0 thousand. As of March 31, 2025, our loan portfolio totaled $5.4 billion of UPB on properties in 47 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 66.1%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 51.4% of the UPB. For the three months ended March 31, 2025, the annualized yield on our total portfolio was 9.11%.

Previous wording

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-five securitized debt transactions, resulting in a total of over $7.4 billion in gross debt proceeds from May 2011 through September 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.

Current wording

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, corporate debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed 38 securitized debt transactions, resulting in a total of over $8.3 billion in gross debt proceeds from May 2011 through March 2025. We may also continue to sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.

Previous wording

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse facilities and securitized debt and excludes our corporate debt. For the three months ended September 30, 2024, our annualized portfolio related net interest margin increased to 3.60% compared to the 3.34% for the three months ended September 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 nine months ended September 30, 2024, including net income attributable to noncontrolling interest, we generated pre-tax income of $21.2 million and $64.4 million, and net income of $15.8 million and $47.8 million, respectively.

Current wording

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on loans and interest expense paid on portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of warehouse facilities and securitized debt and excludes corporate debt. For both the three months ended March 31, 2025 and 2024, our annualized portfolio related net interest margin was 3.35%. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for credit losses and operating expenses. For the three months ended March 31, 2025 and 2024, including net income attributable to noncontrolling interest, we generated pre-tax income of $26.9 million and $23.2 million, and net income of $18.6 million and $17.3 million, respectively.

Previous wording

In September 2024, we collapsed the 2020-2 Trust and redeemed the remaining outstanding balance of securitized debt.

Current wording

In March 2025, we collapsed the 2023-1R Trust and redeemed the remaining outstanding balance of securitized debt.

Previous wording

Our operational and financial performance will depend on certain market developments, including the actions of the Federal Reserve, the Russia/Ukraine war, the ongoing conflicts in the Middle East, a possible global recession, heightened stress in the real estate and corporate debt markets, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.

Current wording

Our operational and financial performance will depend on certain market developments, including the impact of tariffs, the actions of the Federal Reserve, the Russia/Ukraine war, the ongoing conflicts in the Middle East, a possible global recession, heightened stress in the real estate and corporate debt markets, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.

Previous wording

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.

Current wording

These policies and estimates relate to the allowance for credit losses and fair value option accounting. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

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 the ongoing conflicts in the Middle East, an expected recession, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.

Current wording

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

Previous wording

All of our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate (“SOFR”).

Current wording

All our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate (“SOFR”).

Previous wording

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.

Current wording

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

Previous wording

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $43.2 million, $40.7 million, and $41.3 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of September 30, 2024, June 30, 2024, and September 30, 2023, respectively.

Current wording

(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $36.7 million, $40.1 million, and $45.1million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of March 31, 2025, December 31, 2024, and March 31, 2024, respectively.

Previous wording

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.

Current wording

Nonperforming Loans. Loans that are 90 or more days past due, in bankruptcy, in foreclosure, or not accruing interest, are considered nonperforming loans. The dollar amount of nonperforming loans presented in the table above reflects the UPB of all loans that meet this definition.

Previous wording

During the third quarter of 2024, loan originations increased $54.5 million and $186.2 million from the quarters ended June 30, 2024 and September 30, 2023, respectively.

Current wording

During the first quarter of 2025, loan originations increased $76.9 million and $261.8 million from the quarters ended December 31, 2024 and March 31, 2024, respectively.

Previous wording

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

Current wording

Loans Held for Investment

Previous wording

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

Current wording

Our total portfolio of loans held for investment consists of both loans held for investment carried at amortized cost and loans held for investment at fair value, which are presented in the Consolidated Balance Sheets as “Loans held for investment, at amortized cost” and “Loans held for investment, at fair value,” respectively. The following tables show the various components of loans held for investment as of the dates indicated:

Previous wording

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:

Current wording

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

Previous wording

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.

Current wording

For the March 31, 2025 current expected credit loss (“CECL”) estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflected the uncertainties of a volatile market in light of the announced tariffs and federal government layoffs, contributing to a forecasted decreasing GDP and rising unemployment.

Previous wording

For the September 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 decreasing forecasted GDP, rising unemployment, and turmoil in the geopolitical markets with a wider Middle East conflict growing and the continued war in Ukraine.

Current wording

For the December 31, 2024 CECL estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflected the uncertainties of a decreasing forecasted GDP, unstable labor market, and geopolitical risk.

Previous wording

Our allowance for credit losses as of September 30, 2024 was $4.9 million compared to $4.7 million as of September 30, 2023. The increase in allowance for credit losses from September 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 our ability to forecast as economic events evolve.

