VEL Velocity Financial Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.)

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Velocity Financial, Inc.

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2023

Annual Meeting of Shareholders

Proxy Statement

Velocity Financial, Inc.

Notice of Annual Meeting of Shareholders

 

		Date and Time May 19, 2023 at 1:00 p.m.						Virtual Only     Connect by Internet or phone:   www.virtualshareholdermeeting.com/VEL2023

 

 

This Proxy Statement is being furnished to our shareholders in connection with the solicitation of proxies by our Board of Directors for use at our 2023 Annual Meeting of Shareholders.

Purpose of Meeting

 

Proposals		Vote Required to Elect or Approve		Board Recommendation		Page Reference
Election of Directors		Majority of the votes cast		✓ For each nominee		u 1
Advisory Vote on 2022 Executive Compensation		Majority of the votes cast		✓ For		u 12
Ratification of Independent Auditors		Majority of the votes cast		✓ For		u 25

We will also consider other matters that properly come before the meeting.

Shareholders should read Other Important Information for Our Shareholders beginning on page 32 for additional information.

Whether you hold shares directly as a shareholder of record or beneficially in street name, you may vote your shares without attending our Annual Meeting. Voting instructions are outlined in the Notice of Internet Availability of Proxy Materials and on your proxy card.

 

		Vote		If you are a shareholder of record		If you hold your shares in street name
		By Internet (24 hours a day):		proxyvote.com		proxyvote.com
		By Telephone (24 hours a day):		1-800-690-6903		1-800-454-8683
		By Mail:		Return a properly executed and dated proxy card in the provided pre-paid envelope		Return a properly executed and dated voting instruction form by mail, depending upon the method(s) your bank, brokerage firm, broker-dealer or other similar organization makes available

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Biographies of Our Directors

As described below, each of our directors was chosen because his or her background provides each director with the experience and skillset geared toward helping us succeed. Our directors bring to us strong executive operating experience, expertise in the real estate and financial services sectors, accounting and audit expertise and broad experience in other complementary sectors such as investment management and private equity, among others, and meaningful commitment to community and public service – knowledge and experiences that are ideally suited to oversee our management and act as fiduciaries for our shareholders.

Dorika M. Beckett has served as a member of our Board of Directors since July 2020. Ms. Beckett brings to our board executive, entrepreneurial, investment, private equity, operational and philanthropic experience. For over a decade, Ms. Beckett has been Chief Executive Officer of both LW Staffing, a franchise of healthcare professional staffing company ATC Healthcare Services, and Livewell Home Care Inc., an elder care focused service provider with operations in California and North Carolina. Previously, Ms. Beckett served as partner of a private equity firm, director of operations and management consultant in various industries. She is also Chair of the Imani Baraka Foundation, a family non-profit foundation. Ms. Beckett received a Bachelor of Arts (A.B.) in Economics from Harvard College and a Master of Business Administration from the Harvard Business School.

Michael W. Chiao has served as a member of our Board of Directors since April 2021. Mr. Chiao brings to our board extensive investment experience, including direct experience in structured products. Mr. Chiao is an executive vice president and portfolio manager in the Newport Beach office of Pacific Investment Management Company LLC (PIMCO), focusing primarily on residential loan investments. Prior to joining PIMCO in 2017, he worked at Fortress Investment Group, focused on non-agency residential mortgage-backed securities and various structured products. Previously, Mr. Chiao spent three years at PIMCO as a portfolio management associate, and he began his career as an analyst in the whole loan trading and securitization group at Countrywide Capital Markets. He has 16 years of investment experience and holds an undergraduate degree from California State Polytechnic University, Pomona.

Christopher D. Farrar has served as our Chief Executive Officer and as a member of our Board of Directors since 2004. Mr. Farrar brings extensive operating experience and management skills to our Board of Directors. Mr. Farrar has an extensive background in finance, lending, raising capital and business operations – having co-founded us in June 2004. Prior to co-founding Velocity, Mr. Farrar formed and served as Chief Credit Officer for Worth Funding, a mortgage banking firm. Prior to that time, Mr. Farrar served as Senior Vice President of United States Production at Weyerhaeuser Mortgage Company and as a Vice President for Namco Capital Group, Inc., originating commercial real estate loans. Mr. Farrar is currently a director of Generosity.org, a non-profit working to bring global communities access to clean water, and a director of Agoura Aquatic Foundation, a non-profit providing opportunities for youth to participate in aquatic sports and adults and disabled to engage in aquatic training. Mr. Farrar received a Bachelor of Science in Business Administration from Pepperdine University and is a licensed (inactive) California Real Estate Broker.

