Velocity Financial, Inc.

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 December 31, 2024, has an average balance of approximately $391 thousand. As of December 31, 2024, our loan portfolio totaled $5.1 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 66.6%, and was concentrated in 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, representing 52.5% of UPB. For the year ended December 31, 2024, the yield on our total portfolio was 9.06%.

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 December 31, 2025, has an average balance of approximately $390 thousand. As of December 31, 2025, our loan portfolio totaled $6.5 billion of UPB on properties in 48 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 65.2%, and was concentrated in 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, representing 48.1% of UPB. For the year ended December 31, 2025, the yield on our total portfolio was 9.45%.

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, non-recourse financing. We have successfully executed 37 securitized debt offerings, issuing $8.0 billion in principal amount of securities from May 2011 through December 2024.

Current wording

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, unsecured debt, corporate debt and equity. The securitized debt market is our primary source of long-term, non-recourse financing. We have successfully executed 46 securitized debt offerings, issuing $10.6 billion in principal amount of securities from May 2011 through December 2025.

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 year ended December 31, 2024, our portfolio related net interest margin was 3.56%. 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 year ended December 31, 2024, we generated pre-tax and net income of $96.4 million and $68.5 million, respectively, and earned a pre-tax return on average equity and return on average equity of 20.3% and 14.4%, respectively.

Current wording

Besides net income, another core profitably measurement 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 the year ended December 31, 2025, our portfolio related net interest margin was 3.61%. 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 year ended December 31, 2025, including net income attributable to noncontrolling interest, we generated pre-tax and net income of $146.2 million and $105.0 million, respectively, and earned a pre-tax return on average equity and return on average equity of 24.4% and 17.5%, respectively.

Previous wording

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

Current wording

From September 2023, the Company utilized forward starting interest rate swaps or interest rate payer and receiver swaptions designated as cash flow hedges to manage the exposure to interest rate volatility associated with future issuances of fixed-rate debt. The gains or losses on these interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of accumulated other comprehensive income.

Previous wording

We made an election to apply FVO accounting to all our originated mortgage loans on a go-forward basis beginning October 1, 2022. The fair value option loans are presented as a separate line item in the Consolidated Balance Sheets. We do not record a CECL reserve on fair value option loans.

Current wording

We made an election to apply FVO accounting to all our originated mortgage loans on a go-forward basis beginning October 1, 2022. The fair value option loans are presented as a separate line item in the Consolidated Balance Sheets. We do not record an allowance for credit losses on fair value option loans.

Previous wording

In March 2022, we entered into a five-year $215.0 million syndicated corporate debt agreement (“the 2022 Term Loan”). A portion of the net proceeds from the 2022 Term Loan was used to redeem all the amounts owed pursuant to the $175.0 million syndicated corporate debt (“2021 Term Loan”). In February 2024, we entered into a five-year $75.0 million syndicated corporate debt agreement (“the 2024 Term Loan”). We incurred $23.8 million, $16.6 million and $29.5 million of interest expense related to our corporate debt for the years ended December 31, 2024, 2023 and 2022, respectively.

Current wording

In March 2022, we entered into a five-year $215.0 million syndicated corporate debt agreement (“the 2022 Term Loan”). The 2022 Term Loan was paid off on January 30, 2026 with proceeds from the issuance and sale of $500 million Senior Notes. In February 2024, we entered into a five-year $75.0 million syndicated corporate debt agreement (“the 2024 Term Loan”). We incurred $24.6 million, $23.8 million and $16.6 million of interest expense related to our corporate debt for the years ended December 31, 2025, 2024 and 2023, respectively.

Previous wording

In January 2025, we completed the securitization of $351.6 million of investor real estate loans, as measured by UPB.

Current wording

In February 2026, we completed the securitization of $355.2 million of investor real estate loans, as measured by UPB, through a consolidated VIE.