Current wording

Our allowance for credit losses as of March 31, 2025 was $5.0 million compared to $5.3 million as of March 31, 2024. The decrease in allowance for credit losses from March 31, 2024 was primarily due to a decrease in the baseline allowance component of the reserve. Our overall expected credit loss reserves range from 0.15% to 0.20% of loans held for investment, excluding FVO loans. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, is subject to change as conditions in the market change and our ability to forecast as economic events evolve.

Previous wording

The allowance for credit losses was 0.19% of total UPB as of September 30, 2024. Nonperforming loans were 12.5% of total UPB as of September 30, 2024. We believe the allowance for credit losses is adequate because historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. Additionally, our annualized charge-off rates were 0.06% of total UPB for the nine months ended September 30, 2024 and 2023, which is lower as compared to the 0.19% and 0.16% of allowance for credit losses to our total UPB as of September 30, 2024 and 2023, respectively.

Current wording

The allowance for credit losses was 0.22% of total UPB of loans held for investment carried at amortized cost as of March 31, 2025. Although slightly higher than our expected range of 0.15% to 0.20%, the 0.22% reserve is reasonable given the current market uncertainty. Nonperforming loans were 12.71% of total UPB of loans held for investment carried at amortized cost as of March 31, 2025. We believe the allowance for credit losses is adequate because historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. Historically, our actual annual charge-offs rate is 0.06% over the last seven years.

Previous wording

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

Current wording

Credit Quality – Loans Held for Investment

Previous wording

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

Current wording

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

Previous wording

Balance includes $153.9 million UPB of loans held for investment at amortized cost as of September 30, 2024, $158.5 million as of June 30, 2024, and $177.0 million as of September 30, 2023 in our COVID-19 forbearance program.

Current wording

Balance includes $136.1 million UPB of loans held for investment at amortized cost as of March 31, 2025, $142.8 million as of December 31, 2024, and $165.1 million as of March 31, 2024 in our COVID-19 forbearance program.

Previous wording

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 $503.9 million, or 10.6% of our held for investment loan portfolio as of September 30, 2024, compared to $470.6 million, or 10.5% as of June 30, 2024, and $387.7 million, or 10.1% of the held for investment loan portfolio as of September 30, 2023.The increase in total nonperforming loans as of September 30, 2024 compared to June 30, 2024 and September 30, 2023 was due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.

Current wording

Loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $587.8 million, or 10.8% of our held for investment loan portfolio as of March 31, 2025, compared to $539.4 million, or 10.7% as of December 31, 2024, and $432.6 million, or 10.1% as of March 31, 2024. The increase in total nonperforming loans as of March 31, 2025 compared to December 31, 2024 and March 31, 2024 was due to an increase in the size of our portfolio and management’s decision to move loans into foreclosure early in the delinquency process.

Previous wording

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 $65.9 million of long-term and short-term non-performing loans for the quarter ended September 30, 2024, which was lower, compared to $68.6 million for the quarter ended June 30, 2024, and higher compared to $56.9 million for the quarter ended September 30, 2023. From these resolution activities, including the REO resolutions, we realized net gains of $2.3 million, $1.0 million, and $1.2 million for the quarters ended September 30, 2024, June 30, 2024, and September 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.

Current wording

Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $76.4 million of long-term and short-term nonperforming assets for the quarter ended March 31, 2025, which was lower compared to $79.4 million for the quarter ended December 31, 2024, and higher compared to $54.5 million for the quarter ended March 31, 2024. From these resolution activities, we realized net gains of $1.9 million, $5.6 million, and $1.3 million for the quarters ended March 31, 2025, December 31, 2024, and March 31, 2024, respectively. This is largely the result of collecting default interest and prepayment penalties in excess of the contractual principal and interest due on loans.

Previous wording

The table below includes resolutions for our long-term nonperforming loans and REO's for the periods indicated:

Current wording

The table below includes resolutions of our long-term nonperforming loans and REOs for the periods indicated:

Previous wording

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:

Current wording

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

Previous wording

As of September 30, 2024, our REO included 112 properties with a lower of cost or estimated fair value of $62.4 million compared to 89 properties with a lower of cost or estimated fair value of $50.8 million as of June 30, 2024, and 61 properties with a lower of cost or estimated fair value of $29.3 million as of September 30, 2023.

Current wording

As of March 31, 2025, our REO included 157 properties with a lower of cost or estimated fair value of $83.4 million compared to 129 properties with a lower of cost or estimated fair value of $68.0 million as of December 31, 2024, and 76 properties with a lower of cost or estimated fair value of $46.3 million as of March 31, 2024.