Alan H. Mantel has served as a member of our Board of Directors since 2007 and as Chair of our Board of Directors since 2020. With over 30 years on Wall Street, Mr. Mantel has experience across a wide array of investment banking disciplines, including corporate finance, financial advisory and structured finance. Mr. Mantel brings to our Board of Directors extensive experience in the financial services sector, including leveraged and structured finance, and background with and knowledge of accounting principles. Mr. Mantel is a Managing Partner of TruArc Partners, L.P. a successor business to Snow Phipps (one of our largest shareholders). Mr. Mantel was a Partner of Snow Phipps from 2005 to April 2021. Before joining Snow Phipps, Mr. Mantel was a Partner at Guggenheim Merchant Banking. Mr. Mantel served as a Managing Director in the Leveraged Finance department at Credit Suisse from 2000 to 2004 and served as a Managing Director at Donaldson, Lufkin & Jenrette Inc. prior to its merger with Credit Suisse. Mr. Mantel was a Senior Accountant and Certified Public Accountant (inactive) at Ernst & Young LLP from 1985 to 1988. Mr. Mantel currently serves on the boards of ECRM, LLC, EnviroFinance Group, LLC, HCTec, Inc., Lamark Media, LLC and Molded Devices, Inc. He is also Board Chair of Congregation B’nai Jeshurun, a nearly 200-year-old non-affiliated synagogue. Mr. Mantel received a Bachelor of Science in accounting from the State University of New York at Albany and a Master of Business Administration in Finance from the University of Chicago.

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John P. Pitstick has served as a member of our Board of Directors since January 2020. Mr. Pitstick has experience in accounting, taxes, capital markets, financial operations, internal controls and SEC reporting/compliance matters. Mr. Pitstick brings over 20 years of combined experience as an executive of publicly traded and privately held companies along with experience at a major accounting firm to our Board of Directors. Mr. Pitstick currently serves as Chief Financial Officer of privately held biotechnology company Dyve Biosciences, Inc. From 2015 through May 2022, Mr. Pitstick served as the Chief Financial Officer of privately held software company Seven Lakes Enterprises, Inc. Mr. Pitstick served as Executive Vice President from 2005 to 2007 and then as Chief Financial Officer from 2007 to 2015 of publicly traded Conversant, Inc. From 1995 to 2004, Mr. Pitstick worked for Ernst & Young LLP serving a broad range of clients in the technology, biotech and financial services industries, ultimately as a Senior Manager. Mr. Pitstick is a Certified Public Accountant (inactive) and received a Bachelor of Science in Accounting from the University of San Francisco.

John A. Pless has served as a member of our Board of Directors since 2007. Mr. Pless brings broad finance and corporate governance experience to our Board of Directors. Mr. Pless is a Managing Partner of TruArc Partners, LP, a successor business to Snow Phipps. Mr. Pless joined Snow Phipps at the inception of the firm in 2005 and became a Partner in 2012. Prior to his tenure with Snow Phipps, Mr. Pless worked as a Vice President at Guggenheim Merchant Banking and served as Associate Director in the Financial Institutions Group at UBS Investment Bank, the investment banking arm of UBS AG, where he worked on a wide range of mergers and acquisitions and capital raising transactions for banks and specialty finance companies. Mr. Pless currently serves on the boards of BlackHawk Industrial Distribution, Inc., Cascade Corp, EnviroFinance Group, LLC, HCTec, Inc., Ideal-Tridon Holdings, Inc., Prototek Holdings LLC, New Directions Aromatics Inc. and Molded Devices, Inc. He is also a board member of Little Wings Foundation, a family foundation financially assisting other non-profits working on issues like education, children’s health, international outreach and terminal diseases. Mr. Pless received a Bachelor of Arts in Economics from Middlebury College.