Previous wording

We use an open pool loss rate methodology to model expected credit losses. To determine the loss rates using the open pool method, we start with our historical database of losses, segmenting the loans by loan purpose, product type and repayment period. A third-party model applying the open pool method is used to estimate an annual average loss rate by dividing the respective pool’s quarterly historical losses by the pool’s respective prior quarters’ ending unamortized loan cost balance and deriving an annual average loss rate from the historical quarterly loss rates. The model then adjusts the annual average loss rates based upon macroeconomic forecasts over a reasonable and supportable period, followed by a straight-line reversion to the historical loss rates. The adjusted annual average loss rates are applied to the forecasted pool balance within each segment. The forecasted balances in the loan pool segments are calculated based on a principal amortization using contractual maturity, factoring in further principal reductions from estimated prepayments. Estimated prepayments, or Constant Prepayment Rates (“CPRs”) are developed from multiple loan characteristic considerations, such as property types, Fair Isaac Corporation (“FICO”) scores, loan purpose, and prepayment penalty terms, which is the most significant driver of prepayment activity. The prepayment penalty terms differ between the short-term and long-term loans, and we have developed a CPR curve for our short-term loans (two-year or less) and one for our long-term loans (30-year). Data from 2012-2024 is used to develop prepayment rates for our long-term loans. Because of the prepayment penalty structure in our long-term loans, prepayments during the active penalty term are historically low and begin to ramp up after the prepayment penalty term. The active prepayment penalty term is considered for existing and new loans over the reasonable and supportable forecast period in determining estimated prepayments. We back-test the CPR curves on a quarterly basis and adjust the CPR curves as appropriate. The reasonable and supportable period is meant to represent the period in which we believe the forecasted macroeconomic variables can be reasonably estimated. Significant variables or assumptions incorporated in the macroeconomic forecasts include U.S. unemployment, U.S. real gross domestic product (“GDP”), treasury yields, and U.S. real estate housing prices. We consider multiple scenarios from different macroeconomic forecasts and use different forecast and reversion periods for estimating lifetime expected credit losses.

Current wording

We use an open pool loss rate methodology to model expected credit losses. To determine the loss rates using the open pool method, we start with our historical database of losses, segmenting the loans by loan purpose, product type and repayment period. A third-party model applying the open pool method is used to estimate an annual average loss rate by dividing the respective pool’s quarterly historical losses by the pool’s respective prior quarters’ ending unamortized loan cost balance and deriving an annual average loss rate from the historical quarterly loss rates. The model then adjusts the annual average loss rates based upon macroeconomic forecasts over a reasonable and supportable period, followed by a straight-line reversion to the historical loss rates. The adjusted annual average loss rates are applied to the forecasted pool balance within each segment. The forecasted balances in the loan pool segments are calculated based on a principal amortization using contractual maturity, factoring in further principal reductions from estimated prepayments. Estimated prepayments, or Constant Prepayment Rates (“CPRs”) are developed from multiple loan characteristic considerations, such as property types, Fair Isaac Corporation (“FICO”) scores, loan purpose, and prepayment penalty terms, which is the most significant driver of prepayment activity. The prepayment penalty terms differ between the short-term and long-term loans, and we have developed a CPR curve for our short-term loans (two-year or less) and one for our long-term loans (30-year). Data from 2012-2025 is used to develop prepayment rates for our long-term loans. Because of the prepayment penalty structure in our long-term loans, prepayments during the active penalty term are historically low and begin to ramp up after the prepayment penalty term. The active prepayment penalty term is considered for existing and new loans over the reasonable and supportable forecast period in determining estimated prepayments. We back-test the CPR curves on a quarterly basis and adjust the CPR curves as appropriate. The reasonable and supportable period is meant to represent the period in which we believe the forecasted macroeconomic variables can be reasonably estimated. Significant variables or assumptions incorporated in the macroeconomic forecasts include U.S. unemployment, U.S. real gross domestic product (“GDP”) index, real disposable personal income (“DPI”) index, and consumer price index (“CPI”). We consider multiple scenarios from different macroeconomic forecasts and use different forecast and reversion periods for estimating lifetime expected credit losses.

Previous wording

We have determined that once a loan becomes nonperforming (90 or more days past due), it no longer shares the same risk characteristics of the other loans within its segment of homogeneous loans (pool). We pull these loans out of the segments and evaluate the loans individually using the practical expedient to determine the credit exposure. Nonperforming loans are considered collateral dependent. Using the practical expedient, the fair value of the underlying collateral, less estimated selling costs, is compared to the carrying value of the loan in the determination of a credit loss.

Current wording

We have determined that once a loan becomes nonperforming (90 or more days past due), it no longer shares the same risk characteristics of the other loans within its segment of homogeneous loans (pool). We pull these loans out of the segments and evaluate the loans individually using the practical expedient to determine the credit exposure. Nonperforming loans (“NPLs”) are considered collateral dependent. Using the practical expedient, the fair value of the underlying collateral, less estimated selling costs, is compared to the carrying value of the loan in the determination of a credit loss.

