0001527590rc:OriginatedSba7LoansMemberrc:Ltv40.1To60.0PercentMember2020-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2021

Commission File Number: ~~001‑35808~~001-35808

~~SUTHERLAND ASSET MANAGEMENT~~

READY CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Maryland	~~90‑0729143~~90-0729143
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

1251 Avenue of the Americas, 50^th Floor, New York, NY10020
(Address of Principal Executive Offices, Including Zip Code)
(212) 257-4600
(Registrant's Telephone Number, Including Area Code)

~~1140 Avenue~~Securities registered pursuant to Section 12(b) of the ~~Americas, 7~~th ~~Floor, New York, NY 10036~~Exchange Act:

~~(Address of Principal Executive Offices, Including Zip Code)~~


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share Preferred Stock, 6.25% Series C Cumulative Convertible, par value $0.0001 per share Preferred Stock, 6.50% Series E Cumulative Redeemable, par value $0.0001 per share 7.00% Convertible Senior Notes due 2023 6.20% Senior Notes due 2026	RC RC PRC RC PRE RCA RCB	New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange
5.75% Senior Notes due 2026	RCC	New York Stock Exchange

~~(212) 257-4600~~

~~(Registrant's Telephone Number, Including Area Code)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation ~~S‑T~~S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐Emerging growth company ☐

~~Emerging growth company ☒~~

~~(Do not check if a smaller reporting company)~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b‑~~12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The Company has ~~31,996,440~~71,231,487 shares of common stock, par value $0.0001 per share, outstanding as of ~~October 31, 2017.~~August 6, 2021.

Table of Contents

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3
~~Item 1A.~~	~~Forward-Looking Statements~~	65
Item 2.1A.	Forward-Looking Statements	64

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6566

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	9493

Item 4.	Controls and Procedures	97
~~PART II.~~	~~OTHER INFORMATION~~	98
~~Item 1.~~PART II.	~~Legal Proceedings~~OTHER INFORMATION	9897

Item ~~1A.~~1.	~~Risk Factors~~Legal Proceedings	9897

Item 2.1A.	Risk Factors	97

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98

Item 3.	~~Defaults~~Default Upon Senior Securities	98

Item 4.	Mine Safety Disclosures	98

Item 5.	Other Information	98
~~Item 6.~~	~~Exhibits~~	99
Item 6.	Exhibits	98

SIGNATURES		101
~~EXHIBIT 31.1 CERTIFICATIONS~~
~~EXHIBIT 31.2 CERTIFICATIONS~~
~~EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350~~
~~EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350~~

EXHIBIT 31.1 CERTIFICATIONS

EXHIBIT 31.2 CERTIFICATIONS

EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

EXHIBIT 32.2 CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

READY CAPITAL CORPORATION

~~SUTHERLAND ASSET MANAGEMENT CORPORATION~~

~~unaudited~~UNAUDITED CONSOLIDATED BALANCE SHEETS


(In Thousands)	June 30, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	200,723	$	138,975
Restricted cash		57,118		47,697
Loans, net (including $13,681 and $13,795 held at fair value)		2,222,284		1,550,624
Loans, held for sale, at fair value		470,184		340,288
Paycheck Protection Program loans (including $16,431 and $74,931 held at fair value)		2,178,586		74,931
Mortgage backed securities, at fair value		260,110		88,011
Loans eligible for repurchase from Ginnie Mae		173,437		250,132
Investment in unconsolidated joint ventures		86,994		79,509
Purchased future receivables, net		7,213		17,308
Derivative instruments		6,600		16,363
Servicing rights (including $100,820 and $76,840 held at fair value)		145,265		114,663
Real estate, held for sale		71,267		45,348
Other assets		120,214		89,503
Assets of consolidated VIEs		2,976,897		2,518,743
Total Assets	$	8,976,892	$	5,372,095
Liabilities
Secured borrowings		1,703,034		1,294,243
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		2,286,624		76,276
Securitized debt obligations of consolidated VIEs, net		2,309,217		1,905,749
Convertible notes, net		112,684		112,129
Senior secured notes, net		179,825		179,659
Corporate debt, net		333,669		150,989
Guaranteed loan financing		363,955		401,705
Liabilities for loans eligible for repurchase from Ginnie Mae		173,437		250,132
Derivative instruments		3,717		11,604
Dividends payable		33,968		19,746
Accounts payable and other accrued liabilities		180,018		135,655
Total Liabilities	$	7,680,148	$	4,537,887
Preferred stock Series C, liquidation preference $25.00 per share (refer to Note 21)		8,361		—
Stockholders’ Equity
Preferred stock Series B, D, and E, liquidation preference $25.00 per share (refer to Note 21)		209,619		—
Common stock, $0.0001 par value, 500,000,000 shares authorized, 71,231,422 and 54,368,999 shares issued and outstanding, respectively		7		5
Additional paid-in capital		1,090,162		849,541
Retained earnings (deficit)		(23,105)		(24,203)
Accumulated other comprehensive loss		(7,157)		(9,947)
Total Ready Capital Corporation equity		1,269,526		815,396
Non-controlling interests		18,857		18,812
Total Stockholders’ Equity	$	1,288,383	$	834,208
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity	$	8,976,892	$	5,372,095

(In Thousands)

September 30, 2017

December 31, 2016
Assets

Cash and cash equivalents

$
70,590

$
59,566
Restricted cash

16,057

20,190
Short-term investments

99,994

319,984
Loans, net (including $158,393 and $81,592 held at fair value)

892,896

1,011,121
Loans, held for sale, at fair value

200,318

181,797
Mortgage backed securities, at fair value

41,371

32,391
Loans eligible for repurchase from Ginnie Mae

101,408

137,986
Derivative instruments

4,131

5,785
Servicing rights (including $68,815 and $61,376 held at fair value)

89,372

83,854
Receivable from third parties

6,756

7,220
Other assets

35,356

54,277
Assets of consolidated VIEs

944,894

691,096
Total Assets

$
2,503,143

$
2,605,267
Liabilities

Secured short-term borrowings

522,767

927,462
Promissory note, net

6,494

7,378
Securitized debt obligations of consolidated VIEs, net

680,282

492,942
Convertible note, net

109,414

—
Senior secured note, net

138,074

—
Guaranteed loan financing

313,388

390,555
Contingent consideration

9,037

14,487
Liabilities for loans eligible for repurchase from Ginnie Mae

101,408

137,986
Derivative instruments

358

643
Dividends payable

12,289

11,505
Accounts payable and other accrued liabilities

54,579

70,207
Total Liabilities

$
1,948,090

$
2,053,165
Stockholders’ Equity

Common stock, $0.0001 par value, 500,000,000 shares authorized, 31,996,440 and 30,549,084 shares issued and outstanding, respectively

3

3
Additional paid-in capital

539,664

513,295
Deficit

(3,952)

(201)
Total Sutherland Asset Management Corporation equity

535,715

513,097
Non-controlling interests

19,338

39,005
Total Stockholders’ Equity

$
555,053

$
552,102
Total Liabilities and Stockholders’ Equity

$
2,503,143

$
2,605,267

See Notes To Unaudited Consolidated Financial Statements

Table of Contents

READY CAPITAL CORPORATION

~~SUTHERLAND ASSET MANAGEMENT CORPORATION~~

~~Unaudited~~UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, except share data)	2021		2020		2021		2020
Interest income	$	103,047	$	63,211	$	176,418	$	132,762
Interest expense		(55,415)		(43,408)		(106,176)		(90,338)
Net interest income before provision for loan losses	$	47,632	$	19,803	$	70,242	$	42,424
Recovery of (provision for) loan losses		(5,517)		591		(5,509)		(39,214)
Net interest income after recovery of (provision for) loan losses	$	42,115	$	20,394	$	64,733	$	3,210
Non-interest income
Residential mortgage banking activities		36,690		80,564		78,099		117,233
Net realized gain on financial instruments and real estate owned		17,183		7,438		26,029		14,610
Net unrealized gain (loss) on financial instruments		4,612		(13,744)		25,608		(47,178)
Servicing income, net of amortization and impairment of $2,604 and $4,546 for the three and six months ended June 30, 2021, and $1,277 and $3,001 for three and six months ended June 30, 2020, respectively		11,928		8,982		27,563		17,079
Income on purchased future receivables, net of allowance for doubtful accounts of $587 and $1,540 for the three and six months ended June 30, 2021, and $1,771 and $8,688 for three and six months ended June 30, 2020, respectively		2,779		5,586		5,096		9,069
Income (loss) on unconsolidated joint ventures		3,361		507		2,552		(3,030)
Other income (loss)		(688)		31,594		(117)		35,667
Total non-interest income	$	75,865	$	120,927	$	164,830	$	143,450
Non-interest expense
Employee compensation and benefits		(24,270)		(27,288)		(47,047)		(46,224)
Allocated employee compensation and benefits from related party		(3,299)		(1,250)		(5,422)		(2,500)
Variable expenses on residential mortgage banking activities		(21,421)		(36,446)		(36,906)		(56,575)
Professional fees		(2,872)		(1,919)		(5,854)		(4,475)
Management fees – related party		(2,626)		(2,666)		(5,319)		(5,227)
Incentive fees – related party		(286)		(3,506)		(286)		(3,506)
Loan servicing expense		(6,851)		(10,327)		(12,955)		(15,898)
Merger related expenses		(1,266)		(11)		(7,573)		(58)
Other operating expenses		(17,190)		(17,745)		(32,674)		(31,487)
Total non-interest expense	$	(80,081)	$	(101,158)	$	(154,036)	$	(165,950)
Income (loss) before provision for income taxes	$	37,899	$	40,163	$	75,527	$	(19,290)
Income tax (provision) benefit		(6,995)		(5,500)		(15,676)		2,437
Net income (loss)	$	30,904	$	34,663	$	59,851	$	(16,853)
Less: Dividends on preferred stock		3,224		—		3,505		—
Less: Net income (loss) attributable to non-controlling interest		444		810		1,103		(254)
Net income (loss) attributable to Ready Capital Corporation	$	27,236	$	33,853	$	55,243	$	(16,599)

Earnings (loss) per common share - basic	$	0.38	$	0.62	$	0.85	$	(0.33)
Earnings (loss) per common share - diluted	$	0.38	$	0.62	$	0.85	$	(0.33)

Weighted-average shares outstanding
Basic		71,221,806		53,980,451		64,059,509		52,982,246
Diluted		71,385,603		54,013,958		64,209,934		53,015,753

Dividends declared per share of common stock	$	0.42	$	0.25	$	0.82	$	0.65

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands, except share data)

2017

2016

2017

2016
Interest income

$
35,038

$
31,890

$
102,169

$
104,282
Interest expense

(19,908)

(14,097)

(53,579)

(42,043)
Net interest income before provision for loan losses

$
15,130

$
17,793

$
48,590

$
62,239
Provision for loan losses

(466)

(488)

(1,857)

(4,689)
Net interest income after provision for loan losses

$
14,664

$
17,305

$
46,733

$
57,550
Non-interest income (expense)

Gains on residential mortgage banking activities, net of variable loan expenses

10,735

—

32,229

—
Other income

1,853

1,729

4,281

5,335
Servicing income, net of amortization and impairment of $976 and $5,252 for the three and nine months ended September 30, 2017, and $1,850 and $6,079 for the three and nine months ended September 30, 2016, respectively

6,134

1,661

16,208

4,420
Employee compensation and benefits

(13,715)

(4,822)

(40,630)

(14,005)
Allocated employee compensation and benefits from related party

(990)

(900)

(3,010)

(2,700)
Professional fees

(2,151)

(3,120)

(6,334)

(8,573)
Management fees – related party

(2,034)

(1,793)

(6,018)

(5,464)
Loan servicing expense

(3,388)

(1,830)

(7,513)

(3,889)
Other operating expenses

(7,447)

(3,373)

(19,183)

(11,185)
Total non-interest income (expense)

$
(11,003)

$
(12,448)

$
(29,970)

$
(36,061)
Net realized gain on financial instruments

5,695

2,454

13,151

3,720
Net unrealized gain on financial instruments

2,678

3,557

4,933

5,800
Income from continued operations before provision for income (taxes) benefit

$
12,034

$
10,868

$
34,847

$
31,009
Provision for income (taxes) benefit

340

(1,297)

(1,763)

(3,326)
Net income from continuing operations

$
12,374

$
9,571

$
33,084

$
27,683
Discontinued operations

Loss from discontinued operations (including gain on disposal of $267 in the nine months ended September 30, 2016)

—

—

—

(576)
Income tax benefit

—

—

—

225
Loss from discontinued operations

—

—

—

(351)
Net income

$
12,374

$
9,571

$
33,084

$
27,332
Less: Net income attributable to non-controlling interest

533

777

1,891

2,217
Net income attributable to Sutherland Asset Management Corporation

$
11,841

$
8,794

$
31,193

$
25,115

Earnings (loss) per basic common share

Continuing operations

$
0.37

$
0.34

$
1.00

$
0.98
Discontinued operations

—

—

—

(0.01)
Earnings per basic common share

$
0.37

$
0.34

$
1.00

$
0.97

Earnings (loss) per diluted common share

Continuing operations

$
0.37

$
0.34

$
1.00

$
0.98
Discontinued operations

$
—

$
—

$
—

$
(0.01)
Earnings per diluted common share

$
0.37

$
0.34

$
1.00

$
0.97

Weighted-average shares outstanding

Basic

32,026,494

25,870,485

31,120,476

25,870,485
Diluted

32,028,980

25,870,485

31,121,449

25,870,485

Dividends declared per share of common stock

$
0.37

$
0.45

$
1.11

$
0.90

See Notes To Unaudited Consolidated Financial Statements

Table of Contents

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)		2021		2020		2021		2020
Net income (loss)	$	30,904	$	34,663	$	59,851	$	(16,853)
Other comprehensive income (loss) - net change by component
Net change in hedging derivatives (cash flow hedges)		124		(22)		2,102		(3,149)
Foreign currency translation adjustment		(240)		(325)		751		(630)
Other comprehensive income (loss)	$	(116)	$	(347)	$	2,853	$	(3,779)
Comprehensive income (loss)	$	30,788	$	34,316	$	62,704	$	(20,632)
Less: Comprehensive income (loss) attributable to non-controlling interests		475		803		1,198		(333)
Comprehensive income (loss) attributable to Ready Capital Corporation	$	30,313	$	33,513	$	61,506	$	(20,299)

See Notes To Unaudited Consolidated Financial Statements

Table of Contents

READY CAPITAL CORPORATION

~~SUTHERLAND ASSET MANAGEMENT CORPORATION~~

~~Unaudited~~UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


	Three Months Ended June 30, 2021
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at April 1, 2021	1,919,378	2,010,278	—	71,221,699	$	47,984	$	50,257	$	—	$	7	$	1,088,512	$	(20,027)	$	(7,042)	$	1,159,691	$	19,061	$	1,178,752
Dividend declared:
Common stock ($0.42 per share)	—	—	—	—		—		—		—		—		—		(30,312)		—		(30,312)		—		(30,312)
OP units	—	—	—	—		—		—		—		—		—		—		—		—		(494)		(494)
$0.5390625 per Series B preferred share	—	—	—	—		—		—		—		—		—		(1,036)		—		(1,036)		—		(1,036)
$0.3906250 per Series C preferred share	—	—	—	—		—		—		—		—		—		(193)		—		(193)		—		(193)
$0.4765625 per Series D preferred share	—	—	—	—		—		—		—		—		—		(958)		—		(958)		—		(958)
$0.2256940 per Series E preferred share	—	—	—	—		—		—		—		—		—		(1,039)		—		(1,039)		—		(1,039)
Equity issuances	—	—	4,600,000	—		—		—		111,378		—		—		—		—		111,378		—		111,378
Offering costs	—	—	—	—		—		—		—		—		(70)		—		—		(70)		(1)		(71)
Distributions, net	—	—	—	—		—		—		—		—		—		—		—		—		(150)		(150)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(103)		—		—		(103)		(2)		(105)
Stock-based compensation	—	—	—	9,723		—		—		—		—		1,823		—		—		1,823		—		1,823
Share repurchases	—	—	—	—		—		—		—		—		—		—		—		—		—		—
Net income	—	—	—	—		—		—		—		—		—		30,460		—		30,460		444		30,904
Other comprehensive loss	—	—	—	—		—		—		—		—		—		—		(115)		(115)		(1)		(116)
Balance at June 30, 2021	1,919,378	2,010,278	4,600,000	71,231,422	$	47,984	$	50,257	$	111,378	$	7	$	1,090,162	$	(23,105)	$	(7,157)	$	1,269,526	$	18,857	$	1,288,383


	Three Months Ended June 30, 2020
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at April 1, 2020	—	—	—	52,091,850	$	—	$	—	$	—	$	5	$	837,064	$	(69,605)	$	(9,536)	$	757,928	$	17,631	$	775,559
Dividend declared on common stock ($0.25 per share)	—	—	—	—		—		—		—		—		—		(14,003)		—		(14,003)		—		(14,003)
Dividend declared on OP units	—	—	—	—		—		—		—		—		—		—		—		—		(294)		(294)
Stock issued in connection with stock dividend	—	—	—	2,764,487		—		—		—		—		17,033		—		—		17,033		362		17,395
Contributions, net	—	—	—	—		—		—		—		—		—		—		—		—		(50)		(50)
Offering costs	—	—	—	—		—		—		—		—		(7)		—		—		(7)		—		(7)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(95)		—		—		(95)		(2)		(97)
Stock-based compensation	—	—	—	16,452		—		—		—		—		227		—		—		227		—		227
Net income	—	—	—	—		—		—		—		—		—		33,853		—		33,853		810		34,663
Other comprehensive loss	—	—	—	—		—		—		—		—		—		—		(340)		(340)		(7)		(347)
Balance at June 30, 2020	—	—	—	54,872,789	$	—	$	—	$	—	$	5	$	854,222	$	(49,755)	$	(9,876)	$	794,596	$	18,450	$	813,046

Retained

Total Sutherland

Common Stock

Preferred Stock

Additional Paid-

Earnings

Asset Management

Non-controlling

Total Stockholders'
(in thousands, except share data)

Shares

Par Value

Shares

Par Value

In Capital

(Deficit)

Corporation equity

Interests

Equity
Balance at January 1, 2016

25,739,847

$
2

125

$
125

$
447,093

$
(5,899)

$
441,321

$
38,892

$
480,213
Dividend declared on common stock ($0.90 per share)

—

—

—

—

—

(23,484)

(23,484)

—

(23,484)
Dividend reinvestment in common stock

103,440

1

—

—

1,806

—

1,807

—

1,807
Incentive shares issued

27,199

—

—

—

482

—

482

—

482
Dividend declared on preferred stock

—

—

—

—

—

(8)

(8)

—

(8)
Dividend declared on OP units

—

—

—

—

—

—

—

(2,072)

(2,072)
Dividend reinvestment in OP units

—

—

—

—

—

—

—

359

359
Net Income

—

—

—

—

—

25,115

25,115

2,217

27,332
Balance at September 30, 2016

25,870,486

$
3

125

$
125

$
449,381

$
(4,276)

$
445,233

$
39,396

$
484,629

Retained

Total Sutherland

Common Stock

Preferred Stock

Additional Paid-

Earnings

Asset Management

Non-controlling

Total Stockholders'
(in thousands, except share data)

Shares

Par Value

Shares

Par Value

In Capital

(Deficit)

Corporation equity

Interests

Equity
Balance at January 1, 2017

30,549,084

$
3

—

$
—

$
513,295

$
(201)

$
513,097

$
39,005

$
552,102
Dividend declared on common stock ($1.11 per share)

—

—

—

—

—

(34,944)

(34,944)

—

(34,944)
Dividend declared on OP units

—

—

—

—

—

—

—

(1,811)

(1,811)
Shares issued in exchange of litigation settlement

275,862

—

—

—

4,000

—

4,000

—

4,000
Equity component of 2017 convertible note issuance

—

—

—

—

2,147

—

2,147

—

2,147
Distributions, net

—

—

—

—

—

—

—

(34)

(34)
Stock-based compensation

—

—

—

—

509

—

509

—

509
Conversion of OP units into common stock

1,171,494

—

—

—

19,713

19,713

(19,713)

—
Net Income

—

—

—

—

—

31,193

31,193

1,891

33,084
Balance at September 30, 2017

31,996,440

$
3

—

$
—

$
539,664

$
(3,952)

$
535,715

$
19,338

$
555,053

See Notes To Unaudited Consolidated Financial Statements

Table of Contents

READY CAPITAL CORPORATION

~~SUTHERLAND ASSET MANAGEMENT CORPORATION~~UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

~~Unaudited CONSOLIDATED STATEMENT OF CASH FLOWS~~


	Six Months Ended June 30, 2021
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at January 1, 2021	—	—	—	54,368,999	$	—	$	—	$	—	$	5	$	849,541	$	(24,203)	$	(9,947)	$	815,396	$	18,812	$	834,208
Dividend declared:
Common stock ($0.82 per share)	—	—	—	—		—		—		—		—		—		(54,145)		—		(54,145)		—		(54,145)
OP units	—	—	—	—		—		—		—		—		—		—		—		—		(964)		(964)
$0.5390625 per Series B preferred share	—	—	—	—		—		—		—		—		—		(1,162)		—		(1,162)		(1)		(1,163)
$0.3906250 per Series C preferred share	—	—	—	—		—		—		��		—		—		(230)		—		(230)		—		(230)
$0.4765625 per Series D preferred share	—	—	—	—		—		—		—		—		—		(1,074)		—		(1,074)		(1)		(1,075)
$0.2256940 per Series E preferred share	—	—	—	—		—		—		—		—		—		(1,039)		—		(1,039)		—		(1,039)
Shares issued pursuant to merger transactions	1,919,378	2,010,278	—	16,774,337		47,984		50,257		—		2		239,535		—		—		337,778		—		337,778
Equity issuances	—	—	4,600,000	—		—		—		111,378		—		—		—		—		111,378		—		111,378
Offering costs	—	—	—	—		—		—		—		—		(70)		—		—		(70)		(1)		(71)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(202)		—		—		(202)		(4)		(206)
Distributions, net	—	—	—	—		—		—		—		—		—		—		—		—		(150)		(150)
Stock-based compensation	—	—	—	125,327		—		—		—		—		2,345		—		—		2,345		—		2,345
Share repurchases	—	—	—	(37,241)		—		—		—		—		(987)		—		—		(987)		—		(987)
Net income	—	—	—	—		—		—		—		—		—		58,748		—		58,748		1,103		59,851
Other comprehensive income	—	—	—	—		—		—		—		—		—		—		2,790		2,790		63		2,853
Balance at June 30, 2021	1,919,378	2,010,278	4,600,000	71,231,422	$	47,984	$	50,257	$	111,378	$	7	$	1,090,162	$	(23,105)	$	(7,157)	$	1,269,526	$	18,857	$	1,288,383

Nine Months Ended September 30,
(In Thousands)

2017

2016
Cash Flows From Operating Activities:

Net income

$
33,084

$
27,332
Less: Loss from discontinued operations

—

(351)
Net income from continuing operations

33,084

27,683
Adjustments to reconcile net income to net cash provided  (used in) operating activities:

Discount accretion and premium amortization of financial instruments, net

(7,372)

(14,656)
Amortization of guaranteed loan financing, deferred financing costs, and intangible assets

15,266

14,749
Provision for loan losses

1,857

4,689
Charge off of real estate acquired in settlement of loans

746

912
Decrease in repair and denial reserve

(289)

(1,222)
Purchase of short-term investments and trading securities

(839,425)

(749,805)
Proceeds from sale of short-term investments and trading securities

1,059,821

749,995
Net settlement of derivative instruments

(1,085)

(1,428)
Purchase of loans, held for sale, at fair value

(11,195)

—
Origination of loans, held for sale, at fair value

(1,882,626)

(200,574)
Proceeds from disposition and principal payments of loans, held for sale, at fair value

1,943,508

190,674
Gain on sale of mortgages held for sale included in Gains on residential mortgage banking activities, net of variable loan expenses

(49,806)

—
Loss on derivatives included in Gains on residential mortgage banking activities, net of variable loan expenses

2,043

—
Creation of new mortgage servicing rights, net of payoffs

(11,392)

—
Net realized gains on financial instruments

(13,151)

(3,720)
Net unrealized losses on financial instruments

(4,933)

(5,800)
Net changes in operating assets and liabilities

Assets of consolidated VIEs (excluding loans, net) , accrued interest and due from servicers

10,607

2,918
Receivable from third parties

464

801
Other assets

12,293

(8,179)
Accounts payable and other accrued liabilities

(10,210)

6,524
Net cash provided by operating activities

248,205

13,561
Net cash used in operating activities of discontinued operations

—

(3,190)
Cash Flow From Investing Activities:

Origination of loans

(347,988)

(215,204)
Purchase of loans

(78,317)

(89,011)
Purchase of mortgage backed securities, at fair value

(14,448)

(17,388)
Payment of liability under participation agreements

(642)

(1,155)
Proceeds from disposition and principal payment of loans

303,304

330,006
Proceeds from sale and principal payment of mortgage backed securities, at fair value

7,415

197,147
Proceeds from sale of real estate

1,775

4,724
Decrease in restricted cash

(12,234)

(720)
Net cash (used in) provided by investing activities

(141,135)

208,399
Cash Flows From Financing Activities:

Proceeds from secured short-term borrowings

3,692,370

4,194,488
Proceeds from issuance of securitized debt obligations of consolidated VIEs

241,359

—
Proceeds from promissory note

—

9,164
Proceeds from senior secured note offering

141,917

—
Proceeds from convertible note issuance

115,000

—
Payment of secured short-term borrowings

(4,097,065)

(4,204,158)
Payment of securitized debt obligations of consolidated VIEs

(50,265)

(88,966)
Payment of guaranteed loan financing

(87,140)

(94,471)
Payment of promissory note

(884)

(124)
Payment of deferred financing costs

(15,263)

(1,050)
Payment of offering costs

(70)

—
Dividend payments

(35,971)

(36,764)
Distributions

(34)

—
Net cash used in financing activities

(96,046)

(221,881)
Net increase (decrease) in cash and cash equivalents

11,024

(3,111)
Cash and cash equivalents at beginning of period

59,566

41,569
Cash and cash equivalents at end of period

$
70,590

$
38,458

Supplemental disclosure of operating cash flow

Cash paid for interest

$
46,760

$
38,667
Cash paid for income taxes

$
2,503

$
5,918
Stock-based compensation

$
509

$
—

Supplemental disclosure of non-cash investing activities

Loans transferred from Loans, held at fair value to Loans, held-for-investment

$
40,905

$
—
Loans transferred from Loans, net to Loans, held for sale, at fair value

$
5,940

$
11,350

Supplemental disclosure of non-cash financing activities

Shares issued in exchange of litigation settlement

$
4,000

$
—
Incentive shares issued

$
—

$
482
Dividend reinvestment in common stock

$
—

$
1,807
Dividend reinvestment in operating partnership units

$
—

$
359


	Six Months Ended June 30, 2020
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at January 1, 2020	—	—	—	51,127,326	$	—	$	—	$	—	$	5	$	822,837	$	8,746	$	(6,176)	$	825,412	$	19,372	$	844,784
Cumulative-effect adjustment upon adoption of ASU 2016-13, net of taxes (Note 4)	—	—	—	—		—		—		—		—		—		(6,599)		—		(6,599)		(155)		(6,754)
Dividend declared on common stock ($0.65 per share)	—	—	—	—		—		—		—		—		—		(35,303)		—		(35,303)		—		(35,303)
Dividend declared on OP units	—	—	—	—		—		—		—		—		—		—		—		—		(741)		(741)
Stock issued in connection with stock dividend	—	—	—	2,764,487		—		—		—		—		17,033		—		—		17,033		362		17,395
Equity issuances	—	—	—	900,000		—		—		—		—		13,410		—		—		13,410		—		13,410
Offering costs	—	—	—	—		—		—		—		—		(45)		—		—		(45)		(1)		(46)
Distributions, net	—	—	—	—		—		—		—		—		—		—		—		—		(50)		(50)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(187)		—		—		(187)		(4)		(191)
Stock-based compensation	—	—	—	76,822		—		—		—		—		1,121		—		—		1,121		—		1,121
Manager incentive fee paid in stock	—	—	—	4,154		—		—		—		—		53		—		—		53		—		53
Net income	—	—	—	—		—		—		—		—		—		(16,599)		—		(16,599)		(254)		(16,853)
Other comprehensive loss	—	—	—	—		—		—		—		—		—		—		(3,700)		(3,700)		(79)		(3,779)
Balance at June 30, 2020	—	—	—	54,872,789	$	—	$	—	$	—	$	5	$	854,222	$	(49,755)	$	(9,876)	$	794,596	$	18,450	$	813,046

See Notes toTo Unaudited Consolidated Financial Statements

Table of Contents

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS


	Six Months Ended June 30,
(In Thousands)	2021		2020
Cash Flows From Operating Activities:
Net income	$	59,851	$	(16,853)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net		(8,367)		17,389
Provision for (recovery of) loan losses		5,509		39,214
Impairment loss on real estate, held for sale		1,278		3,075
Change in repair and denial reserve		6,095		2,768
Net settlement of derivative instruments		(62,474)		(9,454)
Origination of loans, held for sale, at fair value		(2,899,959)		(2,282,920)
Proceeds from disposition and principal payments of loans, held for sale, at fair value		2,961,060		2,265,362
Realized (gains) losses, net		(92,704)		(122,336)
Unrealized (gains) losses, net		(27,155)		47,790
Net (income) loss of unconsolidated joint ventures, net of distributions		(2,342)		3,030
Foreign currency (gains) losses, net		1,443		(653)
Payoff of purchased future receivables, net of originations		8,465		7,387
Allowance for doubtful accounts on purchased future receivables		1,630		8,688
Net changes in operating assets and liabilities
Assets of consolidated VIEs (excluding loans, net), accrued interest and due from servicers		8,624		12,817
Receivable from third parties		34,487		940
Other assets		(10,871)		1,477
Accounts payable and other accrued liabilities		36,362		70,307
Net cash provided by (used for) operating activities	$	20,932	$	48,028
Cash Flows From Investing Activities:
Origination of loans		(1,497,521)		(473,834)
Purchase of loans		(17,100)		(53,053)
Proceeds from disposition and principal payment of loans		367,055		371,699
Origination of Paycheck Protection Program loans		(2,134,612)		—
Purchase of Paycheck Protection Program loans		(3,866)		—
Proceeds from disposition and principal payment of Paycheck Protection Program loans		62,366		—
Purchase of mortgage backed securities, at fair value		—		(1,576)
Proceeds from sale and principal payment of mortgage backed securities, at fair value		1,846,109		8,546
Proceeds from sale of real estate		2,094		8,955
Funding of unconsolidated joint ventures		(15,686)		(1,698)
Proceeds on unconsolidated joint venture in excess of earnings recognized		10,543		3,579
Cash acquired in connection with the ANH Merger, net of cash paid		49,917		—
Net cash provided by (used for) investing activities	$	(1,330,701)	$	(137,382)
Cash Flows From Financing Activities:
Proceeds from secured borrowings		6,830,648		3,626,223
Payment of secured borrowings		(8,204,704)		(3,561,787)
Proceeds from the Paycheck Protection Program Liquidity Facility borrowings		2,295,535		—
Payment of the Paycheck Protection Program Liquidity Facility borrowings		(85,187)		—
Proceeds from issuance of securitized debt obligations of consolidated VIEs		696,840		495,220
Payment of securitized debt obligations of consolidated VIEs		(290,645)		(168,042)
Proceeds from corporate debt		195,768		—
Payment of corporate debt		(50,000)		—
Payment of guaranteed loan financing		(44,873)		(59,325)
Payment of deferred financing costs		(16,708)		(9,417)
Equity issuance, net of offering costs		111,307		13,364
Distributions from non-controlling interests, net		(150)		(50)
Dividend payments		(44,394)		(25,427)
Share repurchase program		(987)		—
Tender offer of preferred shares		(11,133)		—
Net cash provided by (used for) financing activities	$	1,381,317	$	310,759
Net increase (decrease) in cash, cash equivalents, and restricted cash		71,548		221,405
Cash, cash equivalents, and restricted cash beginning balance		200,482	��	127,980
Cash, cash equivalents, and restricted cash ending balance	$	272,030	$	349,385

Supplemental disclosures:

Cash paid for interest	$	91,099	$	79,394
Cash paid (received) for income taxes	$	416	$	—
Stock-based compensation	$	2,345	$	1,121
Non-cash investing activities
Loans transferred from loans, held for sale, at fair value to loans, net	$	—	$	509
Loans transferred from loans, net to loans, held for sale, at fair value	$	1,793	$	—
Loans transferred to real estate owned	$	1,388	$	8,609
Non-cash financing activities
Dividend paid in stock	$	—	$	17,395
Share-based component of incentive fees	$	—	$	53
Cash, cash equivalents, and restricted cash reconciliation
Cash and cash equivalents	$	200,723	$	257,017
Restricted cash		57,118		91,539
Cash, cash equivalents, and restricted cash in assets of consolidated VIEs		14,189		829
Cash, cash equivalents, and restricted cash ending balance	$	272,030	$	349,385

See Notes To Unaudited Consolidated FinancialStatements

Table of Contents

READY CAPITAL CORPORATION

~~SUTHERLAND ASSET MANAGEMENT CORPORATION~~

NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (~~Unaudited)~~(UNAUDITED)

Note ~~1 –~~1. Organization

~~Sutherland Asset Management~~Ready Capital Corporation (the “Company” or ~~“Sutherland”~~“Ready Capital” and together with its subsidiaries ~~“we,”~~“we”, “us” and “our”), is a Maryland corporation. ~~On October 31, 2016, we completed our path~~The Company is a multi-strategy real estate finance company that originates, acquires, finances and services small to ~~becoming~~medium balance commercial (“SBC”) loans, Small Business Administration (“SBA”) loans, residential mortgage loans, and to a ~~publicly traded company through our merger with~~lesser extent, mortgage backed securities (“MBS”) collateralized primarily by SBC loans, or other real estate-related investments. SBC loans represent a special category of commercial loans, sharing both commercial and ~~into a subsidiary~~residential loan characteristics. SBC loans are generally secured by first mortgages on commercial properties, but because SBC loans are also often accompanied by collateralization of ~~ZAIS Financial Corp. (“ZAIS”), with ZAIS legally surviving~~personal assets and subordinate lien positions, aspects of residential mortgage credit analysis are utilized in the merger and changing its name to Sutherland Asset Management Corporation. On November 1, 2016, our common stock began trading on the New York Stock Exchange (“NYSE”) under ticker symbol “SLD”. See further discussion in Note 5, Business Combinations.underwriting process.