Joy L. Schaefer has served as a member of our Board of Directors since January 2020 and was elected as Lead Independent Director of our Board in February 2022. Ms. Schaefer brings to our Board of Directors a broad range of experience in a variety of asset classes including auto finance, residential mortgages, multi-family mortgages and home equity lending. Since August 2005, Ms. Schaefer has served as President of Golden Eagle Advisors, LLC, a consulting firm focused on organizational development and growth through strategic, operational and financial improvements. From 2005 until August 2018, Ms. Schaefer served as an operating partner of Snow Phipps. From 2002 until 2005, Ms. Schaefer served as President of JL Schaefer Consulting, a strategic, financial and operational consulting practice, advising privately held and family-owned businesses. In 2002, Ms. Schaefer served as President and Chief Operating Officer of Ameriquest Mortgage, a privately held mortgage banking company. From 1990 until 2002, Ms. Schaefer served in various senior management positions within the Westcorp family of companies, including as President and Chief Operating Officer of Westcorp, Inc., a publicly traded financial services holding company, Vice Chairman, Chief Executive Officer, President and Chief Operating Officer of WFS Financial, Inc., a publicly traded national automobile finance company and Chief Operating Officer, Senior Executive Vice President, Chief Financial Officer and Treasurer of Western Financial Bank, Inc. Earlier in her career, Ms. Schaefer was an audit manager for Ernst & Young. Ms. Schaefer currently serves on the board of directors of American Assets Trust, Inc. (NYSE: AAT). Ms. Schaefer received a Bachelor of Science degree in Accounting from Illinois Wesleyan University.

Katherine L. Verner has served as a member of our Board of Directors since June 2021. With over 30 years of relevant business and investment experience, Ms. Verner brings to our Board vast knowledge of our industry. Verner is an executive vice president and portfolio manager in the Newport Beach office of Pacific Investment Management Company LLC (PIMCO), focused on asset management globally for PIMCO’s alternative business. She was previously a member of PIMCO’s executive office with responsibility for strategic initiatives, as well as a portfolio manager on the special situations team. Prior to joining PIMCO in 2014, she was a managing director of a startup NPL platform in Europe for Oaktree Capital; chief operating officer of two corporate finance companies, Goldman Sachs Specialty Lending Group and ORIX Finance and director of executive operations for Goldman’s international asset management platform. Ms. Verner has significant experience working on large complex transactions and platform startups in Europe and Asia, as well as in the U.S. Ms. Verner is currently a director of Comcar Industries (a transportation and logistics company, since 2016), First Guaranty Mortgage Corporation (since 2021) and was a director of Flexshopper, Inc. (a lease-to own financial technology company, from 2016 to 2018). She holds a master’s degree in real estate from the University of Denver. She received an undergraduate degree from Texas A&M in agricultural economics.

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Board Skills, Experience and Demographic Information

 

Skills & Experience

Accounting and Audit Experience

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Corporate Strategy & Business Development

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Corporate Governance

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Corporate Finance

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Ethics / Social Responsibility Oversight

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Financial Services

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Executive Leadership & Management

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Mergers & Acquisitions

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Private Equity and Investments

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Public Company Experience

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Real Estate Industry Experience

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Risk Oversight

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Security Risk Experience

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Demographic Background

Gender

Male

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Female

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Race/Ethnicity

African American / Black

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Asian, Hawaiian or Pacific Islander

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White / Caucasian

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Hispanic / Latino

Native American

Age

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The Board’s Role and Responsibilities

Risk Oversight

Our Board of Directors has extensive involvement in the oversight of risk management related to us and our business and accomplishes financial risk oversight by delegation to the Audit Committee. The Audit Committee represents the Board of Directors by periodically reviewing our accounting, reporting and financial practices, including the integrity of our financial statements, the surveillance of administrative and financial controls and legal matters that could have a significant impact on our financial statements. Through its meetings with and receipt of reports from management, including the finance, legal and internal audit functions, the Audit Committee reviews and discusses significant areas of our business and summarizes for the Board of Directors financial risks and appropriate mitigating factors.

In addition, our Board of Directors communicates regularly with management on operating performance, strategic reviews, potential transactions, legal and compliance matters, corporate policies and procedures as well as other business matters.

Information Security Risk

Among other things, Management has been tasked by the Board of Directors with identifying and mitigating information security risks.

Management has implemented a security awareness training platform to continually train users on computer safety. Monthly simulated phishing campaigns are used to test and assign training to users. Bi-annual company-wide training is also assigned to ensure all employees are staying current on the latest security threats and how to stay protected.