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 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.

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, the implementation of tariffs, the recent U.S. government shutdown, heightened stress in the real estate and corporate debt markets, 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

Portfolio related net interest income is the largest contributor to our net income. We grew our portfolio related net interest income by $35.3 million or 28.4% to $159.6 million for the year ended December 31, 2024 from $124.3 million for the year ended December 31, 2023. The growth in net interest income is largely attributable to new loan originations which we have achieved by executing our principal strategies of expanding our broker network and further penetrating our network of existing brokers. We anticipate that our future performance will continue to depend on growing our origination/acquisition volume and believe that the large and highly fragmented nature of our core market provides meaningful opportunity to achieve this. We intend to grow our portfolio by continuing to serve and build loyalty within our existing network of brokers while expanding our network with new brokers through targeted marketing and improved brand awareness.

Current wording

Portfolio related net interest income is the largest contributor to our net income. We grew our portfolio related net interest income by $50.7 million or 31.8% to $210.4 million for the year ended December 31, 2025 from $159.6 million for the year ended December 31, 2024. The growth in net interest income is largely attributable to new loan originations which we have achieved by executing our principal strategies of expanding our broker network and further penetrating our network of existing brokers. We anticipate that our future performance will continue to depend on growing our origination/acquisition volume and believe that the large and highly fragmented nature of our core market provides meaningful opportunity to achieve this. We intend to grow our portfolio by continuing to serve and build loyalty within our existing network of brokers while expanding our network with new brokers through targeted marketing and improved brand awareness.

Previous wording

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.

Current wording

Our primary funding sources have historically included cash from operations, warehouse facilities, term securitized debt, unsecured 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.

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 for long term loans, 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 have an adverse impact on financial results.

Previous wording

Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $40.1 million, $42.2 million and $39.6 million of COVID-19 forbearance-granted loans 90 days or more past due as of December 31, 2024, 2023 and 2022, respectively.

Current wording

Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $29.6 million, $40.1 million and $42.2 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of December 31, 2025, 2024 and 2023, respectively.

Previous wording

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:

Current wording

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

Previous wording

For the year ended December 31, 2024, we originated $1.8 billion of loans, an increase of $723.3 million, or 64.7% from $1.1 billion for the year ended December 31, 2023. Loan originations for the year end December 31, 2023, decreased $644.0 million, or 36.6% from $1.8 billion for the year ended December 31, 2022.

Current wording

For the year ended December 31, 2025, we originated $2.7 billion of loans, an increase of $896.4 million, or 48.7% from $1.8 billion for the year ended December 31, 2024. Loan originations for the year ended December 31, 2024, increased $723.3 million, or 64.7% from $1.1 billion for the year ended December 31, 2023.

Previous 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 table shows 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

Our actual charge-offs have been minimal as a percentage of nonperforming loans held for investment. The valuation impact to our earnings from loans becoming REO or in REO is a combination of: (1) loan charge-offs, (2) gain on transfer to REO included in “Gain on disposition of loans” in the Consolidated Statements of Income, (3) net valuation adjustments on REO, and (4) net gain or loss on sale of REO.

Current wording

The valuation impact to our earnings from loans becoming REO or in REO is a combination of: (1) loan charge-offs, (2) gain on transfer to REO included in “Gain on disposition of loans” in the Consolidated Statements of Income, (3) net valuation adjustments on REO, and (4) net gain or loss on sale of REO.

Previous wording

Our allowance for credit losses is based on an analysis of historical credit loss data from January 1, 2017 through December 31, 2024, adjusted for macroeconomic forecasts. 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 should a loan become impaired. 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.

Current wording

Our allowance for credit losses is based on an analysis of historical credit loss data from January 1, 2022 through December 31, 2025, adjusted for macroeconomic forecasts. 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, are subject to change as conditions in the market change and our ability to forecast as economic events evolves.

Previous wording

To estimate the allowance for credit losses in our portfolio of loans held for investment carried at amortized cost, we follow a detailed internal 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.

Current wording

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.

Previous wording

The allowance for credit losses was 0.17% of total UPB of loans held for investment carried at amortized cost as of December 31, 2024. Nonperforming loans were 12.91% of total UPB of loans held for investment carried at amortized cost as of December 31, 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 charge-off rates were 0.07% of total UPB of loans held for investment carried at amortized cost for the years ended December 31, 2024 and 2023, and 0.02% for the year ended December 31, 2022, which are lower as compared to the 0.17% of allowance for credit losses to our total UPB of loans held for investment carried at amortized cost as of December 31, 2024 and 2023, and 0.15% as of December 31, 2022.