The Company is externally managed and advised by Waterfall Asset Management, LLC (“Waterfall” or the “Manager”), an investment advisor registered with the United States Securities and Exchange Commission under the Investment Advisors Act of 1940, as amended.

Sutherland Partners, LP (the “Operating Partnership”) holds substantially all of our assets and conducts substantially all of our business. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the Company owned approximately ~~96.5%~~98.4% and ~~92.9%, respectively, of the operating partnership units (“OP units”)~~97.9% of the Operating ~~Partnership.~~Partnership, respectively. The Company, as sole general partner of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership, and the limited partners of the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of the Operating Partnership. Therefore, the Company consolidates the Operating Partnership.

The Company, together with its consolidated subsidiaries and variable interest entities (“VIEs”), is a specialty-finance company which acquires, originates, manages, services and finances small balance commercial (“SBC”) loans, Small Business Administration (“SBA”) loans, residential mortgage loans, and to a lesser extent, mortgage backed securities (“MBS”) collateralized primarily by SBC loans, or other real estate-related investments.

SBC loans represent a special category of commercial loans, sharing both commercial and residential loan characteristics. SBC loans are generally secured by first mortgages on commercial properties, but because SBC loans are also often accompanied by collateralization of personal assets and subordinate lien positions, aspects of residential mortgage credit analysis are utilized in the underwriting process.

The Company reports its results of operations through the following ~~four~~4 business segments: i) ~~Loan~~ Acquisitions,, ii) SBC Originations,, iii) ~~SBA Originations, Acquisitions and Servicing~~,Small Business Lending, and iv) Residential Mortgage Banking, with the remaining amounts recorded in Corporate- ~~Other. Our~~Other. The Company’s acquisition and origination platforms consist of the following ~~four~~4 operating segments:

●

~~Loan~~ Acquisitions. We acquire performing and non-performing SBC loans ~~and intend to continue to acquire these loans~~ as part of our business strategy. We hold performing SBC loans to term, and we seek to maximize the value of the non-performing SBC loans acquired by us through ~~proprietary loan modification programs.~~borrower-based resolution strategies. We typically acquire non-performing loans at a discount to their unpaid principal balance (“UPB”) when we believe that resolution of the loans will provide attractive risk-adjusted returns.

●

SBC Originations. We originate SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels through our wholly-owned subsidiary, ReadyCap Commercial, LLC (“~~RCC”), a wholly-owned subsidiary of~~ ReadyCap ~~Holdings, LLC (collectively, “ReadyCap”~~Commercial”). These originated loans are generally held-for-investment or placed into securitization structures. Additionally, as part of this segment, we originate and service multi-family loan products under the ~~newly launched small balance loan program of the~~ Federal Home Loan Mortgage ~~Corporation~~Corporation’s Small Balance Loan Program (“Freddie Mac” and the “Freddie Mac program”). These originated loans are ~~either held-for-investment, placed into securitization structures, or sold.~~

held for sale, then sold to Freddie Mac.

●

~~SBA Originations, Acquisitions, and Servicing~~Small Business Lending. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap Lending, LLC (“~~RCL”~~ReadyCap Lending”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. ~~In the future, we may originate SBC loans for real estate under the SBA 504 loan program, under which the SBA~~

~~Table of Contents~~

~~guarantees subordinated, long-term financing.~~ These originated loans are either held-for-investment, placed into securitization structures, or sold.

We also acquire purchased future receivables and originate small balance SBA loans through our Knight Capital platform (“Knight Capital”). Knight Capital, which we acquired in 2019, is a technology-driven platform that provides working capital to small and medium sized businesses across the U.S. In the second quarter of 2021, our Chief Executive Officer, as our Chief Operating Decision Maker (“CODM”), realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities of, and projections for, Knight Capital. We have recasted prior period amounts and segment information to conform to this presentation.

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Residential Mortgage Banking. ~~In connection with~~We operate our ~~merger with ZAIS on October 31, 2016, as described in greater detail below, we added a~~ residential mortgage loan origination segment through our wholly-owned subsidiary, GMFS, LLC ("GMFS"). GMFS originates residential mortgage loans eligible to be purchased, guaranteed or insured by the Federal National Mortgage Association (“Fannie Mae”), Freddie Mac, Federal Housing Administration (“FHA”), U.S. Department of Agriculture (“USDA”) and U.S. Department of Veterans Affairs (“VA”) through retail, correspondent and broker channels. These originated loans are then sold to third ~~parties.~~

parties, primarily agency lending programs.

On March 19, 2021, the Company completed the acquisition of Anworth Mortgage Asset Corporation (“ANH”), through a merger of ANH with and into a wholly-owned subsidiary of the Company, in exchange for approximately 16.8 million shares of the Company’s common stock and approximately $60.6 million in cash (“ANH Merger”). In accordance with the Agreement and Plan of Merger, dated as of December 6, 2020 (the "Merger Agreement"), by and among the Company, RC Merger Subsidiary, LLC and ANH, the number of shares of the Company’s common stock issued was based on an exchange ratio of 0.1688 per share plus $0.61 in cash. The total purchase price for the merger of $417.9 million consists of the Company’s common stock issued in exchange for shares of ANH common stock and cash paid in lieu of fractional shares of the Company’s common stock, which was based on a price of $14.28 of the Company’s common stock on the acquisition date, and $0.61 in cash per share.

In addition, the Company issued 1,919,378 shares of newly designated 8.625% Series B Cumulative Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), 779,743 shares of newly designated 6.25% Series C Cumulative Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”), and 2,010,278 shares of newly designated 7.625% Series D Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the “Series D Preferred Stock”), in exchange for all shares of ANH’s 8.625% Series A Cumulative Preferred Stock, 6.25% Series B Cumulative Convertible Preferred Stock and 7.625% Series C Cumulative Redeemable preferred stock outstanding prior to the effective time of the ANH Merger.

Upon the closing of the transaction and after giving effect to the issuance of shares of common stock as consideration in the merger, the Company’s historical stockholders owned approximately 77% of the combined Company’s outstanding common stock, while historical ANH stockholders owned approximately 23% of the combined Company’s outstanding common stock. Refer to Note 5 for assets acquired and liabilities assumed in the merger.

The acquisition of ANH increased the Company’s equity capitalization, supported continued growth of the Company’s platform and execution of the Company’s strategy, and provided the Company with improved scale, liquidity and capital alternatives, including additional borrowing capacity. Also, the stockholder base resulting from the acquisition of ANH enhanced the trading volume and liquidity for our stockholders. In addition, part of our strategy in acquiring ANH was to manage the liquidation and runoff of certain assets within the ANH portfolio and repay certain indebtedness on the ANH portfolio following the completion of the ANH Merger, and to redeploy the capital into opportunities in our core SBC strategies and other assets we expect will generate attractive risk-adjusted returns and long-term earnings accretion. Consistent with this strategy, at June 30, 2021, we have liquidated approximately $1.8 billion of assets within the ANH portfolio, primarily consisting of Agency RMBS, and repaid approximately $1.6 billion of indebtedness on the portfolio.

In addition, concurrently with entering into the Merger Agreement, we, the Operating Partnership and the Manager entered into the First Amendment to the Amended and Restated Management Agreement (the “Amendment”), pursuant to which, upon the closing of the ANH Merger, the Manager’s base management fee will be reduced by $1,000,000 per quarter for each of the first full 4 quarters following the effective time of the ANH Merger (the “Temporary Fee Reduction”). Other than the Temporary Fee Reduction set forth in the Amendment, the terms of the Management Agreement remain the same.

The Company qualifies as a ~~REIT~~real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with its first taxable year ended December 31, 2011. To maintain its tax status as a REIT, the Company distributes at least 90% of its taxable income in the form of distributions to shareholders.

~~In the fourth quarter of 2015,~~ ~~Silverthread Falls, LLC (“Silverthread”), a brokerage subsidiary, was classified as held-for-sale due to management’s intent to sell the business, and the Company has included Silverthread in discontinued operations.~~ ~~The trade date of the Silverthread sale was February 28, 2016 and the closing occurred in May of 2016.~~

Note ~~2 –~~2. Basis of Presentation

The unaudited interim consolidated financial statements ~~presented~~ herein ~~are~~referred to as the “consolidated financial statements” as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016~~2020 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016. These unaudited consolidated financial statements~~2020 and have been prepared in ~~conformity~~accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)—as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the U.S. Securities and Exchange ~~Commission.~~Commission (“SEC”).

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The accompanying ~~unaudited~~ interim consolidated financial statements, ~~do not include all~~including the notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. Accordingly, certain information and ~~footnotes required by generally accepted accounting principles~~footnote disclosures normally included in the ~~United States of America ("GAAP") for complete consolidated financial statements. These interim unaudited interim~~ consolidated financial statements and related notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2016, disclosed within the most recently filed 2016 annual report on Form 10-K.

have been condensed or omitted. In the opinion of management, the accompanying ~~unaudited interim~~ consolidated financial statements contain all ~~adjustments, consisting of~~ normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. Such operating results may not be indicative of the expected results for any other interim ~~periods~~period or the entire year.

Per ASC 805-40-45-1, we were designated as the accounting acquirer (accounting survivor) because of our larger pre-merger size relative to ZAIS, the relative voting interests of our stockholders after consummation of the merger, and our senior management and board continuing on after the consummation of the merger. As the accounting acquirer, our historical financial statements (and not those of ZAIS) are the historical financial statements following the consummation of the merger and are included in this quarterly report on Form 10-Q and the related unaudited interim The accompanying consolidated financial statements ~~and footnotes.~~

~~Historical stockholders’ equity of~~should be read in conjunction with the ~~Company prior to the reverse acquisition has been retrospectively adjusted (a recapitalization)~~audited consolidated financial statements included in our Annual Report on Form 10-K for the ~~equivalent number of shares received by~~fiscal year ended December 31, 2020 filed with the Company after giving effect to any difference in par value of ZAIS and the Company’s stock with any such difference recognized in equity. Retained earnings of the Company have been carried forward after the acquisition. Operations prior to the merger are those of the Company. Under the terms of the merger agreement: (1) stockholders of ZAIS and unitholders in the ZAIS operating partnership retained their existing shares and partnership units following the merger, (2) each outstanding share of Sutherland common stock was converted into 0.8356 of ZAIS common stock and (3) each outstanding partnership unit of Sutherland operating partnership was converted into 0.8356 units of limited partnership interests in the operating partnership.SEC.

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Note ~~3 –~~3. Summary of Significant Accounting Policies

Use of ~~Estimates~~

estimates

The preparation of the Company’s ~~unaudited interim~~ consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the ~~unaudited interim~~ consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could materially differ from those estimates.

Basis of ~~Consolidation~~consolidation

The accompanying ~~unaudited interim~~ consolidated financial statements of the Company include the accounts and results of operations of the Operating Partnership and other consolidated subsidiaries and VIEs in which we are the primary beneficiary. The ~~unaudited interim~~ consolidated financial statements are prepared in accordance with ASC 810, Consolidations. Intercompany ~~accounts~~balances and transactions have been eliminated.

Reclassifications

Certain amounts reported for the prior periods in the accompanying ~~unaudited interim~~ consolidated financial statements have been reclassified in order to conform to the current period’s presentation.

Loans, held-for-investment and loans, held at fair value are now presented on the unaudited interim consolidated balance sheets as Loans, net. These amounts have been presented by loan program type and accounting category, within Note 6. The amounts reported for the prior periods have been reclassified in order to conform to the current period’s presentation.

Servicing rights and residential mortgage servicing rights, at fair value, are now included on the unaudited interim consolidated balance sheets as Servicing rights. These amounts have been presented by loan servicing program and accounting category, within Note 9. The amounts reported for the prior periods have been reclassified in order to conform to the current period’s presentation.

Borrowings under repurchase agreements and borrowings under credit facilities are now included on the unaudited interim consolidated balance sheets as Secured short-term borrowings. The amounts reported for the prior periods have been reclassified in order to conform to the current period’s presentation.

As described in Note 10, the historical results of our Residential mortgage banking segment has been reclassified in the unaudited interim consolidated statements of income to conform to our current period’s presentation of Gains on residential mortgage banking activities, net of variable loan expenses.

As described in Note 26, effective at the beginning of the third quarter of 2017, the Company implemented organizational changes to align its segment financial reporting more closely with its current business practices. These organizational changes resulted in securitization activities on originated SBC and SBA loans being transferred out of the Loan Acquisitions segment and into either the SBC originations or SBA originations, acquisitions, and servicing segment, based on the loan type. These organizational changes also resulted in the Company presenting ~~Corporate- Other~~ amounts separately and no longer reflecting these amounts as part of the four business segments. Prior period numbers were revised to conform to the new segment alignment and to be consistent with our current period’s presentation.

As described in Note 27, the historical results of Silverthread has been reflected in the accompanying unaudited interim consolidated statements of income for the three and nine months ended September 30, 2016 as discontinued operations and financial information related to discontinued operations has been excluded from the notes to these unaudited interim consolidated financial statements for all periods presented.

Cash and ~~Cash Equivalents~~cash equivalents

The Company ~~has accounted~~accounts for cash and cash equivalents in accordance with ASC 305, Cash and Cash Equivalents.The Company defines cash and cash equivalents as cash, demand deposits, and short-term, highly liquid investments with

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original maturities of 90 days or less when purchased. Cash and cash equivalents are exposed to concentrations of credit risk. We deposit our cash with institutions that we believe to have highly valuable and defensible business franchises, strong financial fundamentals, and predictable and stable operating environments.

~~As of September 30, 2017 and December 31, 2016, the Company had $0.6 million and $0.6 million, respectively, in money market mutual funds, and substantially all of the Company’s~~Restricted cash ~~and cash equivalents not held in money market funds were comprised of cash balances with banks that are in excess of the Federal Deposit Insurance Corporation insurance limits.~~

~~Restricted Cash~~

Restricted cash represents cash held by the Company as collateral against its derivatives, borrowings under repurchase agreements, ~~and~~ borrowings under credit facilities and other financing agreements with counterparties, construction and mortgage escrows, as well as cash held for remittance on loans serviced for third ~~parties and collateral related to the ReadyCap Commercial Freddie Mac program.~~ parties. Restricted cash is not available for general corporate purposes but may be applied against amounts due to counterparties under existing swaps and repurchase agreement borrowings, or returned to the Company when the ~~collateral~~restriction requirements ~~are exceeded~~no longer exist or at the maturity of the swap or repurchase agreement. Restricted cash is returned to the Company when our collateral requirements are exceeded or at the maturity or termination of the derivative, borrowings under repurchase agreements and borrowings under credit facilities.

~~Short term investments~~

~~The Company accounts for short-term investments as trading securities under ASC 320,~~ ~~Investments-Debt and Equity Securities~~. Short-term investments consist of U.S. Treasury Bills with original maturities of less than a year but greater than three months. The Company holds short-term investments at fair value. Interest received and accrued as well as the accretion of purchase discount in connection with short-term investments is recorded as interest income on the unaudited interim consolidated statements of income. Changes in the fair value of short-term investments are recorded as net unrealized gain (loss) on the unaudited interim consolidated statements of income.

Loans, net

Loans, net consists of loans, held-for-investment, net of allowance for ~~loan~~credit losses, and loans, held at fair value.

Loans, ~~held-for-investment~~

held-for-investment.Loans, held-for-investment are loans acquired from third parties (“acquired loans”), loans originated by ~~ReadyCap~~the Company that we do not intend to ~~securitize or~~ sell, or securitized loans that were previously originated by ~~ReadyCap.~~us. Securitized loans remain on the Company’s balance sheet because the securitization vehicles are consolidated under ASC 810.

Acquired loans are recorded at cost at the time they are acquired and ~~any related allowance for loan loss is not carried over at the acquisition date.~~

~~Acquired loans are accounted for in accordance with ASC 310-30,~~ ~~Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality~~ (“ASC 310-30”) and referred to as “purchased credit impaired loans” (PCI loans) if both of the following conditions are met as of the acquisition date: (i) there is evidence of deterioration in credit quality of the loan since its origination and (ii) it is probable that we will not collect all contractual cash flows on the loan.

~~Acquired loans without evidence of these conditions, securitized loans, and loans originated by ReadyCap that we do not intend to securitize~~ are accounted for under ASC 310-10, ~~Receivables- Overall, (“ASC 310-10”) and are referred to as “Non-purchased credit impaired loans” (non-PCI loans).~~Receivables.

~~Purchased Credit Impaired (PCI) Loans~~

The estimated cash flow expected for each loan is estimated at the time the loan is acquired. The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the initial investment is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using the interest method of

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accretion. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-accretable difference and is not accreted over time.

The Company estimates expected cash flows to be collected over the life of individual PCI loans on a quarterly basis. If the Company determines that discounted expected cash flows have decreased, the PCI loans would be considered impaired, which would result in a provision for loan loss and a corresponding increase in the allowance for loan losses.

If discounted expected cash flows have increased, or improved, in subsequent evaluations, the increase in cash flows is first used to reverse the amount of any related allowance for loan losses before the yield is adjusted. Additionally, the Company will increase the accretable yield to account for the increase in expected cash flows.

The estimate of the amount and timing of cash flows for our PCI loans is based on historical information available and expected future performance of the loans, and may include the timing of expected future cash flows, prepayment speed, default rates, loss severities, delinquency rates, percentage of non-performing loans, extent of credit support available, Fair Isaac Corporation (“FICO”) scores at loan origination, year of origination, loan-to-value ratios, geographic concentrations, as well as reports by credit rating agencies, such as Moody’s, Standard & Poor’s Corporation (“S&P”), or Fitch, general market assessments and dialogue with market participants. As a result, substantial judgment is used in the analysis to determine the expected cash flows.

~~Non-PCI Loans~~

The Company uses the interest method to recognize, as a constant effective yield adjustment, the difference between the initial recorded investment in the loan and the principal amount of the loan. The calculation of the constant effective yield necessary to apply the interest method uses the payment terms required by the loan contract, and prepayments of principal are not anticipated to shorten the loan term.

~~For non-PCI loans, recognition~~11

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Recognition of interest income is suspended when any loans are placed on non-accrual status. Generally, all classes of loans are placed on non-accrual status when principal or interest has been delinquent for 90 days or when full collection is determined ~~not~~ to be not probable. Interest income accrued, but not collected, at the date loans are placed on non-accrual status is reversed and subsequently recognized only to the extent it is received in cash or until itthe loan qualifies for return to accrual status. However, where there is doubt regarding the ultimate collectability of loan principal, all cash received is applied to reduce the carrying value of such loans. Loans are restored to accrual status only when contractually current and the collection of future payments is reasonably assured.

Loans, held at fair ~~value~~

value.Loans, held at fair value ~~are~~represent certain loans originated by ~~ReadyCap. The~~the Company ~~has~~for which we have elected the fair value ~~option because of the intent to transfer to securitizations in the near term.~~option. Interest is recognized as interest income onin the ~~unaudited interim~~ consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the ~~unaudited interim~~ consolidated statements of income.

~~The Company transfers loans held at fair value to loans, held-for-investment upon the completion of securitization.~~

Allowance for ~~loan losses~~

credit losses. The allowance for ~~loan losses is intended to provide for~~ credit losses ~~inherent in~~consists of the allowance for losses on loans ~~held-for-investment portfolio~~ and islending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly ~~for adequacy~~ considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value ratio and economic conditions. The allowance for ~~loan~~credit losses ~~is increased~~increases through provisions ~~for loan losses~~ charged to earnings and reduced by charge-offs, net of recoveries.

~~We determine~~On January 1, 2020, the ~~allowance for loan~~Company adopted ASU 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by ~~measuring~~including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit ~~impairment on (1) an individual basis for non-accrual status loans, and (2) on a collective basis for all other loans with similar risk characteristics.~~losses under CECL is applicable to financial assets measured at amortized cost. The allowance for credit losses required under ASU 2016-13 is deducted from the respective loans’ amortized cost basis on our consolidated balance sheets. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

In connection with the Company’s adoption of ASU 2016-13 on January 1, 2020, the Company implemented new processes including the utilization of loan loss forecasting models, updates to the Company’s reserve policy documentation, changes to internal reporting processes and related internal controls. The Company has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2020 and (ii) probability weighted expected cash flow method, depending on ~~an individual basis is assessed when a~~the type of loan ~~is on non-accrual~~ and the ~~recoverability~~availability of relevant historical market loan loss data. The Company might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, ~~is less than~~underlying collateral, and availability of relevant historical market loan loss data.

Significant inputs to the Company’s forecasting methods include (i) key loan-specific inputs such as LTV, vintage year, loan-term, underlying property type, occupancy, geographic location, and others, and (ii) a macro-economic forecast, including unemployment rates, interest rates, commercial real estate prices, and others. These estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its ~~carrying value.~~loan portfolio.

In certain instances, the Company considers relevant loan-specific qualitative factors to certain loans to estimate its CECL expected credit losses. The Company considers ~~the loans~~loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, ~~dependent~~ and ~~relies~~(ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that the Company determines that foreclosure of the collateral is probable, the Company measures the expected losses based on the ~~current~~difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that the Company determines foreclosure is not probable, the Company applies a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis ~~for determining impairment. Loans that are not assessed individually for impairment are assessed on a collective basis. For~~of the ~~acquired loans we perform a historical analysis on both cumulative defaults and severity upon default for all~~loan.

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loans that were current as of November 4, 2013 when the Company was formed or acquired thereafter. We calculated the cumulative default and loss severity on the acquired loans with delinquency statuses of 90+ days and applied those factors to the current acquired loan population. For the originated loans, our historical data does not show any defaults, therefore we used an analysis performed on the latest ReadyCap securitization to determine the likelihood of default and to determine loss severity we stressed collateral value to the current principal balance based on the total valuation decline of SBC properties from the peak valuation in 2007 through their post-crisis low in 2010.

The determination of allowances for SBA loans is based upon the assignment of a probability of default on a rating scale. Each loan rating is re-evaluated at least annually for loan performance, underlying borrower financial performance or data from third party credit bureaus. The probability of default is compared to the underlying collateral value securing each loan and compared to each loan carrying value to calculate a loss estimate. Collectively the estimated probability of default and recovery value is compared to actual portfolio default and recovery rates as well as economic factors and adjusted when needed.

The determination of whether an allowance for loan loss is necessary is based on whether or not there is a decrease in cash flows based on consideration of factual information available at the time of assessment as well as management’s estimates of the future performance and projected amount and timing of cash flows expected to be collected on the loan.

While we have a formal methodology to determine the adequate and appropriate level of the allowance for ~~loan~~credit losses, estimates of inherent loan losses involve judgment and assumptions as to various factors, including current economic conditions. Our determination of adequacy of the allowance for ~~loan~~credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for ~~loan~~credit losses will vary from period to period based on management's ongoing assessment of the adequacy of the allowance for ~~loan~~credit losses.

Non-accrual ~~loans~~

loans. Non-accrual loans are the loans for which we are not accruing ~~or accreting~~ interest income. Non-accrual loans include ~~non-PCI~~PCD (“purchased credit-deteriorated”) loans when principal or interest has been delinquent for 90 days or more ~~or when it is determined that full collection of contractual cash flows is not probable. Additionally, PCI loans~~and for which ~~the Company is unable to reasonably estimate the timing and amount of expected cash flows~~specific reserves are ~~considered to be non-accrual loans.~~recorded.

Troubled ~~Debt Restructurings~~

debt restructurings. In situations where, for economic or legal reasons related to the borrower’s financial difficulties, we grant concessions for a period of time to the borrower that we would not otherwise consider, the related loans are classified as troubled debt restructurings (“TDR”). These modified terms may include interest rate reductions, principal forgiveness, term extensions, payment forbearance and other actions intended to minimize our economic loss and to avoid foreclosure or repossession of collateral. For modifications where we forgive principal, the entire amount of such principal forgiveness is immediately charged off. ~~Loans classified as TDRs, are considered impaired loans.~~ Other than resolutions such as foreclosures and sales, we may remove loans held-for-investment from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.

Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected.

~~Impaired loans~~

~~The Company considers~~ In addition, based on issued regulatory guidance provided by federal and state regulatory agencies, a loan modification is not considered a TDR if: (1) made in response to ~~be impaired when~~ the ~~Company does not expect to collect all of~~COVID-19 pandemic; (2) the ~~contractual interest and principal~~borrower was current on payments ~~as scheduled in~~at the ~~loan agreements. This includes certain non-PCI loans where we do not expect to collect all of~~time the ~~contractual interest and principal payments, as well as PCI loans, which experienced credit deterioration prior to acquisition.~~modification program was implemented; (3) the modification was short-term (e.g., six months).

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Loans, held for sale, at fair value

Loans, held for sale, at fair value are loans that are expected to be sold to third parties in the near term. Interest is recognized as interest income onin the ~~unaudited interim~~ consolidated statements of income when earned and deemed collectible. For loans originated by our SBC originations and SBA originations segments, changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the ~~unaudited interim~~ consolidated statements of income. For originated SBA loans, the guaranteed portion is held for sale, at fair value. For loans originated by GMFS, changes in fair value are reported as ~~gains on~~ residential mortgage banking activities ~~net of variable loan expenses, on~~in the ~~unaudited interim~~ consolidated statements of income.

Paycheck Protection Program loans

Paycheck Protection Program (“PPP”) loans originated in response to the COVID-19 pandemic are described in Note 20. The Company has elected the fair value option for the loans originated by the Company for the first round of the program. Interest is recognized as interest income in the consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the consolidated statements of income, although the PPP includes a 100% guarantee from the federal government and principal forgiveness for borrowers if the funds were used for defined purposes.

The ~~Company transfers loans held~~Company’s loan originations in the second round of the program are accounted for ~~sale, at fair value to~~as loans, held-for-investment ~~when~~under ASC 310. Loan origination fees and related direct loan origination costs are capitalized into the initial recorded investment in the loan and are deferred over the loan term. The Company ~~no longer intends~~uses the interest method to ~~sell~~recognize, as a constant effective yield adjustment, the ~~loans.~~difference between the initial recorded investment in the loan and the principal amount of the loan. The calculation of the constant effective yield necessary to apply the interest method uses the payment terms required by the loan contract along with expected prepayments from loan forgiveness by the federal government.

Mortgage backed securities, at fair value

The Company accounts for MBS as trading securities and ~~are carried~~carries them at fair value under ASC 320, Investments-Debt and Equity Securities. Our MBS portfolio is comprised of asset-backed securities collateralized by interest in or obligations backed by pools of SBC ~~loans.~~

loans as well as residential Agency MBS, which are guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Purchases and sales of MBS are recorded onas of the trade date. Our MBS securities pledged as collateral against borrowings under repurchase agreements are included in mortgage backed securities, at fair value on our ~~unaudited interim~~ consolidated balance sheets.

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MBS are recorded at fair value as determined by market prices provided by independent broker dealers or other independent valuation service providers. The fair values assigned to these investments are based upon available information and may not reflect amounts that may be realized. We generally intend to hold our investment in MBS to generate interest income; however, we have and may continue to sell certain of our investment securities as part of the overall management of our assets and liabilities and operating our business.

Loans eligible for repurchase from Ginnie Mae

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company then records the right to repurchase the loan as an asset and liability in its ~~unaudited interim~~ consolidated balance sheets. Such amounts reflect the unpaid principal balance of the loans.

Derivative instruments, at fair value

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we utilize derivative financial instruments, currently comprised of credit default swaps (“CDSs”), interest rate swaps, TBA agency securities, FX forwards and interest rate lock commitments (“IRLCs”) as part of our risk ~~management.~~management strategy. The Company accounts for derivative instruments under ASC 815, Derivatives and ~~Hedges~~Hedging.

All derivatives are reported as either assets or liabilities onin the ~~unaudited interim~~ consolidated balance sheets at the estimated fair value with the changes in the fair value recorded in ~~earnings.~~

~~Although permitted under certain circumstances, generally~~earnings unless hedge accounting is elected. As of June 30, 2021 and December 31, 2020, the Company ~~does not~~has offset $3.1 million and $5.0 million, respectively, of cash collateral receivable ~~or payables~~ against our gross derivative liability positions. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the Company has not offset $6.7 million and $10.5 million, respectively, of cash collateral receivable ~~held for~~against our derivative ~~instruments is $1.6 million and $1.7 million, respectively,~~liability positions and is included in restricted cash onin the ~~unaudited interim~~ consolidated balance sheets.

Interest ~~Rate Swap Agreements~~

rate swap agreements. An interest rate swap is an agreement between two counterparties to exchange periodic interest payments where one party to the contract makes a fixed-rate payment in exchange for a floating-rate payment from the other party. The dollar amount each party pays is an agreed-upon periodic interest rate multiplied by some pre-determined dollar principal

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~~(notional~~ (notional amount). No principal (notional amount) is exchanged between the two parties at trade initiation date. Only interest payments are ~~exchanged.~~exchanged over the life of the contract. Interest rate swaps are classified as Level 2 in the fair value hierarchy. The fair value adjustments ~~along with~~are reported within net unrealized gain (loss) on financial instruments, while the related interest income or interest expense, are reported aswithin net ~~gain/loss~~realized gain (loss) on financial ~~instruments.~~instruments in the consolidated statements of income.

~~Interest Rate Lock Commitments (“IRLCs”)~~TBA Agency Securities. TBA Agency Securities are forward contracts for the purchase or sale of Agency Securities at predetermined measures on an agreed-upon future date. The specific Agency Securities delivered pursuant to the contract upon the settlement date are not known at the time of the transaction. The fair value of TBA Agency Securities is priced based on observed quoted prices. The realized and unrealized gains or losses are reported in the consolidated statements of income as residential mortgage banking activities. TBA Agency Securities are classified as Level 2 in the fair value hierarchy.

IRLC. IRLCs are agreements under which GMFS agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Unrealized gains and losses on the IRLCs, reflected as derivative assets and derivative liabilities, respectively, are measured based on the value of the underlying mortgage loan, quoted government-sponsored enterprise ~~(“GSE”, such as Fannie~~(Fannie Mae, Freddie Mac, or and the Government National Mortgage Association ((“Ginnie ~~Mae)~~Mae”), collectively, “GSEs”) or MBS prices, estimates of the fair value of the mortgage servicing rights (“MSRs”) and the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expense and broker fees. The realized and unrealized gains or losses are reported onin the ~~unaudited interim~~ consolidated statements of income as ~~gains on~~ residential mortgage banking ~~activities, net of variable loan expenses.~~activities. IRLCs are classified as Level 3 in the fair value hierarchy.

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FX forwards.FX forwards are agreements between two counterparties to exchange a pair of currencies at a set rate on a future date. Such contracts are used to convert the foreign currency risk to U.S. dollars to mitigate exposure to fluctuations in FX rates. The fair value adjustments are reported within net unrealized gain (loss) on financial instruments in the consolidated statements of income. FX forwards are classified as Level 2 in the fair value hierarchy.

~~CDS~~

~~CDS~~CDS.CDSs are contracts between two parties, a protection buyer who makes fixed periodic payments, and a protection seller, who collects the premium in exchange for making the protection buyer whole in the case of default. The fair value adjustments ~~along with~~are reported within net unrealized gain (loss) on financial instruments, while the related interest income or interest expense are reported ~~as gain/~~within net realized gain (loss) on financial ~~instruments.~~ ~~CDS~~instruments in the consolidated statements of income. CDSs are classified as Level 2 in the fair value hierarchy.

Hedge accounting. As a general rule, hedge accounting is permitted where the Company is exposed to a particular risk, such as interest rate risk, that causes changes in the fair value of an asset or liability or variability in the expected future cash flows of an existing asset, liability, or forecasted transaction that may affect earnings.

To qualify as an accounting hedge under the hedge accounting rules (versus an economic hedge where hedge accounting is not applied), a hedging relationship must be highly effective in offsetting the risk designated as being hedged. We use cash flow hedges to hedge the exposure to variability in cash flows from forecasted transactions, including the anticipated issuance of securitized debt obligations. ASC 815 requires that a forecasted transaction be identified as either: 1) a single transaction, or 2) a group of individual transactions that share the same risk exposures for which they are designated as being hedged. Hedges of forecasted transactions are considered cash flow hedges since the price is not fixed, hence involve variability of cash flows.

For qualifying cash flow hedges, the change in the fair value of the derivative (the hedging instrument) is recorded in other comprehensive income (loss) ("OCI"), and is reclassified out of OCI and into the consolidated statements of income when the hedged cash flows affect earnings. These amounts are recognized consistent with the classification of the hedged item, primarily interest expense (for hedges of interest rate risk). If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income (loss) ("AOCI") is recognized in earnings when the cash flows that were hedged affect earnings, so long as the forecasted transaction remains probable of occurring.