We have implemented a defense-in-depth strategy to protect all users, network assets and digital information. Perimeter network traffic is controlled by next-generation firewalls that conduct anti-malware, anti-spyware, DNS security, content filtering and threat analysis services on ingress and egress traffic. Endpoints, including servers, workstations, and laptops, run anti-malware agents that monitor for threats in real-time, in addition to scheduled scans of local storage for dormant malicious files. Workstations and laptops run DLP agents that monitor for unsanctioned exfiltration of personal information data. All perimeter and endpoint data are collected in a detection and response platform that correlates the data and alerts the security operations team of potential security breaches. SaaS applications are monitored for malware and personal information data exfiltration using CASB services. E-mails are scanned with protection tools, in additional to other third-party e-mail security tools. The third-party email security service also monitors for personal information data loss. Vulnerability scanning services are utilized to continually scan all network assets for vulnerabilities and sends reports to our security operations teams for remediation.

We recognize that the risks and impacts of cyber based attacks are significant and increasing. Addressing any such incidents quickly and effectively is paramount to the continued operations of our business. We seek to track and investigate all cyber based incidents or incidents that impact our information systems. We adopted an incident response plan that requires us to assess and address such incidents in a timely manner. In the event of an incident, our incident response team and management will focus on minimizing impact while securely and safely restoring disrupted services and systems.

Board Structure

Director Independence

In accordance with our Corporate Governance Guidelines, available on our website, www.velfinance.com, our Board of Directors undertook its annual review of director independence. During this review, our Board considered all transactions and relationships between us and each nominee for director or any member of such person’s immediate family. The purpose of this review is to determine whether any relationship or transaction is considered a “material relationship” that would be inconsistent with a determination that a director is independent. Our Board has not adopted any “categorical standards” for assessing independence.

Our Board affirmatively determined that each of our non-employee director nominees is independent. In making this determination, our Board reviewed the corporate governance rules of the New York Stock Exchange, the exchange where we have listed our common stock. The Board considered commercial, charitable, family and other relationships that directors or members of their immediate family have or have had with us. In addition, for our Audit Committee members, our Board also considered the requirements of Rule 10A-3 under the Exchange Act.

In particular, our Board considered that Messrs. Mantel and Pless were both equity partners of Snow Phipps, one of our largest shareholders, and are managing partners of TruArc Partners, a sub adviser to the Snow Phipps fund that owns our shares, and that until August 2018, Ms. Schaefer was an operating partner of Snow Phipps. Our Board also considered that

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Mr. Chiao and Ms. Verner are officers of Pacific Investment Management Company LLC, another one of our largest shareholders.

Our Board determined that these relationships are not material relationships and therefore do not affect our Board’s determination that these directors are independent.

Board Nominee Rights

In connection with our January 2020 initial public offering, we entered into a stockholders agreement granting rights to nominate up to four individuals to our Board of Directors and in connection with our sale of Series A Preferred Stock, we granted an additional right to nominate an individual to our Board. The following summarizes those rights:

Executive Sessions

Our independent directors and each Board Committee (all comprised of independent directors) have the ability to meet at any time in executive session outside the presence of management. Our Board Chair, our Lead Independent Director Chair or a Committee Chair presides over each executive session, as applicable, and each non-management member of our Board has the authority to call such executive sessions.

Directors and Board Committees

Our Board has standing Audit, Compensation and Governance Committees, each of which has adopted a written charter that is available on our website, www.velfinance.com.

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Key Responsibilities

Key Responsibilities

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Key Responsibilities

Key Responsibilities

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Board Practices, Processes and Policies

Corporate Governance Initiatives

We made a commitment to review and improve upon our corporate governance policies. To that end, in early 2022 and continuing through 2023, our Governance Committee and Board implemented multiple corporate governance enhancements to strengthen our Board’s independence, ensure robust risk oversight and bolster alignment, communication and transparency with our shareholders. Below are some of our initiatives:

Incentive Compensation Clawback Policy

The Compensation Committee adopted a policy that allows the Compensation Committee to claw back cash bonuses and equity awards from an executive if the Committee determines that such compensation was overpaid as a result of a restatement of the reported financial results of the Company or any of its segments due to material non-compliance with financial reporting requirements caused or contributed by the executive’s fraud, willful misconduct or gross negligence.

Individual Board Member Performance Evaluations

Our Board adopted a requirement for each Board member to conduct an annual individual self-assessment.

Director and CEO Stock Ownership Guidelines

Our Corporate Governance Guidelines require our CEO and directors (within four years) to acquire ownership positions in our common equity securities equal to (i) for the CEO, five times the CEO’s annual salary and (ii) for each independent Director, four times the annual cash retainer paid to directors. Messrs. Mantel and Pless as director designees of Snow Phipps, our largest shareholder, and Ms. Verner and Mr. Chiao, as officers and director designees of PIMCO, our second largest shareholder, are prohibited by internal policies and procedures from personally holding our shares and are therefore not subject to our director stock ownership requirement. Furthermore, these four directors are not entitled to and do not receive compensation from us for serving on our Board.