Previous wording

As of September 30, 2024, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 54.2% of the UPB. Mixed used properties represented 11.3% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.5% in California, 16.7% in New York, 12.9% in Florida, and 7.4% in New Jersey.

Current wording

As of March 31, 2025, our held for investment loan portfolio was concentrated in Investor 1-4 loans, representing 51.4% of the UPB. Mixed use properties represented 11.1% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. Geographically, the principal balance of our loans held for investment were concentrated 21.2% in California, 15.3% in New York, 12.8% in Florida, 7.4% in New Jersey, and 5.6% in Texas.

Previous wording

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

Current wording

Portfolio yield is an annualized measure of the total interest income earned on our loan portfolio as a percentage of average loans over the given period. Interest income includes interest earned on performing loans, cash interest received on nonperforming loans, default interest and prepayment fees. The increase in our portfolio yield for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024 was primarily driven by the increase in weighted average loan coupons. Our portfolio yield for the three months ended March 31, 2025 decreased as compared to the three months ended December 31, 2024, primarily due to less default interest and cash interest received on nonperforming loans.

Previous wording

Our portfolio related cost of funds increased to 6.15% for the three months ended September 30, 2024 from 6.01% for the prior quarter and increased from 5.63% for the three months ended September 30, 2023. The increase was primarily due to higher market interest rates.

Current wording

Our portfolio related cost of funds increased to 6.23% for the three months ended March 31, 2025 from 6.14% for the prior quarter and increased from 5.93% for the three months ended March 31, 2024. The increase was primarily due to higher securitized debt interest expense.

Previous wording

Our total company net interest margin of 3.06% for the three months ended September 30, 2024 increased from 2.90% for the three months ended September 30, 2023. Our total company net interest margin of 2.96% for the nine months ended September 30, 2024 increased from 2.82% for the nine months ended September 30, 2023. The increase in total company net interest margin was primarily due to a higher increase in the average yield on our loan portfolio than the increase in our average cost of funds.

Current wording

Total company net interest margin of 2.88% for the three months ended March 31, 2025 increased from 2.83% for the three months ended March 31, 2024. The increase in total company net interest margin was primarily due to a higher increase in the average yield on our loan portfolio than the increase in our average cost of funds. Total company net interest margin for the three months ended March 31, 2025 decreased from 3.20% for the three months ended December 31, 2024 primarily due to less cash interest received on nonperforming loans during the three months ended March 31, 2025 and higher securitized debt interest expense.

Previous wording

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:

Current wording

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

Previous wording

Our annualized charge-off rate over average loans held for investment carried at amortized cost for the three months ended September 30, 2024 remained minimal at 0.05% as compared to 0.04% and 0.01% for the three months ended June 30, 2024 and September 30, 2023, respectively. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment at amortized cost. for the respective quarters. We do not record charge-offs on 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.

Current wording

Our annualized charge-offs rate over average loans held for investment carried at amortized cost for the three months ended March 31, 2025 remained minimal at 0.18% as compared to 0.11% and 0.07% for the three months ended December 31, 2024 and March 31, 2024, respectively. The charge-offs rate reflects year-to-date annualized charge-offs as a percentage of average loans held for investment at amortized cost, for the respective quarters. We do not record charge-offs on loans carried at estimated fair value and loans held for sale.

Previous wording

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 increased during the quarter ended September 30, 2024 as compared to the quarters ended June 30, 2024 and September 30, 2023 primarily due to the increase in income before income taxes and the increase in net income.

Current wording

Pre-tax return on average equity and return on average equity reflect income before income taxes and net income including income attributable to noncontrolling interest, respectively, as a percentage of the monthly average total stockholders’ equity including noncontrolling interest over the specified period. Pre-tax return on average equity and return on average equity decreased during the quarter ended March 31, 2025 as compared to the quarters ended December 31, 2024 and March 31, 2024 and was impacted by the increase in average stockholders' equity resulting from 1,569,255 shares issued under the ATM program for net proceeds of $28.8 million during the quarter ended March 31, 2025.

Previous wording

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.

Current wording

Portfolio related interest expense is incurred on the debt we obtained to fund our loan origination and portfolio activities and consists of our warehouse facilities and securitized debt. Portfolio related interest expense also includes the amortization of other comprehensive income or loss from terminated derivative instruments, amortization of expenses incurred as a result of issuing the debt when the debt is carried at amortized cost. Other comprehensive income or loss, and deferred debt issuance costs are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, other comprehensive income or loss from terminated derivative instruments, and the mix of our securitized debt and warehouse liabilities.

Previous wording

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.

Current wording

Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, loan position as of the balance sheet date, and assumptions from us. We do not record provision for credit losses on loans held for sale, or loans carried at fair value.

Previous wording

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.

Current wording

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