VEL 10-K & 10-Q changes, risk factors and insider trading
Velocity Financial, Inc. · NYSE · Finance Services · CIK 1692376 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Summary of Risk Factors”
New heading “Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy”
New heading “Risks Related to Our Business”
New heading “Legal and Regulatory Risks”
New heading “Risks Relating to Ownership of Our Common Stock”
New heading “Risks Related to Our Business”
New heading “We are dependent upon the success of the investor real estate market and conditions that negatively impact this market may reduce demand for our loans and adversely impact our business, results of operations and financial condition.”
New heading “Difficult conditions in the real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition.”
New heading “Adverse global market, economic and political conditions, including government shutdowns, armed conflicts or terrorist acts, pandemics and other catastrophic events could have a material adverse effect on us.”
New heading “We operate in a competitive market for loan origination and acquisition opportunities and competition may limit our ability to originate and acquire loans, which could adversely affect our ability to execute our business strategy.”
New heading “Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.”
New heading “The failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans may adversely impact our business, results of operations and financial condition.”
New heading “We are dependent on certain of our key personnel for our future success, and their continued service to us is not guaranteed.”
New heading “Our growth strategy relies upon our ability to hire and retain qualified account executives, and if we are unable to do so, our growth could be limited.”
New heading “Inaccurate or incomplete information received from potential borrowers, guarantors and sellers involved in the sale of pools of loans could have a negative impact on our results of operation.”
New heading “Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity.”
New heading “We use leverage in executing our business strategy, which may adversely affect us when economic conditions are unfavorable.”
New heading “Our underwriting guidelines in the mortgage loan origination process may result in increased delinquencies and defaults.”
New heading “We may change our strategy or underwriting guidelines without notice or stockholder consent, which may result in changes to our risk profile, results of operations and financial condition.”
New heading “Our inability to manage future growth effectively could have an adverse impact on our business, results of operations and financial condition.”
New heading “If we fail to develop, enhance and implement strategies to adapt to changing conditions in the real estate and capital markets, our business, results of operations and financial condition may be materially and adversely affected.”
New heading “Operational risks, including the risk of cyberattacks and other security incidents, could disrupt our business and materially and adversely affect our business, results of operations and financial condition.”
New heading “Any disruption in the availability or functionality of our technology infrastructure and systems could have a material adverse effect on our business.”
New heading “Our intellectual property and other proprietary rights may be inadequate to protect our business or may be infringed, misappropriated or challenged by others, or we may be subject to claims of intellectual property infringement or misappropriation asserted by third parties.”
New heading “Acquisitions, strategic investments, entries into new businesses, and divestitures could disrupt our business, divert our management’s attention, result in additional dilution to our stockholders, and harm our business.”
New heading “Risks Related to Our Loan Portfolio”
New heading “A significant portion of our loan portfolio is in the form of investor real estate loans which are subject to increased risks.”
New heading “Loans on properties in transition will involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers.”
New heading “Any costs or delays involved in the completion of a foreclosure or liquidation of the underlying property may further reduce proceeds from the property and may increase the loss.”
New heading “Insurance on collateral underlying mortgage loans and real estate securities may not cover all losses.”
New heading “We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.”
New heading “Our portfolio of assets may at times be concentrated in certain property types or secured by properties concentrated in a limited number of geographic areas, which increases our exposure to economic downturn and natural disasters, including disruptions related to epidemics, with respect to those property types or geographic locations.”
New heading “The investor real estate loans we originate or acquire are dependent on the ability of the property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure.”
New heading “We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.”
New heading “We may be required to repurchase or substitute mortgage loans or indemnify investors if we breach representations and warranties, which could harm our business, cash flow, results of operations and financial condition.”
New heading “Some of our portfolio assets may be recorded at fair value as estimated by management and may not reflect the price we could realize upon disposal.”
New heading “Risks Related to Our Organization and Structure”
New heading “For so long as Snow Phipps Group and TOBI continue to own a substantial amount of our outstanding common stock, they will have the ability to substantially influence us.”
New heading “Our restated certificate of incorporation provides that our directors who are affiliates of Snow Phipps Group and TOBI may engage in similar activities and lines of business as us, which may result in competition between us and such stockholders or another portfolio company of such stockholders for certain corporate opportunities.”
New heading “Some provisions of Delaware law and our organizational documents may deter third parties from acquiring us and may diminish the value of our common stock.”
New heading “Failure to comply with requirements to design, implement and maintain effective internal controls, as well as a failure to remediate any identified weaknesses in our internal controls, could have a material adverse effect on our reputation, business and stock price.”
New heading “Our restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the sole and exclusive forums for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.”
New heading “Our Board is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.”
New heading “Risks Relating to Regulatory Matters”
New heading “The increasing number of proposed United States federal, state and local laws may affect certain mortgage- related assets in which we intend to invest and could materially increase our cost of doing business.”
New heading “The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business.”
New heading “We are subject to state licensing and operational requirements in certain states that may result in substantial compliance costs.”
New heading “Maintenance of our 1940 Act exemption imposes limits on our operations, which may adversely affect our operations.”
New heading “If we fail to comply with laws, regulations and market standards regarding the privacy, use, and security of customer and other regulated information, or if we are the target of a successful cyberattack or other security incident, we may be subject to legal and regulatory actions and our reputation would be harmed.”
New heading “We may be subject to liability for potential violations of predatory lending laws, which could adversely impact our business, results of operations and financial condition.”
New heading “Risks Related to Sources of Financing”
New heading “We may not be able to successfully complete additional securitization transactions on attractive terms or at all, which could limit potential future sources of financing and could inhibit the growth of our business.”
New heading “If one or more of our warehouse facilities on which we are dependent are terminated, we may be unable to find replacement financing on favorable terms on a timely basis, or at all, which would have a material adverse effect on our business, results of operations and financial condition.”
New heading “We may be required to maintain certain levels of collateral or provide additional collateral under our warehouse facilities, which may restrict us from leveraging our assets as fully as desired or forcing us to sell assets under adverse market conditions, resulting in potentially lower returns.”
New heading “If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying asset back to us at the end of the transaction term, or if the value of the underlying asset has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.”
New heading “Our substantial indebtedness could adversely affect our financial condition and impair our ability to operate our business.”
New heading “Interest rate fluctuations could negatively impact our net interest income, cash flows and the market value of our investments.”
New heading “Interest rate mismatches between our loans and our borrowings used to fund our portfolio may reduce our income during periods of changing interest rates.”
New heading “Interest rate caps on our ARMs may reduce our income or cause us to suffer a loss during periods of rising interest rates.”
New heading “Our existing and future financing arrangements and any debt securities we may issue could restrict our operations and expose us to additional risk.”
New heading “Risks Related to Ownership of Our Common Stock”
New heading “The trading and price of our common stock has been and may continue to be volatile, which could result in substantial losses for purchasers of our common stock.”
New heading “We have incurred increased costs as a result of being a public company.”
New heading “Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.”
New heading “Future sales of shares of our common stock, including by our existing stockholders, could depress the market price of our shares.”
New heading “We have not historically paid dividends on our common stock and, as a result, your only opportunity to achieve a return on your investment may be if the price of our common stock appreciates.”
New heading “If securities analysts do not publish research or reports about our business or if they downgrade our stock or our core market, our stock price and trading volume could decline.”
Largest changes
“As a result of having publicly traded common stock, we are also required to comply with, and incur costs associated with such compliance with, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These rules and regulations have increased our legal and financial compliance costs and made some activities more time-consuming and costly. …”see in full comparison
“Our results of operations may be materially affected by conditions in the real estate markets, the financial markets and the economy generally. …”see in full comparison
“Our business could be materially affected by market, economic, political conditions, pandemics and other catastrophic events in the U.S. and internationally, including potential national or international recession, which could result in changes in interest rates and availability of capital, the effects of governmental initiatives to manage economic conditions and the impacts of a federal government shutdown. …”see in full comparison
“Further, our revolving warehouse facility agreements contain various financial and other restrictive covenants, including covenants that require us to maintain a certain amount of cash that is not invested or to set aside non-levered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. …”see in full comparison
“Mortgage loan originators and servicers operate in a highly regulated industry and are required to comply with various federal, state and local laws and regulations. If any of our loans are found to have been originated, serviced or owned by us or a third-party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses. …”see in full comparison
“We may change our strategy or any of our underwriting guidelines at any time without notice or the consent of our stockholders. For example, in response to the economic crisis precipitated by the spread of COVID-19, in late March 2020, we temporarily suspended our loan originations. We may opportunistically acquire commercial mortgage loans that comply with our credit guidelines and may sell commercial mortgage loans We may also change our target assets and financing strategy without notice or the consent of our stockholders. …”see in full comparison
Full comparison: every changed paragraph (239)
References to past events are provided by way of example only and are not intended to be a complete listing or representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.
An investment in our common stock involves significant risk. We describe below material risks that management believes affect or could affect our performance. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock. You should carefully read and consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this Annual Report before you make any decision regarding an investment in our common stock. If any of the following risks actually occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment. While the following discussion provides a description of material risks that could cause our results to vary materially from those expressed in public statements or documents, other factors besides those discussed within this Annual Report or elsewhere in other of our reports filed with or furnished to the SEC could also affect our business, financial condition, liquidity and results of operations.