Director Retirement Age

Our Corporate Governance Guidelines now requires a director, upon reaching 75 years of age, to tender his or her resignation to the Board with an effective date no later than the next annual shareholder meeting.

Stock Pledging and Anti-Hedging Policy

Our Securities Trading Policy expressly prohibits stock pledging as well as hedging transactions involving our securities. Directors and executive officers are prohibited from purchasing our securities on margin, borrowing against any account in which our securities are held or pledging our securities as collateral for a loan. We prohibit hedging by our directors, executives and employees because we believe that hedging against losses in our securities breaks the alignment between our shareholders and our personnel that equity grants are intended to build. Our anti-hedging policy also prohibits direct and indirect short selling and derivative transactions involving our securities, other than the exercise of any options issued by us to our employees or directors.

Board Leadership and Diversity

We adopted a requirement that the Governance Committee and the Board shall ensure that a female director shall hold at least one Chair of a Committee or be appointed as Board Chair or Lead Independent Director. The Governance Committee recommended, and the Board appointed, Joy Schaefer to the position of Lead Independent Director.

Our Corporate Governance Guidelines also requires that women and underrepresented candidates shall be among every pool of individuals from which new Board nominees are chosen.

Majority / Plurality Vote Standards and Director Resignation Policy

Our Bylaws require a majority vote standard for uncontested elections of directors and a plurality vote standard for contested director elections. Our Board also adopted a policy that Directors are expected to tender an advance resignation. The advance resignation becomes effective for a particular director following an uncontested election of directors where that director nominee did not receive the affirmative vote of a majority of the votes cast and our Board accepts the resignation.

Shareholder Rights

Our certificate of incorporation grants shareholders the right to vote by written consent and to call special meetings.

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ESG Policy

Our Governance Committee of the Board recently adopted our Environmental, Social and Governance (ESG) Policy that serves to communicate our commitment to ethical and sustainable business practices. Our ESG Policy is aligned with the United Nations Global Compact’s Ten Principles on human rights, labor, environment and anti-corruption.

Related Person Policy and Transactions

Our Board has adopted a written policy for the review and approval of transactions that involve related persons and potential conflicts of interest. Our Related Person Transaction Policy applies to the following Related Persons: each of our directors and executive officers, any security holder who is known to own more than five percent of our shares, any immediate family member of any of the foregoing persons, any entity of which one of our directors is a director or officer and any entity of which one of our directors has a substantial financial interest.

Under our Related Person Transaction Policy, a covered transaction includes a transaction or arrangement involving us and a Related Person that would require disclosure in our filings with the SEC as a transaction with a Related Person.

Related Persons must disclose to the Audit Committee any potential covered transaction and must disclose all material facts with respect to such interest. All covered transactions will be reviewed by the Audit Committee for approval. In determining whether to approve such a transaction, the Audit Committee will consider the relevant facts and circumstances which may include factors such as the relationship of the Related Person with us, the materiality or significance of the transaction to us and the Related Person, the business purpose and reasonableness of the transaction, whether the transaction is comparable to a transaction that could be available to us on an arms-length basis, the impact of the transaction on our business and operations – and ultimately, whether the proposed transaction is or is not in our best interests.

The following transactions have all been approved in accordance with our Related Person Transaction Policy:

In the ordinary course of business, we sell held for sale loans to various financial institutions. From time to time, an affiliate of PIMCO has purchased such loans from us through an arm’s length bidding process. In January 2022, an affiliate of PIMCO purchased held for sale loans from us for approximately $48,987,314. In February 2022, an affiliate of PIMCO purchased held for sale loans from us for approximately $65,825,232. In April 2022, an affiliate of PIMCO purchased held for sale loans from us for approximately $78,214,984. In May 2022, an affiliate of PIMCO purchased held for sale loans from us for approximately $16,741,609.

Tess Meads, an adult child of Mr. Farrar, was employed by us during 2022 as an account executive. She was compensated in accordance with our typical compensation arrangements for the position she held and for calendar year 2022, she was paid $292,674.

None of our directors or executives participated in any related party transactions with us during 2022.

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Our Compensation Committee conducted an analysis of comparable peer compensation as a general frame of reference for considering the appropriateness of our executive compensation programs and to ensure our CEO and other executive officers’ compensation is aligned with peers.