In May 2021, we discontinued hedge accounting for the anticipated issuance of securitized debt obligations for certain hedges. As a general rule, derivative gains or losses reported in AOCI are required to be recorded in earnings when it becomes probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period thereafter. The guidance in ASC 815 includes an exception to the general rule when extenuating circumstances that are outside the control or influence of the reporting entity cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period. The issuance of the securitized debt obligations was delayed beyond the additional two-month period due to the uncertainty in the capital markets and lower origination volumes as a result of the COVID-19 pandemic. Since the delay was caused by extenuating circumstances related to the COVID-19 pandemic and the issuance of securitized debt obligations remains probable over a reasonable time period after the additional two-month period, the discontinued cash flow hedges qualify for the exception in accordance with FASB Staff Q&A Topic 815: Cashflow hedge accounting affected by the Covid 19-Pandemic. Accordingly, the previously recorded net derivative instrument gains or losses related to the discontinued cash flow hedges will remain in AOCI. Gains and losses from the derivative instruments will be recorded in the earnings from the date of the discontinuation of cash flow hedges.

Hedge accounting is generally terminated at the debt issuance date because we are no longer exposed to cash flow variability subsequent to issuance. Accumulated amounts recorded in AOCI at that date are then released to earnings in future periods to reflect the difference in 1) the fixed rates economically locked in at the inception of the hedge and 2) the actual fixed rates established in the debt instrument at issuance. Because of the effects of the time value of money, the actual interest expense reported in earnings will not equal the effective yield locked in at hedge inception multiplied by the par value. Similarly, this hedging strategy does not actually fix the interest payments associated with the forecasted debt issuance.

Servicing rights

Servicing rights initially represent the fair value of expected future cash flows for performing servicing activities for others. The fair value considers estimated future servicing fees and ancillary revenue, offset by estimated costs to service the loans, and generally declines over time as net servicing cash flows are received, effectively amortizing the servicing right asset against contractual servicing and ancillary fee income.

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Servicing rights are recognized upon sale orof loans, including a securitization of loans accounted for as a sale in accordance with U.S. GAAP, if servicing is retained. For servicing rights, gains related to servicing rights retained is included in ~~other income on~~net realized gain (loss) in the ~~unaudited interim~~ consolidated statements of income. For residential mortgage servicing rights, gains on servicing rights retained upon sale of a loan are included in ~~gains on~~ residential mortgage banking activities ~~net of variable loan expenses, on~~in the ~~unaudited interim~~ consolidated statements of income.

The Company treats its servicing rights and residential mortgage servicing rights as ~~two~~2 separate classes of servicing assets based on the class of the underlying mortgages and it treats these assets as two separate pools for risk management purposes. Servicing rights relating to the Company’s servicing of loans guaranteed by the SBA under its Section 7(a) loan program and servicing rights related to the Freddie Mac program are accounted for under ASC 860, Transfers and Servicing, while the Company’s residential mortgage servicing rights are accounted for under the fair value option under ASC 825, Financial Instruments.

Servicing rights – SBA and Freddie ~~Mac~~

Mac. SBA and Freddie Mac servicing rights are initially recorded at fair value and subsequently carried at amortized cost. We capitalize the value expected to be realized from performing specified servicing activities for others. Servicing rights are amortized in proportion to and over the period of estimated servicing income and ~~is tested~~are evaluated for potential impairment quarterly.

For purposes of testing our servicing rights for impairment, we first determine whether facts and circumstances exist that would suggest the carrying value of the servicing asset is not recoverable. If so, we then compare the net present value of servicing cash flow with its carrying value. The estimated net present value of servicing cash flows is determined using discounted cash flow modeling techniques, which require management to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted loan prepayment rates, delinquency rates and anticipated maturity defaults. If the carrying value of the servicing rights exceeds the net present value of servicing cash flows, the servicing rights are considered impaired and an impairment loss is recognized in earnings for the amount by which carrying value exceeds the net present value of servicing cash flows.

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We ~~leverage all available relevant market data to determine the fair value of our recognized servicing assets. Since quoted market prices for servicing rights are not readily available, we~~ estimate the fair value of servicing rights by determining the present value of future expected servicing cash flows using modeling techniques that incorporate management's best estimates of key variables including estimates regarding future net servicing cash flows, forecasted loan prepayment rates, delinquency rates, and return requirements commensurate with the risks involved. Cash flow assumptions are modeled using our internally forecasted revenue and expenses, and where possible, the reasonableness of assumptions is periodically validated through comparisons to market data. Prepayment speed estimates are determined from historical prepayment rates or obtained from third-party industry data. Return requirement assumptions are determined using data obtained from market participants, where available, or based on current relevant interest rates plus a risk-adjusted spread. We also consider other factors that can impact the value of the servicing rights, such as surety provider termination clauses and servicer terminations that could result if we failed to materially comply with the covenants or conditions of our servicing agreements and did not remedy the failure. Since many factors can affect the estimate of the fair value of servicing rights, we regularly evaluate the major assumptions and modeling techniques used in our estimate and review these assumptions against market comparables, if available. We monitor the actual performance of our servicing rights by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.

Servicing rights - Residential (carried at fair value)

. The Company’s residential mortgage servicing rights consist of conforming conventional residential loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Government insured loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs.

~~As permitted by U.S. GAAP, the~~The Company has elected to account for its portfolio of residential mortgage servicing rights ~~(MSRs)~~(“MSRs”) at fair value. For these assets, the Company uses a third-party vendor to assist management in estimating the fair value. The third-party vendor uses a discounted cash flow approach which consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key assumptions used in the estimation of the fair value of MSRs include prepayment ~~speeds,~~rates, discount rates, default rates, and cost ~~to service, and contractual~~of servicing ~~fees.~~rates. Residential MSRs are classified as Level 3 in the fair value hierarchy.

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Real estate, held for sale

Real estate, held for sale includes purchased real estate and real estate acquired in full or partial settlement of loan obligations, generally through foreclosure, that is being marketed for sale. Real estate, held for sale is recorded at acquisition at the property’s estimated fair value less estimated costs to sell.

After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate, held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged through impairment.

The Company records a gain or loss from the sale of real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction price is probable. Once these criteria are met, the real estate is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. This adjustment is based on management’s estimate of the fair value of the loan extended to the buyer to finance the sale.

Investment in unconsolidated joint ventures

According to ASC 323, Equity Method and Joint Ventures, investors in unincorporated entities such as partnerships and unincorporated joint ventures generally shall account for their investments using the equity method of accounting if the investor has the ability to exercise significant influence over the investee. Under the equity method, we recognize our allocable share of the earnings or losses of the investment monthly in earnings and adjust the carrying amount for our share of the distributions that exceed our allocable share of earnings.

Purchased future receivables

Through Knight Capital, the Company provides working capital advances to small businesses through the purchase of their future revenues. The Company enters into a contract with the business whereby the Company pays the business an upfront amount in return for a specific amount of the business’s future revenue receivables, known as payback amounts. The payback amounts are primarily received through daily payments initiated by automated clearing house (“ACH”) transactions.

Revenues from purchased future receivables are realized when funds are received under each contract. The allocation of the amount received is determined by apportioning the amount received based upon the factor (discount) rate of the business's contract. Management believes that this methodology best reflects the effective interest method.

The Company has established an allowance for doubtful purchased future receivables. An increase in the allowance for doubtful purchased future receivables results in a charge to income and is reduced when purchased future receivables are charged-off. Purchased future receivables are charged-off after 90 days past due. Management believes that the allowance reflects the risk elements and is adequate to absorb losses inherent in the portfolio. Although management has performed this evaluation, future adjustments may be necessary based on changes in economic conditions or other factors.

Intangible assets

The Company accounts for intangible assets under ASC 350, Intangibles- Goodwill and Other. The Company’s intangible assets include an SBA license, capitalized software, a broker network, trade names, and an acquired favorable lease. The Company capitalizes software costs expected to result in long-term operational benefits, such as replacement systems or new applications that result in significantly increased operational efficiencies or functionality. All other costs incurred in connection with internal use software are expensed as incurred. The Company initially records its intangible assets at cost or fair value and will test for impairment if a triggering event occurs. Intangible assets are ~~accounted for under ASC 350,~~ ~~Intangibles-Goodwill and Other. As of September 30, 2017 and December 31, 2016,~~included within other assets in the Company’s identifiable intangible assets include SBA license for our lending operations as well as a trade name, customer relationships, a favorable lease, and other licenses, obtained as part of the ZAIS merger transaction. The Company determined that its SBA license has an indefinite life, while the other intangibles acquired as part of the ZAIS merger transaction are finite-lived.consolidated balance sheets. The Company amortizes intangible assets with identified estimated useful lives on a straight-line basis over their estimated useful lives.

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Goodwill

The Company ~~initially records its intangible assets at cost~~recorded goodwill in connection with the Company’s acquisition of Knight Capital and ~~subsequently tests~~the ANH Merger. Goodwill is not amortized, but rather, is tested for impairment ~~on an annual basis. Intangible~~annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill as of June 30, 2021, represents the excess of the consideration transferred over the fair value of net assets ~~are included within other assets on~~acquired in connection with the ~~unaudited interim consolidated balance sheets.~~acquisition of Knight Capital and the ANH Merger.

In testing goodwill for impairment, the Company follows ASC 350, Intangibles- Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill, or we choose not to perform the qualitative assessment, then we compare the fair value of that reporting unit with its carrying value, including goodwill, in a quantitative assessment. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying value, including goodwill, over its fair value.

The qualitative assessment requires judgment to be applied in evaluating the effects of multiple factors, including actual and projected financial performance of the reporting unit, macroeconomic conditions, industry and market conditions and relevant entity specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.

Deferred financing costs

Costs incurred in connection with our secured borrowings ~~under credit facilities~~ are accounted for under ASC 340, Other Assets and Deferred Costs. Deferred costs are capitalized and amortized using the effective interest method over the respective financing term with such amortization reflected on our ~~unaudited interim~~ consolidated statements of income as a component of interest expense. ~~Our deferred~~Deferred financing costs may include legal, accounting and other related fees. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. ~~Unamortized~~Pursuant to the adoption of ASU 2015-03, unamortized deferred financing costs related to securitizations and note issuances are presented onin the ~~unaudited interim~~ consolidated balance sheets as a direct deduction from the associated liability.

Due from ~~Servicers~~

servicers

The loan-servicing activities of the Company’s ~~SBC Loan Acquisitions~~acquisitions and SBC ~~Originations~~originations reportable segments are performed primarily by third-party servicers. SBA loans originated by and held at RCL are internally serviced. Residential mortgage loans originated by and held at GMFS are both serviced by third-party servicers and internally

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serviced. The Company’s servicers hold substantially all of the cash owned by the Company related to loan servicing activities. These amounts include principal and interest payments made by borrowers, net of advances and servicing fees. Cash is generally received within thirty days of recording the receivable.

The Company is subject to credit risk to the extent any servicer with whom the Company conducts business is unable to deliver cash balances or process loan-related transactions on the Company’s behalf. The Company monitors the financial condition of the servicers with whom the Company conducts business and believes the likelihood of loss under the aforementioned circumstances is remote.

Secured borrowings

Secured ~~short-term borrowings~~

~~Secured short-term~~ borrowings ~~incudes~~include borrowings under credit facilities and ~~borrowings under~~other financing agreements and repurchase agreements.

Borrowings under credit facilities

and other financing agreements. The Company accounts for borrowings under credit facilities and other financing agreements under ASC 470, Debt. The Company partially finances its loans, ~~held-for-investment,~~net through credit agreements and ~~loans, held for sale, at fair value through credit~~other financing agreements with various counterparties. These borrowings are collateralized by loans, held-for-investment, and loans, held for sale, at fair value and have maturity dates within two years from the ~~unaudited interim~~ consolidated balance sheet date. If the fair value (as determined by the applicable counterparty) of the collateral securing these borrowings decreases, we may be subject to margin calls during the period the borrowings are outstanding. In instances where we do not satisfy the margin calls within the required time frame, the counterparty may retain the collateral and pursue collection of any outstanding debt amount from us. Interest paid and accrued in connection with credit facilities is recorded as interest expense onin the ~~unaudited interim~~ consolidated statements of income.

~~Borrowing under repurchase agreements~~18

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Borrowings under repurchase agreements. The Company accounts for borrowings under repurchase agreements ~~are accounted for~~ under ASC 860, Transfers and Servicing. Investment securities financed under repurchase agreements are treated as collateralized borrowings, unless they meet sale treatment or are deemed to be linked transactions. Through ~~September~~June 30, ~~2017, none~~2021, NaN of our repurchase agreements have been accounted for as components of linked transactions. All securities financed through a repurchase agreement have remained on our ~~unaudited interim~~ consolidated balance sheets as an asset and cash received from the lender was recorded on our ~~unaudited interim~~ consolidated balance sheets as a liability. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense onin the ~~unaudited interim~~ consolidated statements of income.

~~Promissory note, net~~Paycheck Protection Program Liquidity Facility borrowings

The Company accounts for ~~promissory notes~~borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings under ASC 470, ~~Debt.~~ ~~There~~Debt. Borrowings under PPPLF are ~~no debt issuance costs associated with the outstanding note. The note is collateralized~~secured by ~~loans, held-for-investment and have maturity dates within five years from the unaudited interim consolidated balance sheet date.~~PPP loans. Interest paid and accrued in connection with ~~the promissory note~~PPPLF is recorded as interest expense onin the ~~unaudited interim~~ consolidated statements of income.

~~Senior secured note,~~Securitized debt obligations of consolidated VIEs, net

~~The~~Since 2011, we have engaged in several securitization transactions, which the Company accounts for ~~secured debt offerings~~ under ASC ~~470,~~ ~~Debt.~~ ~~Pursuant~~810. Securitization involves transferring assets to an SPE, or securitization trust, which typically qualifies as a VIE. The entity that has a controlling financial interest in a VIE is referred to as the ~~adoption~~primary beneficiary and is required to consolidate the VIE. The consolidation of ~~ASU 2015-03,~~ the ~~Company’s~~SPE includes the issuance of senior ~~secured note is presented net of~~securities to third parties, which are shown as securitized debt ~~issuance costs. These notes are collateralized by loans, MBS, and retained interests~~obligations of consolidated ~~VIE’s. Interest paid~~VIEs in the consolidated balance sheets.

Debt issuance costs related to securitizations are presented as a direct deduction from the carrying value of the related debt liability. Debt issuance costs are amortized using the effective interest method and ~~accrued~~are included in ~~connection with promissory notes is recorded as~~ interest expense onin the ~~unaudited interim~~ consolidated statements of income.

Convertible note, net

ASC 470~~Debt~~, requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. ASC 470-20 requires that the initial proceeds from the sale of these notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could

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have been issued by the Company at such time. We measured the estimated fair value of the debt component of our convertible notes as of the issuance date based on our nonconvertible debt borrowing rate. The equity components of the convertible senior notes have been reflected within additional paid-in capital in our ~~unaudited interim~~ consolidated balance sheet, and the resulting debt discount is amortized over the period during which the convertible notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense.

Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase. The difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component, including unamortized debt issuance costs, would be recognized as gain (loss) on extinguishment of debt in our ~~unaudited interim~~ consolidated statements of ~~operations.~~income. The remaining settlement consideration allocated to the equity component would be recognized as a reduction of additional paid-in capital in our ~~unaudited interim~~ consolidated balance sheets.

Senior secured notes, net

~~Securitized debt obligations of consolidated VIEs, net~~

~~Since 2011, we have engaged in several securitization transactions, which the~~The Company accounts for secured debt offerings under ASC 810. The Company is required to consolidate, as a VIE, the special purpose entity (“SPE”)/trust that was created to facilitate the transaction and to which the underlying loans in connection with the securitization were transferred. The consolidation of the SPE includes the issuance of senior securities to third parties, which are shown as securitized debt obligations of consolidated VIEs on the unaudited interim consolidated balance sheets.

470.Pursuant to the adoption of ASU 2015-03, ~~debt issuance costs related to securitizations~~the Company’s senior secured notes are presented ~~as a direct deduction from the carrying value of the related debt liability. These costs are amortized using the effective interest method. Amortization~~net of debt issuance ~~costs~~costs. These senior secured notes are collateralized by loans, MBS, and retained interests of consolidated VIE’s. Interest paid and accrued in connection with senior secured notes is ~~amortized using the effective interest method and is included in~~recorded as interest expense ~~from securitized~~in the consolidated statements of income.

Corporate debt, ~~obligations on~~net

The Company accounts for corporate debt offerings under ASC 470. The Company’s corporate debt is presented net of debt issuance costs. Interest paid and accrued in connection with corporate debt is recorded as interest expense in the ~~unaudited interim~~ consolidated ~~financial statements.~~statements of income.

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Guaranteed loan financing

Certain partial loan sales do not qualify for sale accounting under ASC 860~~Transfers and Servicing~~ because these sales do not meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment onin the ~~unaudited interim~~ consolidated balance sheets and the proceeds from the portion sold is recorded as guaranteed loan financing in the liabilities section of the ~~unaudited interim~~ consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying ~~unaudited interim consolidated statements of income.~~

~~Contingent consideration~~

Contingent consideration represent future payments of cash or equity interests to the former owners of GMFS, which was acquired on October 31, 2016. The contingent consideration was initially recorded on the date of acquisition at fair value in the unaudited interim consolidated balance sheet and is subsequently remeasured each reporting period at fair value with the change in the fair value recorded in earnings in the accompanying unaudited interim consolidated statements of income.

Repair and denial reserve

The repair and denial reserve represents the potential liability to the SBA in the event that we are required to make ~~whole~~ the SBA whole for reimbursement of the guaranteed portion of SBA loans. We may be responsible for the guaranteed portion of SBA loans if there are lien and collateral issues, unauthorized use of proceeds, liquidation deficiencies, undocumented servicing actions or denial of SBA eligibility. This reserve is calculated using an estimated frequency of a repair and denial event upon default, as well as an estimate of the severity of the repair and denial as a percentage of the guaranteed balance.

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Variable ~~Interest Entities~~

interest entities

VIEs are ~~defined as~~ entities ~~in which equity investors~~that, by design, either (i) ~~do not control the entity, and/or (ii) do not have~~lack sufficient equity ~~at risk for~~to permit the entity to finance its activities without additional subordinated financial support from other ~~parties.~~parties; or (ii) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. The entity that ~~consolidates~~is the primary beneficiary is required to consolidate the VIE. An entity is deemed to be the primary beneficiary of a VIE ~~is known as its primary beneficiary and is generally~~if the entity ~~with~~has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. ~~For VIEs that do not have substantial~~

In determining whether we are the primary beneficiary of a VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE, such as our role establishing the VIE and our ongoing ~~activities, the power to direct the activities that most significantly impact the VIE’s economic performance may be determined by an entity’s involvement with~~rights and responsibilities, the design of the ~~VIE.~~

~~The Company is required~~VIE, our economic interests, servicing fees and servicing responsibilities, and other factors. We perform ongoing reassessments to ~~re-evaluate~~evaluate whether ~~to consolidate~~changes in the entity’s capital structure or changes in the nature of our involvement with the entity result in a ~~VIE each reporting period, based upon the facts and circumstances pertaining~~change to the VIE ~~during such period. The Company consolidates a VIE when it is determined to be the primary beneficiary of such VIE.~~

~~The Company uses special purpose entities to securitize financial assets. Securitization involves transferring assets to an SPE, or securitization trust, to convert all~~designation or a ~~portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt instruments.~~change to our consolidation conclusion.

Non-controlling ~~Interests~~

interests

Non-controlling interests are presented on the ~~unaudited interim~~ consolidated balance sheets and the ~~unaudited interim~~ consolidated statements of income and represent direct investment in the Operating Partnership by Sutherland OP Holdings II, Ltd., which is managed by our Manager, and third parties.

Fair ~~Value Option~~value option

~~The guidance in~~ ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an ~~irrevocable~~ election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our ~~unaudited interim~~ consolidated balance sheets from those instruments using another accounting method.

We have elected the fair value option for certain loans held-for-sale originated by ~~ReadyCap that~~ the Company ~~intends~~that we intend to ~~securitize or~~ sell in the near term. The fair value elections for loans, held for sale, at fair value originated by ~~ReadyCap~~the Company were made due to the short-term nature of these instruments.

~~We have elected~~ This includes loans originated in round 1 of the ~~fair value option for~~Paycheck Protection Program, loans held-for-sale originated by GMFS that the Company intends to sell in the near ~~term. We have elected the fair value option for certain~~term and residential mortgage servicing ~~rights acquired~~rights.

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Share repurchase program

The Company accounts for repurchases of its common stock as ~~part of~~a reduction in additional paid in capital. The amounts recognized represent the ~~merger transaction.~~amount paid to repurchase these shares and are categorized on the balance sheet and changes in equity as a reduction in additional paid in capital.

Earnings per ~~Share~~

We present both basic and diluted earnings per share (“EPS”) amounts in our ~~unaudited interim~~ consolidated financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our share-based compensation, consisting of unvested restricted stock units (“RSUs”), unvested restricted stock awards (“RSAs”), ~~and~~performance-based equity awards, as well as “in-the-money” conversion options associated with our outstanding convertible senior ~~notes.~~notes and convertible preferred stock. Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period. ~~The Company’s earnings per share has been updated retroactively as a result of the reverse merger.~~

All of the Company’s unvested RSUs and unvested RSAs contain rights to receive non-forfeitable dividends and, thus, are participating securities. Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities.

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Income taxes

~~Income Taxes~~

U.S. GAAP establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s ~~unaudited interim~~ consolidated financial statements or tax returns. We assess the recoverability of deferred tax assets through evaluation of carryback availability, projected taxable income and other factors as applicable. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our ~~unaudited interim~~ consolidated financial statements or tax returns as well as the recoverability of amounts we record, including deferred tax assets.

We provide for exposure in connection with uncertain tax positions, which requires significant judgment by management including determination, based on the weight of the tax law and available evidence, that it is more-likely-than-not that a tax result will be realized. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense on our ~~unaudited interim~~ consolidated statements of income. As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, we accrued no0 taxes, interest or penalties related to uncertain tax positions. In addition, we do not anticipate a change in this position in the next 12 months.

Revenue recognition

Revenue ~~Recognition~~

is recognized upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is ~~accounted for under ASC 605,~~ ~~Revenue Recognition,~~ ~~which provides~~recognized through the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Since the guidance does not apply to revenue associated with financial instruments, including interest income, realized or unrealized gains on financial instruments, loan servicing fees, loan origination fees, among other ~~things that~~ revenue ~~be recognized when there~~streams, the revenue recognition guidance does not have a material impact on our consolidated financial statements. In addition, revisions to existing accounting rules regarding the determination of whether a company is ~~persuasive evidence~~acting as a principal or agent in an arrangement ~~exists, delivery~~ and ~~services have been rendered, price is fixed and determinable and collectability is reasonably assured.~~accounting for sales of nonfinancial assets where the seller has continuing involvement, did not materially impact the Company.

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Interest ~~Income~~

income. Interest income on ~~non-PCI~~ loans, held-for-investment, loans, held at fair value, loans, held for sale, at fair value, and MBS, at fair value is accrued based on the outstanding principal amount and contractual terms of the instrument. Discounts or premiums associated with the loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on contractual cash flows through the maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to the accrual status of the asset. If the asset has been delinquent for the previous 90 days, the asset status will turn to non-accrual, and recognition of interest income will be suspended until the asset resumes contractual payments for ~~three~~3 consecutive months.

Realized ~~Gains (Losses)~~

gains (losses). Upon the sale or disposition (not including the prepayment of outstanding principal balance) of loans or securities, the excess (or deficiency) of net proceeds over the net carrying value or cost basis of such loans or securities is recognized as a realized ~~gain/loss. Outstanding interest balances for payments in full are reported in interest income.~~gain (loss).

Origination ~~Income~~income and ~~Expense~~

expense. Origination income represents fees received for origination of either loans, held at fair value, loans, held for sale, at fair value, or loans, held-for-investment. For loans held, at fair value, and loans, held for sale, at fair value, pursuant to ASC 825, the Company reports origination fee income as revenue and fees charged and costs incurred as expenses. These fees and costs are excluded from the fair value. For originated loans, held-for-investment, under ASC 310-10, the Company defers these origination fees and costs at origination and amortizes them under the effective interest method over the life of the loan. Origination fees and expenses for ~~ReadyCap~~ loans, held at fair value and loans, held for sale, at fair value, are presented in the ~~unaudited interim~~ consolidated statements of income inas components of other income and operating expenses. Origination fees ~~and expenses~~ for residential mortgage loans originated by GMFS are presented in the ~~unaudited interim~~ consolidated statements of income in ~~gains of~~ residential mortgage banking activities, ~~net of~~while origination expenses are presented within variable ~~loan expenses.~~expenses on residential mortgage banking activities. The amortization of net origination fees and expenses for loans, held-for-investment are presented in the ~~unaudited interim~~ consolidated statements of income inas a component of interest income.

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~~Gains on~~ Residential ~~Mortgage Banking Activities, net of variable loan expenses~~

~~Gains on residential~~ mortgage banking activities ~~net of variable loan expenses,~~

Residential mortgage banking activities reflects ~~variable~~ revenue ~~and expense~~ within our residential mortgage banking business directly related to loan origination and sale activity. This primarily consists of the realized gains on sales of residential loans held for sale and loan origination fee income, ~~offset by direct costs, such as correspondent fee expenses and other direct expenses relating to these loans, which vary based on loan origination volumes. Gains on residential~~Residential mortgage banking activities ~~net of variable loan expenses,~~ also consists of unrealized gains and losses associated with the changes in fair value of the loans held for sale, the fair value of retained MSR additions, and the realized and unrealized gains and losses from derivative instruments.

Gains and losses from the sale of mortgage loans held for sale are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and is included in ~~gains on~~ residential mortgage banking activities, ~~net of variable loan expenses~~ in the ~~unaudited interim~~ consolidated statements of income. Sales proceeds reflect the cash received from investors from the sale of a loan plus the servicing release premium if the related MSR is sold. Gains and losses also ~~includes~~include the unrealized gains and losses associated with the mortgage loans held for sale and the realized and unrealized gains and losses from ~~IRLCs.~~derivative instruments.

Loan origination ~~costs directly attributable to the processing, underwriting, and closing of a loan are included in the gain on sale of~~fee income represents revenue earned from originating mortgage loans held for sale and are reflected in residential mortgage banking activities, when loans are sold.

Variable expenses on residential mortgage banking activities. Loan expenses include indirect costs related to loan origination activities, such as correspondent fees, and are expensed as incurred and are included ~~in gains~~within variable expenses on residential mortgage banking activities ~~net of variable loan expenses, in~~on the Company’s ~~unaudited interim~~ consolidated statements of income. The provision for loan indemnification includes the fair value of the incurred liability for mortgage repurchases and indemnifications recognized at the time of loan sale and any other provisions recorded against the loan indemnification ~~reserve~~reserve. Loan origination costs directly attributable to the processing, underwriting, and closing of a loan are included in ~~gains~~the gain on ~~residential mortgage banking activities, net~~sale of ~~variable loan expenses, in the Company’s unaudited interim consolidated statements of income.~~

Loan origination fee income represents revenue earned from originating mortgage loans and is included in gains on residential mortgage banking activities, net of variable loan expenses in the Company’s unaudited interim consolidated statements of income. Loan origination fees relating to mortgage loans held for sale ~~are reflected in gains on residential mortgage banking activities, net of variable loan expenses,~~ when loans are sold.

Foreign currency transactions

Assets and liabilities denominated in non-U.S. currencies are translated into U.S. dollars using foreign currency exchange rates prevailing at the end of the reporting period. Revenue and expenses are translated at the average exchange rates for each reporting period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of taxes, in the consolidated statements of comprehensive income.

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Note ~~4 – Recently Issued Accounting Pronouncements~~4. Recent accounting pronouncements

Financial Accounting Standards Board ~~("FASB"~~(“FASB”) Standards ~~adopted during 2017~~


Standard		Summary of guidance		Effects on financial statements
ASU ~~2014-15, Disclosure~~2020-04, Reference Rate Reform (Topic 848): Facilitation of ~~Uncertainties about an Entity’s Ability to Continue as a Going Concern~~the Effects of Reference Rate Reform on Financial Reporting		~~Explicitly requires management~~Provides optional expedients and exceptions to ~~assess~~GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from LIBOR, and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. The guidance generally considers contract modifications related to reference rate reform to be an ~~entity’s ability to continue as~~event that does not require contract remeasurement at the modification date nor a ~~going concern, and to provide related footnote disclosure in certain circumstances.~~reassessment of a previous accounting determination.		The Company has loan, security, and debt agreements that incorporate LIBOR as a reference interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets.
Issued March 2020		In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. Guidance is optional and may be elected over time, through December 31, 2022 using a prospective application on all eligible contract modifications.		The Company has not adopted any of the optional expedients or exceptions through June 30, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions.
ASU 2020-06, Debt – Debt with Conversion and other Options and Derivatives and Hedging-Contracts in Entity’s Own Equity (Topic 470-20)		Addresses the complexities in accounting for certain financial instruments with a debt and equity component. The number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted “Earnings per share” under ASC 260.		The Company is currently assessing the impact this ~~standard did not~~guidance will have ~~an impact~~ on our ~~unaudited interim~~ consolidated financial statements.
Issued August ~~2014~~2020			
~~ASU 2016-09, Compensation—Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting~~		~~Simplifies the accounting~~Effective for ~~employee share-based payment transactions, including the accounting for associated income taxes and forfeitures.~~		~~The adoption of this standard did not have an impact on our unaudited interim consolidated financial statements.~~
~~Issued March 2016~~			
~~ASU 2016-17, Consolidation (Topic 810) – Interests Held through Related Parties That Are under Common Control~~		When assessing which party is the primary beneficiary in a VIE requires that the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those interests as if they were that of the decision maker itself, as current GAAP requires.		~~The adoption of this standard did not have an impact on our unaudited interim consolidated financial statements.~~
~~Issued October 2016~~			

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~~FASB Standards issued, but not yet adopted~~


~~Standard~~	~~Summary of guidance~~		~~Effects on financial statements~~
~~ASU 2014-09, Revenue from Contracts with Customers (Topic 606)~~		Outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.		~~Required effective date: Annual reporting periods~~fiscal years beginning after December 15, ~~2017.~~
~~Issued May 2014~~2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition.		~~The standard clarifies the required factors that an entity must consider when recognizing revenue and also requires additional disclosures.~~		Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company does not expect the new revenue recognition guidance to have a material impact on the elements of its unaudited interim consolidated statements of income most closely associated with financial instruments, including interest income, gains and losses on financial instruments, gains on residential mortgage banking activities, and servicing income.
		~~May be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.~~		The Company has evaluated the impact of this standard and we do not anticipate that the adoption will have a material impact on our unaudited interim consolidated financial statements. To the extent an adjustment is warranted, we will adjust for the cumulative effect recognized as of the date of adoption.
~~ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments~~		Requires the use of an “expected loss” credit model for estimating future credit losses of certain financial instruments instead of the “incurred loss” credit model that existing GAAP currently requires.		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018.~~
~~Issued June 2016~~		The “expected loss” model requires the consideration of possible credit losses over the life of an instrument compared to only estimating credit losses upon the occurrence of a discrete loss event in accordance with the current “incurred loss” methodology.		~~The Company is evaluating the impact ASU 2016-13 will have on our unaudited interim consolidated financial statements.~~
~~ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments~~		Provides guidance on the disclosure and classification of certain items within the statement of cash flows, including beneficial interests obtained in a securitization of financial assets, debt prepayment or extinguishment costs, and distributions received from equity-method investees.		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017.~~
~~Issued August 2016~~		~~Required to be applied retrospectively to all periods presented beginning in the year of adoption.~~		~~The Company is evaluating the impact this standard will have on our statement of cash flows.~~
~~ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory~~		Requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current GAAP requires.		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted.~~
~~Issued October 2016~~				~~The Company is evaluating the impact this standard will have on our unaudited interim consolidated financial statements.~~
~~ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash~~		Requires that restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted.~~
~~Issued November 2016~~				~~The Company is evaluating the impact this standard will have on our unaudited interim consolidated financial statements.~~
~~ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business~~		Amends the definition of a business to exclude acquisitions of groups of assets where substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted.~~

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~~Standard~~	~~Summary of guidance~~		~~Effects on financial statements~~
~~Issued January 2017~~		~~This ASU results in most real estate acquisitions no longer being considered business combinations and instead being accounted for as asset acquisitions.~~		~~The Company is evaluating the impact this standard will have on our unaudited interim consolidated financial statements.~~
~~ASU 2017-05, Other Income – Gains and Losses from the De-recognition of Nonfinancial Assets~~		~~Requires that all entities account for the de-recognition of a business in accordance with ASC 810, including instances in which the business is considered in substance real estate.~~		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted.~~
~~Issued February 2017~~				~~The Company is evaluating the impact this standard will have on our unaudited interim consolidated financial statements.~~
~~ASU 2017-09, Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting~~		~~Provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.~~		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted.~~
~~Issued May 2017~~				~~There is currently no impact as there have been no modifications to share-based compensation.~~
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)—Accounting for Certain Financial Instruments with Down Round Features		~~Provides guidance which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.~~		~~Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2018. Early adoption is permitted.~~
~~Issued July 2017~~		When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock.		This standard currently would not have an impact on our unaudited interim consolidated financial statements. None of our issued equity or debt (in particular our convertible notes), contain down round features.
~~ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~		~~Provides guidance on simplifying the accounting and presentation for hedging activities.~~		~~This standard currently would not have an impact on our unaudited interim consolidated financial statements. We do not apply hedge accounting to any of our derivative instruments.~~
~~Issued August 2017~~			

Note ~~5 –~~5. Business Combinations

On ~~October 31, 2016, Sutherland merged~~March 19, 2021, the Company completed a merger agreement with ANH, a specialty finance company that focuses primarily on residential mortgage-backed securities and ~~into a subsidiary of ZAIS, with ZAIS legally surviving~~residential loans that are either rated “investment grade” or are guaranteed by federally sponsored enterprises. See Note 1 for more information about the ~~merger~~ANH Merger. The consideration transferred was allocated to the assets acquired and ~~changing its name~~liabilities assumed based on their respective fair values. The methodologies used and key assumptions made to ~~Sutherland Asset Management Corporation (the “combined company”). Per~~estimate the ~~terms~~fair value of the ~~Agreement~~assets acquired and ~~Plan~~liabilities assumed are primarily based on future cash flows and discount rates.