Summary of Risk Factors
As a non-bank mortgage company, we are exposed in the normal course of business to multiple risks shared by other participants in our industry. In addition, some of the risks we face are unique to Velocity or such risks could have a different or greater impact on Velocity than on other companies. These risks could adversely impact our business, regulatory or agency approval, financial condition, liquidity, results of operations, ability to grow, and reputation, and are summarized below. This summary is intended to supplement, and should not be considered a substitute for, the complete Risk Factors that follow.
Risks Related to Our Financial Performance, Financing Our Business, Liquidity and Net Worth, and the Economy
Conditions in the real estate markets, the financial markets and the economy generally Fiscal policies or inaction at the U.S. federal government level, which have led to and may in the future lead to federal government shutdowns or negative impacts on the U.S. economy Disruptions in the capital markets, including market fluctuations and economic instability as a result of tariffs, trade restrictions, armed conflict and other geopolitical disruptions or conditions Economic downturns, including disruptions to business, market and operational conditions related to natural disasters or epidemics, in geographies where our assets are concentrated
Risks Related to Our Business
Competition in the market for loan origination and acquisition opportunities The high degree of risk involved in loans to small businesses, self-employed borrowers, properties in transition, and certain portions of our investment real estate portfolio Failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans Additional or increased risks if we change our business model or create new or modified real estate lending products Use of incorrect, misleading or incomplete information in our analytical models and data, and risks relating to the possibility of receiving inaccurate and/or incomplete information from potential borrowers, guarantors and loan sellers Deficiencies in appraisal quality in the mortgage loan origination process and risks associated with our underwriting guidelines and our ability to change our underwriting guidelines Loss of our key personnel or our inability to hire and retain qualified account executives Any inability to manage future growth effectively or failure to develop, enhance and implement strategies to adapt to changing conditions in the real estate and capital market, including risks associated with our ability to successfully identify, acquire, and integrate companies and assets Any inability of our borrowers to generate net income from operating the property that secures our loans Costs or delays involved in the completion of a foreclosure or liquidation of the underlying property Operational risks, including the risk of cyberattacks and other security incidents, or disruption in the availability and/or functionality of our technology infrastructure and systems Lender liability claims, requirements that we repurchase mortgage loans or indemnify investors, or allegations of violations of predatory lending laws and environmental liabilities with respect to properties to which we take title Inadequate insurance on collateral underlying mortgage loans and real estate securities Failure to realize an attractive price upon disposal of portfolio assets that are recorded at fair value The interest margin, cost structure and return on equity of our existing and future securitizations and the inability to successfully complete additional securitization transactions on attractive terms or at all The termination of one or more of our warehouse repurchase and revolving loan facilities Interest rate fluctuations or mismatches between our loans and our borrowings
Legal and Regulatory Risks
Legal or regulatory developments related to mortgage-related assets, securitizations or state licensing and operational requirements Our ability to maintain our exclusion under the Investment Company Act of 1940, as amended (the “1940 Act”) Our ability to comply with laws, regulations and market standards regarding the privacy, use, and security of customer and other regulated information Litigation and adverse legislative or regulatory changes
Risks Relating to Ownership of Our Common Stock
Substantial volatility in our common stock price
The influence of our largest stockholders over us and our performance The issuance of additional securities that dilute or depress the market price of our common stock Future offerings of debt securities that are senior to our common stock in liquidation, or equity securities that are senior to our common stock in respect of liquidation and distributions Certain provisions in our organizational documents that may make takeovers more difficult
Risks Related to Our Business
We are dependent upon the success of the investor real estate market and conditions that negatively impact this market may reduce demand for our loans and adversely impact our business, results of operations and financial condition.
Our borrowers are primarily owners of residential rental and small commercial properties. Accordingly, the success of our business is closely tied to the overall success of the investors and small business owners in that market. Various changes in real estate conditions may impact this market. Any negative trends in such real estate conditions may reduce demand for our products and services and, as a result, adversely affect our results of operations. These conditions include:
oversupply of, or a reduction in demand for, residential rental and small commercial properties;
a change in policy or circumstances that may result in a significant number of potential residents of multifamily properties deciding to purchase homes instead of renting;
zoning, rent control or stabilization laws, or other laws regulating multifamily housing, which could affect the profitability of residential rental developments;
the inability of residents and tenants to pay rent;
changes in the tax code related to investment real estate;
increased operating costs, including increased real property taxes, maintenance, insurance, and utilities costs; and potential liability under environmental and other laws.
Any or all of these factors could negatively impact the investor real estate market and, as a result, reduce the demand for our loans or the terms on which we are able to make our loans and, as a result materially and adversely affect us.
Difficult conditions in the real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition.
Our results of operations may be materially affected by conditions in the real estate markets, the financial markets and the economy generally. These conditions include changes as a result of global and regional macroeconomic developments, such as uncertainty related to future economic activity, the current tariff environment, including increased tariff rates and reciprocal tariffs, which remains dynamic and uncertain, reduced access to credit and decreased liquidity, as well as changes in short-term and long-term interest rates, inflation and deflation, fluctuations in the real estate and debt capital markets and developments in national and local economies, unemployment rates, commercial property vacancy rates, and rental rates. Any deterioration of real estate fundamentals generally, and in the United States in particular, and changes in general economic conditions could decrease the demand for our loans, negatively impact the value of the real estate collateral securing our loans, increase the default risk applicable to borrowers, and make it relatively more difficult for us to generate attractive risk-adjusted returns.
We also are significantly affected by the fiscal, monetary, and budgetary policies of the U.S. government and its agencies. We are particularly affected by the policies of the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve, which regulates the supply of money and credit in the United States. The Federal Reserve’s policies affect interest rates, which can have a significant impact on the demand for investor real estate loans. Significant fluctuations in interest rates as well as protracted periods of increases or decreases in interest rates could adversely affect the operation and income of the investment properties securing our loans, as well as the demand from investors for investor real estate loans in the secondary market. In particular, changes in interest rates often affect the number of loans originated. For example, a decrease in interest rates could cause refinancing of existing loans to become more attractive and qualifying for a loan to become easier, while an increase in interest rates could cause refinancing of existing loans to become less attractive and qualifying for a loan to become more difficult.
We cannot predict the degree to which economic conditions generally, and the conditions for real estate debt investing in particular, will improve or decline. Any stagnation in or deterioration of the real estate markets may limit our ability to originate or acquire loans on attractive terms or cause us to experience losses related to our assets. Declines in the market values of our investments may adversely affect our results of operations and credit availability.
Adverse global market, economic and political conditions, including government shutdowns, armed conflicts or terrorist acts, pandemics and other catastrophic events could have a material adverse effect on us.
Our business could be materially affected by market, economic, political conditions, pandemics and other catastrophic events in the U.S. and internationally, including potential national or international recession, which could result in changes in interest rates and availability of capital, the effects of governmental initiatives to manage economic conditions and the impacts of a federal government shutdown. Terrorist attacks, actual or threatened acts of war or armed conflict or the escalation of current hostilities, such as the ongoing conflicts between Russia and Ukraine, Israel and Hamas, or involving Iran, Venezuela or any other military or armed conflict have led and could lead to further regional instability, market disruptions, geopolitical shifts and adverse effects on macroeconomic conditions which could adversely affect our results of operations and financial conditions.
In addition, a prolonged or repeated shutdown of the U.S. federal government could adversely affect our business, results of operations and financial conditions. Funding gaps or lapses in federal appropriations may disrupt the operations of government agencies that provide critical economic data, administer regulatory functions, or directly support our customers and counterparties. During a shutdown, federal agencies such as the Internal Revenue Service, Small Business Administration, and various supervisory bodies may suspend or significantly curtail their activities, which can delay loan originations, hinder verification processes, impede regulatory approvals, and reduce the availability of government‑guaranteed lending programs. A shutdown may also impair the financial capacity of borrowers who depend on federal salaries, contracts, reimbursements, or benefit programs, including government employees, federal contractors, and recipients of government-funded services. Reduced or delayed income to these borrowers could reduce loan demand, negatively affect deposit inflows, and increase our credit risk exposure. In addition, disruptions to federal economic data releases or fiscal operations may create volatility in financial markets, affecting interest rates, liquidity conditions, and the valuation of securities in our investment portfolio. The duration and economic impact of any government shutdown are inherently uncertain, and any such event could, individually or in the aggregate, have a material adverse effect on our business, financial condition and results of operations.
We operate in a competitive market for loan origination and acquisition opportunities and competition may limit our ability to originate and acquire loans, which could adversely affect our ability to execute our business strategy.
We operate in a competitive market for investment and loan origination and acquisition opportunities. Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices and originate loans that allow us to generate compelling net interest margins. In acquiring our target assets or originating loans, we compete with a variety of institutional investors, including real estate investment trusts, specialty finance companies, public and private funds, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of these competitors may enjoy competitive advantages over us, including:
greater name recognition;
a larger, more established network of correspondents and loan originators;
established relationships with mortgage brokers or institutional investors;
access to lower cost and more stable funding sources;
an established market presence in markets where we do not yet have a presence or where we have a smaller presence;
ability to diversify and grow by providing a greater variety of commercial real estate loan products on more attractive terms, some of which require greater access to capital and the ability to retain loans on the balance sheet; and greater financial resources and access to capital to develop branch offices and compensate key employees.
Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Commercial banks may have an advantage over us in originating loans if borrowers already have a line of credit or construction financing with the bank. Commercial real estate service providers may have an advantage over us to the extent they also offer a larger or more comprehensive investment sales platform. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of originations or loan acquisitions, and establish more relationships than us. Furthermore, competition for loans on our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns, and competition in investor real estate loan origination may increase the availability of investor real estate loans which may result in a reduction of interest rates on investor real estate loans. We cannot assure you that the competitive pressures we face will not have a material and adverse effect on our business, results of operations and financial condition. In addition, future changes in laws, regulations, and consolidation in the commercial real estate finance market could lead to the entry of more competitors. We cannot guarantee that we will be able to compete effectively in the future, and our failure to do so would materially and adversely affect us.
Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.
Our operations and activities include, without limitation, loans to small, privately owned businesses. Often, there is little or no publicly available information about these businesses. Accordingly, we must rely on our own due diligence to obtain information in connection with our investment decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by banks. A borrower’s ability to repay its loan may be adversely impacted by numerous factors, including a downturn in its industry or other negative local or more general economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses typically depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have a material and adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to expand or compete. These factors may have an impact on loans involving such businesses. Loans to small businesses, therefore, involve a high degree of business and financial risk, which can result in substantial losses, and in turn could have a material and adverse effect on our business, results of operations and financial condition.
The failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans may adversely impact our business, results of operations and financial condition.
Most mortgage loans and securitizations of mortgage loans require a servicer to manage collections for each of the underlying loans. Onity Group Inc. (formerly PHH Mortgage Corporation) currently provides loan servicing on most of our loan portfolio, and we work with several other servicers for a portion of our portfolio. We refer to these providers as our third-party loan servicers. A third-party loan servicer’s responsibilities include providing loan administration, issuing monthly statements, managing borrower insurance and tax impounds, sending delinquency notices, collection activity, all cash management and reporting on the performance of the loans. A third-party loan servicer may retain sub-servicers in any jurisdictions where licensing is required and the third-party loan servicer has not obtained the necessary license or where it otherwise deems it advisable. Both default frequency and default severity of loans may depend upon the quality of the servicer. If a third-party loan servicer or any sub-servicer is not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If a third-party loan servicer or any sub-servicers takes longer to liquidate non-performing assets, loss severities may be higher than originally anticipated. Higher loss severity may also be caused by less competent dispositions of real estate owned, or REO.
Servicer quality, whether performed by third-party loan servicers or internally by us, is of prime importance in the default performance of investor real estate loans and securitizations. If we are unable to maintain our relationships with our third-party loan servicers, or they become unwilling or unable to continue to perform servicing activities, we could incur additional costs to obtain replacement loan servicers and there can be no assurance that a replacement servicer could be retained in a timely manner or at similar rates. Should we have to transfer loan servicing to another servicer for any reason, the transfer of our loans to a new servicer could result in more loans becoming delinquent because of confusion or lack of attention. Servicing transfers involve notifying borrowers to remit payments to the new servicer, and these transfers could result in misdirected notices, misapplied payments, data input errors and other problems. Industry experience indicates that mortgage loan delinquencies and defaults are likely to temporarily increase during the transition to a new servicer and immediately following the servicing transfer. Further, when loan servicing is transferred, loan servicing fees may increase, which may have an adverse effect on the credit support of assets held by us. Effectively servicing our portfolio of mortgage loans is critical to our success, particularly given our strategy of maximizing the value of our portfolio with our proprietary loan modification programs and special servicing techniques, and therefore, if one of our third-party loan servicers or our internal special servicing fails to effectively service our portfolio of mortgage loans, it could have a material and adverse effect on our business, results of operations and financial condition.
In addition, third-party loan servicers collect loan payments from our borrowers and hold them until remitting them to us, our lenders or our securitization trustees, as applicable, on scheduled monthly payment dates. As part of industry practice, third-party loan servicers are also often contractually required to advance amounts to their clients in some circumstances where borrowers have not yet made payments on the underlying mortgage loans, which could increase financial and liquidity demands on third-party loan servicers during times of economic distress when borrowers failed to make payments on mortgage loans or were late in doing so. Financial distress or insolvency of any of our third-party loan servicers would have a material adverse effect on our business, results of operations and financial condition.
We are dependent on certain of our key personnel for our future success, and their continued service to us is not guaranteed.
Our future success depends on the continued service of key personnel, including Christopher D. Farrar, our Chief Executive Officer, Mark R. Szczepaniak, our Chief Financial Officer, and Jeffrey T. Taylor, our Executive Vice President for Capital Markets, and our ability to attract new skilled personnel. We do not have employment contracts that provide severance payments and/or change in control benefits with our executive officers, and there can be no assurance that we will be able to retain their services. The departure of key personnel, until suitable replacements could be identified and hired, if at all, could have a material and adverse effect on our business, results of operations and financial condition.
Our growth strategy relies upon our ability to hire and retain qualified account executives, and if we are unable to do so, our growth could be limited.
We depend on our qualified account executives to generate broker relationships which leads to repeat and referral business. Accordingly, we must be able to attract, motivate and retain qualified account executives. The market for qualified account executives is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that we will be able to attract or retain qualified account executives. If we cannot attract, motivate or retain a sufficient number of qualified account executives, or if our hiring and retention costs increase our business, results of operations and financial condition could be materially and adversely affected.
Inaccurate or incomplete information received from potential borrowers, guarantors and sellers involved in the sale of pools of loans could have a negative impact on our results of operation.
In deciding whether to extend credit or enter into transactions with potential borrowers and their guarantors, we are forced to primarily rely on information furnished to us by or on behalf of these potential borrowers or guarantors, including financial statements. We also must rely on representations of potential borrowers and guarantors as to the accuracy and completeness of that information and we must rely on information and representations provided by sellers involved in the sale of pools of loans that we purchase when we make bulk acquisitions. Our results of operations could be negatively impacted to the extent we rely on financial statements or other information that is misleading, inaccurate or incomplete.
Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity.
During the mortgage loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective mortgage. The quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the mortgage loans, which could have a material and adverse effect on our business, results of operations and financial condition.
We use leverage in executing our business strategy, which may adversely affect us when economic conditions are unfavorable.
We leverage certain of our assets through borrowings under warehouse facilities and securitization transactions, as well as any corporate borrowings, and other debt we may incur from time to time. Our use of leverage may enhance our potential returns and increase the number of loans that can be made, but may also substantially increase the risk of loss. While our current and future financing arrangements and other debt obligations impose certain limitations on the amount of leverage we may incur, there are no such limits in our restated certificate of incorporation or our amended and restated bylaws. Our percentage of leverage will vary depending on our ability to obtain financing and the limitations imposed by our financing arrangements and debt securities and we may not be able to meet our debt service obligations. Our return on equity may be reduced if market conditions cause the cost of our financing to increase relative to the income that can be derived from our loan portfolio, which could adversely affect the price of our common stock. In addition, our debt service payments will reduce cash flow available for distributions to stockholders. To the extent that we cannot meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.
Our underwriting guidelines in the mortgage loan origination process may result in increased delinquencies and defaults.
Mortgage originators, including us, generally underwrite mortgage loans in accordance with their pre-determined loan underwriting guidelines, and from time to time and in the ordinary course of business, originators will make exceptions to these guidelines. There can be no assurance that our underwriting guidelines will identify or appropriately assess the risk that the interest and principal payments due on a loan will be repaid when due, or at all, or whether the value of the mortgaged property will be sufficient to otherwise provide for recovery of such amounts. Our underwriting guidelines are more narrow than some other mortgage lenders because we give primary consideration to the adequacy of the property as collateral and source of repayment for the loan rather than focusing on the personal income of the borrower. For example, while we emphasize credit scores in our underwriting process, there is no minimum credit score that a potential borrower must have in order to obtain a loan from us. Although we believe that this asset-driven approach is one of our competitive advantages, it may result in higher delinquency and default rates than those experienced by mortgage lenders with broader underwriting guidelines and/or those who require minimum credit scores or verify the personal income of their borrowers.
On a case by case basis, our underwriters may determine that a prospective borrower that does not strictly qualify under our underwriting guidelines warrants an underwriting exception, based upon compensating factors. Compensating factors may include, but are not limited to, a lower loan-to-value ratio, a higher debt coverage ratio, experience as a real estate owner or investor, higher borrower net worth or liquidity, stable employment, longer length of time in business and length of time owning the property. Loans originated with exceptions may result in a higher number of delinquencies and defaults, which could have a material and adverse effect on our business, results of operations and financial condition.
We may change our strategy or underwriting guidelines without notice or stockholder consent, which may result in changes to our risk profile, results of operations and financial condition.
We may change our strategy or any of our underwriting guidelines at any time without notice or the consent of our stockholders. For example, in response to the economic crisis precipitated by the spread of COVID-19, in late March 2020, we temporarily suspended our loan originations. We may opportunistically acquire commercial mortgage loans that comply with our credit guidelines and may sell commercial mortgage loans We may also change our target assets and financing strategy without notice or the consent of our stockholders. From time to time, based on market conditions and our perception of business opportunities, we vary the mix of types of loans we originate or purchase, our relative emphasis of loan originations and purchases of loans and related assets, and our preference for monetizing our financial assets through securitizations, sales of loans and sales of retained subordinated interests in our securitizations. Any of these changes could result in us holding a loan portfolio with a different risk profile from the risk profile described in this Annual Report and the documents incorporated by reference herein or, as well as affect the timing and amount of cash received or invested and of revenue recognized or charges or other expenses recorded. In addition, originating or purchasing loans of types with which we do not have significant prior experience may have greater risk of associated loss or other expense, or may not be as profitable as we expect. Additionally, a change in our strategy or underwriting guidelines may increase our exposure to interest rate risk, default risk, real estate market fluctuations and liquidity risk, all of which could have a material and adverse effect on our business, results of operations and financial condition.