Our list of peers stayed the same from our 2021 peer group. The following 15 companies were used as compensation peers for our 2022 compensation programs:

The Compensation Committee believes the peer group provided an appropriate benchmark given the size and scope of our firm. Target compensation should be sufficiently competitive with industry peers to attract and retain executives with similar levels of experience, skills and responsibilities. Peer group data serves as an important and informative reference point in evaluating our executive compensation. Our Compensation Committee compared the components of our 2022 compensation program as well as total compensation to the peer group data and determined that our 2022 compensation program was appropriate and competitive.

The below analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program and each material element of compensation for the fiscal year ended December 31, 2022 that we provided to each person who served as our principal executive officer and our other two most highly compensation executive officers during 2022, all of whom we refer to collectively as our Named Executive Officers.

Our 2022 Named Executive Officers

Our Named Executive Officers for the fiscal year ended December 31, 2022 were as follows:

Executive Compensation Objectives and Philosophy

The goal of our executive compensation program is to create long-term value for our investors while at the same time reward our executives for superior financial and operating performance and encourage them to remain with us for long, productive careers. We believe the most effective way to achieve this objective is to design an executive compensation program rewarding the achievement of each executive and aligning executives’ interests with those of our investors by using equity as a component of compensation. The following are the core elements of our executive compensation program:

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By incorporating these elements, we believe our executive compensation program is responsive to our investors’ objectives and effective in attracting, motivating and retaining the level of talent necessary to grow and manage our business successfully.

Process for Determining Compensation

Following the end of the year, our Compensation Committee reviews our CEO’s performance and our performance and meets (with and without the CEO) to conduct these evaluations. While our Compensation Committee tries to ensure that a substantial portion of the CEO’s compensation is directly linked to his performance and the performance of our business, our Compensation Committee also seeks to set his compensation in a manner that is competitive with compensation for similarly performing executive officers with similar responsibilities in companies we consider our peers.

In determining the compensation of each of our other executive officers, our Compensation Committee seeks the input of the CEO. At the end of each year, the CEO assesses our executive officers’ performance against the business unit (or area of responsibility), individual goals and objectives and total compensation available to similarly situated executives at our peers. Our Compensation Committee and the CEO then review the CEO’s assessments and discuss and approve the compensation for each executive officer.

Considerations in Setting 2022 Compensation

Our Compensation Committee believes that the total 2022 compensation for our executive officers was competitive while at the same time being responsible to our investors.

The following is a summary of key considerations that affected the development of 2022 compensation decisions for our executive officers:

We expect that going forward, the Compensation Committee will adhere to the compensation philosophy described above. In addition, we anticipate that the Compensation Committee will continue to retain an independent compensation consultant from time to time.

Elements of 2022 Compensation Program

There are four key components of our executive compensation program for our Named Executive Officers:

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We believe that offering each of the components of our executive compensation program is necessary to remain competitive in attracting and retaining talented executives. Base salaries and cash bonuses are designed to reward executives for their performance and our performance. Furthermore, the cash incentive bonus and long-term equity incentive compensation align the executive’s goals with our goals and those of our shareholders. The components of incentive compensation (the cash bonus and equity awards) are significantly “at risk,” as the cash bonuses and the value of the equity awards depend on our business successes and our stock price. Collectively, these components are designed to reward and influence an executive’s individual performance and our short-term and long-term performance.

Performance-Based Cash Incentive Bonus

In addition to receiving base salaries, our Named Executive Officers are eligible to receive cash incentive bonuses. Cash bonuses are designed to incentivize our Named Executive Officers at a variable level of compensation that is “at risk,” based on our performance and the performance of each executive.

In February 2022, our Compensation Committee approved fiscal year 2022 target bonuses for our Named Executive Officers and adopted the Velocity Financial FY 2022 Annual Cash Incentive Program which provided that cash bonus amounts for the Named Executive officers would be formulaically based 50% on our 2022 core net income annual growth and 50% on individual and corporate performance objectives. Under the incentive program, each Named Executive Officer could have been awarded between 0% – 200% of that officer’s target bonus. At the time of adoption, the Compensation Committee believed that the performance amounts below to achieve Threshold, Target and Maximum performance payouts were equally uncertain and fair.

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Individual and corporate performance consisted of the following:

Formulaic Outcome:

Core Net Income Annual Growth for 2022 was 26.7%, exceeding the 20% level for an award of maximum bonus. Our performance resulted in each of our Named Executive Officers being entitled to an amount equal to 100% of his target bonus for 2022.