The following table summarizes the fair value of ~~Merger (“Merger Agreement”), dated as of April 6, 2016, as amended as of May 9, 2016~~assets acquired and ~~August 4, 2016, (i) Sutherland merged with~~liabilities assumed from the merger:


(In Thousands)	March 19, 2021
Assets
Cash and cash equivalents	$	110,545
Mortgage backed securities, at fair value		2,010,504
Loans, held for sale, at fair value		102,798
Real estate, held for sale		26,107
Accrued interest		8,183
Other assets		38,216
Total assets acquired	$	2,296,353
Liabilities
Secured borrowings		1,784,047
Corporate debt, net		36,250
Derivative instruments, at fair value		60,719
Accounts payable and other accrued liabilities		4,811
Total liabilities assumed	$	1,885,827
Net assets acquired	$	410,526

For acquired loan receivables, the gross contractual unpaid principal acquired is $98.3 million and ~~into ZAIS Merger Sub, LLC, with ZAIS Merger Sub, LLC surviving~~we expect to collect all contractual amounts.

The following table illustrates the ~~merger transaction~~aggregate consideration transferred, net assets acquired, and ~~continuing as~~the related goodwill:


(In thousands, except per share data)
Fair value of net assets acquired	$	410,526

ANH shares outstanding at March 19, 2021		99,374
Exchange ratio	x	0.1688
Shares issued		16,774
Market price as of March 19, 2021	$	14.28
Consideration transferred based on value of common shares issued	$	239,537

Cash paid per share	$	0.61
Cash paid based on outstanding ANH shares	$	60,626

Preferred Stock, Series B Issued		1,919,378
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series B issued	$	47,984

Preferred Stock, Series C Issued		779,743
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series C issued	$	19,494

Preferred Stock, Series D Issued		2,010,278
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series D shares issued	$	50,257

Total consideration transferred	$	417,898

Goodwill	$	7,372

In a ~~wholly-owned subsidiary of ZAIS and (ii) Sutherland Partners, L.P. merged with and into ZAIS Financial Partners, L.P., with ZAIS Financial Partners, L.P. legally surviving~~business combination, the ~~merger transaction, continuing as a wholly-owned subsidiary of ZAIS, and changing its name to Sutherland Partners, L.P. ZAISwas re-named Sutherland Asset Management Corporation as part~~initial allocation of the ~~merger transaction (as a whole,~~purchase price is considered preliminary and, therefore, is subject to change until the ~~“Merger Transaction” or “merger”).~~

~~Prior to and as a condition to the merger, ZAIS disposed of its seasoned re-performing mortgage loan portfolio, such that upon the completion~~end of the ~~merger, ZAIS’s assets largely consisted~~measurement period. The final determination must occur within one year of ~~its GMFS origination subsidiary, cash, conduit loans and residential mortgage backed securities (“RMBS”). Additionally, prior~~the acquisition date. Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received.

As of June 30, 2021, the closing, ZAIS completed a tender offer, purchasing 4,185,478 shares of common stock from existing ZAIS stockholders at a purchase price of $15.37 per share. In connection with the merger, 25,870,420 shares of common stock were issued to our pre-merger common stockholders, and 2,288,663 unitsgoodwill recorded in the ~~operating partnership subsidiary (“OP units”) were issued~~ANH Merger has not been allocated to ~~our pre-merger OP~~any reporting unit ~~holders. Our pre-merger stockholders held approximately 86% of our stockholders’ equity as a result of~~because the ~~merger, with continuing ZAIS stockholders holding approximately 14% of our stockholders’ equity, on a fully diluted basis.~~benefitting reportable segment has yet to be determined.

Under the terms of the Merger Agreement, in connection with the Merger Transaction, each outstanding share of the Company and each outstanding unit of Sutherland Partners, L.P. was converted into the right to receive 0.8356 (the “Exchange Ratio”) shares of common stock in ZAIS or units in ZAIS Financial Partners, L.P., respectively. The Exchange Ratio was determined by dividing the Company’s adjusted book value per share on July 31, 2016 (the “Determination Date”) by the ZAIS adjusted book on the Determination Date.

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Additionally, the Merger Agreement provided for a cash tender offer to existing ZAIS shareholders for cash proceeds up to $64.3 million. The tender offer was completed at a price of $15.37 equal to 95% of ZAIS’s adjusted book value per share, as further adjusted by ZAIS’s pro-rata share of (i) an $8.0 million payment to ZAIS REIT Management, LLC relating to the termination of ZAIS’s existing advisory agreement, and (ii) approximately $4.0 million related to intangible assets. The tender offer resulted in the tender of 4,185,478 shares of ZAIS common stock.

The primary purpose of the merger was to increase the combined company’s scale, which is expected to enhance operational efficiencies, substantially increase the liquidity in the combined company common stock and meaningfully reduce operating costs.

The following pro-forma income and earnings (unaudited) of the combined company are presented ~~for the three and nine months ended September 30, 2016~~ as if the merger had occurred on January 1, ~~2016:~~2021 and January 1, 2020:

For the three months ended

For the nine months ended
(In Thousands)

September 30, 2016

September 30, 2016
Selected Financial Data

Interest income

$
34,945

$
112,712
Interest expense

(17,074)

(50,393)
Provision for loan losses

(488)

(4,689)
Non-interest income (expense)

(8,977)

(29,282)
Realized gain (loss)

2,161

2,767
Unrealized gain (loss)

6,644

(5,559)
Net income from continuing operations before income taxes

$
17,211

$
25,556


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Selected Financial Data
Interest income	$	103,047	$	83,623	$	188,167	$	188,937
Interest expense		(55,415)		(53,455)		(109,704)		(123,772)
Recovery of (provision for) loan losses		(5,517)		27		(5,509)		(39,833)
Non-interest income		75,865		150,970		167,555		170,433
Non-interest expense		(80,081)		(104,163)		(159,665)		(400,637)
Income (loss) before provision for income taxes		37,899		77,002		80,844		(204,872)
Income tax benefit (expense)		(6,995)		(5,500)		(15,676)		2,437
Net income (loss)	$	30,904	$	71,502	$	65,168	$	(202,435)

Non-recurring pro-forma transaction costs directly attributable to the merger were $1.3 million and $7.6 million, respectively, for the three and six months ended June 30, 2021, and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the merger.

Note ~~6 –~~6. Loans and ~~Allowance~~allowance for ~~Loan Losses~~credit losses

~~Loan accounting framework~~

The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was ~~credit-impaired~~credit-deteriorated at the date of acquisition. The Company accounts for loans based on the following loan program categories:

●

Originated or purchased loans held-for-investment ~~other than PCI loans~~ – originated transitional loans, originated conventional SBC and SBA loans, ~~that have been securitized,~~ or acquired loans with no signs of credit deterioration at the time of ~~purchase.~~

purchase

●

Loans, held at fair value – certain originated conventional SBC ~~and SBA~~ loans ~~that we intend to securitize~~

for which the Company has elected the fair value option

●

Loans, held-for-sale, at fair value – originated or acquired loans that we intend to sell in the near term

●

Paycheck Protection Program loans, held at fair value – SBA loans originated in round 1 of the PPP program for which the Company has elected the fair value option

~~PCI~~●

Paycheck Protection Program loans, held-for-investment – ~~acquired~~SBA loans ~~with signs~~originated in round 2 of ~~credit deterioration at time of purchase~~

the PPP program

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Loan portfolio

~~Loan Portfolio~~

The following table summarizes the classification, ~~unpaid principal balance (“UPB”),~~UPB, and carrying value of loans held by the Company including loans of consolidated VIEs:


	September 30, 2017				December 31, 2016
Loans (In Thousands)	Carrying Value		UPB		Carrying Value		UPB

									June 30, 2021				December 31, 2020
(In Thousands)									Carrying Value		UPB		Carrying Value		UPB
Loans
Originated Transitional loans									$	1,323,784	$	1,334,668	$	530,671	$	535,963
Originated SBA 7(a) loans										311,905		317,386		310,537		314,938
Acquired SBA 7(a) loans	$	354,293	$	378,544	$	440,731	$	471,189		177,266		184,200		201,066		210,115
Originated SBC loans										176,393		170,469		173,190		167,470
Acquired loans		133,506		152,284		310,286		355,660		252,093		257,071		351,381		352,546
Originated Transitional loans		192,263		191,880		163,155		162,270
Originated Transitional loans, at fair value		—		—		14,505		13,958
Originated SBC loans, at fair value		158,393		153,017		67,087		65,131		13,681		13,870		13,795		14,088
Originated SBC loans		30,279		29,846		10,426		10,749
Originated SBA 7(a) loans		32,829		34,742		15,414		16,112
Originated Residential Agency loans		1,552		1,553		2,238		2,413		3,342		3,335		3,208		3,208
Total Loans, before allowance for loan losses	$	903,115	$	941,866	$	1,023,842	$	1,097,482	$	2,258,464	$	2,280,999	$	1,583,848	$	1,598,328
Allowance for loan losses	$	(10,219)		—	$	(12,721)		—	$	(36,180)	$	—	$	(33,224)	$	—
Total Loans, net	$	892,896	$	941,866	$	1,011,121	$	1,097,482	$	2,222,284	$	2,280,999	$	1,550,624	$	1,598,328
Loans in consolidated VIEs
Loans
Originated SBC loans	$	402,432	$	392,234	$	448,722	$	436,220	$	888,923	$	884,871	$	889,566	$	885,235
Originated Transitional loans										1,263,143		1,271,048		788,403		792,432
Acquired loans		204,123		219,769		92,844		101,481		701,349		701,263		697,567		701,133
Originated SBA 7(a) loans										63,022		66,730		68,625		72,451
Acquired SBA 7(a) loans		74,616		103,268		91,978		127,963		37,896		46,688		42,154		52,456
Originated Transitional loans		225,700		223,954		25,424		24,486
Total Loans, in consolidated VIEs, before allowance for loan losses	$	906,871	$	939,225	$	658,968	$	690,150	$	2,954,333	$	2,970,600	$	2,486,315	$	2,503,707
Allowance for loan losses on loans in consolidated VIEs	$	(2,505)		—	$	(3,409)		—	$	(13,449)	$	—	$	(13,508)	$	—
Total Loans, net, in consolidated VIEs	$	904,366	$	939,225	$	655,559	$	690,150	$	2,940,884	$	2,970,600	$	2,472,807	$	2,503,707
Total Loans, net, and Loans, net in consolidated VIEs	$	1,797,262	$	1,881,091	$	1,666,680	$	1,787,632
Held for sale, at fair value, loans
Loans, held for sale, at fair value
Originated Residential Agency loans	$	101,659	$	97,653	$	127,773	$	125,012	$	283,721	$	275,937	$	260,447	$	249,852
Originated Freddie Mac loans		78,875		76,753		17,311		17,162		37,015		36,533		51,248		50,408
Originated SBC loans										28,706		28,455		17,850		17,850
Originated SBA 7(a) loans		13,807		13,190		—		—		36,573		32,792		10,232		9,436
Acquired loans		5,977		6,099		36,713		36,734		84,169		80,146		511		499
Total Loans, held for sale, at fair value	$	200,318	$	193,695	$	181,797	$	178,908	$	470,184	$	453,863	$	340,288	$	328,045
Total Loans, net and Loans, held for sale, at fair value									$	5,633,352	$	5,705,462	$	4,363,719	$	4,430,080
Paycheck Protection Program loans
Paycheck Protection Program loans, held-for-investment									$	2,162,155	$	2,257,578	$	—	$	—
Paycheck Protection Program loans, held at fair value										16,431		16,431		74,931		74,931
Total Paycheck Protection Program loans									$	2,178,586	$	2,274,009	$	74,931	$	74,931
Total Loan portfolio	$	1,997,580	$	2,074,786	$	1,848,477	$	1,966,540	$	7,811,938	$	7,979,471	$	4,438,650	$	4,505,011

~~Credit Quality Indicators~~

Table of Contents

Loan vintage and credit quality indicators

The Company monitors the credit quality of our loan portfolio based on primary credit quality indicators. Delinquency rates are a primary credit quality indicator for our types of loans. Loans that are more than 30 days past due provide an

~~Table of Contents~~

early warning of borrowers who may be experiencing financial difficulties and/or who may be unable or unwilling to repay the loan. As the loan continues to age, it becomes ~~more clear~~clearer that the borrower is likely either unable or unwilling to pay.

The following tables ~~display~~summarize the classification, UPB and carrying value of loans by year of origination:


			Carrying Value by Year of Origination
(In Thousands)	UPB		2021		2020		2019		2018		2017		Pre 2017		Total
As of June 30, 2021
Loans^{(1) (2)}
Originated Transitional loans	$	2,605,716	$	1,341,558	$	418,648	$	536,185	$	264,044	$	8,631	$	14,294	$	2,583,360
Originated SBC loans		1,055,340		49,837		43,300		450,390		233,457		104,872		178,711		1,060,567
Acquired loans		958,334		9,636		32,002		57,639		41,554		37,148		772,034		950,013
Originated SBA 7(a) loans		384,116		22,873		46,819		94,454		124,085		57,911		24,762		370,904
Acquired SBA 7(a) loans		230,888		41		58		19,163		14,069		273		178,142		211,746
Originated SBC loans, at fair value		13,870		—		—		—		—		1,605		12,076		13,681
Originated Residential Agency loans		3,335		1,034		705		643		764		—		196		3,342
Total Loans, before general allowance for loan losses	$	5,251,599	$	1,424,979	$	541,532	$	1,158,474	$	677,973	$	210,440	$	1,180,215	$	5,193,613
General allowance for loan losses															$	(30,445)
Total Loans, net															$	5,163,168
(1) Loan balances include specific allowance for loan losses of $19.2 million
(2) Includes Loans, net in consolidated VIEs


			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
As of December 31, 2020
Loans^{(1) (2)}
Originated Transitional loans	$	1,328,395	$	385,183	$	583,593	$	306,971	$	23,783	$	18,480	$	1,064	$	1,319,074
Originated SBC loans		1,052,705		66,715		486,033		237,313		110,354		43,696		112,444		1,056,555
Acquired loans		1,053,679		21,414		40,572		42,167		38,649		19,533		883,774		1,046,109
Originated SBA 7(a) loans		387,389		47,939		98,568		133,812		68,375		22,056		4,041		374,791
Acquired SBA 7(a) loans		262,571		139		19,658		14,636		283		19		204,703		239,438
Originated SBC loans, at fair value		14,088		—		—		—		1,598		6,442		5,755		13,795
Originated Residential Agency loans		3,208		1,571		645		705		—		88		199		3,208
Total Loans, before general allowance for loan losses	$	4,102,035	$	522,961	$	1,229,069	$	735,604	$	243,042	$	110,314	$	1,211,980	$	4,052,970
General allowance for loan losses															$	(29,539)
Total Loans, net															$	4,023,431
(1) Loan balances include specific allowance for loan losses of $17.2 million
(2) Includes Loans, net in consolidated VIEs

The following tables present delinquency information on loans, net asby year of ~~September 30, 2017 and December 31, 2016:~~origination:


			Carrying Value by Year of Origination
(In Thousands)	UPB		2021		2020		2019		2018		2017		Pre 2017		Total
As of June 30, 2021
Loans^{(1) (2)}
Current and less than 30 days past due	$	5,026,125	$	1,424,466	$	532,477	$	1,138,815	$	585,393	$	184,504	$	1,119,741	$	4,985,396
30 - 59 days past due		61,826		—		—		16,304		35,159		1,443		8,820		61,726
60+ days past due		163,648		513		9,055		3,355		57,421		24,493		51,654		146,491
Total Loans, before general allowance for loan losses	$	5,251,599	$	1,424,979	$	541,532	$	1,158,474	$	677,973	$	210,440	$	1,180,215	$	5,193,613
General allowance for loan losses															$	(30,445)
Total Loans, net															$	5,163,168
(1) Loan balances include specific allowance for loan losses of $19.2 million
(2) Includes Loans, net in consolidated VIEs


			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
As of December 31, 2020
Loans^{(1) (2)}
Current and less than 30 days past due	$	3,904,294	$	516,474	$	1,221,227	$	707,068	$	203,331	$	100,003	$	1,125,100	$	3,873,203
30 - 59 days past due		38,836		5,812		5,191		15,097		401		2		11,933		38,436
60+ days past due		158,905		675		2,651		13,439		39,310		10,309		74,947		141,331
Total Loans, before general allowance for loan losses	$	4,102,035	$	522,961	$	1,229,069	$	735,604	$	243,042	$	110,314	$	1,211,980	$	4,052,970
General allowance for loan losses															$	(29,539)
Total Loans, net															$	4,023,431
(1) Loan balances include specific allowance for loan losses of $17.2 million
(2) Includes Loans, net in consolidated VIEs

September 30, 2017
Loans (In Thousands)
Current and
less than 30 days
past due
30-89 Days
Past Due
90+ Days
Past Due
Total Loans Carrying Value

Non-Accrual
Loans

90+ Days Past Due but Accruing
Loans(1)(2)

   Acquired SBA 7(a) loans
$
409,053
$
10,622
$
5,877
$
425,552

$
18,976

$
—
   Acquired loans

271,849

29,376

29,514

330,739

24,525

6,642
   Originated Transitional loans

417,963

—

—

417,963

—

—
   Originated SBC loans, at fair value

158,393

—

—

158,393

—

—
   Originated SBC loans

431,005

—

1,704

432,709

1,704

—
   Originated SBA 7(a) loans

32,791

—

11

32,802

427

—
   Originated Residential Agency loans

896

—

656

1,552

656

—
Total Loans, before general allowance for loans losses
$
1,721,950
$
39,998
$
37,762
$
1,799,710

$
46,288

$
6,642
General allowance for loan losses

$
(2,448)

Total Loans, net

$
1,797,262

$
46,288

$
6,642
Percentage of outstandings

95.7%

2.2%

2.1%

100%

2.6%

0.4%
(1) Loan balances include specific allowance for loan losses.
(2) Includes Loans, net in consolidated VIEs

Table of Contents

The following tables present delinquency information on loans, net:


	December 31, 2016
Loans (In Thousands)	Current and less than 30 days past due		30-89 Days Past Due		90+ Days Past Due		Total Loans Carrying Value		Non-Accrual Loans		90+ Days Past Due but Accruing

													June 30, 2021
(In Thousands)													Current and less than 30 days past due		30-59 days past due		60+ days past due		Total Loans Carrying Value		Non-Accrual Loans		90+ days past due and Accruing
Loans(1)(2)
Originated Transitional loans													$	2,471,105	$	43,090	$	69,165	$	2,583,360	$	67,268	$	—
Originated SBC loans														1,029,294		3,630		27,643		1,060,567		27,643		—
Acquired loans														891,270		14,865		43,878		950,013		53,741		—
Originated SBA 7(a) loans														369,436		—		1,468		370,904		11,295		—
Acquired SBA 7(a) loans	$	501,651	$	15,715	$	10,590	$	527,956	$	20,673	$	2,127		209,565		141		2,040		211,746		7,533		—
Acquired loans		354,123		7,230		32,476		393,829		25,669		9,677
Originated Transitional loans, at fair value		14,505		—		—		14,505		—		—
Originated Transitional loans		179,700		8,879		—		188,579		—		—
Originated SBC loans, at fair value		67,087		—		—		67,087		—		—		13,681		—		—		13,681		—		—
Originated SBC loans		458,371		—		712		459,083		712		—
Originated SBA 7(a) loans		15,192		—		222		15,414		222		—
Originated Residential Agency loans		931		744		563		2,238		387		176		1,045		—		2,297		3,342		2,717		—
Total Loans, before allowance for loans losses	$	1,591,560	$	32,568	$	44,563	$	1,668,691	$	47,663	$	11,980
Total Loans, before general allowance for loan losses													$	4,985,396	$	61,726	$	146,491	$	5,193,613	$	170,197	$	—
General allowance for loan losses							$	(2,011)											$	(30,445)
Total Loans, net							$	1,666,680	$	47,663	$	11,980							$	5,163,168
Percentage of outstandings		95.4%		2.0%		2.7%		100%		2.9%		0.7%
(1) Loan balances include specific allowance for loan losses.
Percentage of loans outstanding														96.0%		1.2%		2.8%		100%		3.3%		0.0%
(1) Loan balances include specific allowance for loan losses of $19.2 million													(1) Loan balances include specific allowance for loan losses of $19.2 million
(2) Includes Loans, net in consolidated VIEs	(2) Includes Loans, net in consolidated VIEs												(2) Includes Loans, net in consolidated VIEs


	December 31, 2020
(In Thousands)	Current and less than 30 days past due		30-59 days past due		60+ days past due		Total Loans Carrying Value		Non-Accrual Loans		90+ days past due and Accruing
Loans⁽¹⁾⁽²⁾
Originated Transitional loans	$	1,281,579	$	17,713	$	19,782	$	1,319,074	$	19,416	$	—
Originated SBC loans		1,000,878		6,591		49,086		1,056,555		37,635		—
Acquired loans		978,346		7,729		60,034		1,046,109		57,020		-
Originated SBA 7(a) loans		369,416		1,741		3,634		374,791		8,668		—
Acquired SBA 7(a) loans		228,651		4,008		6,779		239,438		9,001		—
Originated SBC loans, at fair value		13,795		—		—		13,795		—		—
Originated Residential Agency loans		538		654		2,016		3,208		2,418		—
Total Loans, before general allowance for loan losses	$	3,873,203	$	38,436	$	141,331	$	4,052,970	$	134,158	$	—
General allowance for loan losses							$	(29,539)
Total Loans, net							$	4,023,431
Percentage of loans outstanding		95.6%		0.9%		3.5%		100%		3.3%		0.0%
(1) Loan balances include specific allowance for loan losses of $17.2 million
(2) Includes Loans, net in consolidated VIEs

In addition to delinquency rates, the current estimated LTV ratio is another indicator that can provide insight into a borrower’s continued willingness to pay, as the delinquency rate of high LTV loans tends to be greater than that for loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, property price changes and specific events such as natural disasters, will affect credit quality. The collateral concentration of the loan portfolio also provides insight as to the credit quality of the portfolio, as certain economic factors or events may have a more pronounced impact on certain sectors or property types. The Company monitors the loan-to-value ratio and associated risks on a monthly basis.

Table of Contents

The following ~~tables~~table presents quantitative information on the credit quality of loans, ~~net as~~net:


	Loan-to-Value ⁽¹⁾
(In Thousands)	0.0 – 20.0%		20.1 – 40.0%		40.1 – 60.0%		60.1 – 80.0%		80.1 – 100.0%		Greater than 100.0%		Total
June 30, 2021
Loans^{(2) (3)}
Originated Transitional loans	$	6,319	$	16,690	$	227,146	$	1,841,265	$	450,716	$	41,224	$	2,583,360
Originated SBC loans		12,521		46,253		290,644		687,206		18,063		5,880		1,060,567
Acquired loans		217,175		343,378		227,202		120,404		29,195		12,659		950,013
Originated SBA 7(a) loans		1,105		15,865		53,481		139,590		65,524		95,339		370,904
Acquired SBA 7(a) loans		6,012		31,674		79,081		49,554		29,198		16,227		211,746
Originated SBC loans, at fair value		—		7,243		—		6,438		—		—		13,681
Originated Residential Agency loans		—		—		—		655		1,831		856		3,342
Total Loans, before general allowance for loan losses	$	243,132	$	461,103	$	877,554	$	2,845,112	$	594,527	$	172,185	$	5,193,613
General allowance for loan losses													$	(30,445)
Total Loans, net													$	5,163,168
Percentage of loans outstanding		4.7%		8.9%		16.9%		54.8%		11.4%		3.3%
December 31, 2020
Loans^{(2) (3)}
Originated Transitional loans	$	5,485	$	8,269	$	252,798	$	891,895	$	157,900	$	2,727	$	1,319,074
Originated SBC loans		5,372		76,899		453,381		515,023		—		5,880		1,056,555
Acquired loans		266,345		385,579		228,262		113,023		40,838		12,062		1,046,109
Originated SBA 7(a) loans		1,203		15,013		51,133		147,020		61,297		99,125		374,791
Acquired SBA 7(a) loans		7,523		39,086		89,644		54,007		28,332		20,846		239,438
Originated SBC loans, at fair value		—		7,354		—		6,441		—		—		13,795
Originated Residential Agency loans		—		—		88		1,236		1,552		332		3,208
Total Loans, before general allowance for loan losses	$	285,928	$	532,200	$	1,075,306	$	1,728,645	$	289,919	$	140,972	$	4,052,970
General allowance for loan losses													$	(29,539)
Total Loans, net													$	4,023,431
Percentage of loans outstanding		7.1%		13.0%		26.5%		42.7%		7.2%		3.5%
(1) Loan-to-value is calculated as carrying amount as a percentage of current collateral value
(2) Loan balances include specific allowance for loan loss reserves
(3) Includes Loans, net in consolidated VIEs

As of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016:~~

Loan-to-Value  (a)

(In Thousands)

0.0 – 20.0%
20.1 – 40.0%
40.1 – 60.0%
60.1 – 80.0%
80.1 – 100.0%
Greater than 100.0%
Total
September 30, 2017

Loans(1) (2)

   Acquired SBA 7(a) loans

$
9,243
$
41,208
$
130,248
$
116,684

60,720
$
67,449
$
425,552
   Acquired loans

51,041

81,451

100,840

54,317

24,906

18,184

330,739
   Originated Transitional loans

—

38,073

170,268

189,063

14,234

6,325

417,963
   Originated SBC loans, at fair value

—

17,364

20,034

104,196

16,799

—

158,393
   Originated SBC loans

2,673

56,347

185,800

180,146

7,743

—

432,709
   Originated SBA 7(a) loans

268

515

4,754

11,709

5,775

9,781

32,802
   Originated Residential Agency loans

—

60

95

422

972

3

1,552
Total Loans, before general allowance for loans losses

$
63,225
$
235,018
$
612,039
$
656,537
$
131,149
$
101,742
$
1,799,710
General allowance for loan losses

$
(2,448)
Total Loans, net

$
1,797,262
December 31, 2016

Loans(1) (2)

   Acquired SBA 7(a) loans

$
9,301
$
42,617
$
153,710
$
141,586

86,085
$
94,657
$
527,956
   Acquired loans

46,776

90,574

109,330

106,432

20,335

20,382

393,829
   Originated Transitional loans, at fair value

—

—

1,475

13,030

—

—

14,505
   Originated Transitional loans

—

17,187

78,219

44,730

32,967

15,476

188,579
   Originated SBC loans, at fair value

—

11,303

5,728

34,150

15,906

—

67,087
   Originated SBC loans

2,709

56,050

187,823

190,473

20,258

1,770

459,083
   Originated SBA 7(a) loans

145

375

2,995

3,351

2,456

6,092

15,414
   Originated Residential Agency loans

—

—

217

434

1,399

188

2,238
Total Loans, before allowance for loans losses

$
58,931
$
218,106
$
539,497
$
534,186
$
179,406
$
138,565
$
1,668,691
General allowance for loan losses

$
(2,011)
Total Loans, net

$
1,666,680
(a) Loan-to-value is calculated as carrying amount as a percentage of current collateral value
(1) Loan balances include specific allowance for loan loss reserves.
(2) Includes Loans, net in consolidated VIEs

~~As of September 30, 2017 and December 31, 2016,~~2020, the Company’s total carrying amount of loans in the foreclosure process was ~~$0.3~~$1.0 million and ~~$2.3~~$2.2 million, respectively.

The following table displays the geographic concentration of the Company’s loans, net, secured by real ~~estate recorded on our unaudited interim consolidated balance sheets.~~estate:

Geographic Concentration (Unpaid Principal Balance)

September 30, 2017


December 31, 2016

California

13.7
%

13.6
%
Texas

12.4

14.0

Florida

11.3

9.9

New York

7.2

6.9

Georgia

6.1

5.9

Arizona

5.2

5.2

North Carolina

3.8

3.7

Ohio

2.9

2.9

Virginia

2.7

2.9

Pennsylvania

2.0

2.9

Other

32.7

32.1

Total

100.0
%

100.0
%


Geographic Concentration (% of Unpaid Principal Balance)	June 30, 2021		December 31, 2020
California	16.9	%	18.1	%
Texas	14.7		14.2
New York	9.3		9.8
Georgia	8.3		4.9
Florida	6.9		7.8
Illinois	5.8		5.2
Arizona	4.7		2.8
North Carolina	3.3		3.1
Washington	2.5		3.1
Colorado	2.2		2.8
Other	25.4		28.2
Total	100.0	%	100.0	%

~~Table of Contents~~

The following table displays the collateral type concentration of the Company’s loans, ~~net, on our unaudited interim consolidated balance sheets.~~net:


Collateral Concentration (% of Unpaid Principal Balance)	June 30, 2021		December 31, 2020
Multi-family	39.8	%	23.8	%
Retail	13.6		17.3
SBA⁽¹⁾	11.7		17.4
Office	11.2		13.1
Mixed Use	10.6		12.9
Industrial	5.9		7.1
Lodging/Residential	2.5		3.2
Other	4.7		5.2
Total	100.0	%	100.0	%
(1) Further detail provided on SBA collateral concentration is included in table below.

Collateral Concentration (Unpaid Principal Balance)

September 30, 2017


December 31, 2016

SBA(1)

27.5
%

34.4
%
Multi-family

18.4

13.8

Retail

18.2

14.3

Office

15.6

14.9

Mixed Use

6.2

5.0

Industrial

6.2

6.9

Lodging/Residential

3.1

4.8

Other

4.8

5.9

Total

100.0
%

100.0
%
(1) Further detail provided on SBA collateral concentration is included in table below.