Management's Discussion & Analysis (MD&A)
New heading “Year Ended December 31, 2025 Compared to Year Ended December 31, 2024”
New heading “Interim Reporting”
New heading “Derivatives and Hedging”
New heading “Expense Disaggregation”
New heading “Recently Adopted Accounting Standard”
Removed heading “Year Ended December 31, 2023 Compared to Year Ended December 31, 2022”
Largest changes
“The tables below include resolutions of our long-term nonperforming loans during the periods indicated. Historically, we have resolved our nonperforming loans at a gain over and above contractual interest due. Below is a breakout of the net gains, regular accrued interest income and expense recognized with the resolution of these nonperforming loans. Total nonperforming loans recovered include default interest, prepayment penalty, and contractual regular interest received, and any servicing advance recovered or written off:”see in full comparison
“Year Ended December 31, 2025 Compared to Year Ended December 31, 2024”see in full comparison
“Year Ended December 31, 2023 Compared to Year Ended December 31, 2022”see in full comparison
Full comparison: every changed paragraph (151)
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 3746 securitized debt offerings, issuing $8.0$10.6 billion in principal amount of securities from May 2011 through December 2024.2025.
OneBesides ofnet ourincome, another core profitably measurementsmeasurement is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolioloans 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, 2024,2025, our portfolio related net interest margin was 3.56%.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, 2024,2025, including net income attributable to noncontrolling interest, we generated pre-tax and net income of $96.4$146.2 million and $68.5$105.0 million, respectively, and earned a pre-tax return on average equity and return on average equity of 20.3%24.4% and 14.4%,17.5%, respectively.
In January 2026, the Company completed the issuance and sale of $500.0 million aggregate principal amount of 9.375% Senior Notes (“the 2026 Term Notes”) which will mature on February 15, 2031.
InFrom September 2023, the Company began utilizingutilized forward starting interest rate derivativeswaps instrumentsor 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 forward startingthese interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of accumulated other comprehensive income.
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 aan CECLallowance reservefor credit losses on fair value option loans.
Income Taxes
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 theThe 2022 Term Loan was usedpaid tooff redeemon allJanuary 30, 2026 with proceeds from the amountsissuance owedand pursuantsale toof the $175.0$500 million syndicatedSenior corporate debt (“2021 Term Loan”).Notes. In February 2024, we entered into a five-year $75.0 million syndicated corporate debt agreement (“the 2024 Term Loan”). We incurred $23.8$24.6 million, $16.6$23.8 million and $29.5$16.6 million of interest expense related to our corporate debt for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively.
Corporate Debt
On January 30, 2026, we completed the issuance and sale of $500 million aggregate principal amount of 9.375% Senior Notes due 2031 (“the 2026 Term Notes”). The 2026 Term Notes bear interest at 9.375% and are guaranteed by us on an unsecured basis.
In JanuaryFebruary 2025,2026, we completed the securitization of $351.6$355.2 million of investor real estate loans, as measured by UPB.UPB, through a consolidated VIE.
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 2012-20242012-2025 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”), treasuryindex, yields,real disposable personal income (“DPI”) index, and U.S.consumer realprice estateindex housing prices.(“CPI”). We consider multiple scenarios from different macroeconomic forecasts and use different forecast and reversion periods for estimating lifetime expected credit losses.
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.
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.
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.
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,payments, coupled with meaningful borrower equity in properties, limit the probability of losses,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.
Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $40.1$29.6 million, $42.2$40.1 million and $39.6$42.2 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of December 31, 2024,2025, 20232024 and 2022,2023, respectively.
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:
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.
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.
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 tabletables showsshow the various components of loans held for investment as of the dates indicated:
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.
The increase in charge-offs was higher than the previous year mainly as a result of two unusually large charge-offs taken during 2025.
Our allowance for credit losses increased to $4.5 million as of December 31, 2025, from $4.2 million as of December 31, 2024. The increase in allowance was primarily due to higher charge-offs from 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 allowance decreased to $4.8 million as of December 31, 2023, from $4.9 million as of December 31, 2022. The decrease in allowance was primarily due to loan paydowns and payoffs decreasing our portfolio of loans held for investment carried at amortized cost.
Our allowance for credit losses is based on an analysis of historical credit loss data from January 1, 20172022 through December 31, 2024,2025, 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 should a loan become impaired.losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss, isare subject to change as conditions in the market change and the Company’sour ability to forecast as 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 allowance for credit losses was 0.17%0.22% of total UPB of loans held for investment carried at amortized cost as of December 31, 2024.2025. Nonperforming loans were 12.91%11.6% of total UPB of loans held for investment carried at amortized cost as of December 31, 2024.2025. We believe the allowance for credit losses is adequate because historically,historically most loans that become nonperforming resolveeither priorpaid tooff convertingor topaid REO.current, resulting in an overall gain. This is due to low LTVs at origination and our active management of the portfolio. Additionally,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 ratesrate werehas 0.07%historically ofbeen total UPB of loans held for investment carriedlow at amortized0.10% cost forover the yearslast endedfour 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.years.
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, 2024,2025, $174.62024 million as of December 31,and 2023, and $201.0 million as of December 31, 2022respectively, in our COVID-19 forbearance program.
ResolutionsResolution of Nonperforming Loans
Historically, most loans that become nonperforming resolve prior to converting to REO. This wasis due to low LTVs at origination and our active management of the portfolio. The following tables summarize the resolution activities of loans that werebecame nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $253.4$331.5 million, $206.1$253.4 million and $142.2$206.1 million of long-term and short-term nonperforming loans during the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively. We alsorecovered resolvedtotal $29.8revenue of $30.0 million, $19.3$22.3 million and $16.2$19.1 million of long-term and short-term nonperforming loans transferred to REO duringfor the years ended December 31, 2024,2025, 20232024 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 2022,2023, respectively. This was largely the result of collecting all regular accrued interest, default interestinterest, and prepayment penalties in excess of the contractualprincipal intereston due and collected.loans.
The tables below include resolutions of our long-term nonperforming loans during the periods indicated. Historically, we have resolved our nonperforming loans at a gain over and above contractual interest due. Below is a breakout of the net gains, regular accrued interest income and expense recognized with the resolution of these nonperforming loans. Total nonperforming loans recovered include default interest, prepayment penalty, and contractual regular interest received, and any servicing advance recovered or written off:
The table below includes resolutions of our long-term nonperforming loans and REOs during the periods indicated:
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 tabletables below includesinclude resolutions of our short-term nonperforming loans and REOs, and loans granted a COVID-19 forbearance in 20202020, duringfor the periods indicated:
Our recovery rates were elevated in 2022 because of the positive resolution of loans impacted by the COVID pandemic.
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.losses Positivefor adjustmentsloan carried at amortized cost. Gains at the time of foreclosure are recognized in other operating income. AfterThe foreclosure,difference REO assets are carried atbetween the lowercarrying value of carryingthe amountFVO orloan and the REO fair value less estimated costcosts to sell.sell, Weis recorded as unrealized gain or loss on fair value loans. After foreclosure, we periodically obtain new valuations and any subsequent write-downs,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 December 31, 2024,2025, 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 compared to 71 properties with a carrying value of $44.3 million as of December 31, 2023.2024. 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.portfolio.
As of December 31, 2024,2025, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 52.5%48.1% of the UPBUPB. Mixed-use properties and mixed-useretail properties representingrepresented 11.1%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. By geography,Geographically, the principal balance of our loans held for investment were concentrated 21.0%20.3% in California, 16.3%13.8% in New York, 12.7%12.0% in Florida, 7.5%7.6% in New Jersey, and 5.4%6.1% in Texas.
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 reflectsreflect the monthly average of all portfolio-related and total company debt, as measured by outstanding principal balance, over the specified time period.
Over the periods shown below, our portfolio related net interest margin increased to 3.56%3.61% for the year ended December 31, 20242025 compared to the3.56% and 3.34% for the yearyears ended December 31, 2023,2024 and decreased2023, from 3.64% for the year ended December 31, 2022.respectively. The increaseincreases in portfolio related net interest margin from the yearyears ended December 31, 2024 and 2023 waswere 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. The decrease from the year ended December 31, 2022 was primarily due to higher debt cost caused by an overall increase in interest rates.
Our totalTotal company net interest margin of 3.03%3.19% for the year ended December 31, 20242025 increased from 3.03% and 2.89% for the yearyears ended December 31, 2023,2024, and increased2023, from 2.69% for the year ended December 31, 2022.respectively. The increases in total company net interest margin from the years ended December 31, 20232024 and 20222023 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.
The following tablestable showshows 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:
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 remainedwas minimal0.25% atfor the year ended December 31, 2025 and 0.07% for the years ended December 31, 2024 and 2023, and 0.02% for the year ended December 31, 2022.2023.
