Velocity Financial, Inc. Income Taxes Disclosure
Note 19 — Income Taxes
The Company elected to be treated as a corporation, for tax purposes, effective January 1, 2018. The following table details the Company’s income tax expense (benefit):
|
|
December 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
|
|
(In thousands) |
|
|||||||||
Current tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
$ |
27,810 |
|
|
$ |
13,631 |
|
|
$ |
(90 |
) |
State |
|
|
11,546 |
|
|
|
2,509 |
|
|
|
552 |
|
Total current tax expense |
|
|
39,356 |
|
|
|
16,140 |
|
|
|
462 |
|
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
|
(8,396 |
) |
|
|
1,654 |
|
|
|
8,553 |
|
State |
|
|
(3,035 |
) |
|
|
1,040 |
|
|
|
3,018 |
|
Total deferred tax expense (benefit) |
|
|
(11,431 |
) |
|
|
2,694 |
|
|
|
11,571 |
|
Total income tax expense |
|
$ |
27,925 |
|
|
$ |
18,834 |
|
|
$ |
12,033 |
|
The following table contains a reconciliation of the Company’s provision for income taxes at the federal statutory tax rate to the provision for income taxes at the effective tax rate as of December 31, 2024, 2023 and 2022:
|
|
December 31, |
|
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|
|||
Federal income tax provision at statutory rate |
|
|
21.0 |
|
% |
|
21.0 |
|
% |
|
21.0 |
|
% |
State income taxes, net of federal tax benefit |
|
|
7.3 |
|
|
|
6.2 |
|
|
|
6.3 |
|
|
Permanent items |
|
|
1.1 |
|
|
|
0.6 |
|
|
|
0.2 |
|
|
Federal true-ups |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
— |
|
|
Tax credits |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Change in unrecognized tax benefit |
|
|
(0.1 |
) |
|
|
(2.3 |
) |
|
|
— |
|
|
Other |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
Effective tax rate |
|
|
29.0 |
|
% |
|
25.2 |
|
% |
|
27.2 |
|
% |
The changes in state income taxes and unrecognized tax benefit in the reconciliation are primarily due to changes in state apportionment and the related valuation impacts on taxes payable as well as the deferred tax asset in the prior year.
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of December 31, 2024 and 2023 are presented below:
|
|
December 31, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
|
|
(In thousands) |
|
|||||
Deferred tax assets: |
|
|
|
|
|
|
||
REMIC book-tax basis difference |
|
$ |
9,220 |
|
|
$ |
— |
|
Lease liability |
|
|
779 |
|
|
|
780 |
|
Stock compensation |
|
|
834 |
|
|
|
1,779 |
|
Accrued bonus |
|
|
144 |
|
|
|
— |
|
Accrued vacation |
|
|
521 |
|
|
|
386 |
|
Intangibles |
|
|
1 |
|
|
|
3 |
|
REO |
|
|
207 |
|
|
|
160 |
|
Deferred state taxes |
|
|
510 |
|
|
|
374 |
|
Research and experimental expenditures capitalization |
|
|
2,241 |
|
|
|
1,721 |
|
MSR valuation allowance |
|
|
— |
|
|
|
53 |
|
Derivative - OCI |
|
|
294 |
|
|
|
427 |
|
Deferred revenue |
|
|
1,053 |
|
|
|
1,038 |
|
Gross deferred tax assets |
|
|
15,804 |
|
|
|
6,721 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
||
REMIC book-tax basis difference |
|
|
— |
|
|
|
(2,522 |
) |
Mark-to-market on loans |
|
|
(172 |
) |
|
|
(36 |
) |
Right-of-use assets |
|
|
(721 |
) |
|
|
(735 |
) |
Deferred origination costs |
|
|
(108 |
) |
|
|
(63 |
) |
Property and equipment |
|
|
(157 |
) |
|
|
(332 |
) |
MSR valuation allowance |
|
|
(246 |
) |
|
|
— |
|
Other |
|
|
(788 |
) |
|
|
(694 |
) |
Gross deferred tax liabilities |
|
|
(2,192 |
) |
|
|
(4,382 |
) |
Total net deferred tax asset |
|
$ |
13,612 |
|
|
$ |
2,339 |
|
The Company’s main temporary difference is due to the difference between the U.S. income tax and U.S. GAAP treatment with respect to its REMIC securities. For tax purposes, the issuances are considered taxable sales, whereas, for U.S. GAAP purposes, the REMIC issuances are considered financings.
No Federal net operating loss (“NOL”) carryforwards were utilized to offset current U.S. federal taxable income in 2024, and $5.7 million were utilized to offset U.S. federal taxable income in 2023. No State NOL carryforwards were utilized to offset taxable income in 2024, and $2.5 million were utilized to offset taxable income in 2023. There were no additional NOL carryforwards after 2023.
The Company had no valuation allowance as of December 31, 2024 and 2023. Based on the Company’s estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local jurisdictions, where applicable. As of December 31, 2024, the Company is no longer subject to U.S. tax examinations for years before 2021 and is no longer subject to state tax examinations for years before 2020.
The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
The Company had gross unrecognized tax benefits in the amount of $0.3 million and $0.4 million recorded as of December 31, 2024 and 2023, respectively. If recognized, $0.3 million of the unrecognized tax benefits would affect the 2024 annual effective tax rate. Interest and penalties on unrecognized tax benefits were reported by the Company as a component of tax expense. The Company recorded interest and penalties in its Consolidated Statements of Income in the amount of $0.5 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively. Interest and penalties for the year ended December 31, 2024 was immaterial. As of December 31, 2024 and 2023, the accrued interest and penalties related to unrecognized tax benefits were $33.8 thousand and $32.9 thousand, respectively.
There are no positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.
Detailed below is a reconciliation of the Company’s gross unrecognized tax benefits for the years ended December 31, 2024, 2023 and 2022, respectively:
|
|
December 31, |
|
|||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
|
|
(In thousands) |
|
|||||||||
Beginning balance |
|
$ |
390 |
|
|
$ |
1,940 |
|
|
$ |
1,911 |
|
Changes related to current year tax positions |
|
|
61 |
|
|
|
93 |
|
|
|
68 |
|
Changes related to prior year tax positions |
|
|
(33 |
) |
|
|
25 |
|
|
|
19 |
|
Decreases due to lapsed statutes of limitations |
|
|
(113 |
) |
|
|
(1,668 |
) |
|
|
(58 |
) |
Ending balance |
|
$ |
305 |
|
|
$ |
390 |
|
|
$ |
1,940 |
|
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About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.