Table of Contents

The following table displays the collateral type concentration of the Company’s SBA loans within loans, ~~net, on our unaudited interim consolidated balance sheets.~~net:


Collateral Concentration (Unpaid Principal Balance)	September 30, 2017		December 31, 2016

Collateral Concentration (% of Unpaid Principal Balance)					June 30, 2021		December 31, 2020
Lodging					19.2	%	17.2	%
Offices of Physicians	16.1	%	15.8	%	12.3		12.0
Child Day Care Services	12.4		14.3		7.9		7.2
Lodging	11.1		11.4
Eating Places					5.5		5.3
Gasoline Service Stations					4.0		3.4
Veterinarians	7.2		6.7		3.4		3.3
Eating Places	5.3		6.3
Funeral Service & Crematories					2.1		1.8
Grocery Stores	4.6		4.3		1.8		1.7
Auto	3.3		3.2
Accounting Auditing & Bookkeeping	2.1		2.4
Funeral Service & Crematories	2.0		1.7
Gasoline Service Stations	1.8		1.8
Car washes					1.7		1.4
Couriers					1.0		1.0
Other	34.1		32.1		41.1		45.7
Total	100.0	%	100.0	%	100.0	%	100.0	%

Allowance for ~~Loan Losses~~credit losses

The allowance for loan losses represents the Company’s estimate of ~~probable~~expected credit losses inherent in the Company’s held-for-investment loan portfolio. This is assessed by considering credit quality indicators, including probable and historical losses, collateral values, ~~LTV~~loan-to-value (“LTV”) ratios, and economic conditions. ~~The allowance for loan losses includes an asset-specific component, a general formula-based component, and a component related to PCI loans.~~

The following tables ~~detail~~present the allowance for loan losses by loan product and impairment ~~methodology as of the unaudited interim consolidated balance sheet dates:~~methodology:


	September 30, 2017

													June 30, 2021
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses		Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses
General	$	487	$	-	$	1,072	$	251	$	638	$	2,448	$	3,231	$	17,634	$	3,669	$	559	$	5,352	$	30,445
Specific		2		-		919		1,622		27		2,570		4,749		3,567		3,429		3,416		4,023		19,184
PCI		-		-		5,971		1,735		-		7,706
Ending balance	$	489	$		$	7,962	$	3,608	$	665	$	12,724	$	7,980	$	21,201	$	7,098	$	3,975	$	9,375	$	49,629


	December 31, 2016

													December 31, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses		Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses
General	$	718	$	21	$	847	$	253	$	172	$	2,011	$	2,640	$	14,995	$	5,457	$	767	$	5,680	$	29,539
Specific		44		-		1,131		2,491		-		3,666		6,200		—		2,840		3,782		4,371		17,193
PCI		-		-		8,193		2,260		-		10,453
Ending balance	$	762	$	21	$	10,171	$	5,004	$	172	$	16,130	$	8,840	$	14,995	$	8,297	$	4,549	$	10,051	$	46,732

Table of Contents

The following tables detail the activity of the allowance for loan losses for loans:


	Three months ended September 30, 2017

													Three Months Ended June 30, 2021
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses		Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	313	$	105	$	8,328	$	4,648	$	381	$	13,775	$	7,972	$	17,043	$	7,035	$	4,322	$	9,277	$	—	$	45,649
Provision for (Recoveries of) loan losses		176		(105)		825		(714)		284		466
Provision for (recoveries of) loan losses														508		4,158		74		(155)		949		—		5,534
Charge-offs and sales		-		-		(254)		(186)		-		(440)		(311)		—		—		(193)		(852)		—		(1,356)
Recoveries		-		-		(937)		(140)		-		(1,077)		(189)		—		(11)		1		1		—		(198)
Ending balance	$	489	$	-	$	7,962	$	3,608	$	665	$	12,724	$	7,980	$	21,201	$	7,098	$	3,975	$	9,375	$	—	$	49,629


	Three months ended September 30, 2016

													Three Months Ended June 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses		Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	-	$	-	$	9,953	$	5,741	$	-	$	15,694	$	10,362	$	24,264	$	10,646	$	5,622	$	7,074	$	—	$	57,968
Provision for (Recoveries of) loan losses		-		-		(153)		227		414		488
Provision for (recoveries of) loan losses														(1,388)		(4,433)		1,960		190		2,580		500		(591)
Charge-offs and sales		-		-		9		(358)		-		(349)		—		—		(42)		(97)		(204)		—		(343)
Recoveries		-		-		(853)		1		-		(852)		—		—		—		29		—		—		29
Ending balance	$	-	$	-	$	8,956	$	5,611	$	414	$	14,981	$	8,974	$	19,831	$	12,564	$	5,744	$	9,450	$	500	$	57,063


	Six Months Ended June 30, 2021
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	8,840	$	14,995	$	8,297	$	4,549	$	10,051	$	—	$	46,732
Provision for (Recoveries of) loan losses		640		6,206		(1,188)		(108)		547		—		6,097
Charge-offs and sales		(1,311)		—		—		(476)		(1,227)		—		(3,014)
Recoveries		(189)		—		(11)		10		4		—		(186)
Ending balance	$	7,980	$	21,201	$	7,098	$	3,975	$	9,375	$	—	$	49,629


	Nine months ended September 30, 2017

													Six Months Ended June 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses		Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	762	$	21	$	10,171	$	5,004	$	172	$	16,130	$	304	$	188	$	3,054	$	2,114	$	1,781	$	—	$	7,441
Cumulative-effect adjustment upon adoption of ASU 2016-13														2,400		1,906		1,878		3,562		1,379		—		11,125
Provision for (Recoveries of) loan losses		(273)		(21)		1,997		(339)		493		1,857		6,270		17,737		7,682		202		6,823		500		39,214
Charge-offs and sales		-		-		(914)		(1,598)		-		(2,512)		—		—		(50)		(229)		(533)		—		(812)
Recoveries		-		-		(3,292)		541		-		(2,751)		—		—		—		95		—		—		95
Ending balance	$	489	$	-	$	7,962	$	3,608	$	665	$	12,724	$	8,974	$	19,831	$	12,564	$	5,744	$	9,450	$	500	$	57,063

Nine months ended September 30, 2016
(In Thousands)
Originated
SBC loans
Originated Transitional loans
Acquired
loans
Acquired
SBA 7(a) loans
Originated
SBA 7(a) loans
Total Allowance for
loan losses
Beginning balance
$
-
$
-
$
10,967
$
6,155
$
-
$
17,122
Provision for (Recoveries of) loan losses

-

-

3,369

906

414

4,689
Charge-offs and sales

-

-

(876)

(1,451)

-

(2,327)
Recoveries

-

-

(4,504)

1

-

(4,503)
Ending balance
$
-
$
-
$
8,956
$
5,611
$
414
$
14,981

~~Impaired Loans- Non-PCI loans~~

The ~~Company considers a~~tables above exclude $0.4 million of allowance for loan losses on unfunded lending commitments as of June 30, 2021. There was 0 such allowance for loan losses on unfunded lending commitments as of June 30, 2020. Refer to ~~be impaired when~~Note 3 – Summary of Significant Accounting Policies for more information on our accounting policies, methodologies and judgment applied to determine the ~~Company does not expect to collect all~~allowance for loan losses and lending commitments.

Non-accrual loans

The following table details information about the ~~contractual and principal payments as scheduled in the loan agreements. Impaired loans include loans that have been modified in a TDR~~

~~Table of Contents~~Company’s non-accrual loans:


(In Thousands)	June 30, 2021		December 31, 2020
Non-accrual loans
With an allowance	$	122,021	$	75,862
Without an allowance		48,176		58,296
Total recorded carrying value of non-accrual loans	$	170,197	$	134,158
Allowance for loan losses related to non-accrual loans	$	(19,458)	$	(17,367)
Unpaid principal balance of non-accrual loans	$	194,737	$	158,471

	June 30, 2021		June 30, 2020
Interest income on non-accrual loans for the three months ended	$	611	$	290
Interest income on non-accrual loans for the six months ended	$	1,727	$	1,061

~~or loans that are placed on non-accrual status. All impaired loans are evaluated for an asset-specific allowance as described in Note 3.~~

(In Thousands)
September 30, 2017

December 31, 2016
Impaired loans

With an allowance
$
14,356

$
14,772
Without an allowance

15,948

17,653
Total recorded carrying value of impaired loans
$
30,304

$
32,425
Allowance for loan losses related to impaired loans
$
(2,562)

$
(3,693)
Unpaid principal balance of impaired loans
$
39,447

$
33,185
Impaired loans on non-accrual status
$
30,304

$
32,425

Average carrying value of impaired loans
$
30,964

$
28,891

September 30, 2017

September 30, 2016
Interest income on impaired loans for the three months ended
$
1,508

$
41
Interest income on impaired loans for the nine months ended
$
2,703

$
264

Troubled ~~Debt Restructurings~~debt restructurings

If the borrower is determined to be in financial difficulty, then the Company will determine whether a financial concession has been granted to the borrower by analyzing the value of the loan as compared to the recorded investment, modifications of the interest rate as compared to market rates, modification of the stated maturity date, modification of the timing of principal and interest payments and the partial forgiveness of the loan. Modified loans that are classified as TDRs are individually evaluated and measured for impairment.

Table of Contents

The following table summarizes the recorded investment of TDRs onin the ~~unaudited interim~~ consolidated balance sheet ~~dates~~ by loan type.

September 30, 2017

December 31, 2016
(In Thousands)
SBC

SBA

Total

SBC

SBA

Total
Recorded carrying value modified loans classified as TDRs
$
3,462

$
10,374

$
13,836

$
7,918

$
11,135

$
19,053
Allowance for loan losses on loans classified as TDRs
$
829

$
715

$
1,544

$
656

$
1,544

$
2,200

Carrying value of modified loans classified as TDRs

Carrying value of modified loans classified as TDRs on accrual status
$
1,856

$
3,343

$
5,199

$
5,196

$
359

$
5,555
Carrying value of modified loans classified as TDRs on non-accrual status

1,606

7,031

8,637

2,722

10,776

13,498
Total carrying value of modified loans classified as TDRs
$
3,462

$
10,374

$
13,836

$
7,918

$
11,135

$
19,053


	June 30, 2021						December 31, 2020
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Carrying value of modified loans classified as TDRs:
On accrual status	$	304	$	6,988	$	7,292	$	307	$	6,888	$	7,195
On non-accrual status		6,904		12,946		19,850		7,020		11,044		18,064
Total carrying value of modified loans classified as TDRs	$	7,208	$	19,934	$	27,142	$	7,327	$	17,932	$	25,259
Allowance for loan losses on loans classified as TDRs	$	7	$	3,689	$	3,696	$	17	$	3,323	$	3,340

~~Table of Contents~~

The following ~~table summarizes~~tables summarize the TDR activity ~~that occurred during the three months ended September 30, 2017 and 2016~~ and the financial effects of these modifications.


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016

													Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total		SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		-		9		9		2		14		16		—		10		10		2		3		5
Pre-modification recorded balance (a)	$	-	$	766	$	766	$	284	$	629	$	913	$	—	$	6,867	$	6,867	$	8,305	$	211	$	8,516
Post-modification recorded balance (a)		-		843		843		299		646		945	$	—	$	6,867	$	6,867	$	8,305	$	250	$	8,555

Number of loans that remain in default as of September 30, 2017 (b)		-		5		5		-		-		-
Balance of loans that remain in default as of September 30, 2017 (b)	$	-	$	374	$	374	$	-	$	-	$	-


Number of loans that remain in default as of June 30, 2021 ^(b)														—		1		1		2		—		2
Balance of loans that remain in default as of June 30, 2021 ^(b)													$	—	$	93	$	93	$	8,305	$	—	$	8,305

Concession granted (a):
Term extension	$	-	$	462	$	462	$	175	$	339	$	514	$	—	$	6,345	$	6,345	$	—	$	250	$	250
Interest rate reduction		-		5		5		-		35		35		—		—		—		—		—		—
Principal reduction		-		-		-		-		62		62		—		—		—		—		—		—
Foreclosure		-		374		374		124		205		329		—		93		93		8,305		—		8,305
Total	$	-	$	841	$	841	$	299	$	641	$	940	$	—	$	6,438	$	6,438	$	8,305	$	250	$	8,555
(a) Represents carrying value.	(a) Represents carrying value.												(a) Represents carrying value.
(b) Represents the September 30, 2017 carrying values of the TDRs that occurred during the three months ended September 30, 2017 and 2016 that remained in default as of September 30, 2017. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.
(b) Represents the June 30, 2021 carrying values of the TDRs that occurred during the three months ended June 30, 2021 and 2020 that remained in default as of June 30, 2021. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.													(b) Represents the June 30, 2021 carrying values of the TDRs that occurred during the three months ended June 30, 2021 and 2020 that remained in default as of June 30, 2021. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.


	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		1		17		18		3		10		13
Pre-modification recorded balance ^(a)	$	1,276	$	8,309	$	9,585	$	8,456	$	2,978	$	11,434
Post-modification recorded balance ^(a)	$	1,276	$	7,842	$	9,118	$	8,456	$	3,018	$	11,474

Number of loans that remain in default as of June 30, 2021 ^(b)		1		1		2		2		1		3
Balance of loans that remain in default as of June 30, 2021 ^(b)	$	1,276	$	93	$	1,369	$	8,305	$	141	$	8,446

Concession granted ^(a):
Term extension	$	—	$	7,319	$	7,319	$	—	$	1,850	$	1,850
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		1,276		93		1,369		8,305		141		8,446
Total	$	1,276	$	7,412	$	8,688	$	8,305	$	1,991	$	10,296
(a) Represents carrying value.
(b) Represents the June 30, 2021 carrying values of the TDRs that occurred during the six months ended June 30, 2021 and 2020 that remained in default as of June 30, 2021. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.

~~The following table summarizes the TDR activity that occurred during the nine months ended September 30, 2017 and 2016 and the financial effects of these modifications.~~

Nine Months Ended September 30, 2017

Nine Months Ended September 30, 2016
(In Thousands, except number of loans)
SBC

SBA

Total

SBC

SBA

Total
Number of loans permanently modified

11

34

45

12

51

63
Pre-modification recorded balance (a)
$
3,070

$
3,650

$
6,720

$
2,339

$
6,309

$
8,648
Post-modification recorded balance (a)

2,593

3,685

6,278

2,362

6,299

8,661

Number of loans that remain in default as of September 30, 2017 (b)

7

14

21

2

62

64
Balance of loans that remain in default as of September 30, 2017 (b)
$
1,364

$
1,369

$
2,733

$
118

$
5,377

$
5,495

Concession granted (a):

Term extension
$
17

$
2,772

$
2,789

$
1,135

$
4,998

$
6,133
Interest rate reduction

157

5

162

-

38

38
Principal reduction

775

167

942

-

93

93
Foreclosure

930

498

1,428

311

550

861
Total
$
1,879

$
3,442

$
5,321

$
1,446

$
5,679

$
7,125
(a) Represents carrying value.
(b) Represents the September 30, 2017 carrying values of the TDRs that occurred during the nine months ended September 30, 2017 and 2016 that remained in default as of September 30, 2017. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.

The Company does not believe the financial impact of the presented TDRs to be material. The other elements of the Company’s modification programs do not have a significant impact on financial results given their relative size, or do not have a direct financial impact as in the case of covenant changes.

~~Table of Contents~~PCD loans

~~Loans, held-for-investment are accounted for under ASC 310-10 or ASC 310-30 depending on whether there is evidence of credit deterioration at the time of acquisition.~~ The ~~outstanding carrying amount of our held-for-investment loan portfolio broken down by ASC 310-10 (non-PCI loans) and ASC 310-30 (PCI loans) is as follows:~~

September 30, 2017

December 31, 2016


Non-PCI

PCI

Non-PCI

PCI
(In Thousands)

Loans

Loans

Loans

Loans
Unpaid principal balance

$
1,599,354

$
128,720

$
1,536,245

$
172,298
Non-accretable discount

—

(8,838)

—

(24,784)
Accretable discount

(43,633)

(24,010)

(55,563)

(26,978)
Loans, held-for-investment

1,555,721

95,872

1,480,682

120,536
Allowance for loan losses

(5,018)

(7,706)

(5,677)

(10,453)
Loans, held-for-investment

$
1,550,703

$
88,166

$
1,475,005

$
110,083

~~In the three and nine months ended September 30, 2017 and 2016, the~~ Company did not acquire any ~~PCI loans.~~PCD loans in the three and six months ended June 30, 2021 and 2020.

~~PCI Loans~~32

~~The following table details the activity~~Table of the accretable yield on PCI loans, held-for investment. The amount of accretable yield is affected by changes in credit outlooks, including metrics such as default and loss severities, prepayment speeds, which can change the amount and period of time over which interest payments are expected to be received, and the interest rates on variable loans.Contents

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Beginning accretable yield- PCI loans

$
(23,839)

$
(30,840)

$
(26,978)

$
(42,031)
Purchases/Originations

—

(676)

—

(676)
Sales

165

1,521

1,940

6,448
Accretion

1,164

1,414

3,592

5,487
Other

(194)

(1)

(993)

(3,038)
Transfers

(1,306)

716

(1,571)

5,944
Ending accretable yield- PCI loans

$
(24,010)

$
(27,866)

$
(24,010)

$
(27,866)

Note 7. Fair value measurements

~~Note 7 – Fair Value Measurements~~

The Company adopted the provisions of ASC 820 Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring ~~investments~~financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of ~~investments.~~financial instruments. Fair value for these investments are determined using valuation methodologies that consider a range of

~~Table of Contents~~

factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of ~~September~~June 30, ~~2017:~~2021:


(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Loans, held for sale, at fair value	$	—	$	470,184	$	—	$	470,184
Loans, net, at fair value		—		—		13,681		13,681
Paycheck Protection Program loans		—		—		16,431		16,431
Mortgage backed securities, at fair value		—		258,396		1,714		260,110
Derivative instruments, at fair value		—		470		6,130		6,600
Residential mortgage servicing rights, at fair value		—		—		100,820		100,820
Total assets	$	—	$	729,050	$	138,776	$	867,826

Liabilities:
Derivative instruments, at fair value	$	—	$	3,717	$	—	$	3,717
Total liabilities	$	—	$	3,717	$	—	$	3,717

(In Thousands)

Level 1

Level 2

Level 3

Total
Assets:

Cash held in money market funds

$
632

$
—

$
—

$
632
Short term investments

99,994

—

—

99,994
Loans, held for sale, at fair value

—

107,631

92,687

200,318
Loans, held at fair value

—

—

158,393

158,393
Mortgage backed securities, at fair value

—

—

41,371

41,371
Derivative instruments, at fair value

—

1,562

2,569

4,131
Residential mortgage servicing rights, at fair value

—

—

68,815

68,815
Total assets

$
100,626

$
109,193

$
363,835

$
573,654

Liabilities:

Derivative instruments, at fair value

$
—

$
358

$
—

$
358
Contingent consideration

—

—

9,037

9,037
Total liabilities

$
—

$
358

$
9,037

$
9,395

Table of Contents

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of December 31, ~~2016:~~2020:



(In Thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash held in money market funds	$	632	$	—	$	—	$	632
Short term investments		319,984		—		—		319,984
Assets:
Loans, held for sale, at fair value		—		164,485		17,312		181,797	$	—	$	340,288	$	—	$	340,288
Loans, held at fair value		—		—		81,592		81,592
Loans, net, at fair value										—		—		13,795		13,795
Paycheck Protection Program loans										—		—		74,931		74,931
Mortgage backed securities, at fair value		—		—		32,391		32,391		—		62,880		25,131		88,011
Derivative instruments, at fair value		—		3,095		2,690		5,785		—		—		16,363		16,363
Residential mortgage servicing rights, at fair value		—		—		61,376		61,376		—		—		76,840		76,840
Total assets	$	320,616	$	167,580	$	195,361	$	683,557	$	—	$	403,168	$	207,060	$	610,228

Liabilities:

Liabilities:
Derivative instruments, at fair value	$	—	$	643	$	—	$	643	$	—	$	11,604	$	—	$	11,604
Contingent consideration		—		—		14,487		14,487
Total liabilities	$	—	$	643	$	14,487	$	15,130	$	—	$	11,604	$	—	$	11,604

~~Table of Contents~~

The following ~~table presents~~tables present a summary of changes in ~~the fair value of loans, held at fair value, classified as~~our Level 3:3 assets and liabilities:


	Three Months Ended September 30,				Nine Months Ended September 30,

									Three Months Ended June 30, 2021
(In Thousands)	2017		2016		2017		2016		MBS		Derivatives		Loans, net, at fair value		Paycheck Protection Program loans		Residential MSRs, at fair value		Total
Beginning Balance	$	161,890	$	212,920	$	81,592	$	155,134	$	5,633	$	11,724	$	13,618	$	38,388	$	98,542	$	167,905
Realized gains (losses), net		(1)		9		(7)		7
Originations										—		—		—		—		—		—
Accreted discount, net										2		—		—		—		—		2
Additions due to loans sold, servicing retained										—		—		—		—		11,925		11,925
Sales / Principal payments										—		—		(11)		(21,957)		(4,948)		(26,916)
Realized gains, net										—		—		—		—		—		—
Unrealized gains (losses), net		2,307		1,040		4,485		2,989		125		(5,594)		74		—		(4,699)		(10,094)
Originations		36,243		24,932		119,856		88,272
Sales		—		(4,800)		(3,352)		(1,434)
Principal payments		(1,141)		(20)		(3,276)		—
Transfer to loans, held for sale, at fair value		—		(463)		—		(11,350)
Transfer to loans, held-for-investment		(40,905)		—		(40,905)		—
Transfer to (from) Level 3										(4,046)		—		—		—		—		(4,046)
Ending Balance	$	158,393	$	233,618	$	158,393	$	233,618	$	1,714	$	6,130	$	13,681	$	16,431	$	100,820	$	138,776

Unrealized gains (losses), net on assets/liabilities held at the end of the period									$	286	$	6,130	$	(189)	$	—	$	(36,553)	$	(30,326)


									Six Months Ended June 30, 2021
(In Thousands)									MBS		Derivatives		Loans, net, at fair value		Paycheck Protection Program loans		Residential MSRs, at fair value		Total
Beginning Balance									$	25,131	$	16,363	$	13,795	$	74,931	$	76,840	$	207,060
Purchases or Originations										—		—		—		3,866		—		3,866
Additions due to loans sold, servicing retained										—		—		—				23,973		23,973
Sales / Principal payments										(92)		—		(212)		(62,366)		(10,650)		(73,320)
Realized gains, net										—		—		(5)				-		(5)
Unrealized gains (losses), net										1,194		(10,233)		103				10,657		1,721
Accreted discount, net										60				—				—		60
Transfer to (from) Level 3										(24,579)		—		—				—		(24,579)
Ending Balance									$	1,714	$	6,130	$	13,681		16,431	$	100,820	$	138,776

Unrealized gains (losses), net on assets/liabilities held at the end of the period									$	286	$	6,130	$	(189)	$	—	$	(36,553)		(30,326)

~~As of September 30, 2017 and December 31, 2016, the unrealized gains on loans, held at fair value were $5.4 million and $2.5 million, respectively.~~

~~The following table presents a summary of changes in the fair value of loans, held for sale, at fair value classified as Level 3:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Beginning Balance

$
60,045

$
—

$
17,311

$
—
Realized gains, net

4,313

844

9,005

3,641
Unrealized gains, net

1,771

929

2,595

603
Purchases

—

—

—

—
Originations

196,068

75,109

352,975

200,574
Sales

(165,334)

(36,622)

(284,707)

(170,082)
Principal payments

(9,743)

(17,409)

(10,429)

(22,772)
Transfer from loans, held at fair value

—

463

—

11,350
Transfer from loans, held-for-investment, net

5,567

—

5,937

—
Ending Balance

$
92,687

$
23,314

$
92,687

$
23,314

~~As of September 30, 2017 and December 31, 2016,~~ ~~the unrealized gains on loans, held for sale, at fair value were $6.6 million and $0.1 million, respectively.~~

~~The following table presents a summary of changes in the fair value of MBS, at fair value classified as Level 3:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Beginning Balance

$
43,877

$
27,013

$
32,391

$
213,504
Accreted discount, net

96

64

204

145
Realized gains (losses), net

395

157

433

(3,396)
Unrealized gains (losses), net

194

664

1,311

4,318
Purchases

—

8,844

14,448

17,388
Sales / Principal Payments

(3,191)

(1,930)

(7,416)

(197,147)
Ending Balance

$
41,371

$
34,812

$
41,371

$
34,812

~~As of September 30, 2017 and December 31, 2016, the unrealized gain (loss) on MBS at fair value was $1.0 million and ($0.3 million), respectively.~~

Refer to “Note 9 – Servicing rights” for activity relating to the changes in the fair value of the Company’s residential mortgage servicing rights. As of September 30, 2017 and December 31, 2016, the unrealized gains on residential mortgage servicing rights, at fair value were $3.0 million and $6.9 million, respectively.

Table of Contents


	Three Months Ended June 30, 2020
(In Thousands)	MBS		Derivatives		Loans, net, at fair value		Residential MSRs, at fair value		Total
Beginning Balance	$	103	$	17,250	$	19,813	$	78,631	$	115,797
Originations		—		—		105,530		13,331		118,861
Additions due to loans sold, servicing retained		—		—		—		—		—
Sales / Principal payments		—		—		(288)		(6,274)		(6,562)
Unrealized gains (losses), net		—		1,787		(757)		(12,043)		(11,013)
Transfer to (from) Level 3		308		—		—		—		308
Ending Balance	$	411	$	19,037	$	124,298	$	73,645	$	217,391

Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	307	$	19,037	$	(501)	$	(38,435)	$	(19,592)


	Six Months Ended June 30, 2020
(In Thousands)	MBS		Derivatives		Loans, net, at fair value		Residential MSRs, at fair value		Total
Beginning Balance	$	460	$	2,814	$	20,212	$	91,174	$	114,660
Originations		—		—		105,530		—		105,530
Additions due to loans sold, servicing retained		—		—		—		20,478		20,478
Sales / Principal payments		(2)		—		(296)		(9,527)		(9,825)
Unrealized gains (losses), net		(40)		16,223		(1,148)		(28,480)		(13,445)
Transfer to (from) Level 3		(7)		—		—		—		(7)
Ending Balance	$	411	$	19,037	$	124,298	$	73,645	$	217,391

Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	307	$	19,037	$	(501)	$	(38,435)	$	(19,592)

~~The following table presents a summary of changes in the fair value of derivatives instruments, at fair value classified as Level 3, or interest rate lock commitments:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Beginning Balance

$
2,719

$
—

$
2,690

$
—
Unrealized gains

(150)

—

(121)

—
Ending Balance

$
2,569

$
—

$
2,569

$
—

~~As of September 30, 2017 and December 31, 2016, the unrealized gains (loss) on derivative instruments, at fair value were ($1.4 million) and $0.8 million, respectively.~~

~~The following table presents a summary of changes in the fair value of contingent consideration classified as Level 3:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Beginning Balance

$
8,939

$
—

$
14,487

$
—
Adjustment for legal settlement

—

—

(5,744)

—
Amortization

98

—

294

—
Ending Balance

$
9,037

$
—

$
9,037

$
—

~~As of September 30, 2017 and December 31, 2016, there was no unrealized gain (loss) on contingent consideration.~~

The Company’s policy is to recognize transfers in and transfers out as of the ~~beginning~~end of the period of the event or the date of the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments. ~~There were no transfers to or from Level 3~~

Valuation process for ~~the unaudited interim consolidated balance sheet periods presented.~~

~~Valuation Process for Fair Value Measurements~~

fair value measurements

The Company establishes valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that valuation approaches are consistently applied and the assumptions and inputs are reasonable. The Company has also established processes to provide that the valuation methodologies, techniques and approaches for ~~investments~~financial instruments that are categorized within Level 3 of the fair value hierarchy are fair, consistent and verifiable. The Company’s processes provide a framework that ensures the oversight of the Company’s fair value methodologies, techniques, validation procedures, and results.

The Company designates a valuation committee (the “Committee”) to oversee the entire valuation process of the Company’s Level 3 ~~investments.~~financial instruments. The Committee is comprised of various personnel who are responsible for developing the Company’s written valuation policies, processes and procedures, conducting periodic reviews of the valuation policies, and performing validation procedures on the overall fairness and consistent application of the valuation policies and processes and that the assumptions and inputs used in valuation are reasonable.

The validation procedures overseen by the Committee are also intended to provide that the values received from external third-party pricing sources are consistent with the Company’s ~~Valuation Policy~~valuation policy and are carried at fair value. To the extent that there ~~are~~is no exchange pricing, vendor marks or broker quotes readily available, the Company may use an internal valuation model or other valuation methodology that may be based on unobservable market inputs to fair value the investment.

The values provided by a third-party pricing service are calculated based on key inputs provided by the Company including collateral values, unpaid principal balances, cash flow velocity, contractual status and anticipated disposition timelines. In addition, the Company performs an internal valuation used to assess and review the reasonableness and validity of the fair values provided by a third party. The Company also performs analytical procedures, which include automated checks consisting of prior-period variance analysis, comparisons of actual prices to internally calculate expected prices based on observable market changes, analysis of changes in pricing ranges, and relative value and yield comparisons using the Company’s proprietary valuation models.

Table of Contents

Upon completion of the review process described above, the Company may provide additional quantitative and qualitative data to the third-party pricing service to consider in valuing certain financial assets and liabilities, as applicable. Such data may include deal specific information not included in the data tape provided to the third party, outliers when compared to the unpaid principal balance and collateral value and knowledge of any impending liquidation of an investment. If deemed necessary by the third party and management, the investments are re-valued by the third party to account for the updated information.

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of ~~September~~June 30, ~~2017~~2021, using third party information without adjustment:



(In Thousands, except price)	Fair Value		Predominant Valuation Technique (a)		Type	Range		Weighted Average
Residential mortgage servicing rights, at fair value	$	100,820		Income Approach	Discounted cash flow		N/A		N/A
Derivative instruments, at fair value	$	6,130		Market Approach	Origination pull-through rate \| Servicing Fee Multiple \| Percentage of unpaid principal balance		56.6 - 100% \| 1.1 - 5.1% \| 0.3 to 3.0%		85.6% \| 4.1% \| 1.3%

(a)	Prices are weighted based on the unpaid principal balance of the loans and securities included in the range for each class.

Predominant

Weighted

Valuation

Average Price
(In Thousands, except price)

Fair Value

Technique

Type

Price Range

(a)
Loans, held at fair value

$
158,393

Single External Source

Third Party Mark

$
100.00 – 104.00

$
103.51
Loans, held for sale, at fair value

92,687

Single External Source

Third Party Mark

100.00 – 108.72

103.05
Mortgage backed securities, at fair value (b)

41,245

Broker Quotes

Third Party Mark

29.89 – 103.60

70.01
Mortgage backed securities, at fair value

126

Transaction Price

Transaction Price

99.00 – 99.00

99.00
Residential mortgage servicing rights, at fair value

68,815

Single external source

Discounted cash flow

N/A

N/A
Contingent consideration

9,037

Single external source

Option pricing model

N/A

N/A

~~(a)Prices~~Included within Level 3 assets of $138.8 million is $31.9 million of quoted or transaction prices in which quantitative unobservable inputs are ~~weighted based on~~not developed by the ~~unpaid principal balance of the loans and securities included in the range for each class~~

~~(b)Price ranges and weighted averages exclude interest-only strips with a~~Company when measuring fair value ~~of $1.2 million as of September 30, 2017.~~(for example, when we utilize prices from prior transactions or third-party pricing information without adjustments). Refer to Note 9 for more information on Residential mortgage servicing rights unobservable inputs.

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of December 31, ~~2016~~2020 using third-party information without adjustment:

Predominant





Weighted

Valuation

Average Price
(In Thousands, except price)

Fair Value

Technique

Type

Price Range

(a)
Loans, held at fair value

$
81,592

Single External Source

Third Party Mark

$
98.47 – 105.00

$
103.16
Loans, held for sale, at fair value

17,312

Single External Source

Third Party Mark

100.04 – 102.97

100.87
Mortgage backed securities, at fair value (b)

29,883

Broker Quotes

Third Party Mark

17.91 – 101.00

68.90
Mortgage backed securities, at fair value

2,508

Transaction Price

Transaction Price

99.00 – 99.00

99.00
Residential mortgage servicing rights, at fair value

61,376

Single external source

Discounted cash flow

N/A

N/A
Contingent consideration

14,487

Single external source

Option pricing model

N/A

N/A


(In Thousands, except price)	Fair Value		Predominant Valuation Technique (a)		Type	Range		Weighted Average
Residential mortgage servicing rights, at fair value	$	76,840		Income Approach	Discounted cash flow		N/A		N/A
Derivative instruments, at fair value	$	16,363		Market Approach	Origination pull-through rate \| Servicing Fee Multiple \| Percentage of unpaid principal balance		47.6 - 100% \| 0.5 - 12.8% \| 0.1 to 2.9%		84.1% \| 3.6% \| 1.1%

(a)	Prices are weighted based on the unpaid principal balance of the loans and securities included in the range for each class.

~~(a)Prices~~

Included within Level 3 assets of $207.1 million is $113.9 million of quoted or transaction prices in which quantitative unobservable inputs are ~~weighted based on~~not developed by the ~~unpaid principal balance of the loans and securities included in the range for each class~~

~~(b)Price ranges and weighted averages exclude interest-only strips with a~~Company when measuring fair value ~~of $1.5 million as of December 31, 2016.~~(for example, when we utilize prices from prior transactions or third-party pricing information without adjustments). Refer to Note 9 - Servicing Rights for more information on Residential mortgage servicing rights unobservable inputs.

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. Generally, an increase in the probability of default and loss severity in the event of default would result in a lower fair value measurement. A decrease in these assumptions would have the opposite effect. Conversely, an assumption that the home prices will increase would result in a higher fair value measurement. A decrease in the assumption for home prices would have the opposite effect.

Table of Contents

Financial instruments not carried at fair value

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value onin the ~~unaudited interim~~ consolidated balance sheets and are classified as Level 3:


	September 30, 2017				December 31, 2016

									June 30, 2021				December 31, 2020
(In Thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Loans, held-for-investment	$	1,638,869	$	1,707,078	$	1,585,088	$	1,639,982
Assets:
Loans, net									$	5,149,487	$	5,252,812	$	4,009,636	$	4,103,200
Paycheck Protection Program loans										2,162,155		2,162,155		—		—
Purchased future receivables, net										7,213		7,213		17,308		17,308
Servicing rights		20,557		22,047		22,478		23,470		44,445		53,428		37,823		47,567
Total assets	$	1,659,426	$	1,729,125	$	1,607,566	$	1,663,452	$	7,363,300	$	7,475,608	$	4,064,767	$	4,168,075
Liabilities:
Secured short-term borrowings	$	522,767	$	522,767	$	927,462	$	927,462
Promissory note, net		6,494		6,494		7,378		7,378
Liabilities:
Secured borrowings									$	1,703,034	$	1,703,034	$	1,294,243	$	1,294,243
Paycheck Protection Program Liquidity Facility borrowings										2,286,624		2,286,624		76,276		76,276
Securitized debt obligations of consolidated VIEs, net		680,282		685,694		492,942		483,381		2,309,217		2,352,471		1,905,749		1,907,541
Senior secured note, net		138,074		138,074		—		—		179,825		183,322		179,659		188,114
Guaranteed loan financing		313,388		328,495		390,555		409,751		363,955		388,646		401,705		426,348
Convertible note, net		109,414		109,414		—		—
Convertible notes, net										112,684		84,710		112,129		68,186
Corporate debt, net										333,669		354,996		150,989		151,209
Total liabilities	$	1,770,419	$	1,790,938	$	1,818,337	$	1,827,972	$	7,289,008	$	7,353,803	$	4,120,750	$	4,111,917

Other assets ~~totaling $31.2~~of $37.6 million at ~~September~~June 30, ~~2017~~2021, and ~~$32.6~~$23.8 million at December 31, ~~2016~~2020, are not carried at fair value and include ~~Due~~due from servicers and ~~Accrued~~accrued interest, which are reflected in Note ~~20.~~19 – Other Assets and Other Liabilities. Receivable from third parties ~~totaling $6.8~~of $3.8 million at ~~September~~June 30, ~~2017~~2021, and ~~$7.2~~$1.2 million at December 31, ~~2016~~2020, are not carried at fair value. For these instruments, carrying value approximates fair value and are classified as Level 3.

Accounts payable and other accrued liabilities ~~totaling $8.5~~of $25.8 million at ~~September~~June 30, ~~2017~~2021, and ~~$8.4~~$23.8 million at December 31, ~~2016~~2020, are not carried at fair value and include ~~Payable~~payable to related parties and ~~Accrued~~accrued interest payable which are included in Note ~~20.~~19. For these instruments, carrying value approximates fair value and are classified as Level 3.

Note 8. Mortgage backed securities

~~Note 8 – Mortgage Backed Securities~~

The following table presents certain information about the Company’s MBS portfolio, which are classified as trading securities and carried at fair ~~value, as of September 30, 2017.~~value.