Pre-tax return on average equity and return on average equity reflect income before income taxes,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, 20242025 as compared to 20232024 and 20222023 due to the increases in income before income taxes and net income.income resulting from the increases in net interest income, gain on sale of loans, and valuation gains in 2025.
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.
Interest expense on corporate debt primarily consists of interest expense paid with respect to the 2022 Term Loan and the 2024 Term Loan,Loan (“Corporate Debt”), as reflected in “Secured financing, net” on our Consolidated Balance Sheets, and the related amortization of deferred debt issuance costs.
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.
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.
Gain on Sale of Loans to a Related Party. Gain related to sale of loans to a related party. The gain reflects the difference between the proceeds received for the loans sold and their respective carrying values.
Unrealized Gain (Loss) on Mortgage Servicing Rights. TheWe Company hashave elected to record itsour mortgage servicing rights using the fair value measurement method. Changes in fair value are reported as “Unrealized gainsgain (lossesloss) on mortgage servicing rights”, a component of other operating income within the Consolidated Statements of Income.
Unrealized Gain (Loss) on Fair Value Securitized Debt. We have elected to apply the fair value option accounting to securitized debt issued effective January 1, 2023 when the underlying collateral is also carried at fair value. We regularly estimate the fair value of securitized debt. Changes in fair value,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.
Year Ended December 31, 2025 Compared to Year Ended December 31, 2024
Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased to $210.4 million from $159.6 million for the years ended December 31, 2025 and 2024, respectively.
Interest Income. Interest income increased by $144.0 million, or 35.4%, to $550.8 million for the year ended December 31, 2025, compared to $406.8 million for the year ended December 31, 2024. The increase was primarily attributable to higher average portfolio balances and average yield. The average yield increased to 9.45% for the year ended December 31, 2025 from 9.06% for the year ended December 31, 2024. Average loans increased $1.3 billion, or 29.9% to $5.8 billion for the year ended December 31, 2025 from $4.5 billion for the year ended December 31, 2024. The increase in average yield was attributable to the overall higher interest rate environment in 2025.
The following table distinguishes between the change in interest income attributable to change in average loan balance (volume) and the change in interest income attributable to change in annualized yield (rate) for the years ended December 31, 2025 and 2024.
Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased by $93.3 million, or 37.7%, to $340.5 million for the year ended December 31, 2025, from $247.2 million for the year ended December 31, 2024. The increase in portfolio related interest expense in 2025 was primarily attributable to a higher loan portfolio being financed and increased interest rates.
The following table presents information regarding portfolio related interest expense and distinguishes between the change in interest expense attributable to change in the average outstanding debt balance (volume) and change in cost of funds (rate) for the years ended December 31, 2025 and 2024.
Includes securitized debt and warehouse agreements.
Net interest income after provision for credit losses increased 33.7% over the prior year driven by our growth in the portfolio.
Interest Expense — Corporate Debt. Corporate debt interest expense increased by $0.8 million to $24.6 million for the year ended December 31, 2025 from $23.8 million for the year ended December 31, 2024 due to the addition of a $75.0 million financing in February 2024 and its related debt issuance costs amortization. The corporate debt balance was $290.0 million as of December 31, 2025 and 2024.
Provision for Credit Losses. Our provision for credit losses increased by approximately $4.6 million to $5.8 million for the year ended December 31, 2025 from $1.2 million for the year ended December 31, 2024. The increase in provision for credit losses was primarily attributable to the higher charge-offs 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.
What changed in the latest 10-Q
Risk Factors
New heading “Risks Related to Mergers, Acquisitions and Strategic Investments”
New heading “Risks Related to Retained Securities”
Largest changes
“As part of our loan securitization program, we transfer commercial real estate and residential mortgage loans to securitization trusts and retain interests in those trusts, including subordinate certificates, interest-only strips, and other residual interests. We record these retained interests at fair value, which requires management to make significant estimates and assumptions regarding, among other things, prepayment speeds, default and loss severity rates, discount rates, and the timing and amount of expected future cash flows. …”see in full comparison
“Even if completed, acquisitions and other strategic transactions involve numerous risks and uncertainties, including difficulties in integrating operations, technologies, products, controls, personnel and corporate cultures; diversion of management's attention from existing business operations; challenges in retaining key employees, customers, counterparties and business relationships; failure to achieve anticipated synergies, cost savings, growth opportunities or other expected benefits; assumption of unknown, contingent or unexpected liabilities; …”see in full comparison
“Our retained interests are subordinate to the interests of senior certificate holders in the related trusts. As a result, we bear a disproportionate share of the credit risk associated with the underlying loan pools, and we would generally not receive any distributions on our retained interests until the senior classes have been paid the amounts to which they are entitled. …”see in full comparison
“Our ability to continue to securitize loans and retain interests on terms favorable to us also depends on conditions in the capital markets that are outside of our control, including investor demand for asset-backed securities, prevailing interest rates, credit spreads, and regulatory requirements applicable to securitization transactions (including risk retention rules). …”see in full comparison
Full comparison: every changed paragraph (12)
We have included in Part I, Item 1A of our 2025 Form 10-K descriptions of certain risks and uncertainties that could affect our business, future performance, or financial condition (the "Risk Factors"). ThereOther than as updated below, there have been no material changes from the disclosures provided in our 2025 Form 10-K. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.
Risks Related to Mergers, Acquisitions and Strategic Investments
We may be unable to successfully identify, complete, integrate or realize the anticipated benefits of mergers, acquisitions, strategic investments, joint ventures or other business combinations, which could adversely affect our business, financial condition and results of operations.
From time to time, we may pursue acquisitions, strategic investments, joint ventures, minority investments, asset purchases or other business combinations that we believe will complement or expand our business. There can be no assurance that we will be able to identify suitable opportunities, negotiate acceptable terms, obtain required financing, secure necessary regulatory or third-party approvals, or otherwise complete transactions on favorable terms or at all.
Even if completed, acquisitions and other strategic transactions involve numerous risks and uncertainties, including difficulties in integrating operations, technologies, products, controls, personnel and corporate cultures; diversion of management's attention from existing business operations; challenges in retaining key employees, customers, counterparties and business relationships; failure to achieve anticipated synergies, cost savings, growth opportunities or other expected benefits; assumption of unknown, contingent or unexpected liabilities; increased legal, regulatory, compliance and operational risks; and potential impairment charges related to goodwill, intangible assets or other acquired assets.
In addition, acquired businesses may have liabilities, deficiencies, cybersecurity vulnerabilities, compliance issues or other risks that were not identified during the due diligence process or that exceed our estimates. Any such issues could result in increased costs, litigation, regulatory scrutiny, reputational harm or operational disruptions. If we are unable to successfully integrate acquired businesses or realize the anticipated benefits of a transaction within the expected timeframe, or at all, our business strategy, results of operations, financial condition, cash flows and stock price could be materially and adversely affected.
Furthermore, acquisitions and strategic transactions may require the use of substantial cash resources, the incurrence of indebtedness, the issuance of equity securities or other financing arrangements, which could dilute existing stockholders, increase our leverage, restrict operational flexibility or otherwise adversely affect our financial condition. As a result, any future merger, acquisition or strategic investment may not contribute positively to our results and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Retained Securities
Our retained interests in securitization trusts are subject to valuation, credit, and liquidity risks that could adversely affect our financial condition and results of operations.
As part of our loan securitization program, we transfer commercial real estate and residential mortgage loans to securitization trusts and retain interests in those trusts, including subordinate certificates, interest-only strips, and other residual interests. We record these retained interests at fair value, which requires management to make significant estimates and assumptions regarding, among other things, prepayment speeds, default and loss severity rates, discount rates, and the timing and amount of expected future cash flows. These assumptions are inherently subjective and subject to change based on economic conditions, borrower behavior, and performance of the underlying collateral. If actual performance of the securitized loans differs materially from our assumptions, or if market conditions affecting the assumptions used by market participants to value similar instruments change, we may be required to record other-than-temporary impairments or fair value adjustments that could materially and adversely affect our earnings and financial condition in the periods in which they occur.
Our retained interests are subordinate to the interests of senior certificate holders in the related trusts. As a result, we bear a disproportionate share of the credit risk associated with the underlying loan pools, and we would generally not receive any distributions on our retained interests until the senior classes have been paid the amounts to which they are entitled. An increase in delinquencies, defaults, or loss severities on the underlying loans—whether due to weakening economic conditions, declines in commercial or residential real estate values, borrower-specific factors, or other causes—could reduce or eliminate the value of our retained interests and reduce or delay the cash flows we expect to receive.
Our ability to continue to securitize loans and retain interests on terms favorable to us also depends on conditions in the capital markets that are outside of our control, including investor demand for asset-backed securities, prevailing interest rates, credit spreads, and regulatory requirements applicable to securitization transactions (including risk retention rules). Adverse changes in any of these factors could reduce the value of, or our ability to monetize, our retained interests, could require us to hold a greater proportion of credit risk on our balance sheet than we currently anticipate, and could adversely affect our liquidity, financial condition, and results of operations.