The Compensation Committee then discussed the individual and corporate performance metric with our CEO and concluded that each Named Executive Officer had at least equaled or exceeded the “Met Expectations” target. Using the result of “Met Expectations,” each of our Named Executive Officers was entitled to an additional amount equal to 50% of his target bonus for 2022.

Based on Core Net Income Annual Growth for 2022 and the Compensation Committee’s conclusions regarding individual and corporate performance, each of our Named Executive Officers could have received up to 150% of his target cash bonus for 2022. Our Compensation Committee, with the input from our CEO, determined to reduce the 2022 incentive cash bonuses from the formulaic outcomes to the amounts set forth in the table below.

The following table provides the cash incentive bonus targets, the formulaic outcome of our 2022 incentive program and actual cash bonuses awarded to each Named Executive Officer in 2022. Each bonus was paid in January 2023 but is reflected as 2022 compensation.

Annual Long-Term Equity Incentive Compensation

In addition to base salary and cash bonus compensation, each of our Named Executive Officers was provided long-term equity incentive compensation. The use of long-term equity incentives creates a link between executive compensation and our long-term performance, thereby creating alignment between executive and investor interests.

Equity awards under our 2020 Omnibus Incentive Plan, as amended in 2022 (the “2020 Plan”) are designed to reward our Named Executive Officers for long-term shareholder value creation and provide a means through which to attract and retain key personnel. Granting equity provides a means whereby our directors, officers and employees become shareholders, thereby strengthening their commitment to our welfare and aligning their interests with those of our other shareholders.

For fiscal year 2022, we granted restricted stock with a pro rata three-year vesting schedule to our Named Executive Officers. The following table provides the grant date fair value of these long-term equity incentives granted to each Named Executive Officer:

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Multi-Year Long-Term Performance-Based Equity Incentive Compensation

For fiscal year 2022, we also granted performance-based stock units (“PSUs”) with three-year cliff vesting and performance-vesting requirements to our Named Executive Officers. In February 2022, the Compensation Committee granted to each of Messrs. Farrar, Szczepaniak and Taylor 45,000, 15,000 and 15,000 shares, respectively, target number of performance-based stock units. The performance-based stock units will only vest at the end of three years if our average Core Net Income annual growth over a 3-year period meets or exceeds the 15% threshold growth rate approved by our Compensation Committee.

None of the Named Executive Officers or the Compensation Committee will know how many PSUs will vest until February 2025. At that time, the Named Executive Officers may vest in between 0 and 200% of the target number of performance-based stock units issued.

Other Considerations

Compensation Risk Management

Our Compensation Committee has considered whether our compensation policies and practices reward employees for imprudent risk taking and has determined that our compensation policies and practices are not reasonably likely to have a material adverse effect on us. The Compensation Committee’s assessment will be conducted annually. Management reviews with our Compensation Committee our compensation programs, focusing on incentive programs, risks and mitigation factors. Based on the totality of this information, the Compensation Committee determines whether any portion of such compensation encourages excessive risk taking and concludes whether or not our compensation programs are reasonably likely to have a material adverse effect on us.

In assessing risks, our Compensation Committee considers mitigating factors such as the multiple elements of our compensation packages, including base salary, cash bonuses, equity awards that are subject to vesting conditions, our ability to implement and enforce our clawback policy and other factors deemed relevant by the Committee.

Tax Considerations

Our Compensation Committee is aware that tax deductions for executive pay in excess of $1 million per year is not deductible for tax purposes. Our Compensation Committee awards executive compensation based on the factors described above, notwithstanding the non-deductibility of certain amounts.

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Some of the items under this caption constitute taxable income to the Named Executive Officers. These amounts are reported as taxable income for the executives pursuant to IRS rules which differ from the SEC reporting rules used to report the amounts reflected in this table and these notes.

None of our Named Executive Officers had pensions or qualified deferred compensation earnings required to be reported above.

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2022 Financial Performance Measures

As described in greater detail above our executive compensation program reflects a pay for performance philosophy. The metrics that are used for both our long-term and short-term incentive awards are selected based on an objective of incentivizing our executives to increase the value of our enterprise for our shareholders. The most important financial performance measures used by us to link executive compensation actually paid to our executives, for the most recently completed fiscal year, to our performance are as follows:

Compensation Actually Paid, Total Shareholder Return and Net Income

As shown in the Pay Versus Performance chart above, our Principal Executive Officer (“PEO”) and other NEOs’ compensation actually paid decreased from 2021 to 2022. Our PEO’s compensation decreased by over 62% while the average compensation actually paid to our other NEOs decreased by approximately 48%.