September 30, 2017




Weighted










Weighted

Average

Gross

Gross

Average

Interest

Principal

Amortized

Unrealized

Unrealized
(In Thousands)

Maturity (a)

Rate (a)

Balance

Cost

Fair Value

Gains

Losses
MBS

Freddie Mac Loans

12/2036

3.6
%
$
42,035

$
29,916

$
30,039

$
1,428

$
(1,305)
Commercial Loans

11/2031

8.2

15,106

10,306

11,206

899

—
Tax Liens

09/2026

6.0

127

127

126

—

—
Total

4.8
%
$
57,268

$
40,349

$
41,371

$
2,327

$
(1,305)


		Weighted
	Weighted	Average								Gross		Gross
	Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)	Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
June 30, 2021
Freddie Mac Loans	03/2037	3.7	%	$	119,428	$	50,876	$	55,137	$	4,261	$	(0)
Commercial Loans	11/2050	3.8			72,896		39,100		34,511		700		(5,289)
Residential	11/2042	4.9			228,818		168,190		170,462		2,820		(548)
Total Mortgage backed securities, at fair value	08/2042	4.5	%	$	421,142	$	258,166	$	260,110	$	7,781	$	(5,837)
December 31, 2020
Freddie Mac Loans	01/2037	3.7	%	$	139,408	$	52,320	$	53,509	$	1,880	$	(691)
Commercial Loans	11/2050	4.5			73,074		39,224		34,411		226		(5,039)
Tax Liens	09/2026	6.0			92		92		91		—		(1)
Total Mortgage backed securities, at fair value	10/2041	4.1	%	$	212,574	$	91,636	$	88,011	$	2,106	$	(5,731)

(a)

~~(a)~~

Weighted based on current principal balance

~~Table of Contents~~

~~The following table presents certain information about the Company’s MBS portfolio, which are classified as trading securities and carried at fair value, as of December 31, 2016.~~

December 31, 2016

Weighted

Weighted

Average

Gross

Gross

Average

Interest

Principal

Amortized

Unrealized

Unrealized
(In Thousands)

Maturity (a)

Rate (a)

Balance

Cost

Fair Value

Gains

Losses
MBS

Freddie Mac Loans

04/2036

3.6
%
$
22,219

$
16,999

$
16,937

$
1,466

$
(1,528)
Commercial Loans

08/2031

7.9

19,027

13,149

12,946

139

(342)
Tax Liens

03/2031

6.5

2,534

2,533

2,508

—

(25)
Total

5.7
%
$
43,780

$
32,681

$
32,391

$
1,605

$
(1,895)

~~(a)~~

~~Weighted based on current principal balance~~

The following table presents certain information about the maturity of the Company’s MBS ~~portfolio as of September 30, 2017.~~portfolio.

Weighted






Average

Interest

Principal

Amortized

(In Thousands)

Rate (b)

Balance

Cost

Fair Value
After five years through ten years

3.8
%
$
47,305

$
31,147

$
31,615
After ten years

9.6

9,963

9,203

9,756
Total

4.8
%
$
57,269

$
40,350

$
41,371


	Weighted Average		Principal		Amortized
(In Thousands)	Interest Rate (a)		Balance		Cost		Fair Value
June 30, 2021
After five years through ten years	—	%	$	—	$	—	$	—
After ten years	4.5			421,142		258,166		260,110
Total Mortgage backed securities, at fair value	4.5	%	$	421,142	$	258,166	$	260,110
December 31, 2020
After five years through ten years	6.0	%	$	92	$	92	$	91
After ten years	2.8			212,482		91,544		87,920
Total Mortgage backed securities, at fair value	4.1	%	$	212,574	$	91,636	$	88,011

(a)

~~(b)~~

Weighted based on current principal balance

~~The following table presents certain information about the maturity~~

Table of ~~the Company’s MBS portfolio as of December 31, 2016.~~Contents

Weighted






Average

Interest

Principal

Amortized

Estimated
(In Thousands)

Rate (c)

Balance

Cost

Fair Value
After five years through ten years

8.9
%
$
13,616

$
12,579

$
12,709
After ten years

4.2

30,164

20,102

19,682
Total

5.7
%
$
43,780

$
32,681

$
32,391

~~(c)~~

~~Weighted based on current principal balance~~

Note ~~9 -~~9. Servicing rights

The Company performs servicing activities for third parties, which primarily include collecting principal, interest and other payments from borrowers, remitting the corresponding payments to investors and monitoring delinquencies. The Company’s servicing fees are specified by pooling and servicing ~~Agreements. The Company earned gross servicing fees of $7.1 million and $2.8~~ million, for the three months ended September 30, 2017 and 2016, respectively. The Company earned gross servicing fees of $21.5 million and $8.9 million, for the nine months ended September 30, 2017 and 2016, respectively.agreements.

~~Table of Contents~~

The following table presents information about the Company’s portfolios of servicing rights:


		Three Months Ended September 30,				Nine Months Ended September 30,

											Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)		2017		2016		2017		2016			2021		2020		2021		2020
SBA servicing rights, at amortized cost	SBA servicing rights, at amortized cost									SBA servicing rights, at amortized cost
Beginning net carrying amount		$	17,631	$	22,677	$	20,275	$	26,329		$	18,642	$	17,536	$	18,764	$	17,660
Additions due to loans sold, servicing retained			710		310		1,409		685			2,741		374		3,700		1,335
Acquisitions												—		—		—		—
Amortization			(969)		(1,230)		(3,099)		(3,942)			(1,042)		(860)		(2,089)		(1,733)
Impairment			76		(253)		(1,137)		(1,568)
Impairment (recovery)												(620)		268		(654)		56
Ending net carrying value of SBA servicing rights		$	17,448	$	21,504	$	17,448	$	21,504		$	19,721	$	17,318	$	19,721	$	17,318
Freddie Mac servicing rights, at amortized cost
Freddie Mac multi-family servicing rights, at amortized cost										Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount		$	2,323	$	1,714	$	2,203	$	921		$	21,757	$	13,944	$	19,059	$	13,135
Additions due to loans sold, servicing retained			869		274		1,922		1,495			3,909		3,539		7,468		4,987
Amortization			(159)		(141)		(386)		(391)			(942)		(685)		(1,803)		(1,324)
Impairment			76		—		(630)		(178)
Ending net carrying value of Freddie Mac servicing rights		$	3,109	$	1,847	$	3,109	$	1,847
Ending net carrying value of SBA and Freddie Mac servicing rights, at amortized cost		$	20,557	$	23,351	$	20,557	$	23,351
Ending net carrying value of Freddie Mac multi-family servicing rights											$	24,724	$	16,798	$	24,724	$	16,798
Total servicing rights, at amortized cost											$	44,445	$	34,116	$	44,445	$	34,116
Residential mortgage servicing rights, at fair value	Residential mortgage servicing rights, at fair value									Residential mortgage servicing rights, at fair value
Beginning Balance		$	66,797	$	—	$	61,376	$	—
Beginning net carrying amount											$	98,542	$	78,631	$	76,840	$	91,174
Additions due to loans sold, servicing retained			5,245		—		15,629		—			11,925		13,331		23,973		20,478
Loan pay-offs			(1,499)		—		(4,238)		—			(4,948)		(6,274)		(10,650)		(9,527)
Unrealized losses			(1,728)		—		(3,952)		—
Ending fair value of residential mortgage servicing rights		$	68,815	$	—		68,815		—
Unrealized (losses) gains												(4,699)		(12,043)		10,657		(28,480)
Ending fair value of Residential mortgage servicing rights											$	100,820	$	73,645	$	100,820	$	73,645
Total servicing rights		$	89,372	$	23,351		89,372		23,351		$	145,265	$	107,761	$	145,265	$	107,761

Servicing rights – SBA and Freddie ~~Mac~~

Mac. The Company’s SBA and Freddie Mac multi-family servicing rights are carried at the lower of cost or amortized cost. The Company estimates the fair value of the SBA and Freddie Mac multi-family servicing rights carried at amortized cost using a combination of internal models and data provided by third-party valuation experts. The assumptions used in our internal models include ~~the speed at which the mortgages prepay, cost of~~forward prepayment rates, forward default rates, discount rates, and servicing ~~discount rate and probability of default.~~expenses.

The Company’s models calculate the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. We derive forward prepayment ~~speeds,~~rates, forward default ~~assumptions~~rates and discount ~~rate~~rates from historical experience adjusted for prevailing market conditions. Components of the estimated future cash flows include servicing fees, late fees, other ancillary fees and cost of servicing.

The following table presents additional information about the Company’s SBA and Freddie Mac multi-family servicing rights:


	As of September 30, 2017				As of December 31, 2016
	Unpaid Principal				Unpaid Principal

									As of June 30, 2021				As of December 31, 2020
									Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value		Amount		Carrying Value		Amount		Carrying Value
SBA	$	424,881	$	17,448	$	449,115	$	20,275	$	729,071	$	19,721	$	643,135	$	18,764
Freddie Mac		439,681		3,109		224,826		2,203
Freddie Mac multi-family										1,802,187		24,724		1,501,998		19,059
Total	$	864,562	$	20,557	$	673,941	$	22,478	$	2,531,258	$	44,445	$	2,145,133	$	37,823

~~Table of Contents~~

The significant assumptions used in the ~~September 30, 2017 and December 31, 2016~~ estimated valuation of the Company’s SBA and Freddie Mac ~~commercial~~multi-family servicing rights carried at amortized cost include:


		June 30, 2021						December 31, 2020
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights (at amortized cost)
	Forward prepayment rate	6.9	-	21.2	%	8.3	%	6.7	-	20.8	%	8.5	%
	Forward default rate	0.0	-	10.6	%	8.8	%	0.0	-	10.5	%	8.2	%
	Discount rate	6.4	-	18.2	%	7.0	%	4.5	-	4.5	%	4.5	%
	Servicing expense	0.4	-	0.4	%	0.4	%	0.4	-	0.4	%	0.4	%

Freddie Mac multi-family servicing rights (at amortized cost)
	Forward prepayment rate	0.1	-	5.1	%	2.4	%	0.1	-	5.1	%	2.4	%
	Forward default rate	0.0	-	0.4	%	0.3	%	0.0	-	0.4	%	0.3	%
	Discount rate	6.0	-	6.0	%	6.0	%	6.0	-	6.0	%	6.0	%
	Servicing expense	0.2	-	0.3	%	0.2	%	0.2	-	0.3	%	0.2	%

September 30, 2017

December 31, 2016

Range of input
values

Weighted
Average

Range of input
values

Weighted
Average
SBA servicing rights (at amortized cost)

• Forward prepayment rate

2.3
-
21.0
%

11.9
%

2.1
-
19.1
%

13.1
%

• Forward default rate

0.0
-
9.6
%

2.2
%

0.0
-
10.8
%

1.2
%

• Discount rate

12.0
-
12.0
%

12.0
%

12.0
-
12.0
%

12.0
%

• Servicing expense

0.4
-
0.4
%

0.4
%

0.4
-
0.4
%

0.4
%

Freddie Mac commercial servicing rights (at amortized cost)

• Forward prepayment rate

10.0
-
10.0
%

10.0
%

10.0
-
10.0
%

10.0
%

• Forward default rate

1.1
-
1.1
%

1.1
%

1.1
-
1.1
%

1.1
%

• Discount rate

12.0
-
12.0
%

12.0
%

12.0
-
12.0
%

12.0
%

• Servicing expense

0.2
-
0.2
%

0.2
%

0.2
-
0.2
%

0.2
%

Table of Contents

~~These assumptions~~Assumptions can change between and at each reporting period as market conditions and projected interest rates change.

The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the carrying amount of the Company’s SBA and Freddie Mac multi-family servicing rights.

(In Thousands)

September 30, 2017

December 31, 2016
SBA servicing rights (at amortized cost)

• Forward prepayment rate

10% adverse change

$
(547)

$
(664)
20% adverse change

(1,062)

(1,290)

• Default rate

10% adverse change

$
(20)

$
(12)
20% adverse change

(39)

(24)

• Discount rate

10% adverse change

$
(529)

$
(576)
20% adverse change

(1,024)

(1,290)

Freddie Mac commercial servicing rights (at amortized cost)

• Forward prepayment rate

10% adverse change

$
(119)

$
(55)
20% adverse change

(231)

(107)

• Default rate

10% adverse change

$
(4)

$
(2)
20% adverse change

(9)

(4)

• Discount rate

10% adverse change

$
(116)

$
(54)
20% adverse change

(223)

(104)


(In Thousands)	June 30, 2021		December 31, 2020
SBA servicing rights (at amortized cost)
Forward prepayment rate
Impact of 10% adverse change	$	(696)	$	(729)
Impact of 20% adverse change	$	(1,357)	$	(1,420)
Default rate
Impact of 10% adverse change	$	(161)	$	(150)
Impact of 20% adverse change	$	(320)	$	(298)
Discount rate
Impact of 10% adverse change	$	(565)	$	(395)
Impact of 20% adverse change	$	(1,102)	$	(777)
Freddie Mac multi-family servicing rights (at amortized cost)
Forward prepayment rate
Impact of 10% adverse change	$	(198)	$	(163)
Impact of 20% adverse change	$	(393)	$	(324)
Default rate
Impact of 10% adverse change	$	(8)	$	(6)
Impact of 20% adverse change	$	(16)	$	(13)
Discount rate
Impact of 10% adverse change	$	(829)	$	(678)
Impact of 20% adverse change	$	(1,620)	$	(1,324)

The estimated future amortization expense for the servicing rights is expected to be as follows:



(In Thousands)	September 30, 2017		June 30, 2021
2017	$	1,127
2018		4,009
2019		3,308
2020		2,719
2021		2,221	$	3,957
2022				7,235
2023				6,406
2024				5,673
2025				5,023
Thereafter		7,173		16,151
Total	$	20,557	$	44,445

~~Table of Contents~~

Residential mortgage servicing rights. The Company's residential mortgage servicing rights consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Department of Veteran Affairs.

The following table presents additional information about the Company’s residential mortgage servicing rights carried at fair value:


	As of September 30, 2017				As of December 31, 2016
	Unpaid Principal				Unpaid Principal

									As of June 30, 2021				As of December 31, 2020
(In Thousands)	Amount		Fair Value		Amount		Fair Value		Unpaid Principal Amount		Fair Value		Unpaid Principal Amount		Fair Value
Fannie Mae	$	2,482,149	$	26,105	$	2,211,493	$	23,924	$	3,983,064	$	36,424	$	3,700,450	$	27,632
Ginnie Mae		2,062,515		22,849		1,817,009		21,205		2,839,821		30,651		2,757,124		25,899
Freddie Mac		1,804,468		19,861		1,452,902		16,247		3,550,626		33,745		3,071,312		23,309
Total	$	6,349,132	$	68,815	$	5,481,404	$	61,376	$	10,373,511	$	100,820	$	9,528,886	$	76,840

The significant assumptions used in the ~~September 30, 2017 and December 31, 2016~~ valuation of the Company’s residential mortgage servicing rights carried at fair value include:


		June 30, 2021						December 31, 2020
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights (at fair value)
	Forward prepayment rate	10.4	-	27.7	%	11.2	%	12.6	-	31.4	%	14.3	%
	Discount rate	9.0	-	11.4	%	9.7	%	9.1	-	11.7	%	9.8	%
	Servicing expense	$70	-	$85		$74		$70	-	$85		$74

September 30, 2017

December 31, 2016

Range of input
values

Weighted
Average

Range of input
values

Weighted
Average
Residential mortgage servicing rights (at fair value)

• Forward prepayment rate

7.3
-
28.0
%

8.7
%

6.9
-
11.7
%

9.3
%

• Discount rate

10.5
-
13.0
%

10.9
%

10.5
-
11.5
%

10.8
%

• Servicing expense

0.7
-
0.8
%

0.7
%

0.4
-
1.7
%

0.5
%

Table of Contents

The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the fair value of the Company’s residential mortgage servicing rights.

(In Thousands)

September 30, 2017

December 31, 2016
Prepayment rate

10% adverse change

$
(2,412)

$
(2,038)
20% adverse change

(4,679)

(3,983)
Discount rate

10% adverse change

$
(2,871)

$
(2,299)
20% adverse change

(5,520)

(4,438)
Cost of servicing

10% adverse change

$
(1,193)

$
(1,304)
20% adverse change

(2,387)

(2,607)


(In Thousands)	June 30, 2021		December 31, 2020
Residential mortgage servicing rights (at fair value)
Prepayment rate
Impact of 10% adverse change	$	(5,053)	$	(5,049)
Impact of 20% adverse change	$	(9,743)	$	(9,701)
Discount rate
Impact of 10% adverse change	$	(3,622)	$	(2,601)
Impact of 20% adverse change	$	(6,996)	$	(5,028)
Cost of servicing
Impact of 10% adverse change	$	(1,850)	$	(1,469)
Impact of 20% adverse change	$	(3,701)	$	(2,938)

Note ~~10 – Gains~~10. Residential mortgage banking activities and variable expenses on residential mortgage banking activities ~~net of variable loan expenses~~

~~Gains on residential~~Residential mortgage banking activities, ~~net of variable loan expenses,~~ reflects ~~variable~~ revenue ~~and expense~~ within our residential mortgage banking business directly related to loan origination and sale activity. This primarily consists of the realized gains on sales of residential loans held for sale and loan origination fee ~~income, offset by direct costs, such as correspondent fee expenses and other direct expenses relating to these loans, which vary based on loan origination volumes. Gains on residential~~income. Residential mortgage banking activities ~~net of variable loan expenses,~~ also consists of unrealized gains and losses associated with the changes in fair value of the loans held for sale, the fair value of retained MSR additions, and the realized and unrealized gains and losses from derivative instruments. Variable expenses include correspondent fee expenses and other direct expenses relating to these loans, which vary based on loan origination volumes.

~~Table of Contents~~

The following table presents the components of ~~gains~~residential mortgage banking activities and variable expenses on residential mortgage banking activities ~~net of variable loan expenses,~~ recorded in the Company’s ~~unaudited interim~~ consolidated statements of ~~operations.~~income.

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Realized and unrealized gains and losses of residential mortgage loans held for sale, at fair value

$
16,388

$
—

$
49,806

$
—
Creation of new mortgage servicing rights, net of payoffs

3,746

—

11,392

—
Loan origination fee income on residential mortgage loans

2,079

—

6,221

—
Correspondent fees and other direct loan expenses, including provision for loan indemnification

(11,276)

—

(33,147)

—
Unrealized gains (loss) on IRLCs and other derivatives

(202)

—

(2,043)

—
Total gains on residential mortgage banking activities, net of variable loan expenses

$
10,735

$
—

$
32,229

$
—


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Realized and unrealized gain (loss) of residential mortgage loans held for sale, at fair value	$	1,462	$	57,450	$	31,022	$	82,616
Creation of new mortgage servicing rights, net of payoffs		6,976		7,057		13,324		10,950
Loan origination fee income on residential mortgage loans		34,750		3,907		40,982		7,211
Unrealized gain (loss) on IRLCs and other derivatives		(6,498)		12,150		(7,229)		16,456
Residential mortgage banking activities	$	36,690	$	80,564	$	78,099	$	117,233

Variable expenses on residential mortgage banking activities	$	(21,421)	$	(36,446)	$	(36,906)	$	(56,575)

Table of Contents

Note ~~11 –~~11. Secured ~~Short-Term Borrowings and Promissory Note~~borrowings

The following tables present certain characteristics of our secured ~~short-term borrowings and promissory note:~~borrowings:

Pledged Assets
Carrying Value at

Carrying Value
of Borrowing at
(in 000s)
Maturity

Pricing

Facility
Size

September 30,
2017

December 31,
2016

September 30,
2017

December 31,
2016
Borrowings under credit facilities

JPMorgan - Commercial (1)
June 2018

L+ 3.25 to 3.50%

$
250,000

$
43,407

$
226,253

$
30,960

$
190,066
Keybank - Commercial (2)
September 2018

L + 1.75%

100,000

78,872

17,311

76,753

17,162
Comerica - Residential (3)
March 2018

L + 2.125%

150,000

65,460

35,102

61,332

33,575
UBS - Residential loans (3)
November 2017

L + 2.30%

65,000

—

43,121

—

39,750
Associated Bank - Residential loans (3)
August 2018

L + 2.25%

40,000

15,446

28,575

14,345

27,869
Origin Bank - Residential loans (3)
May 2018

L + 2.25%

40,000

20,191

18,910

19,006

18,188
Total borrowings under credit facilities (9)

$
645,000

$
223,376

$
369,272

$
202,396

$
326,610
Borrowings under repurchase agreements

Deutsche Bank- Commercial (4)
February 2018

L + 2.50 to 3.50%

$
275,000

$
119,707

$
118,962

$
76,954

$
82,716
JPMorgan - Commercial (5)
December 2017

L + 2.50 to 4.50%

250,000

77,343

93,691

44,883

52,169
Citibank - Commercial (6)
June 2018

L + 2.25% to 3.00%

200,000

59,911

119,376

49,778

102,576
JPMorgan - MBS (7)
November 2017

2.56 to 3.94%

36,331

54,518

42,253

36,331

30,363
Citibank - MBS (7)
November 2017

3.37%

5,957

11,496

11,496

5,957

5,226
Bank of America - MBS (7)
January 2018

3.38 - 3.48%

8,112

9,630

11,815

6,568

8,112
Mizuho - STI (8)
N/A

N/A

99,950

—

100,000

—

99,950
Societe Generale - STI (8)
N/A

N/A

19,940

—

19,994

—

19,940
RBC - STI (8)
October 2017

1.50%

199,800

99,994

199,990

99,900

199,800
Total borrowings under repurchase agreements (10)

$
1,095,090

$
432,599

$
717,577

$
320,371

$
600,852
Total secured short-term borrowings

$
1,740,090

$
655,975

$
1,086,849

$
522,767

$
927,462

Promissory note payable

FCB - Commercial
June 2021

2.75%

$
9,164

$
8,233

$
9,144

$
6,494

$
7,378
Total promissory note payable

$
9,164

$
8,233

$
9,144

$
6,494

$
7,378


				��					Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size			Pledged Assets Carrying Value		June 30, 2021		December 31, 2020
JPMorgan	Acquired loans, SBA loans	July 2021	1M L + 2.5% to 2.875%	$	200,000		$	57,147	$	42,488	$	36,604
Keybank	Freddie Mac loans	February 2022	SOFR + 1.41%		100,000			37,015		36,533		50,408
East West Bank	SBA loans	October 2022	Prime - 0.821% to + 0.00%		50,000			48,652		41,581		40,542
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50% to 3.00%		237,160	^(a)		63,261		43,554		36,840
Comerica Bank	Residential loans	September 2021	1M L + 1.75%		125,000			90,085		83,613		78,312
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000			124,670		121,761		123,951
Origin Bank	Residential loans	August 2021	Variable Pricing		60,000			28,305		27,186		27,450
Associated Bank	Residential loans	November 2021	1M L + 1.50%		60,000			40,686		38,000		15,556
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000			70,147		21,400		34,400
Credit Suisse	Purchased future receivables	October 2023	1M L + 4.50%		150,000			7,213		1,000		—
Bank of the Sierra	Real estate	August 2050	3.25% to 3.45%		22,770			32,438		22,391		22,611
Total borrowings under credit facilities and other financing agreements ^(b)				$	1,204,930		$	599,619	$	479,507	$	466,674
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 2.50% to 3.25%	$	500,000		$	101,862	$	66,184	$	210,735
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00% to 2.40%		350,000			334,503		187,050		190,567
JPMorgan	Transitional loans	November 2022	1M L + 2.00% to 2.75%		600,000			763,711		571,516		247,616
Performance Trust	Acquired loans	March 2024	1M T + 2.00%		123,000			40,886		35,625		—
Credit Suisse	Fixed rate, Transitional, Acquired loans	May 2022	1M L + 2.00% to 2.35%		500,000			10,066		7,607		—
Credit Suisse	Residential loans	July 2021	L + 3.00%		100,000			83,677		70,570		—
JPMorgan	MBS	September 2021	1.30% to 1.98%		59,794			93,489		59,794		65,407
Deutsche Bank	MBS	July 2021	2.44%		13,157			19,777		13,157		16,354
Citibank	MBS	July 2021	2.39%		47,878			84,189		47,878		58,076
RBC	MBS	October 2021	1.74% to 2.33%		41,006			60,419		41,006		38,814
CSFB	MBS	July 2021	2.40% to 2.95%		58,786			108,138		58,786		—
Various	MBS	July 2021	Variable Pricing		64,354			95,686		64,354		—
Total borrowings under repurchase agreements ^(c)				$	2,457,975		$	1,796,403	$	1,223,527	$	827,569
Total secured borrowings				$	3,662,905		$	2,396,022	$	1,703,034	$	1,294,243
(a) The current facility size is €200.0 million, but has been converted into USD for purposes of this disclosure.
(b) The weighted average interest rate of borrowings under credit facilities was 4.5% and 2.8% as of June 30, 2021 and December 31, 2020, respectively.
(c) The weighted average interest rate of borrowings under repurchase agreements was 2.2% and 3.3% as of June 30, 2021 and December 31, 2020, respectively.

~~(1)~~

~~Borrowings are used to finance SBC and SBA loan acquisitions, and SBA loan originations.~~

~~(2)~~

~~Borrowings are used to finance Freddie Mac SBC loan originations.~~

~~(3)~~

~~Borrowings are used to finance Residential Agency loan originations.~~

~~(4)~~

~~Borrowings are used to finance SBC loan originations.~~

~~(5)~~

~~Borrowings are used to finance SBC loan originations, Transitional loan originations, and SBC loan acquisitions.~~

~~(6)~~

~~Borrowings are used to finance SBC loan originations and SBC loan acquisitions.~~

~~(7)~~

~~Borrowings are used to finance Mortgage backed securities and Retained interests in consolidated VIE's.~~

~~(8)~~

~~Borrowings are used to finance Short-term investments.~~

~~(9)~~

~~The weighted average interest rate of borrowings under credit facilities was 2.9% and 4.2% as of September 30, 2017 and December 31, 2016, respectively.~~

~~(10)~~

~~The weighted average interest rate of borrowings under repurchase agreements was 2.4% and 1.8% as of September 30, 2017 and December 31, 2016, respectively.~~

~~Table of Contents~~

The following table presents the carrying value of the Company’s collateral pledged with respect to ~~short-term~~ secured borrowings ~~and promissory note payable~~ outstanding with our lenders:


	Pledged Assets Carrying Value at

					Pledged Assets Carrying Value at
(In Thousands)	September 30, 2017		December 31, 2016		June 30, 2021		December 31, 2020
Collateral pledged - borrowings under credit facilities
Collateral pledged - borrowings under credit facilities and other financing agreements
Loans, held for sale, at fair value					$	195,689	$	313,844
Loans, net	$	223,376	$	369,272		169,531		159,482
Total collateral pledged on borrowings under credit facilities	$	223,376	$	369,272
Loans, held at fair value						124,503		73,799
Mortgage servicing rights						70,147		50,941
Paycheck Protection Program loans						—		—
Purchased future receivables						7,213		—
Real estate, held for sale						32,536		32,948
Total					$	599,619	$	631,014
Collateral pledged - borrowings under repurchase agreements
Short-term investments	$	99,994	$	319,984
Loans, net		256,961		332,029	$	1,222,248	$	815,603
Mortgage backed securities		9,630		11,815		366,161		72,179
Retained interest in assets of consolidated VIEs		66,014		53,749		95,537		226,773
Total collateral pledged on borrowings under repurchase agreements	$	432,599	$	717,577
Total collateral pledged on secured short-term borrowings	$	655,975	$	1,086,849

Collateral pledged - promissory note payable
Loans, net	$	8,233	$	9,144
Total collateral pledged on promissory note payable	$	8,233	$	9,144
Loans, held for sale, at fair value						107,723		17,850
Loans, held at fair value						3,056		3,071
Real estate acquired in settlement of loans						1,678		829
Total					$	1,796,403	$	1,136,305
Total collateral pledged on secured borrowings					$	2,396,022	$	1,767,319

The agreements governing the Company’s secured ~~short-term~~ borrowings ~~and promissory note~~ require the Company to maintain certain financial and debt covenants. The Company was in compliance with all debt and financial covenants as of ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table of Contents

Note 12. Senior secured notes, convertible notes, and corporate debt, net

~~Note 12 – Offsetting Assets and Liabilities~~

Senior secured notes, net

~~In order to better define its contractual rights and to secure rights that will help~~During 2017, ReadyCap Holdings LLC, a subsidiary of the Company, ~~mitigate its counterparty risk, the Company may enter into~~issued $140.0 million in 7.50% Senior Secured Notes due 2022. On January 30, 2018, ReadyCap Holdings, LLC issued an ~~International Swaps~~additional $40.0 million in aggregate principal amount of 7.50% Senior Secured Notes due 2022, which have identical terms (other than issue date and Derivatives Association (“ISDA”) Master Agreement with multiple derivative counterparties. An ISDA Master Agreement, published by ISDA, is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter (“OTC”), derivative contracts. The ISDA Master Agreement contains a Scheduleissue price) to the ~~Master Agreement and~~notes issued during 2017 (collectively “the Senior Secured Notes”). The additional $40.0 million in Senior Secured Notes were priced with a ~~Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event~~yield to par call date of ~~a default and/or a termination event)~~6.5%. Under an ISDA Master Agreement, the Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisionsPayments of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Company’s stockholders’ equity decline by a stated percentage or the Company fails to meet the terms of its ISDA Master Agreements, which would cause the Company to accelerate payment of any net liability owed to the counterparty. As of September 30, 2017 and December 31, 2016 and for the periods then ended, the Company was in good standing on all of its ISDA Master Agreements or similar arrangements with its counterparties.

For derivatives traded under an ISDA Master Agreement, the collateral requirements are listed under the Credit Support Annex, which is the sum of the mark to market for each derivative contract, the independent amountamounts due to the derivative counterparty and any thresholds, if any. Collateral may be in the form of Cash or any eligible securities, as defined in the respective ISDA agreements. Cash collateral pledged to and by the Company with the counterparty, if any, is reported separately on the ~~unaudited interim consolidated balance sheets as restricted cash. All margin call amounts must be made before the notification time~~Senior Secured Notes are fully and ~~must exceed a minimum transfer amount threshold before a transfer is required. All margin calls must be responded to and completed~~unconditionally guaranteed by ~~the close of business on the same day of the margin call, unless otherwise specified. Any margin calls after the notification time must be completed by the next business day. Typically,~~ the Company and its ~~counterparties are not permitted~~subsidiaries: Sutherland Partners LP, Sutherland Asset I, LLC, and ReadyCap Commercial, LLC. The funds were used to ~~sell, rehypothecate or use the collateral posted. To the extent amounts due~~fund new SBC and SBA loan originations and new SBC loan acquisitions.

As of June 30, 2021, we were in compliance with all covenants with respect to the ~~Company from its counterparties are not fully collateralized,~~Senior Secured Notes.

Convertible notes, net

On August 9, 2017, the Company ~~bears exposure~~closed an underwritten public sale of $115.0 million aggregate principal amount of its 7.00% convertible senior notes due 2023 (the “Convertible Notes”). The Convertible Notes will mature on August 15, 2023, unless earlier repurchased, redeemed or converted. During certain periods and subject to certain conditions, the ~~risk~~Convertible Notes will be convertible by holders into shares of ~~loss from~~the Company's common stock. As of June 30, 2021, the conversion rate was 1.6146 shares of common stock per $25 principal amount of the Convertible Notes, which is equals a ~~defaulting counterparty.~~ conversion price of approximately $15.48 per share of the Company’s common stock. Upon conversion, holders will receive, at the Company's discretion, cash, shares of the Company's common stock, or a combination thereof.

The Company ~~attempts~~may redeem all or any portion of the Convertible Notes on or after August 15, 2021, if the last reported sale price of the Company’s common stock has been at least 120% of the conversion price in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price payable in cash equal to ~~mitigate counterparty risk~~100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. Additionally, upon the occurrence of certain corporate transactions, holders may require the Company to purchase the Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.

The Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is greater than or equal to 120% of the conversion price of the respective Convertible Notes for at least 20 out of 30 days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10 day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by ~~establishing ISDA Agreements~~more than 10%, or (4) certain other specified corporate events (significant consolidation, sale, merger share exchange, etc.) occur.

At issuance, we allocated $112.7 million and $2.3 million of the carrying value of the Convertible Notes to its debt and equity components, respectively, before the allocation of deferred financing costs.

As of June 30, 2021, we were in compliance with ~~only high grade counterparties that have~~all covenants with respect to the ~~financial health~~Convertible Notes.

Corporate debt, net

The 2021 Notes

On April 27, 2018, the Company completed the public offer and sale of $50.0 million aggregate principal amount of its 6.50% Senior Notes due 2021 (the “2021 Notes”). The Company issued the 2021 Notes under a base indenture, dated August 9, 2017, (the “base indenture”) as supplemented by the second supplemental indenture, dated as of April 27, 2018, between the Company and U.S. Bank National Association, as trustee. The 2021 Notes accrued interest at a rate of 6.50% per annum, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, on July 30, 2018. The 2021 Notes had a maturity date of April 30, 2021.

On March 26, 2021, the Company redeemed all of the outstanding 2021 Notes, at a redemption price equal to ~~honor their obligations~~100% of the principal amount of the 2021 Notes plus accrued and ~~diversification, entering into agreements with multiple counterparties.~~

unpaid interest, for cash.