Management's Discussion & Analysis (MD&A)
New heading “Securitization of Nonperforming Loans”
Largest changes
Over the periods shown in the tables below, portfolio related net interest marginsee in full comparisonincreaseddecreased to3.56%3.66% for the three months endedMarchJune31,30, 2026 from3.35%3.82% for the three months endedMarchJune31,30,2025,2025.andPortfoliodecreasedrelated net interest margin increased slightly to 3.61% for the six months ended June 30, 2026 from3.59%3.60% for the six months ended June 30, 2025. The decrease from the three months ended June 30, 2025 was primarily due to elevated yields on loans for the three months endedDecemberJune31, 2025. The increase from the three months ended March 31,30, 2025was primarilydue tohighertheaveragetimingyieldof receipts of regular interest on a cash basis on past due loans, default interest, andbalance.prepaymentThe decrease from the three month ended December 31, 2025 was primarily due to lower average yield.fees.
“Unrealized Gain (Loss) on Fair Value Securitized Debt. Unrealized gain on fair value securitized debt was $2.3 million for the three months ended June 30, 2026, compared to $7.6 million of unrealized loss for the three months ended June 30, 2025. Unrealized gain on fair value securitized debt increased by $49.8 million to $28.6 million for the six months ended June 30, 2026 from $21.3 million unrealized loss for the six months ended June 30, 2025. The increases in unrealized gain on fair value securitized debt were primarily attributable to the increase in market interest rates.”see in full comparison
see in full comparisonInterestUnrealizedIncomeGain onCashFairBalance.ValueInterestLoans.incomeUnrealized gain oncashfairbalancevalueincreasedloans decreased by$0.1$5.4 million to$1.4$24.5 million for the three months endedMarchJune31,30, 2026 compared to$1.3$29.9 million for the three months endedMarchJune31,30, 2025. Unrealized gain on fair value loans decreased by $39.2 million to $25.5 million for the six months ended June 30, 2026 compared to $64.7 million for the six months ended June 30, 2025. Theincreasedecrease wasprimarilymainlyattributabledriventoby anoverallincreasehigherincashmarketbalance.interest rates.
“Interest Income on Cash Balance. Interest income on cash balance decreased by $0.2 million to $1.3 million for the three months ended June 30, 2026 compared to $1.5 million for the three months ended June 30, 2025. Interest income on cash balance decreased by $0.1 million to $2.7 million for the six months ended June 30, 2026 compared to $2.8 million for the six months ended June 30, 2025. The decreases were primarily attributable to a decrease in interest rates combined with a decrease in average bank balances.”see in full comparison
“Origination Fee Income. Origination fee income increased by $3.2 million to $12.2 million for the three months ended June 30, 2026 compared to $8.9 million for the three months ended June 30, 2025. Origination fee income increased by $2.5 million to $20.1 million for the six months ended June 30, 2026 compared to $17.6 million for the six months ended June 30, 2025. The increases were primarily attributable to interest rate buy downs in the current quarter.”see in full comparison
Full comparison: every changed paragraph (79)
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 MarchJune 31,30, 2026, has an average balance of approximately $388$383 thousand. As of MarchJune 31,30, 2026, our loan portfolio totaled $6.8$7.0 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 64.9%,64.6%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 46.9%45.6% of the UPB. For the three and six months ended MarchJune 31,30, 2026, the annualized yieldyields on our total portfolio waswere 9.23%.9.29% and 9.26%, respectively.
We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, unsecured and secured debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed 4849 securitized debt transactions, resulting in a total of overapproximately $11.1$11.5 billion in gross debt proceeds from May 2011 through MarchJune 2026. We may also 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 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 and unsecured debt. For the three and six months ended MarchJune 31,30, 2026, our annualized portfolio related net interest margin was 3.56%,3.66% and 3.61%, respectively, compared to 3.35%3.82% and 3.60% for the three and six months ended MarchJune 31,30, 2025. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt and unsecured debt, provision for credit losses and operating expenses. For the three and six months ended MarchJune 31,30, 2026, including net income attributable to noncontrolling interest, we generated pre-tax income of $30.9$35.2 million and $66.1 million, and net income of $22.4$25.2 million.million and $47.5 million, respectively. For the three and six months ended MarchJune 31,30, 2025, including net income attributable to noncontrolling interest, we generated pre-tax income of $26.9$33.9 million and $60.8 million, and net income of $18.9$26.0 million.million and $44.9 million, respectively.
Securitization of Nonperforming Loans
In June 2026, we completed a securitization of nonperforming mortgage loans (the “2026-MC2 Securitization”), through which we sold and transferred the underlying loans to VCC 2026-MC2 Trust (the “Trust”) via our Depositor subsidiary. The transaction qualifies for sale accounting under ASC 860, Transfers and Servicing, resulting in a corresponding decrease in nonperforming loans on our balance sheet during the period.
In May 2026, we completed the securitization of $414.5 million of investor real estate loans, as measured by UPB, through a consolidated VIE.
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, the prolonged government shutdown, 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.
(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $27.3$26.2 million, $29.6$27.3 million and $36.7$31.7 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of June 30, 2026, March 31, 2026, December 31, 2025, and MarchJune 31,30, 2025, respectively.
During the firstsecond quarter of 2026, loan originations increased $4.8$33.2 million and decreased $1.1$52.8 million from the quarters ended December 31, 2025 and March 31, 2026 and June 30, 2025, respectively.
For the June 30, 2026 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 economic uncertainties due to the ongoing conflict in Iran, unstable labor market, and softening economic conditions.
Our allowance for credit losses as of MarchJune 31,30, 2026 was $4.9$5.1 million compared to $5.0$4.9 million as of MarchJune 31,30, 2025. The decreaseincrease in allowance for credit losses from MarchJune 31,30, 2025 was primarily due to a decreasehigher loss rate driven by increased charge-off activity in therecent amortized cost loan portfolio subject to CECL, and the removal of COVID pandemic era data from the macroeconomic forecasts in the latest CECL model update.periods. 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 evolve.
The allowance for credit losses was 0.25%0.28% of total UPB of loans held for investment carried at amortized cost as of MarchJune 31,30, 2026. Nonperforming loans were 12.3%9.9% of total UPB of loans held for investment carried at amortized cost as of MarchJune 31,30, 2026. Management believes the allowance for credit losses is adequate to absorb expected lifetime credit losses 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 active management of our portfolio. Historically, our actual annual charge-offs rate was 0.11% over the last fourfive years.
Balance includes $120.9$116.7 million UPB of loans held for investment at amortized cost as of MarchJune 31,30, 2026, $126.1 million as of December 31, 2025, and $136.1$120.9 million as of March 31, 2026, and $130.5 million as of June 30, 2025 in our 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 $692.1$673.3 million, or 10.1%9.6% of our held for investment loan portfolio as of MarchJune 31,30, 2026, compared to $554.5$692.1 million, or 8.5% as of December 31, 2025, and $587.8 million, or 10.8%10.1% as of March 31, 2026, and $601.8 million, or 10.3% as of June 30, 2025. The increasedecrease in total nonperforming loans as of MarchJune 31,30, 2026 compared to DecemberMarch 31, 20252026 and MarchJune 31,30, 2025 was primarily dueattributable to the sale of nonperforming loans into the securitization trust in connection with the 2026-MC2 Securitization offset by an increase in the size and aging of our portfolio.
Historically, most loans that become nonperforming resolve prior to converting to REO. 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 $70.1$90.5 million of long-term and short-term nonperforming loans for the quarter ended MarchJune 31,30, 2026, compared to $78.1 million for the quarter ended December 31, 2025, and $68.3$70.1 million for the quarter ended March 31, 2026, and $90.3 million for the quarter ended June 30, 2025. We recovered total revenue of $4.6$6.9 million, $5.2$4.6 million and $7.6$8.7 million for the quarters ended June 30, 2026, March 31, 2026, December 31, 2025, and MarchJune 31,30, 2025, respectively. This is largely the result of collecting all regular accrued interest, default interest, and prepayment penalties in excess of the principal on loans.
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 tabletables below includesinclude resolutions of our short-term nonperforming loans and loans granted a COVID-19 forbearance in 2020, for the periods indicated:
As of MarchJune 31,30, 2026, REO included 286 properties with a lower of cost or estimated fair value of $142.1 million compared to 259 properties with a lower of cost or estimated fair value of $131.8 million comparedas toof 254March 31, 2026, and 175 properties with a lower of cost or estimated fair value of $118.3$93.4 million as of DecemberJune 31, 2025, and 157 properties with a lower of cost or estimated fair value of $83.4 million as of March 31,30, 2025.
The table below shows the gain (loss) activity subsequent to the REO being record,recorded, for the periods indicated:
As of MarchJune 31,30, 2026, our held for investment loan portfolio was concentrated in Investor 1-4 loans, representing 46.9%45.6% of the UPB. Retail and Mixed use and Retail properties represented 10.8%11.5% and 10.8%,11.0%, 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 19.6% in California, 13.6% in New York, 11.7% in Florida, 7.6% in New Jersey, and 6.3% in Texas.
Geographically, the principal balance of our loans held for investment were concentrated 19.7% in California, 13.1% in New York, 11.5% in Florida, 7.9% in New Jersey, and 6.3% in Texas as of June 30, 2026.
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 increasedecrease in our portfolio yield for the three months ended MarchJune 31,30, 2026 as compared to the three months ended MarchJune 31,30, 2025 was primarily driven by the increase in weightedlower average loan coupons. Portfolio yield for the three months ended MarchJune 31,30, 2026 decreasedincreased slightly from the three months ended DecemberMarch 31, 20252026 mainly attributable to lessmore interest income and default interest collected on resolutions of nonperforming loans.