TSR of our stock decreased almost 30% from 2021 to 2022. Our PEO and other NEOs’ compensation actually paid are aligned with our TSR in that they all decreased from 2021 to 2022. This is due primarily to our use of equity incentives, the decrease in our stock price from year to year and the weight changes in stock price have on the calculation of compensation actually paid.

Although our net income was up $3 million year over year, representing an increase of approximately 10%, there is no positive correlation to the 62% and 48% decreases in compensation actually paid to our PEO and other NEOs.

Pension Benefits in 2022

None

Non-Qualified Deferred Compensation

None

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Potential Payments upon Termination of Employment or Change-in-Control

The following information describes and quantifies certain compensation that would become payable under then-existing agreements and plans if a Named Executive Officer’s employment had terminated on December 31, 2022.

Named Executive Officer Termination Payments

No Severance Payments

None of our executive officers are entitled to any severance payments.

Summary of Payments upon Termination or Change-in-Control

The table below shows the estimated value of payments to which a named executive officer would have been entitled if the executive’s employment had been terminated on December 31, 2022. For purposes of valuing these amounts, we made the following assumptions:

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The Audit Committee selected RSM US LLP as our independent registered public accounting firm (our independent auditors) for 2023, and we are requesting our shareholders ratify this selection. This proposal is being submitted to shareholders because we believe that this action follows sound corporate practice and is in the best interests of the shareholders. If the shareholders do not ratify the selection, such a vote will not be binding, but the Audit Committee will reconsider the selection of independent auditors. If the shareholders ratify the selection, the Audit Committee, in its discretion, may still direct the appointment of new independent auditors at any time during the year if the Committee believes that this change would be in our and our shareholders’ best interests.

Prior Change in Our Independent Registered Public Accounting Firm

On May 26, 2021, the Audit Committee of our Board of Directors approved the engagement of RSM US LLP as our independent registered public accounting firm for our fiscal year ending December 31, 2021. This approval followed the determination by the Audit Committee on May 26, 2021 that the engagement of our auditor for the last ten years, KPMG LLP, would cease effective May 26, 2021.

The report of KPMG LLP dated March 16, 2021 on our consolidated financial statements for the fiscal years ended December 31, 2019 and 2020 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except for a modification to identify a change in accounting principles as of January 1, 2020 as a result of our adoption of Accounting Standards Update 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

During the fiscal years ended December 31, 2019 and 2020 and the subsequent interim period through May 26, 2021, there were: (i) no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to KPMG LLP’s satisfaction, would have caused KPMG LLP to make reference thereto in their reports on the consolidated financial statements for such fiscal years and (ii) no “reportable events,” as defined in Item 304(a)(1)(v) of Regulation S-K, other than the material weakness in internal control over financial reporting identified and disclosed by us in our Form 10-K for the year ended December 31, 2019 and the remediation of such material weakness as disclosed in our Form 10-K for the year ended December 31, 2020 relating to controls to properly document and review relevant facts and apply the appropriate tax accounting which impacted deferred tax asset and income tax benefit accounts.

We did not consult with RSM US LLP during our two most recent fiscal years prior to May 26, 2021 regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written report was provided to us or oral advice was provided that RSM US LLP concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement or reportable event as defined in Item 304(a)(1)(iv) and (v) of Regulation S-K.

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A description of the types of services provided in each category is as follows:

The Board considered whether providing the non-audit services included in this table was compatible with maintaining RSM US LLP’s independence and concluded that it was.

Audit Committee Pre-Approval Process

Consistent with SEC policies regarding auditor independence and our Audit Committee’s charter, the Audit Committee has responsibility for engaging, setting compensation for and reviewing the performance of our independent auditor. In exercising this responsibility, the Audit Committee has established procedures relating to the approval of all audit and non-audit services that are to be performed by our independent auditor and pre-approves all audit and permitted non-audit services provided by any independent registered public accounting firm prior to each engagement.

We have been advised that representatives of RSM US LLP will attend the Annual Meeting and will have an opportunity to make a statement.

Burn Rate Calculation:

The number of shares subject to time vesting equity awards granted in a fiscal year plus the number of shares subject to performance vesting that vested in that fiscal year; divided by the number of common shares outstanding at the end of that fiscal year.

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Stock Ownership Information