Table of Contents

The 6.20% 2026 Notes

On July 22, 2019, the Company completed the public offer and sale of $57.5 million aggregate principal amount of its 6.20% Senior Notes due 2026 (the “6.20% 2026 Notes”), which includes $7.5 million aggregate principal amount of the 6.20% 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of the 6.20% 2026 Notes were approximately $55.3 million, after deducting underwriters’ discount and estimated offering expenses. The Company contributed the net proceeds to Sutherland Partners, L.P. (the “Operating Partnership”), the operating partnership subsidiary, in exchange for the issuance by the Operating Partnership of a senior note with terms that are substantially equivalent to the terms of the 6.20% 2026 Notes.

The 6.20% 2026 Notes bear interest at a rate of 6.20% per annum, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2019. The 6.20% 2026 Notes will mature on July 30, 2026, unless earlier repurchased or redeemed.

The Company may redeem for cash all or any portion of the 6.20% 2026 Notes, at its option, on or after July 30, 2022 and before July 30, 2025 at a redemption price equal to 101% of the principal amount of the 6.20% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On or after July 30, 2025, the Company may redeem for cash all or any portion of the 6.20% 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 6.20% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes a change of control repurchase event, holders may require it to purchase the 6.20% 2026 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 6.20% 2026 Notes to be purchased, plus accrued and unpaid interest.

The 6.20% 2026 Notes are the Company’s senior obligations and will not be guaranteed by any of its subsidiaries, except to the extent described in the Indenture upon the occurrence of certain events. The 6.20% 2026 Notes rank equal in right of payment to any of the Company’s existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of its existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by the Company) preferred stock, if any, of its subsidiaries.

On December 2, 2019, the Company completed an additional public offering and sale of $45.0 million aggregate principal amount of the 6.20% 2026 Notes. The new notes have the same terms (except with respect to issue date, issue price and the date from which interest will accrue), and are fully fungible with and are treated as a single series of debt securities as the 6.20% 2026 Notes the Company issued on July 22, 2019.

The 5.75% 2026 Notes

On February 10, 2021, the Company completed the public offer and sale of $201.3 million aggregate principal amount of its 5.75% Senior Notes due 2026 (the “5.75% 2026 Notes”), which includes $26.3 million aggregate principal amount of 5.75% 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of 5.75% Senior Notes were approximately $195.2 million, after deducting underwriters’ discount and estimated offering expenses. The Company contributed the net proceeds to the Operating Partnership in exchange for the issuance by the Operating Partnership of a senior note with terms that are substantially equivalent to the terms of the 5.75% 2026 Notes.

The 5.75% 2026 Notes bear interest at a rate of 5.75% per annum, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, beginning on April 30, 2021. The 5.75% 2026 Notes will mature on February 15, 2026, unless earlier repurchased or redeemed.

The 5.75% 2026 Notes are the Company’s senior unsecured obligations and will not be guaranteed by any of its subsidiaries, except to the extent described in the Indenture upon the occurrence of certain events. The 5.75% 2026 Notes rank equal in right of payment to any of the Company’s existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of its existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by the Company) preferred stock, if any, of its subsidiaries.

As of June 30, 2021, we were in compliance with all covenants with respect to the corporate debt.

Table of Contents

Junior subordinated notes

On March 19, 2021, the Company completed the ANH Merger which included the Company assuming the outstanding junior subordinated notes (“Junior subordinated notes”) issued of ANH. On March 15, 2005 ANH issued $37,380,000 of junior subordinated notes to a newly formed statutory trust, Anworth Capital Trust I, organized by ANH under Delaware law. The trust issued $36,250,000 in trust preferred securities, of which $15,000,000 were for I-A notes and $21,250,000 for I-B notes, to unrelated third party investors. Both the junior subordinated notes and the trust preferred securities require quarterly payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. Both the junior subordinated notes and the trust preferred securities will mature in 2035 and are currently redeemable, at our option, in whole or in part, without penalty. ANH used the net proceeds of this issuance to invest in Agency MBS. In accordance with ~~ASU 2013-01,~~ ~~Balance Sheet (Topic 210): Clarifying~~ASC 810-10, Anworth Capital Trust I does not meet the ~~Scope of Disclosures about Offsetting Assets and Liabilities~~,requirements for consolidation.

The Debt ATM Agreement

On May 20, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which the Company may offer and sell, from time to time, up to $100.0 million of the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) (the “Debt ATM Program”). The Agent is not required to ~~disclose the impact of offsetting of assets and liabilities represented in the unaudited interim consolidated balance sheets to enable users~~sell any specific number of the ~~unaudited interim consolidated financial statements to evaluate~~notes, but the ~~effect or potential effect of netting arrangements~~Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on ~~its financial position for recognized assets~~mutually agreed terms between the Agent and liabilities. These recognized assets and liabilities are financial instruments and derivative instruments that are either subject to enforceable master netting arrangements or ISDA Master Agreements or meet the ~~following right of setoff criteria: (a)~~Company. During the ~~amounts owed by~~three months ended June 30, 2021, the Company ~~to another party are determinable, (b)~~did not sell any amount of the ~~Company has~~6.20% 2026 Notes or the ~~right to set off~~5.75% 2026 Notes through the amounts owed with the amounts owed by the counterparty, (c) the Company intends to set off, and (d) the Company’s right of setoff is enforceable at law. As of September 30, 2017 and December 31, 2016, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the unaudited interim consolidated balances sheets. Debt ATM Program.

The following table ~~provides disclosure regarding~~presents the ~~effect of offsetting~~components of the ~~Company’s recognized assets~~Senior Secured Notes, Convertible Notes, and ~~liabilities presented in~~corporate debt including the ~~unaudited interim consolidated balance sheet as of September 30, 2017:~~carrying value for the aggregate contractual maturities:

Gross

Assets

Amounts

Presented in

Gross Amounts Not Offset in the Consolidated

Gross

Offset in the

the

Balance Sheets (1)

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

(In Thousands)

Assets

Sheets

Sheets

Instruments

Received

Net Amount
Interest rate swaps

$
1,562

$
—

$
1,562

$
—

$
1,562

$
—
Total

$
1,562

$
—

$
1,562

$
—

$
1,562

$
—


(in thousands, except rates)	Coupon Rate		Maturity Date	June 30, 2021
Senior secured notes principal amount⁽¹⁾	7.50	%	2/15/2022	$	180,000
Unamortized premium - Senior secured notes					490
Unamortized deferred financing costs - Senior secured notes					(665)
Total Senior secured notes, net				$	179,825
Convertible notes principal amount ⁽²⁾	7.00	%	8/15/2023		115,000
Unamortized discount - Convertible notes⁽³⁾					(854)
Unamortized deferred financing costs - Convertible notes					(1,462)
Total Convertible notes, net				$	112,684
Corporate debt principal amount⁽⁴⁾	6.20	%	7/30/2026		104,250
Corporate debt principal amount⁽⁵⁾	5.75	%	2/15/2026		201,250
Unamortized discount - corporate debt					(4,753)
Unamortized deferred financing costs - corporate debt					(3,328)
Junior subordinated notes principal amount⁽⁶⁾	3M + 3.10	%	3/30/2035		15,000
Junior subordinated notes principal amount⁽⁷⁾	3M + 3.10	%	4/30/2035		21,250
Total corporate debt, net				$	333,669
Total carrying amount of debt components				$	626,178
Total carrying amount of conversion option of equity components recorded in equity				$	854
(1) Interest on the senior secured notes is payable semiannually on each February 15 and August 15.
(2) Interest on the convertible notes is payable quarterly on February 15, May 15, August 15, and November 15 of each year.
(3) Represents the discount created by separating the conversion option from the debt host instrument.
(4) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year.
(5) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year, beginning on April 30, 2021.
(6) Interest on the Junior subordinated notes I-A payable March 30, June 30, September 30, and December 30 of each year.
(7) Interest on the Junior subordinated notes I-B payable January 30, April 30, July 30, and October 30 of each year.

Gross

Liabilities

Amounts

Presented in

Gross Amounts Not Offset in the Consolidated

Gross

Offset in the

the

Balance Sheets (1)

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

(In Thousands)

Liabilities

Sheets

Sheets

Instruments

Paid

Net Amount
Interest rate swaps

$
303

$
—

$
303

$
—

$
303

$
—
Credit default swaps

55

—

55

—

55

—
Secured short-term borrowings

522,767

—

522,767

522,767

—

—
Promissory note, net

6,494

—

6,494

6,494

—

—
Total

$
529,619

$
—

$
529,619

$
529,261

$
358

$
—

~~(1)~~

Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty that exceed the financial liabilities subject to a master netting repurchase arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our unaudited interim consolidated balance sheets as assets or liabilities, respectively.

~~Table of Contents~~

The following table ~~provides disclosure regarding~~presents the ~~effect~~contractual maturities of ~~offsetting~~Senior Secured Notes, Convertible Notes, and corporate debt:


(In Thousands)	June 30, 2021
2021	$	—
2022		180,000
2023		115,000
2024		—
2025		—
Thereafter		341,750
Total contractual amounts	$	636,750
Unamortized deferred financing costs, discounts, and premiums, net		(10,572)
Total carrying amount of debt components	$	626,178

Table of Contents

Note 13. Guaranteed loan financing

Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment in the consolidated balance sheets and the portion sold is recorded as guaranteed loan financing in the liabilities section of the ~~Company’s recognized assets~~consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and ~~liabilities presented~~the interest earned by the buyer in the ~~unaudited interim~~partial loan sale is recorded within interest expense in the accompanying consolidated ~~balance sheet~~statements of income.

The following table presents guaranteed loan financing and the related interest rates and maturity dates:


	Weighted Average		Range of		Range of
(In Thousands)	Interest Rate		Interest Rates		Maturities (Years)	Ending Balance
June 30, 2021	3.77	%	0.99-6.50	%	2021-2044	$	363,955
December 31, 2020	3.76	%	0.99-6.50	%	2021-2044	$	401,705

The following table summarizes contractual maturities of total guaranteed loan financing outstanding:


(In Thousands)	June 30, 2021
2021	$	101
2022		1,057
2023		1,566
2024		2,899
2025		3,100
Thereafter		355,232
Total	$	363,955

Our guaranteed loan financings are secured by loans of $365.2 million and $403.0 million as of June 30, 2021 and December 31, ~~2016:~~2020, respectively.

Gross

Assets

Amounts

Presented in

Gross Amounts Not Offset in the Consolidated

Gross

Offset in the

the

Balance Sheets (1)

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

(In Thousands)

Assets

Sheets

Sheets

Instruments

Received

Net Amount
Credit default swaps

$
173

$
—

$
173

$
—

$
—

$
173
Interest rate swaps

2,924

2

2,922

—

—

2,922
Total

$
3,097

$
2

$
3,095

$
—

$
—

$
3,095

Liabilities

Gross

Presented in

Gross Amounts Not Offset in the Consolidated

Gross

Amounts

the

Balance Sheets (1)

Amounts of

Offset in the

Consolidated

Cash

Recognized

Consolidated

Balance

Financial

Collateral

(In Thousands)

Liabilities

Balance Sheets

Sheets

Instruments

Paid

Net Amount
Interest rate swaps

$
643

$
—

$
643

$
—

$
643

$
—
Secured short-term borrowings

927,462

—

927,462

925,602

1,860

—
Promissory note, net

7,378

—

7,378

7,378

—

—
Total

$
935,483

$
—

$
935,483

$
932,980

$
2,503

$
—

~~(1)~~

Note 14. Variable interest entities and securitization activities

In the normal course of business, we enter into certain types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transfer assets to securitization trusts. We primarily securitize our acquired and originated loans, which provides a source of funding for us and has enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties. We also transfer originated loans to securitization trusts sponsored by third parties, most notably Freddie Mac. Third-party securitizations are securitization entities in which we maintain an economic interest but do not sponsor. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we have been involved in are consolidated within our financial statements. See Note ~~13 – Derivative Instruments~~3 for a discussion of our accounting policies applied to the consolidation of the VIE and transfer of the loans in connection with the securitization.

Securitization-related VIEs

Company sponsored securitizations. In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. Our primary securitization activity is in the form of SBC and SBA loan securitizations, conducted through securitization trusts which we consolidate, as we determined that we are the primary beneficiary.

For financial statement reporting purposes, since the underlying trust is consolidated, the securitization is effectively viewed as a financing of the loans that were securitized to enable the senior security to be created and sold to a third-party investor. As such, the senior security is presented in the consolidated balance sheets as securitized debt obligations of consolidated VIEs. The third-party beneficial interest holders in the VIE have no recourse against the Company, except that the Company has an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.

The ~~Company is exposed~~securitization trust receives principal and interest on the underlying loans and distributes those payments to ~~changing interest rates~~the certificate holders. The assets and ~~market conditions, which affects cash flows~~other instruments held by the securitization trust are restricted in that they can only be used to fulfill the obligations of the securitization trust. The risks associated with ~~borrowings. The Company uses derivative instruments~~the Company’s involvement with the VIE is limited to ~~manage interest rate risk~~the risks and ~~conditions in the commercial mortgage market and,~~rights as ~~such, views them as economic hedges. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from~~ a ~~counterparty in exchange for making payments based on a fixed interest rate over the life~~certificate holder of the ~~swap contract. CDS are executed in order to mitigate~~securities retained by the risk of deterioration in the current credit health of the commercial mortgage market. IRLCs are entered into with customers who have applied for residential mortgage loans and meet certain underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and if the loan is not economically hedged or committed to an investor.Company.

The Company has not elected hedge accounting for these derivative instruments and, as a result, the fair value adjustments on such instruments are recorded in earnings. The fair value adjustments for interest rate swaps and CDS, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported as a net realized gain on financial instruments on the unaudited interim consolidated statements of income. The fair value adjustments for IRLCs, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported in gains on residential mortgage banking activities, net of variable loan expenses on the unaudited interim consolidated statements of income.

The following tables summarize the Company’s use of derivatives and their effect on the unaudited interim consolidated financial statements. Notional amounts included in the table are the average notional amounts on the unaudited interim consolidated balance sheet dates. We believe these are the most relevant measure of volume or derivative activity as they best represent the Company’s exposure to underlying instruments.

~~As of September 30, 2017 and December 31, 2016 the Company had one open credit default swap contract and 50 open interest rate swap contracts with counterparties.~~

Table of Contents

The consolidation of the securitization transactions includes the senior securities issued to third parties which are shown as securitized debt obligations of consolidated VIEs in the consolidated balance sheets. The following table presents additional information on the Company’s securitized debt obligations:


	June 30, 2021						December 31, 2020
	Current				Weighted		Current				Weighted
	Principal		Carrying		Average		Principal		Carrying		Average
(In Thousands)	Balance		value		Interest Rate		Balance		value		Interest Rate
Waterfall Victoria Mortgage Trust 2011-SBC2	$	2,427	$	2,427	5.5	%	$	4,055	$	4,055	5.5	%
ReadyCap Lending Small Business Trust 2019-2		103,030		90,589	2.6			103,030		101,468	3.1
Sutherland Commercial Mortgage Trust 2017-SBC6		22,258		21,909	3.8			27,035		26,555	3.6
Sutherland Commercial Mortgage Trust 2018-SBC7		—		—	—			79,302		78,168	4.7
Sutherland Commercial Mortgage Trust 2019-SBC8		163,289		160,915	2.9			178,911		176,307	2.9
Sutherland Commercial Mortgage Trust 2020-SBC9		113,735		111,472	4.0			131,729		129,014	3.8
Sutherland Commercial Mortgage Trust 2021-SBC10		181,449		178,822	—			—		—	—
ReadyCap Commercial Mortgage Trust 2014-1		9,565		9,545	5.7			10,880		10,858	5.8
ReadyCap Commercial Mortgage Trust 2015-2		32,476		30,531	5.1			45,075		35,183	4.8
ReadyCap Commercial Mortgage Trust 2016-3		22,800		21,850	4.9			26,371		25,286	4.7
ReadyCap Commercial Mortgage Trust 2018-4		89,047		86,149	4.1			94,273		91,098	4.0
ReadyCap Commercial Mortgage Trust 2019-5		222,322		214,350	4.2			229,232		220,605	4.2
ReadyCap Commercial Mortgage Trust 2019-6		337,925		331,885	3.2			359,266		348,773	3.2
Ready Capital Mortgage Financing 2018-FL2		—		—	—			48,979		48,975	2.4
Ready Capital Mortgage Financing 2019-FL3		183,893		183,359	1.6			229,440		227,950	2.0
Ready Capital Mortgage Financing 2020-FL4		324,211		319,733	3.0			324,219		318,385	3.1
Ready Capital Mortgage Financing 2021-FL5		510,955		504,351	1.5			—		—	—
Total ⁽¹⁾	$	2,319,382	$	2,267,887	2.6	%	$	1,891,797	$	1,842,680	3.3	%
(1) Excludes non-company sponsored securitized debt obligations of $41.3 million and $63.1 million that are consolidated in the consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively.

Repayment of our securitized debt will be dependent upon the cash flows generated by the loans in the securitization trust that collateralize such debt. The actual cash flows from the securitized loans are comprised of coupon interest, scheduled principal payments, prepayments and liquidations of the underlying loans. The actual term of the securitized debt may differ significantly from our estimate given that actual interest collections, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected.

Third-party sponsored securitizations. For third-party sponsored securitizations, we determined that we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not manage these entities or otherwise solely hold decision making powers that are significant, which include special servicing decisions. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these trusts, we only account for our specific interests in them.

Other VIEs

Other VIEs include a variable interest that we hold in an acquired joint venture investment that we account for as an equity method investment. We do not consolidate these entities because we do not have the power to direct the activities that most significantly impact their economic performance, we only account for our specific interest in them.

Assets and liabilities of consolidated VIEs

The following table ~~summarizes the Company’s derivatives as~~presents securitized assets and liabilities of ~~the unaudited interim~~VIEs consolidated on our consolidated balance ~~sheet dates:~~sheets:


(In Thousands)	June 30, 2021		December 31, 2020
Assets:
Cash and cash equivalents	$	2	$	20
Restricted cash		14,187		13,790
Loans, net		2,940,884		2,472,807
Real estate, held for sale		2,778		4,456
Other assets		19,046		27,670
Total assets	$	2,976,897	$	2,518,743
Liabilities:
Securitized debt obligations of consolidated VIEs, net		2,309,217		1,905,749
Total liabilities	$	2,309,217	$	1,905,749

As of September 30, 2017

As of December 31, 2016






Asset

Liability


Asset

Liability

Notional

Derivatives

Derivatives

Notional

Derivatives

Derivatives
(In Thousands)

Primary Underlying Risk

Amount

Fair Value

Fair Value

Amount

Fair Value

Fair Value
Credit Default Swaps

Credit Risk

$
15,000

$
—

$
(55)

$
15,000

$
(173)

$
–
Interest Rate Swaps

Interest rate risk

373,850

1,562

(303)

378,050

(2,922)

(643)
Interest rate lock commitments (IRLCs)

Interest rate risk

206,988

2,569

—

212,530

(2,690)

—
Total

$
595,838

$
4,131

$
(358)

$
605,580

$
(5,785)

$
(643)

Table of Contents

Assets of unconsolidated VIEs

The following ~~tables summarize~~table reflects our variable interests in identified VIEs, of which we are not the ~~gains~~primary beneficiary:


	Carrying Amount				Maximum Exposure to Loss⁽¹⁾
(In Thousands)	June 30, 2021		December 31, 2020		June 30, 2021		December 31, 2020
Mortgage backed securities, at fair value⁽²⁾	$	83,721	$	80,690	$	83,721	$	80,690
Investment in unconsolidated joint ventures		26,275		28,290		26,275		28,290
Total assets in unconsolidated VIEs	$	109,996	$	108,980	$	109,996	$	108,980
(1) Maximum exposure to loss is limited to the greater of the fair value or carrying value of the assets as of the consolidated balance sheet date.
(2) Retained interest in Freddie Mac and other third party sponsored securitizations.

Note 15. Interest income and ~~losses~~interest expense

Interest income and expense are recorded in the consolidated statements of income and classified based on the ~~Company’s derivatives:~~

Three Months Ended September 30, 2017

Nine Months Ended September 30, 2017




Net Change in



Net Change in

Net Realized

Unrealized

Net Realized

Unrealized
(In Thousands)

Gain (Loss)

Gain (Loss)

Gain (Loss)

Gain (Loss)
Credit default swaps (1)

$
—

$
(150)

$
(230)

$
(227)
Interest rate swaps (1)

(742)

870

(855)

901
Residential mortgage banking activities interest rate swaps (2)

—

(53)

—

(1,922)
Interest rate lock commitments (IRLCs) (2)

—

(149)

—

(121)
Total

$
(742)

$
518

$
(1,085)

$
(1,369)
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income.
(2) Gains (losses) are recorded in gains on residential mortgage banking activities, net of variable loan expenses, in the consolidated statements of income.

Three Months Ended
September 30, 2016

Nine Months Ended
September 30, 2016




Net Change in



Net Change in

Net Realized

Unrealized

Net Realized

Unrealized
(In Thousands)

Gain (Loss)

Gain (Loss)

Gain (Loss)

Gain (Loss)
Credit default swaps (1)

$
—

$
(195)

$
—

$
(360)
Interest rate swaps (1)

(347)

1,004

(1,476)

(1,868)
Total

$
(347)

$
809

$
(1,476)

$
(2,228)
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the unaudited interim consolidated statements of income.

~~Note 14 – Senior secured notes, net and Convertible notes, net~~

~~Senior secured notes, net~~

~~On February 13, 2017, ReadyCap Holdings LLC, a subsidiary~~nature of the Company, issued $75.0 million in 7.50% Senior Secured Notes due 2022. On June 13, 2017, ReadyCap Holdings LLC, issued an additional $65.0 million in aggregate principal amount of 7.50% Senior Secured Notes due 2022, which have identical terms (other than issue date and issue price) to the notes issued on February 13, 2017 (collectively “the Senior Secured Notes”). The additional $65.0 million in Senior Secured Notes were priced with a yield-to-maturity of 6.75%.Payments of the amounts due on the Senior Secured Notes are fully and unconditionally guaranteed by the Company and its subsidiaries: Sutherland Partners LP, Sutherland Asset I, LLC, and ReadyCap Commercial, LLC. The funds are be used to fund new SBC and SBA loan originations.

~~As of September 30, 2017, we were in compliance with all covenants with respect to the Senior Secured Notes.~~

~~Convertible notes, net~~

On August 9, 2017, the Company closed an underwritten public sale of $115.0 million aggregate principal amount of its 7.00% convertible senior notes due 2023 (“Convertible Notes”). The Convertible Notes will mature on August 15, 2023, unless earlier repurchased, redeemedunderlying asset or ~~converted. During certain periods and subject to certain conditions, the notes will be convertible by holders into shares of the Company's common stock at an initial conversion rate of 1.4997 shares~~

~~Table of Contents~~

of common stock per $25 principal amount of the notes, which is equivalent to an initial conversion price of approximately $16.67 per share of common stock. Upon conversion, holders will receive, at the Company's discretion, cash, shares of the Company's common stock or a combination thereof.

The Company may redeem all or any portion of the Convertible Notes, at its option, on or after August 15, 2021, at a redemption price payable in cash equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. Additionally, upon the occurrence of certain corporate transactions, holders may require the Company to purchase the Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.

The Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is greater than or equal to 120% of the conversion price of the respective Convertible Notes for at least 20 out of 30 days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10%, or (4) certain other specified corporate events (significant consolidation, sale, merger share exchange, etc.) occur.

~~As of September 30, 2017, we were in compliance with all covenants with respect to the Convertible Notes.~~

liability. The following table presents the components of ~~the Senior Secured Notes and Convertible Notes, including the carrying value for the aggregate contractual maturities, on the unaudited interim consolidated balance sheet:~~

(in thousands, except rates)

Coupon Rate

Maturity Date

September 30, 2017
2017 Senior Secured Notes principal amount(1)

7.50
%

2/15/2022

$
140,000
Unamortized premium - Senior Secured Notes

1,827
Unamortized deferred financing costs - Senior Secured Notes

(3,753)
Total Senior secured notes, net

$
138,074
2017 Convertible Notes- principal amount (2)

7.00
%

8/15/2023

115,000
Unamortized discount - Convertible Notes (3)

(2,218)
Unamortized deferred financing costs - Convertible Notes

(3,368)
Total Convertible Notes, net

$
109,414
Total carrying amount of debt components

$
247,488
Total carrying amount of conversion option of equity components recorded in additional paid-in capital

$
2,147

~~(1)~~

~~Interest on the Senior Secured Notes is payable semiannually on each February 15 and August 15, beginning on August 15, 2017.~~

~~(2)~~

~~Interest on the Convertible Notes is payable quarterly on February 15, May 15, August 15, and November 15 of each year, beginning on November 15, 2017.~~

~~(3)~~

~~Represents the discount created by separating the conversion option from the debt host instrument.~~

~~Note 15 – Guaranteed loan financing~~

Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the unaudited interim consolidated balance sheets and the proceeds from the portion sold is recorded as guaranteed loan financing in the liabilities section of the unaudited interim consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and ~~the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying unaudited interim consolidated statements of income.~~expense:


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Interest income
Loans
Originated transitional loans	$	32,027	$	22,368	$	57,587	$	44,587
Originated SBC loans		12,312		13,930		24,753		29,928
Acquired loans		13,372		13,924		27,182		29,335
Acquired SBA 7(a) loans		4,538		3,949		9,464		10,151
Originated SBA 7(a) loans		4,417		4,665		8,031		10,934
Originated SBC loans, at fair value		249		515		478		832
Originated residential agency loans		42		28		79		49
Total loans ⁽¹⁾	$	66,957	$	59,379	$	127,574	$	125,816
Held for sale, at fair value, loans
Originated residential agency loans	$	3,161	$	1,901	$	5,282	$	3,198
Originated Freddie loans		725		419		1,332		690
Acquired loans		2		58		4		126
Total loans, held for sale, at fair value⁽¹⁾	$	3,888	$	2,378	$	6,618	$	4,014
Paycheck Protection Program loans
Paycheck Protection Program loans	$	26,766	$	—		33,487	$	—
Paycheck Protection Program loans, at fair value		412		—		583		—
Total Paycheck Protection Program loans	$	27,178	$	—	$	34,070	$	—
Mortgage backed securities, at fair value	$	5,024	$	1,454	$	8,156	$	2,932
Total interest income	$	103,047	$	63,211	$	176,418	$	132,762
Interest expense
Secured borrowings	$	(18,065)	$	(13,539)	$	(35,639)	$	(26,297)
Paycheck Protection Program Liquidity Facility borrowings		(1,545)		—		(1,879)		—
Securitized debt obligations of consolidated VIEs		(21,421)		(17,317)		(40,514)		(36,846)
Guaranteed loan financing		(3,472)		(4,153)		(7,123)		(10,396)
Senior secured note		(3,456)		(3,469)		(6,915)		(6,941)
Convertible note		(2,188)		(2,188)		(4,376)		(4,376)
Corporate debt		(5,268)		(2,742)		(9,730)		(5,482)
Total interest expense	$	(55,415)	$	(43,408)	$	(106,176)	$	(90,338)
Net interest income before provision for loan losses	$	47,632	$	19,803	$	70,242	$	42,424
(1) Includes interest income on loans in consolidated VIEs.

~~Table of Contents~~

~~The following table summarizes certain information with respect to the Company's total guaranteed loan financings outstanding as of the unaudited interim consolidated balance sheet dates:~~

Weighted

Range of




Average

Interest

Range of

(In Thousands)

Interest Rate

Rates

Maturities (Years)

Ending Balance
September 30, 2017

3.48
%
1.62 – 7.00 %

2017 - 2038

$
313,388
December 31, 2016

2.79
%
3.50 – 8.75 %

2017 - 2038

$
390,555

~~The following table summarizes contractual maturities of total guaranteed loan financing outstanding:~~

(In Thousands)

September 30, 2017
2017

$
809
2018

2,872
2019

3,205
2020

3,855
2021

5,267
Thereafter

297,380
Total

$
313,388

~~Our guaranteed loan financings are secured by loans, net of $318.1 million and $396.9 million as of September 30, 2017 and December 31, 2016, respectively.~~

~~Note 16 – Related Party Transactions~~

~~Management Agreement~~

The Company has entered into a management agreement with the Manager (the “Management Agreement”), which describes the services to be provided to us by the Manager and compensation for such services. The Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors.

~~Management Fee~~

Pursuant to the terms of the Management Agreement, our Manager is paid a management fee calculated and payable quarterly in arrears equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement) up to $500 million and 1.00% per annum of stockholders’ equity in excess of $500 million.

~~The following table presents certain information on the management fee payable to our Manager:~~

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016
Management fee - total

$
2.0 million

$
1.8 million

$
6.0 million

$
5.5 million
Management fee - amount unpaid

$
2.0 million

$
2.5 million

$
2.0 million

$
2.5 million

~~Incentive Distribution~~

The Manager is entitled to an incentive distribution in an amount equal to the product of (i) 15% and (ii) the excess of (a) core earnings (as defined in the partnership agreement or our operating partnership) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that core earnings over the prior twelve calendar quarters (or the period since the closing of the ZAIS merger, whichever is shorter) is greater than zero. For purposes of determining the incentive distribution payable to our Manager, core earnings is defined under the partnership agreement of our operating partnership in a manner that is similar to the definition of Core Earnings described below under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense,

~~Table of Contents~~

if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d) depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of Core Earnings described under "Non-GAAP Financial Measures". There was no incentive fee distribution for the three or nine months ended September 30, 2017 or 2016.

The initial term of the Management Agreement extends for three years from the closing of the ZAIS merger and is automatically renewed for one-year terms on each anniversary thereafter. Following the initial term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of our independent directors or the holders of a majority of the outstanding common stock (excluding shares held by employees and affiliates of the Manager), based upon (1) unsatisfactory performance by our Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

~~Expense Reimbursement~~

In addition to the management fees and profit allocation described above, the Company is also responsible for reimbursing the Manager for certain expenses paid by our Manager on behalf of the Company and for certain services provided by the Manager to the Company.~~Expenses incurred by the Manager and reimbursed by us are typically included in salaries and benefits or general and administrative expense on the unaudited interim consolidated statements of income.~~

~~The following table presents certain information on reimbursable expenses payable to our Manager:~~

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016
Reimbursable expenses payable to our Manager - total

$
0.7 million

$
0.5 million

$
2.4 million

$
1.3 million
Reimbursable expenses payable to our Manager - amount unpaid

$
1.3 million

$
0.5 million

$
1.3 million

$
0.5 million

Note 16. Derivative instruments

~~Note 17 – Financial Instruments with Off-balance Sheet Risk, Credit Risk, and Certain Other Risks~~

In the normal course of business, the Company enters into transactions in various financial instruments that expose us to various types of risk, both on and off balance sheet. Such risks are associated with financial instruments and markets in which the Company invests. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off balance sheet risk and prepayment risk.

~~Market Risk~~ — Market risk is the potential adverse changes in the values of the financial instrument due to unfavorable changes in the level or volatility of interest rates, foreign currency exchange rates, or market values of the underlying financial instruments. We attempt to mitigate our exposure to market risk by entering into offsetting transactions, which may include purchase or sale of interest-bearing securities and equity securities.

~~Credit Risk~~ — The Company is subject to credit risk in connection with our investments in SBC loans and SBC MBS and other target assets we may acquire in the future. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value−driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur which could adversely impact operating results.

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The Company is ~~also subject~~exposed to ~~credit~~changing interest rates and market conditions, which affect cash flows associated with borrowings. The Company uses derivative instruments to manage interest rate risk ~~with respect~~and conditions in the commercial mortgage market and, as such, views them as economic hedges. Interest rate swaps are used to mitigate the ~~counterparties~~exposure to ~~derivative contracts. If~~changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty ~~becomes bankrupt or otherwise fails to perform its obligation under~~in exchange for making payments based on a ~~derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under~~fixed interest rate over the ~~derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the event~~life of the ~~insolvency of a counterparty~~swap contract. CDS are executed in order to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom we enter a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price.

Counterparty credit risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.

The Company finances the acquisition of a significant portion of its loans and investments with repurchase agreements and borrowings under credit facilities. In connection with these financing arrangements, the Company pledges its loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

~~GMFS sells loans to investors without recourse. As such, the investors have assumed~~mitigate the risk of ~~loss or default by~~deterioration in the ~~borrower. However, GMFS is usually required by these investors to make certain standard representations and warranties relating to~~current credit information, loan documentation and collateral. To the extent that GMFS does not comply with such representations, or there are early payment defaults, GMFS may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, GMFS may be required to refund a portionhealth of the ~~sales proceeds to the investors.~~

~~Liquidity Risk~~ — Liquidity risk arises in our investments and the general financing of our investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at a reasonable price, in addition to potential increase in collateral requirements during times of heightened market volatility. If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss. We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in SBC loans, MBS and other financial instruments. Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding,commercial mortgage market. IRLCs are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements. While we may finance certain investment in security positions using traditional margin arrangements and borrowings under repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer term financing vehicles may be utilized to attempt to provide us with sources of long-term financing.

~~Off‑Balance Sheet Risk~~ ~~—The Company has undrawn commitments on outstanding loans which are disclosed in Note 18.~~

~~Interest Rate~~ — Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

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rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest-earning assets and interest-bearing liabilities.

While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for SBC financing.

~~Prepayment Risk —~~ As we receive prepayments of principal on our investments, premiums paid on such investments will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments and this is also affected by interest rate movements. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments. An increase in prepayment rates will also adversely affect the fair value of our MSRs.

~~Note 18 – Commitments, Contingencies and Indemnifications~~

~~Litigation~~

~~The Company may be subject to litigation and administrative proceedings arising in the ordinary course of its business.~~

~~The Company has~~ entered into agreements, which provide for indemnifications against losses, costs, claims, and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to these agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on history and experience, the Company expects the risk of loss to be remote.