Our portfolio related cost of funds was relatively consistent at 6.09% for both the three months ended June 30, 2026 and the prior quarter, and decreased tofrom 6.09%6.24% for the three months ended MarchJune 31, 2026 from 6.23% for the prior quarter and 6.23% for the three months ended March 31,30, 2025. The decrease was primarily due to lower average cost of securitized debt interest expense.debt.
Over the periods shown in the tables below, portfolio related net interest margin increaseddecreased to 3.56%3.66% for the three months ended MarchJune 31,30, 2026 from 3.35%3.82% for the three months ended MarchJune 31,30, 2025,2025. andPortfolio decreasedrelated net interest margin increased slightly to 3.61% for the six months ended June 30, 2026 from 3.59%3.60% for the six months ended June 30, 2025. The decrease from the three months ended June 30, 2025 was primarily due to elevated yields on loans for the three months ended DecemberJune 31, 2025. The increase from the three months ended March 31,30, 2025 was primarily due to higherthe averagetiming yieldof receipts of regular interest on a cash basis on past due loans, default interest, and balance.prepayment The decrease from the three month ended December 31, 2025 was primarily due to lower average yield.fees.
Total company net interest margin of 2.65%2.82% for the three months ended MarchJune 31,30, 2026 decreased from 2.88%3.39% for the three months ended MarchJune 31,30, 2025,2025. andTotal company net interest margin of 2.74% for the six months ended June 30, 2026 decreased from 3.21%3.14% for the threesix months ended DecemberJune 31,30, 2025. The decreases were primarily due to higher interest expense on our corporate debt due to expensing the non-cash unamortized debt issuance costs related to the payoff of our $215.0 million corporate debt in January 2025.2026.
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.
The average yield of 18.81%16.01% for corporate secured debt reflects a lower average balance given that the $215.0 million secured debt was paid off at the end of January 2026,2026. and interestInterest expense also included $1.3 million write-off of debt issuance costs andrelated $3.2 million interest expense forto the quarter.2022 Term Loan payoff in January 2026. Excluding these non-recurring costs, the adjusted average yield on the remaining secured debt would be approximately 10.50% going forward.
Our annualized charge-offs rate over average loans held for investment carried at amortized cost for the three months ended MarchJune 31,30, 2026 decreased to 0.27%0.16% as compared to 0.39% for the three months ended December 31, 2025 and increased from 0.18%0.27% for the three months ended March 31, 2026 and from 0.31% for the three months ended June 30, 2025. 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.
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 decreasedincreased during the quarter ended MarchJune 31,30, 2026 as compared to the quarter ended DecemberMarch 31, 20252026 primarily due to ahigher gainincome ofbefore $19.7income million on sale of nonperforming loans in December 2025taxes and highernet average shareholders' equity.income. Pre-tax return on average equity and return on average equity slightly decreased as compared to the quarter ended MarchJune 31,30, 2025 primarily due to non-recurringhigher expensesaverage duringshareholders' equity for the quarterthree months ended MarchJune 31,30, 2026.
Portfolio related net interest income is the largest contributor to our net income. Our portfolio related net interest income increased 35.3%17.9% to $59.1$63.4 million from $43.7$53.7 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively. Our portfolio related net interest income increased 25.7% to $122.4 million from $97.4 million for the six months ended June 30, 2026 and 2025, respectively.
Interest Income. Interest income increased by $34.3$25.4 million or 28.9%18.8% to $153.1$161.0 million for the three months ended MarchJune 31,30, 2026, compared to $118.7$135.6 million for the three months ended MarchJune 31,30, 2025, primarily attributable to higher average loan portfolio balances and yield.balances. For the three months ended MarchJune 31,30, 2026, the average loan yield was 9.23%9.29% compared to 9.11%9.65% for the three months ended MarchJune 31,30, 2025. Interest income increased by $59.8 million to $314.1 million for the six months ended June 30, 2026, compared to $254.3 million for the six months ended June 30, 2025. The increase in interest income for the six months ended June 30, 2026 was primarily attributable to higher average portfolio balances due to loan originations.
The following tables distinguish between the changes in interest income attributable to changes in average loan balance (volume) and the changes in interest income attributable to changes in annualized yield (rate) for the three and six months ended MarchJune 31,30, 2026 and 2025.
Interest Expense — Portfolio Related. Portfolio related interest expense, which consists of interest incurred on our warehouse facilities and securitized debt, increased 25.2%19.3% to $94.0$97.6 million for the three months ended MarchJune 31,30, 2026 from $75.1$81.8 million for the three months ended MarchJune 31,30, 2025. Portfolio related interest expense increased to $191.7 million for the six months ended June 30, 2026 from $156.9 million for the six months ended June 30, 2025. The increaseincreases waswere primarily attributable to a higher loan portfolio being financed, offsets by lower portfolio cost of funds.
The following tables present information regarding portfolio related interest expense and distinguish between the changes in interest expense attributable to changes in the average outstanding debt balance (volume) and changes in cost of funds (rate) for the three and six months ended MarchJune 31,30, 2026 and 2025.
Includes securitized debt and warehouse agreements.
Annualized
Interest Expense — Corporate Debt. Corporate debt interest expense increased to $15.1$14.5 million from $6.1 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively. Corporate debt interest expense increased to $29.6 million for the six months ended June 30, 2026, compared to $12.3 million for the six months ended June 30, 2025. The increase in corporate debt interest expense was primarily due to the issuance of $500.0 million unsecured senior notes in January 2026 and write-off of $1.3 million non-cash unamortized debt issuance costs related to the payoff of the $215.0 million secured corporate debt in January 2026.
Provision for Credit Losses. Our provision for credit losses decreased to $1.7$1.0 million for the three months ended MarchJune 31,30, 2026 from $1.9$1.6 million for the three months ended MarchJune 31,30, 2025,2025. primarilyOur dueprovision for credit losses decreased to $2.6 million for the six months ended June 30, 2026 from $3.5 million for the six months ended June 30, 2025. The decreases resulted from the decrease in loans carried at amortized cost subject to the CECL allowance methodology.
The $9.5$7.2 million increase in total other operating income from the three months ended MarchJune 31,30, 2025 to the three months ended MarchJune 31,30, 2026 was primarily due to ahigher net unrealized gain of $6.1$4.5 million on loans and securitized debt and $3.2 million in origination fee income. The $16.7 million increase from the recognitionsix months ended June 30, 2025 to the six months ended June 30, 2026 was mainly due to higher net unrealized gain of $10.6 million on loans and securitized debt, $2.5 million in origination fee income and $2.4 million employee retention credit as other income in the first quarter of 2026.
Gain on Disposition of Loans. Gain on disposition of loans remained relatively consistent at $2.9 million for the three months ended March 31, 2026 compared to $2.8 million for the three months ended March 31, 2025.
Unrealized Gain on Fair Value Loans. Unrealized gain on fair value loans decreased by $33.8 million to $1.0 million for the three months ended March 31, 2026 compared to $34.8 million for the three months ended March 31, 2025. The decrease was mainly driven by an increase in market interest rates and spreads.
Unrealized Gain (Loss) on Fair Value Securitized Debt. Unrealized gain on fair value securitized debt was $26.3 million for the three months ended March 31, 2026, compared to $13.7 million of unrealized loss for the three months ended March 31, 2025. The increase in unrealized gain on fair value securitized debt was primarily attributable to the increase in market interest rates and spreads.
Unrealized Gain (Loss) on Mortgage Servicing Rights. Unrealized loss on mortgage servicing rights was $0.3 million for the three months ended March 31, 2026 as compared to $1.1 million for the three months ended March 31, 2025. The decrease in unrealized loss on mortgage servicing rights was primarily attributable to an increase in the servicing portfolio.
OriginationGain Feeon Income.Disposition Originationof feeLoans. incomeGain slightlyon disposition of loans decreased by $0.7 million to $8.0$4.0 million for the three months ended MarchJune 31,30, 2026 compared to $8.7$6.3 million for the three months ended MarchJune 31,30, 2025. TheGain decreaseon wasdisposition of loans decreased by $2.3 million to $6.9 million for the six months ended June 30, 2026 compared to $9.1 million for the six months ended June 30, 2025 primarily attributabledue to slightlyless lowergain feesrecognized collectedupon ondisposition newof loans.loans in 2026.
InterestUnrealized IncomeGain on CashFair Balance.Value InterestLoans. incomeUnrealized gain on cashfair balancevalue increasedloans decreased by $0.1$5.4 million to $1.4$24.5 million for the three months ended MarchJune 31,30, 2026 compared to $1.3$29.9 million for the three months ended MarchJune 31,30, 2025. Unrealized gain on fair value loans decreased by $39.2 million to $25.5 million for the six months ended June 30, 2026 compared to $64.7 million for the six months ended June 30, 2025. The increasedecrease was primarilymainly attributabledriven toby an overallincrease higherin cashmarket balance.interest rates.
Unrealized Gain (Loss) on Fair Value Securitized Debt. Unrealized gain on fair value securitized debt was $2.3 million for the three months ended June 30, 2026, compared to $7.6 million of unrealized loss for the three months ended June 30, 2025. Unrealized gain on fair value securitized debt increased by $49.8 million to $28.6 million for the six months ended June 30, 2026 from $21.3 million unrealized loss for the six months ended June 30, 2025. The increases in unrealized gain on fair value securitized debt were primarily attributable to the increase in market interest rates.