Current wording

The allowance for credit losses was 0.22% of total UPB of loans held for investment carried at amortized cost as of December 31, 2025. Nonperforming loans were 11.6% of total UPB of loans held for investment carried at amortized cost as of December 31, 2025. We believe the allowance for credit losses is adequate because historically most loans that become nonperforming either paid off or paid current, resulting in an overall gain. This is due to low LTVs at origination and our active management of the portfolio. Our actual 2025 charge-offs were higher mainly due to two unusually large losses on a couple of legacy loan types on which we no longer lend and have no additional such loan types in our portfolio. Our average annual charge-off rate has historically been low at 0.10% over the last four years.

Previous wording

Balance includes $142.8 million UPB of loans held for investment at amortized cost as of December 31, 2024, $174.6 million as of December 31, 2023, and $201.0 million as of December 31, 2022 in our COVID-19 forbearance program.

Current wording

Balance includes $126.1 million, $142.8 million and $174.6 million UPB of loans held for investment at amortized cost as of December 31, 2025, 2024 and 2023, respectively, in our COVID-19 forbearance program.

Previous wording

Loans that are 90 days or more past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $539.4 million, or 10.7% of our held for investment loan portfolio as of December 31, 2024, compared to $394.6 million, or 9.7% as of December 31, 2023, and $292.8 million, or 8.3% of the loan portfolio as of December 31, 2022. The increase in total nonperforming loans as of December 31, 2024 compared to December 31, 2023 and 2022 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 or more past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $554.5 million, or 8.5% of our held for investment loan portfolio as of December 31, 2025, compared to $539.4 million, or 10.7% as of December 31, 2024, and $394.6 million, or 9.7% of the loan portfolio as of December 31, 2023. The increase in total nonperforming loans as of December 31, 2025 compared to December 31, 2024 and 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.

Previous wording

Historically, most loans that become nonperforming resolve prior to converting to REO. This was due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that were nonperforming or became nonperforming during the periods indicated. We resolved $253.4 million, $206.1 million and $142.2 million of long-term and short-term nonperforming loans during the years ended December 31, 2024, 2023 and 2022, respectively. We also resolved $29.8 million, $19.3 million and $16.2 million of long-term and short-term nonperforming loans transferred to REO during the years ended December 31, 2024, 2023 and 2022, respectively. From these resolution activities, we realized net gains of $10.2 million, $5.5 million and $10.8 million during the years ended December 31, 2024, 2023 and 2022, respectively. This was largely the result of collecting default interest and prepayment penalties in excess of the contractual interest due and collected.

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 $331.5 million, $253.4 million and $206.1 million of long-term and short-term nonperforming loans during the years ended December 31, 2025, 2024 and 2023, respectively. We recovered total revenue of $30.0 million, $22.3 million and $19.1 million for the years ended December 31, 2025, 2024 and 2023, respectively. This was largely the result of collecting all regular accrued interest, default interest, and prepayment penalties in excess of the principal on loans.

Previous wording

Short-term loans, or loans with a maturity of two years 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 during the periods indicated:

Current wording

Short-term loans, or loans with a maturity of two years 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 tables below include resolutions of our short-term nonperforming loans and loans granted a COVID-19 forbearance in 2020, for the periods indicated:

Previous wording

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, REO assets are carried at the lower of carrying amount or fair value less estimated cost to sell. We periodically obtain new valuations and any subsequent write-downs, are reflected as valuation adjustments, included in “Real estate owned, net” in the Consolidated Statements of Income.

Current wording

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 for loan carried at amortized cost. Gains at the time of foreclosure are recognized in other operating income. The difference between the carrying value of the FVO loan and the REO fair value less estimated costs to sell, is recorded as unrealized gain or loss on fair value loans. 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.

Previous wording

As of December 31, 2024, our REO included 129 properties with a carrying value of $68.0 million compared to 71 properties with a carrying value of $44.3 million as of December 31, 2023. The increase in REO assets was primarily 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

As of December 31, 2025, our REO included 254 properties with a carrying value of $118.3 million compared to 129 properties with a carrying value of $68.0 million as of December 31, 2024. The increase in REO assets was primarily due to an increase in the size of our portfolio.

Previous wording

As of December 31, 2024, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 52.5% of the UPB and mixed-use properties representing 11.1% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. By geography, the principal balance of our loans held for investment were concentrated 21.0% in California, 16.3% in New York, 12.7% in Florida, 7.5% in New Jersey, and 5.4% in Texas.

Current wording

As of December 31, 2025, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 48.1% of the UPB. Mixed-use properties and retail properties represented 10.9% and 10.7% , respectively, 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 20.3% in California, 13.8% in New York, 12.0% in Florida, 7.6% in New Jersey, and 6.1% in Texas.

Previous wording

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

Current wording

Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse repurchase 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.

Previous wording

Our portfolio related cost of funds increased to 6.06% for the year ended December 31, 2024 from 5.58% and 4.64% for the years ended December 31, 2023 and 2022, respectively. The increases were driven by higher market interest rates.

Current wording

Our portfolio related cost of funds increased to 6.24% for the year ended December 31, 2025 from 6.06% and 5.58% for the years ended December 31, 2024 and 2023, respectively. The increases were driven by higher market interest rates.

Previous wording

Over the periods shown below, our portfolio related net interest margin increased to 3.56% for the year ended December 31, 2024 compared to the 3.34% for the year ended December 31, 2023, and decreased from 3.64% for the year ended December 31, 2022. The increase in portfolio related net interest margin from the year ended

Current wording

Over the periods shown below, our portfolio related net interest margin increased to 3.61% for the year ended December 31, 2025 compared to 3.56% and 3.34% for the years ended December 31, 2024 and 2023, respectively. The increases in portfolio related net interest margin from the years ended December 31, 2024 and 2023 were primarily due to a higher increase in the average yield on our loan portfolio than the increase in our average cost of portfolio related funds.

Previous wording

Our total company net interest margin of 3.03% for the year ended December 31, 2024 increased from 2.89% for the year ended December 31, 2023, and increased from 2.69% for the year ended December 31, 2022. The increases in total company net interest margin from the years ended December 31, 2023 and 2022 were 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 3.19% for the year ended December 31, 2025 increased from 3.03% and 2.89% for the years ended December 31, 2024, and 2023, respectively. The increases in total company net interest margin from the years ended December 31, 2024 and 2023 were primarily due to a higher increase in the average yield on our loan portfolio than the increase in our average cost of total company funds.

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

The charge-offs ratio reflects charge-offs as a percentage of average loans held for investment carried at amortized cost over the specific time period. We do not record charge-offs on loans carried at fair value and loans held for sale. The charge-offs ratio remained minimal at 0.07% for the years ended December 31, 2024 and 2023, and 0.02% for the year ended December 31, 2022.

Current wording

The charge-offs ratio reflects charge-offs as a percentage of average loans held for investment carried at amortized cost over the specific time period. We do not record charge-offs on loans carried at estimated fair value and loans held for sale. The charge-offs ratio was 0.25% for the year ended December 31, 2025 and 0.07% for the years ended December 31, 2024 and 2023.

Previous wording

Pre-tax return on average equity and return on average equity reflect income before income taxes, and net income including net 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 increased for the year ended December 31, 2024 as compared to 2023 and 2022 due to the increases in income before income taxes and 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 increased for the year ended December 31, 2025 as compared to 2024 and 2023 due to the increases in income before income taxes and net income resulting from the increases in net interest income, gain on sale of loans, and valuation gains in 2025.

Previous 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 loss from terminated derivative instruments, 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

Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2022 Term Loan and the 2024 Term Loan, as reflected in “Secured financing, net” on our Consolidated Balance Sheets, and the related amortization of deferred debt issuance costs.

Current wording

Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2022 Term Loan and the 2024 Term Loan (“Corporate Debt”), as reflected in “Secured financing, net” on our Consolidated Balance Sheets, and the related amortization of deferred debt issuance costs.

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 current expected credit loss (CECL) approach. Under the CECL methodology, the allowance for credit losses is calculated using a third-party model with our historical loss rates by segment, 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.

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

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

Current wording

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

Previous wording

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”, a component of other operating income within the Consolidated Statements of Income.

Current wording

Unrealized Gain (Loss) on Mortgage Servicing Rights. We have elected to record our mortgage servicing rights using the fair value measurement method. Changes in fair value are reported as “Unrealized gain (loss) on mortgage servicing rights”, a component of other operating income within the Consolidated Statements of Income.