Unrealized Gain (Loss) on Mortgage Servicing Rights. Unrealized gain on mortgage servicing rights was $1.1 million for the three months ended June 30, 2026 as compared to $0.3 million for the three months ended June 30, 2025. Unrealized gain on mortgage servicing rights was $0.8 million for the six months ended June 30, 2026 as compared to an unrealized loss of $0.8 million for the six months ended June 30, 2025. The increases in unrealized gain on mortgage servicing rights were primarily attributable to new servicing rights on Century loan originations.
Origination Fee Income. Origination fee income increased by $3.2 million to $12.2 million for the three months ended June 30, 2026 compared to $8.9 million for the three months ended June 30, 2025. Origination fee income increased by $2.5 million to $20.1 million for the six months ended June 30, 2026 compared to $17.6 million for the six months ended June 30, 2025. The increases were primarily attributable to interest rate buy downs in the current quarter.
Interest Income on Cash Balance. Interest income on cash balance decreased by $0.2 million to $1.3 million for the three months ended June 30, 2026 compared to $1.5 million for the three months ended June 30, 2025. Interest income on cash balance decreased by $0.1 million to $2.7 million for the six months ended June 30, 2026 compared to $2.8 million for the six months ended June 30, 2025. The decreases were primarily attributable to a decrease in interest rates combined with a decrease in average bank balances.
Other Income. Other income was $3.7$1.7 million and $0.5 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively. TheOther increaseincome wasincreased to $5.5 million for the six months ended June 30, 2026 compared to $1.0 million for the six months ended June 30, 2025, primarily attributable to the recognition of $2.4 million employee retention credit as other income in March 2026, and higher servicing fee income from the new loan servicing portfolio serviced for others.
Compensation and Employee Benefits. Compensation and employee benefits slightly increased by $1.8$2.9 million to $23.5$25.5 million for the three months ended MarchJune 31,30, 2026 compared to $21.7$22.6 million for the three months ended MarchJune 31,30, 2025. Compensation and employee benefits increased by $4.7 million to $49.0 million for the six months ended June 30, 2026 compared to $44.3 million for the six months ended June 30, 2025. The increaseincreases waswere primarily attributable to the annual salary increases and increase in headcount to support future growth in loan production.
Origination Expenses. Origination expenses increased by $0.3$0.2 million to $1.4 million for the three months ended June 30, 2026 from $1.2 million for the three months ended MarchJune 31,30, 20262025. fromOrigination $0.8expenses increased by $0.5 million to $2.6 million for the threesix months ended MarchJune 31,30, 2026 from $2.0 million for the six months ended June 30, 2025. The increase in origination expenses was due to higher third party fees paid.
Securitization Expenses. Securitization expenses were $5.3$4.7 million for the three months ended MarchJune 31,30, 2026 compared to $4.0$11.5 million for the three months ended MarchJune 31,30, 2025. Securitization expenses were $10.0 million for the six months ended June 30, 2026 compared to $15.6 million for the six months ended June 30, 2025. The increasedecreases in securitization expenses wasresulted duefrom to twofewer securitization transactions and securitized debt issued in the first quarter of 2026 as compared to one transaction in the same period of the prior year.
Loan Servicing. Loan servicing expenses increased to $8.6$15.7 million for the three months ended MarchJune 31,30, 2026 from $8.0$8.2 million for the three months ended MarchJune 31,30, 2025. Loan servicing expenses increased to $24.2 million for the six months ended June 30, 2026 from $16.2 million for the six months ended June 30, 2025. The increaseincreases waswere primarily attributable to the growth$6.0 million write-off of ourprotective loanadvances portfolio.related to the nonperforming loans that we elected to transfer into the 2026-MC2 Trust in June 2026.
Professional Fees. Professional fees increased to $5.8$2.2 million for the three months ended MarchJune 31,30, 2026 compared to $1.8$2.0 million for the three months ended MarchJune 31,30, 2025. Professional fees were $8.0 million for the six months ended June 30, 2026 compared to $3.8 million for the six months ended June 30, 2025. The increaseincreases waswere primarily attributable to higher legal fees related to potential merger and acquisition due diligence.
Rent and Occupancy. Rent and occupancy expenses remainedslightly relativelyincreased consistentto at$0.4 million for the three months ended June 30, 2026 and $0.3 million for the three months ended MarchJune 31,30, 20262025. Rent and occupancy expenses increased to $0.7 million for the threesix months ended MarchJune 31,30, 2026 compared to $0.6 million for the six months ended June 30, 2025.
Real Estate Owned, Net. Net expenses of real estate owned increased to $6.9$6.7 million for the three months ended MarchJune 31,30, 2026 from $3.0$3.3 million for the three months ended MarchJune 31,30, 2025. Net expenses of real estate owned increased to $13.6 million for the six months ended June 30, 2026 from $6.3 million for the six months ended June 30, 2025. The increaseincreases waswere mainly due to the increase in REOs combined with higher valuation adjustments.
Other Operating Expenses. Other operating expenses increased to $3.2 million for the three months ended June 30, 2026 from $2.8 million for the three months ended MarchJune 31,30, 20262025. fromOther $2.5operating expenses increased to $6.1 million for the threesix months ended MarchJune 31,30, 2026 from $5.3 million for the six months ended June 30, 2025. The increaseincreases reflected higher information technology maintenance and data processing costs.
Income Tax Expense. Income tax expense was $8.6$9.5 million and $8.2$7.8 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively, and $18.1 million and $16.0 million for the six months ended June 30, 2026 and 2025, respectively. The increaseincreases in income tax expense waswere primarily attributable to the increaselower income tax rate in pretaxQ2 income.2025. Our annual consolidated effective tax rates as a percentage of pre-tax income were 28.2%28.3% and 28.5%28.2% for the years 2026 and 2025, respectively.
VEL insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 0 Form 4 filings and open-market sales in 14 filings (4 insiders, 11 trade dates, 22,671 shares, about $423.8K; 14 of these filings say the sales were made under a Rule 10b5-1 trading plan). Net open-market shares: -22,671 (purchases minus sales); net value about -$423.8K.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-09-10 | Szczepaniak Mark R |
Open-market sale |
2,000 | $18.03 | $36.1K |
| 2026-09-01 | Kelly Roland Thomas |
Open-market sale |
1,600 | $18.00 | $28.8K |
| 2026-08-11 | Taylor Jeffrey T. |
Open-market sale |
4,330 | $19.06 | $82.5K |
| 2026-08-11 | Tam Fiona |
Open-market sale |
1,232 | $19.00 | $23.4K |
| 2026-08-10 | Szczepaniak Mark R |
Open-market sale |
2,000 | $18.16 | $36.3K |
| 2026-08-06 | Kelly Roland Thomas |
Open-market sale |
1,600 | $18.00 | $28.8K |
| 2026-08-06 | Szczepaniak Mark R |
Open-market sale |
400 | $18.00 | $7.2K |
| 2026-07-28 | Szczepaniak Mark R |
Open-market sale |
400 | $18.00 | $7.2K |
| 2026-07-07 | Tam Fiona |
Open-market sale |
68 | $19.00 | $1.3K |
| 2026-07-07 | Taylor Jeffrey T. |
Open-market sale |
2,165 | $19.00 | $41.1K |
| 2026-07-01 | Kelly Roland Thomas |
Open-market sale |
1,600 | $18.57 | $29.7K |
| 2026-06-30 | Kelly Roland Thomas |
Other | 858 | $18.46 | $15.8K |
| 2026-06-30 | Farrar Christopher D. |
Other | 1,272 | $18.46 | $23.5K |
| 2026-06-26 | Szczepaniak Mark R |
Open-market sale |
1,573 | $18.07 | $28.4K |
| 2026-05-26 | Pitstick John |
Disposition to issuer | 3,603 | $17.17 | $61.9K |
| 2026-05-26 | Schaefer Joy L. |
Disposition to issuer | 3,603 | $17.17 | $61.9K |
| 2026-05-21 | Beckett Dorika M |
Grant/award | 5,413 | $17.55 | $95.0K |
| 2026-05-21 | Schaefer Joy L. |
Grant/award | 5,413 | $17.55 | $95.0K |
| 2026-05-21 | Pitstick John |
Grant/award | 5,413 | $17.55 | $95.0K |
| 2026-05-01 | Szczepaniak Mark R |
Open-market sale |
1,573 | $19.30 | $30.4K |
| 2026-04-17 | Taylor Jeffrey T. |
Open-market sale |
2,130 | $20.00 | $42.6K |
Well-known investors holding VEL (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| D. E. Shaw & Co. | 2026-06-30 | 124,130 | $2.3M | 0.0% | Added 41% |
| AQR Capital Management (Cliff Asness) | 2026-06-30 | 71,546 | $1.3M | 0.0% | Added 21% |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 54,027 | $997.3K | 0.0% | Added 38% |
| Renaissance Technologies | 2026-06-30 | 51,400 | $948.8K | 0.0% | Added 86% |
| Millennium Management (Israel Englander) | 2026-06-30 | 33,615 | $608.1K | — | Sold out |
| Two Sigma Investments | 2026-06-30 | 17,144 | $310.1K | — | Sold out |