~~Management is not aware of any other contingencies that would require accrual or disclosure in the unaudited interim consolidated financial statements.~~

~~Unfunded Loan Commitments~~

As of September 30, 2017 and December 31, 2016, the Company had $5.3 million and $14.9 million of unfunded loan commitments related to loans, held at fair value, respectively. As of September 30, 2017 and December 31, 2016, the Company had $80.5 million and $29.3 million of unfunded loan commitments related to loans, held-for-investment, respectively.

~~Commitments to Originate Loans~~

~~GMFS enters into IRLCs~~ with customers who have applied for residential mortgage loans and meet certain ~~credit and~~ underwriting criteria. These commitments expose GMFS to market risk if interest rates change and if the loan is not economically hedged or committed to an investor. ~~GMFS~~

For derivative instruments that the Company has not elected hedge accounting, the fair value adjustments on such instruments are recorded in earnings. The fair value adjustments for interest rate swaps and CDS, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported as a net realized gain on financial instruments in the consolidated statements of income. The fair value adjustments for IRLCs, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported in residential mortgage banking activities in the consolidated statements of income.

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As described in Note 3, for qualifying cash flow hedges, the entire change in the fair value of the derivative is recorded in OCI and recognized in the consolidated statements of income when the hedged cash flows affect earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item, primarily interest expense. The ineffective portions of the cash flow hedges are immediately recognized in earnings.

The following tables summarize the Company’s use of derivatives and their effect in the consolidated financial statements. Notional amounts included in the table are the average notional amounts on the consolidated balance sheet dates. We believe these are the most relevant measure of volume or derivative activity as they best represent the Company’s exposure to underlying instruments.

The following table summarizes our derivatives, by type:


		As of June 30, 2021						As of December 31, 2020
				Asset		Liability				Asset		Liability
		Notional		Derivatives		Derivatives		Notional		Derivatives		Derivatives
(In Thousands)	Primary Underlying Risk	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Interest rate lock commitments	Interest rate risk	$	537,363	$	6,130	$	—	$	614,358	$	16,363	$	—
Interest Rate Swaps - not designated as hedges	Interest rate risk		302,982		—		(2,565)		160,801		—		(952)
Interest Rate Swaps - designated as hedges	Interest rate risk		—		—		—		132,325		—		(5,701)
TBA Agency Securities	Interest rate risk		521,500		—		(999)		565,000		—		(4,004)
Credit Default Swaps	Credit risk		199,381		—		(153)		15,000		—		(174)
FX forwards	Foreign exchange rate risk		28,030		470		—		3,866		—		(773)
Total		$	1,589,256	$	6,600	$	(3,717)	$	1,491,350	$	16,363	$	(11,604)

The following tables summarize the gains and losses on the Company’s derivatives:


	Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps ⁽¹⁾	$	—	$	(21)	$	—	$	21
Interest rate swaps ⁽¹⁾⁽²⁾		(4,482)		1,947		(5,779)		8,470
TBA Agency Securities ⁽³⁾		—		(903)		—		3,005
Interest rate lock commitments ⁽³⁾		—		(5,595)		—		(10,234)
FX forwards ⁽¹⁾		170		(334)		(358)		1,243
Total	$	(4,312)	$	(4,906)	$	(6,137)	$	2,505
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) For qualifying hedges of interest rate risk, the effective portion relating to the unrealized gain (loss) on derivatives are recorded in accumulated other comprehensive income (loss). (3) Gains (losses) are recorded in residential mortgage banking activities in the consolidated statements of income.


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps ⁽¹⁾	$	—	$	(310)	$	—	$	60
Interest rate swaps ⁽¹⁾⁽²⁾		(748)		(517)		(995)		(10,504)
Residential mortgage banking activities interest rate swaps ⁽³⁾		—		8,076		—		(2,104)
Interest rate lock commitments ⁽³⁾		—		1,776		—		16,263
FX forwards ⁽¹⁾		428		(584)		291		(98)
Total	$	(320)	$	8,441	$	(704)	$	3,617
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) For qualifying hedges of interest rate risk, the effective portion relating to the unrealized gain (loss) on derivatives are recorded in accumulated other comprehensive income (loss). (3) Gains (losses) are recorded in residential mortgage banking activities in the consolidated statements of income.

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The following table summarizes the gains and losses on the Company’s derivatives which have qualified for hedge accounting:


(In Thousands)	Derivatives - effective portion reclassified from AOCI to income		Hedge ineffectiveness recorded directly in income ⁽²⁾		Total income statement impact		Derivatives- effective portion recorded in OCI ⁽³⁾		Total change in OCI for period ⁽³⁾
Hedge type:
Interest rate - forecasted transactions ⁽¹⁾		(312)		—		(312)		(188)		124
Three Months Ended June 30, 2021	$	(312)	$	—	$	(312)	$	(188)	$	124
Interest rate - forecasted transactions ⁽¹⁾		(366)		—		(366)		(388)		(22)
Three Months Ended June 30, 2020	$	(366)	$	—	$	(366)	$	(388)	$	(22)
Interest rate - forecasted transactions ⁽¹⁾		(610)		—		(610)		1,492		2,102
Six Months Ended June 30, 2021	$	(610)	$	—	$	(610)	$	1,492	$	2,102
Interest rate - forecasted transactions ⁽¹⁾		(733)		(1,694)		(2,427)		(5,576)		(3,149)
Six Months Ended June 30, 2020	$	(733)	$	(1,694)	$	(2,427)	$	(5,576)	$	(3,149)
(1) Consists of benchmark interest rate hedges of LIBOR-indexed floating-rate liabilities.
(2) Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.
(3) Represents after tax amounts recorded in OCI.

Note 17. Real estate, held for sale

The following table summarizes the carrying amount of the Company’s real estate holdings. The Company completed the acquisition of Owens Realty Mortgage, Inc. (“ORM”), through a merger in March of 2019. Real estate, held for sale acquired in the merger with ORM is separately disclosed below.


(In Thousands)	June 30, 2021		December 31, 2020
Acquired ORM Portfolio:
Retail	$	18,408	$	18,700
Mixed Use		14,027		14,248
Land		6,318		7,256
Lodging/Residential		3,230		3,230
Total Acquired ORM REO	$	41,983	$	43,434
Other REO held for sale:
Single Family	$	25,575	$	—
Retail		3,382		660
Office		—		829
SBA		327		425
Total Other REO⁽¹⁾	$	29,284	$	1,914
Total Real Estate, held for sale	$	71,267	$	45,348
(1) Excludes $2.8 million and $4.5 million of real estate, held for sale within consolidated VIEs, respectively.

Note 18. Agreements and transactions with related parties

Management Agreement

The Company has entered into a management agreement with our Manager (the “Management Agreement”), which describes the services to be provided to us by our Manager and compensation for such services. Our Manager is responsible for managing the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors.

Management fee. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee calculated and payable quarterly in arrears equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement) up to $500 million and 1.00% per annum of stockholders’ equity in excess of $500 million. Concurrently with entering into the Merger Agreement, we, our operating partnership and our Manager entered into the Amendment. The Amendment provides that, contingent upon the closing of the Merger, the Manager’s base management fee will be reduced by the Temporary Fee Reduction. Other than the Temporary Fee Reduction set forth in the Amendment, the terms of the Management Agreement remain the same.

The following table presents certain information on the management fee payable to our Manager:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021

2020

2021

2020

Management fee - total

2.6 million

2.7 million

5.3 million

5.2 million

Management fee - amount unpaid

2.6 million

2.7 million

2.6 million

2.7 million

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Incentive distribution. Our Manager is entitled to an incentive distribution in an amount equal to the product of (i) 15% and (ii) the excess of (a) distributable earnings (which is referred to as core earnings in the partnership agreement or the operating partnership) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that distributable earnings over the prior twelve calendar quarters (or the period since the closing of the ZAIS Merger, whichever is shorter) is greater than 0. For purposes of determining the incentive distribution payable to our Manager, distributable earnings is defined under the partnership agreement of the operating partnership in a manner that is similar to the definition of Distributable Earnings described below under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d) depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of distributable earnings described under "Non-GAAP Financial Measures".

The following table presents certain information on the incentive fee payable to our Manager:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021

2020

2021

2020

Incentive fee distribution - total

0.3 million

3.5 million

0.3 million

3.5 million

Incentive fee distribution - amount unpaid

0.3 million

3.5 million

0.3 million

3.5 million

The Management Agreement may be terminated upon the affirmative vote of at least two-thirds of our independent directors or the holders of a majority of the outstanding common stock (excluding shares held by employees and affiliates of our Manager), based upon (1) unsatisfactory performance by our Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term. Additionally, upon such a termination by the Company without cause (or upon termination by the Manager due to the Company’s material breach), the management agreement provides that the Company will pay the Manager a termination fee equal to 3 times the average annual base management fee earned by our Manager during the prior 24 month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, except upon an internalization. Additionally, if the management agreement is terminated under circumstances in which the Company is obligated to make a termination payment to the Manager, the operating partnership shall repurchase, concurrently with such termination, the Class A special unit for an amount equal to 3 times the average annual amount of the incentive distribution paid or payable in respect of the Class A special unit during the 24 month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination.

The current term of the Management Agreement will expire on October 31, 2021, and is automatically renewed for successive one-year terms on each anniversary thereafter; provided, however, that either the Company, under the certain limited circumstances described above that would require the Company and the operating partnership to make the payments described above, or the Manager may terminate the Management Agreement annually upon 180 days prior notice.

Expense reimbursement. In addition to the management fees and incentive distribution described above, the Company is also ~~exposed~~responsible for reimbursing our Manager for certain expenses paid by our Manager on behalf of the Company and for certain services provided by our Manager to ~~credit loss if~~ the ~~loan is originated~~Company. Expenses incurred by our Manager and ~~not sold~~reimbursed by us are typically included in salaries and benefits or general and administrative expense in the consolidated statements of income.

The following table presents certain information on reimbursable expenses payable to ~~an investor and the borrower does not perform.~~our Manager:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021

2020

2021

2020

Reimbursable expenses payable to our Manager - total

3.5 million

0.8 million

5.5 million

2.0 million

Reimbursable expenses payable to our Manager - amount unpaid

4.6 million

0.6 million

4.6 million

0.6 million

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform.

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Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. As of September 30, 2017 and December 31, 2016, total commitments to originate loans were $193.4 million and $200.0 million, respectively.

Note ~~19 – Income Taxes~~

The Company is a REIT pursuant to IRC Section 856. Our qualification as a REIT depends on our ability to meet various requirements imposed by the Internal Revenue Code, which relate to our organizational structure, diversity of stock ownership and certain requirements with regard to the nature of our19. Other assets and the sources of our income. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four taxable years. As of September 30, 2017 and December 31, 2016, we were in compliance with all REIT requirements.other liabilities

Certain of our subsidiaries have elected to be taxed as a taxable REIT subsidiary (“TRS”). A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying unaudited interim consolidated financial statements include an interim tax provision for our TRS’ for the three and nine months ended September 30, 2017 and 2016, respectively.

During the three months ended September 30, 2017 and 2016, we recorded an income tax benefit of $0.3 million and an income tax expense $1.3 million, respectively. During the nine months ended September 30, 2017 and 2016, we recorded an income tax expense of $1.8 million and $3.3 million, respectively. The income tax expense for the above periods primarily related to activities of our taxable REIT subsidiaries and various state and local taxes. During the three months ended September 30, 2017, the Company executed an internal restructuring involving ReadyCap Holdings, LLC and SAMC REO 2013-01, LLC. As a result of the restructuring, Management concluded that SAMC REO’s deferred tax assets are more likely than not to be realized in the future and released $2.9 million of valuation allowance. There were no material changes to uncertain tax positions during the quarter.

~~Table of Contents~~

~~Note 20 – Other Asset and Other Liabilities~~

The following table details the Company’s other assets and other ~~liabilities as of the unaudited interim consolidated balance sheet dates.~~liabilities.



(In Thousands)	September 30, 2017		December 31, 2016		June 30, 2021		December 31, 2020
Other assets:
Deferred tax asset					$	18,396	$	18,396
Deferred loan exit fees						19,664		13,940
Accrued interest						21,582		12,656
Goodwill						18,578		11,206
Due from servicers		6,053		27,029		15,970		11,171
Right-of-use lease asset						2,890		3,172
Intangible assets		3,357		3,636		6,338		6,986
Accrued interest		5,284		5,606
Real estate acquired in settlement of loans		4,217		3,933
Deferred financing costs		2,487		3,376		3,054		2,612
Fixed assets		1,329		1,572
Prepaid taxes		4,646		1,456
Deferred tax asset		1,371		1,371
Prepaid technology expense		519		918
Prepaid insurance expense		135		899
Other		5,958		4,481
Total other assets	$	35,356	$	54,277
PPP fee receivable						1,903		18
Other assets						11,839		9,346
Other assets					$	120,214	$	89,503
Accounts payable and other accrued liabilities:
Deferred tax liability					$	16,839	$	16,839
Accrued salaries, wages and commissions	$	13,722	$	17,450		36,446		35,724
Accrued interest payable						22,899		19,695
Servicing principal and interest payable		7,196		10,664		12,647		7,318
Repair and denial reserve		6,524		6,813		15,652		9,557
Liability under subservicing agreements		2,158		6,757
Unapplied cash		5,421		6,278
Accrued interest payable		6,548		4,680
Payable to related parties		2,034		3,762		2,916		4,088
Accrued professional fees		997		2,880		1,758		1,365
Loan indemnification reserve		2,813		2,780
Accrued tax liability		3,667		1,996
Liability under participation agreements		1,115		1,735
Deferred tax liability		632		632
Accounts payable on liability under participation agreements		50		982
Cash held as collateral		—		80
Other		1,702		2,718
Lease payable						3,860		3,670
Deferred LSP revenue						842		10,700
Accrued PPP related costs						37,953		498
Other liabilities						28,206		26,201
Total accounts payable and other accrued liabilities	$	54,579	$	70,207	$	180,018	$	135,655

~~Real Estate Acquired in Settlement of Loans~~

Intangible assets

The ~~Company acquires real estate through~~following table presents information about the ~~foreclosure of its loans~~intangible assets held by the Company:


(In Thousands)	June 30, 2021		December 31, 2020		Estimated Useful Life
Internally developed software - Knight Capital	$	2,743	$	3,061	6 years
Broker network - Knight Capital		756		889	4.5 years
Trade name - Knight Capital		636		709	6 years
Favorable lease		704		768	12 years
Trade name - GMFS		499		559	15 years
SBA license		1,000		1,000	Indefinite life
Total Intangible Assets	$	6,338	$	6,986

Amortization expense related to the intangible assets previously acquired for both the three months ended June 30, 2021 and 2020, was $0.3 million. Amortization expense related to the ~~occasional purchase of real estate. The Company’s real estate properties~~intangible assets previously acquired for the six months ended June 30, 2021 and June 30, 2020 was $0.6 million and $0.7 million, respectively. Such amounts are ~~held~~recorded as other operating expenses in the ~~Company’s~~ consolidated ~~Taxable REIT Subsidiaries (“TRS”), SAMC REO 2013-01, LLC, ReadyCap Lending, LLC, and other asset specific TRSs. The following tables summarize~~statements of income.

Accumulated amortization for finite-lived intangible assets is as follows:


(In Thousands)	June 30, 2021
Favorable lease	$	744
Trade name - GMFS		694
Internally developed software - Knight Capital		897
Broker network - Knight Capital		378
Trade name - Knight Capital		208
Total Accumulated Amortization	$	2,921

Amortization expense related to the ~~carrying amount of~~finite-lived intangible assets for the ~~Company’s real estate holdings~~subsequent five years is as ~~of the unaudited interim consolidated balance sheet dates:~~follows:

(In Thousands)

September 30, 2017

December 31, 2016
North Carolina

1,850

1,850
Florida

1,023

1,320
Illinois

873

19
Texas

108

108
Other

363

636
Total

$
4,217

$
3,933


(In Thousands)	June 30, 2021
2021	$	647
2022		1,268
2023		1,242
2024		1,032
2025		786
Thereafter		363
Total	$	5,338

The table above includes real estate acquired in settlement of loans for which the Company has recorded cumulative valuation adjustments of $7.7 million and $6.9 million at September 30, 2017 and December 31, 2016, respectively. These assets have been marked to third-party broker price opinions less an estimate of costs to sell.

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Loan indemnification reserve

A liability has been established for potential losses related to representations and warranties made by GMFS for loans sold with a corresponding provision recorded for loan indemnification losses. The liability is included in accounts payable and other accrued liabilities in the Company's ~~unaudited interim~~ consolidated balance sheets and the provision for loan indemnification losses is included in ~~gains~~variable expenses on residential mortgage banking activities, ~~net of variable loan expenses,~~ in the Company's ~~unaudited interim~~ consolidated statements of income. In assessing the adequacy of the liability, management evaluates various factors including historical repurchases and indemnifications, historical loss experience, known delinquent and other problem loans, outstanding repurchase demand, historical rescission rates and economic trends and conditions in the industry. Actual losses incurred are reflected as a reduction of the reserve liability. At ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the loan indemnification reserve was ~~$2.8 million.~~ $4.3 million and $4.1 million, respectively.

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At ~~September~~June 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

Note ~~21 –~~20. Other ~~Income~~income and operating expenses

Paycheck Protection Program

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Round 1”), signed into law on March 27, 2020, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act” or “Round 2”), signed into law on December 27, 2020, established and extended the PPP. Both the CARES Act and the Economic Aid Act, among other things, provide certain measures to support individuals and businesses in maintaining solvency through monetary relief in the form of financing and loan forgiveness and/or forbearance. The primary catalyst of small business stimulus is the PPP, an SBA loan that temporarily supports businesses to retain their workforce and cover certain operating expenses during the COVID-19 pandemic. Furthermore, the PPP includes a 100% guarantee from the federal government and principal forgiveness for borrowers if the funds are used for defined purposes.

The Company has participated in the PPP as both a direct lender and as service provider. Under the CARES Act, we originated $109.5 million of PPP loans and were a Lender Service Provider (“LSP”) for $2.5 billion of PPP loans. For our originations as direct lender, we classified the loans as held at fair value and elected the fair value option. Fees totaling $5.2 million, were recognized in the period of origination. For loans processed under the LSP, we were obligated to perform certain services including: 1) assistance and services to the third-party in the underwriting, marketing, processing and funding of loans, 2) processing forgiveness of the loans with the SBA and 3) servicing and management of subsequently resulting PPP loan portfolios. We do not hold these loans on balance sheet and fees totaling $43.3 million were recognized as services are performed. As of June 30, 2021, we have $0.8 million in unrecognized fees. Expenses related to PPP loans under the CARES Act were recognized in the period in which they were incurred.

Under the Economic Aid Act, we have originated $2.2 billion of PPP loans. These loans are classified as held-for-investment and are accounted for under ASC 310-10, Receivables. Net fees totaling $104.0 million are deferred over the expected life of the PPP loans and will be recognized as interest income. As of June 30, 2021, we have $95.4 million in unrecognized net fees.

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The following tables present details about the Company’s financial position related to its PPP activities:


(In Thousands)	June 30, 2021
Assets
Restricted cash	$	10,000
Paycheck Protection Program loans		2,162,155
Paycheck Protection Program loans, at fair value		16,431
Prepaid expenses		—
PPP fee receivable		1,903
Deferred financing costs		—
Accrued interest receivable		5,948
Total PPP related assets	$	2,196,437
Liabilities
Paycheck Protection Program Liquidity Facility borrowings	$	2,286,624
Interest payable		1,846
Deferred LSP revenue		842
Accrued PPP related costs		37,953
Payable to third parties		581
Repair and denial reserve		8,694
Total PPP related liabilities	$	2,336,540


(In Thousands)	Three Months Ended June 30, 2021		Three Months Ended June 30, 2020		Six Months Ended June 30, 2021		Six Months Ended June 30, 2020		Financial statement account
Income
LSP origination fees	$	—	$	26,116	$	—	$	26,116	Other income - origination fees
PPP processing fees		—		5,155		—		5,155	Other income - origination fees
LSP fee income		3,117		853	$	9,858		853	Servicing income
Interest income		26,355		194		33,247		194	Interest income
Total PPP related income	$	29,472	$	32,318	$	43,105	$	32,318
Expense
Direct operating expenses	$	3,673	$	5,525	$	8,218	$	5,525	Other operating expenses - origination costs
Repair and denial reserve		3,733		2,319		5,389		2,319	Other income - change in repair and denial reserve
Interest expense		8,761		1,402		12,622		1,402	Interest expense
Total PPP related expenses (direct)	$	16,167	$	9,246	$	26,229	$	9,246
Net PPP related income	$	13,305	$	23,072	$	16,876	$	23,072

Other ~~Operating Expenses~~

income and expenses

The following table details the Company’s other income and operating ~~expenses~~expenses.


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Other income
Origination income	$	1,890	$	33,617	$	3,503	$	36,112
Change in repair and denial reserve		(4,084)		(2,651)		(6,153)		(2,515)
Other		1,506		628		2,533		2,070
Total other income	$	(688)	$	31,594	$	(117)	$	35,667
Other operating expenses
Origination costs	$	7,883	$	9,430	$	16,028	$	12,455
Technology expense		2,038		1,742		3,910		3,322
Impairment on real estate		1,278		106		1,278		3,075
Rent and property tax expense		1,743		1,200		3,429		2,384
Recruiting, training and travel expense		333		235		829		859
Marketing expense		609		385		1,185		931
Loan acquisition costs		300		356		334		453
Financing costs on purchased future receivables		32		789		56		1,413
Other		2,974		3,502		5,625		6,595
Total other operating expenses	$	17,190	$	17,745	$	32,674	$	31,487

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Note 21. Redeemable Preferred Stock and Stockholders’ Equity

Common stock dividends

The following table presents cash dividends declared by our board of directors on our common stock from June 30, 2020 through June 30, 2021:



Declaration Date	Record Date	Payment Date	Dividend per Share
June 15, 2020	June 30, 2020	July 31, 2020	$	0.25
September 16, 2020	September 30, 2020	October 30, 2020	$	0.30
December 14, 2020	December 31, 2020	January 29, 2021	$	0.35
March 1, 2021	March 15, 2021	March 18, 2021	$	0.30
March 24, 2021	April 5, 2021	April 30, 2021	$	0.10
June 14, 2021	June 30, 2021	July 30, 2021	$	0.42

Stock incentive plan

The Company currently maintains the 2012 equity incentive plan (the “2012 Plan”). The 2012 Plan authorizes the Compensation Committee to approve grants of equity-based awards to our officers, directors, and employees of our Manager and its affiliates. The equity incentive plan provides for grants of equity-based awards up to an aggregate of 5% of the shares of the Company’s common stock issued and outstanding from time to time on a fully diluted basis.

The Company’s current policy for issuing shares upon settlement of stock-based incentive awards is to issue new shares. The fair value of the RSUs and RSAs granted, which is determined based upon the stock price on the grant date, is recorded as compensation expense on a straight-line basis over the vesting periods for the ~~unaudited interim~~awards, with an offsetting increase in stockholders’ equity.

The following table summarizes the Company’s RSU and RSA activity:


	Restricted Stock Awards
(In Thousands, except share data)	Number of Shares	Grant date fair value		Weighted-average grant date fair value (per share)
Outstanding, December 31, 2020	872,079	$	13,737	$	15.75
Granted	185,586		2,379		12.82
Vested	(115,604)		(1,801)		15.58
Canceled	(1,547)		(21)		13.50
Outstanding, March 31, 2021	940,514	$	14,294	$	15.20
Granted	10,636		149		14.03
Vested	(9,723)		(126)		12.99
Outstanding, June 30, 2021	941,427	$	14,317	$	15.21

For the three and six months ended June 30, 2021, the Company recognized $1.7 million and $3.3 million, respectively of noncash compensation expense related to its stock-based incentive plan in our consolidated statements of ~~income.~~income, respectively.

For the three and six months ended June 30, 2020, the Company recognized $1.5 million and $2.9 million, respectively of noncash compensation expense related to its stock-based incentive plan in our consolidated statements of income, respectively.

At June 30, 2021 and December 31, 2020, approximately $14.3 million and $13.7 million, respectively of noncash compensation expense related to unvested awards had not yet been charged to net income. These costs are expected to be amortized into compensation expense ratably over the course of the remainder of the respective vesting periods.

Performance-based equity awards

In February 2021, the Company granted to certain key employees 61,895 shares of performance-based equity awards, which are allocated 50% to awards that vest based on absolute total shareholder return (“TSR”) for the three-year forward-looking period ending December 31, 2023 and 50% to awards that vest based on TSR for such three-year forward-looking performance period relative to the performance of a designated peer group. Subject to the absolute and relative TSR achieved during the vesting period, the actual number of shares that the key employees receive at the end of the period may range from 0% to 300% of the target shares granted.

The fair value of the performance-based equity awards granted is recorded as compensation expense and will cliff vest at the end of the vesting period on December 31, 2023, with an offsetting increase in stockholders’ equity.

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Other income

Origination income

1,163

1,601

3,184

3,139
Release/(Increase) of repair and denial reserve

277

(343)

289

1,222
Other

413

471

808

974
Total other income

$
1,853

$
1,729

$
4,281

$
5,335
Other operating expenses

Origination costs

2,167

916

4,636

2,804
Technology expense

964

732

2,736

2,096
Charge off of real estate acquired in settlement of loans

644

278

746

912
Rent expense

554

317

1,676

931
Recruiting, training and travel expenses

539

273

1,718

954
Acquisition costs

282

71

600

500
Depreciation

125

—

390

—
Marketing expense

401

49

1,168

278
Insurance expense

247

109

733

367
Other

1,524

628

4,780

2,343
Total other operating expenses

$
7,447

$
3,373

$
19,183

$
11,185

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Preferred Stock

The following is a summary of the Company’s preferred stock outstanding at June 30, 2021. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock ranks senior to the Company’s common stock with respect to payment of dividends and the distribution of assets.

We classify our Series C Cumulative Convertible Preferred Stock, or Series C Preferred Stock, on our balance sheets using the guidance in ASC 480‑10‑S99. Our Series C Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events occur, such as a change in control. As redemption under these circumstances is not solely within our control, we have classified our Series C Preferred Stock as temporary equity. We have analyzed whether the conversion features in our Series C Preferred Stock should be bifurcated under the guidance in ASC 815‑10 and have determined that bifurcation is not necessary.

In June 2021, the Company issued 4,600,000 shares of 6.50% Series E Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the “Series E Preferred Stock”) and received net proceeds of $111,377,500.


				Preferential Cash Dividends⁽¹⁾⁽²⁾					Carrying Value (in thousands)
Series	Shares Issued and Outstanding (in thousands)	Par Value		Liquidation Preference ⁽³⁾		Rate per Annum	Annual Dividend (per share)		June 30, 2021
B	1,919	$	0.0001	$	25.00	8.63%	$	2.16	$	47,984
C	335		0.0001		25.00	6.25%		1.56	$	8,361
D	2,010		0.0001		25.00	7.63%		1.91	$	50,257
E	4,600		0.0001		25.00	6.50%		1.63	$	111,378

⁽¹⁾Holders of shares of the Series B, C, D, and E preferred stock are entitled to receive dividends, when and as authorized by the Company's Board, out of funds legally available for the payment of dividends. Dividends for Series B, C, and D preferred stock are payable quarterly on the 15th day of January, April, July and October of each year or if not a business day, the next succeeding business day. Dividends for Series E preferred stock are payable quarterly on or about the last day of each January, April, July and October of each year. Any dividend payable on the preferred stock for any partial dividend period will be computed on the basis of a 360- day year consisting of twelve 30-day months. Dividends will be payable in arrears to holders of record as they appear on the Company’s records at the close of business on the last day of each of March, June, September and December, as the case may be, immediately preceding the applicable dividend payment date. ⁽²⁾The Company declared dividends of $1.0 million, $0.1 million, $1.0 million, and $1.0 million of its Series B,C, D and E Cumulative preferred stock during the three months ended June 30, 2021. The dividends are payable on July 15, 2021 for Series B, C, and D preferred stock and on July 31, 2021 for Series E preferred stock to the Preferred Stock Shareholders of record as of the close of business on June 30, 2021. ⁽³⁾The Company may, at its option, redeem the Series B, D, and E Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. Series E Preferred Stock is not redeemable prior to June 10, 2026, except under certain conditions.

Note 22. Earnings per Share of Common Stock

The following table provides information on the basic and diluted earnings per share computations, including the number of shares of common stock used for purposes of these computations.


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, except for share and per share amounts)	2021		2020		2021		2020
Basic Earnings
Net income (loss)	$	30,904	$	34,663	$	59,851	$	(16,853)
Less: Income (loss) attributable to non-controlling interest		444		810		1,103		(254)
Less: Income attributable to participating shares		3,616		285		4,273		748
Basic earnings	$	26,844	$	33,568	$	54,475	$	(17,347)

Diluted Earnings
Net income (loss)	$	30,904	$	34,663	$	59,851	$	(16,853)
Less: Income (loss) attributable to non-controlling interest		444		810		1,103		(254)
Less: Income attributable to participating shares		3,616		285		4,273		748
Diluted earnings	$	26,844	$	33,568	$	54,475	$	(17,347)

Number of Shares
Basic — Average shares outstanding		71,221,806		53,980,451		64,059,509		52,982,246
Effect of dilutive securities — Unvested participating shares		163,797		33,507		150,425		33,507
Diluted — Average shares outstanding		71,385,603		54,013,958		64,209,934		53,015,753

Earnings Per Share Attributable to RC Common Stockholders:
Basic	$	0.38	$	0.62	$	0.85	$	(0.33)
Diluted	$	0.38	$	0.62	$	0.85	$	(0.33)

Participating unvested RSUs were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

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Additionally, as of June 30, 2021, there are potential shares of common stock contingently issuable upon the conversion of the Convertible Notes in the future. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash. Based on this assessment, the Company determined that it would be appropriate to apply a method similar to the treasury stock method, such that contingently issuable common stock is assessed quarterly along with our other potentially dilutive instruments. In order to compute the dilutive effect, the number of shares included in the denominator of diluted EPS is determined by dividing the “conversion spread value” of the share-settled portion (value above accreted value of face value and interest component) of the instrument by the share price. The “conversion spread value” is the value that would be delivered to investors in shares based on the terms of the bond upon an assumed conversion. As of June 30, 2021, the conversion spread value is currently 0, since the closing price of our common stock does not exceed the conversion rate (strike price) and is “out-of-the-money”, resulting in 0 impact on diluted EPS.

Certain investors own OP units in our operating partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the operating partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: 1 share of the Company's common stock, or cash equal to the fair value of a share of the Company's common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interests in the operating partnership is reduced and the Company's equity is increased. As of June 30, 2021 and December 31, 2020, the non-controlling interest OP unit holders owned 1,175,205 OP units.

Note 23. Offsetting assets and liabilities

~~Note 22 – Variable Interest Entities~~In order to better define its contractual rights and ~~Securitization Activities~~

~~Special purpose entities,~~ to secure rights that will help the Company mitigate its counterparty risk, the Company may enter into an International Swaps and Derivatives Association (“ISDA”) Master Agreement with multiple derivative counterparties. An ISDA Master Agreement, published by ISDA, is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter (“OTC”), derivative contracts. The ISDA Master Agreement contains a Schedule to the Master Agreement and a Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event of a default and/or ~~“SPEs”, are entities (in~~a termination event). Under an ISDA Master Agreement, the ~~form of trusts) designed to fulfill a specific limited need~~Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the entity that organizes it. SPEs are often used to facilitate transactions that involve securitizing financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on more favorable terms than available on such assets on an un-securitized basis. Securitization involves transferring assets to an SPE to convert all orISDA Master Agreement typically permit a ~~portion of those assets into cash before they would have been realized~~single net payment in the ~~normal course~~event of ~~business, through~~default, including the ~~SPE’s issuance~~bankruptcy or insolvency of ~~debt~~the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Company’s stockholders’ equity ~~instruments. Investors in an SPE usually have recourse only~~declines by a stated percentage or the Company fails to meet the terms of its ISDA Master Agreements, which would cause the Company to accelerate payment of any net liability owed to the ~~assets~~counterparty. As of June 30, 2021 and December 31, 2020, the Company was in good standing on all of its ISDA Master Agreements or similar arrangements with its counterparties.

For derivatives traded under an ISDA Master Agreement, the ~~SPE and, depending on~~collateral requirements are listed under the ~~overall structure~~Credit Support Annex, which is the sum of the ~~transaction,~~mark to market for each derivative contract, the independent amount due to the derivative counterparty and any thresholds, if any. Collateral may ~~benefit from various forms of credit enhancement, such as over-collateralization~~be in the form of ~~excess assets~~cash or any eligible securities, as defined in the ~~SPE, priority with respect~~respective ISDA agreements. Cash collateral pledged to ~~receipt of cash flows relative to holders of other debt or equity instruments issued~~and by the ~~SPE,~~Company with the counterparty, if any, is reported separately in the consolidated balance sheets as restricted cash. All margin call amounts must be made before the notification time and must exceed a minimum transfer amount threshold before a transfer is required. All margin calls must be responded to and completed by the close of business on the same day of the margin call, unless otherwise specified. Any margin calls after the notification time must be completed by the next business day. Typically, the Company and its counterparties are not permitted to sell, rehypothecate or use the collateral posted. To the extent amounts due to the Company from its counterparties are not fully collateralized, the Company bears exposure and the risk of loss from a ~~line of~~defaulting counterparty. The Company attempts to mitigate counterparty risk by establishing ISDA agreements with only high grade counterparties that have the financial health to honor their obligations and diversification by entering into agreements with multiple counterparties.

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~~credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in~~In accordance with ASU 2013-01, Balance Sheet (Topic 210): Clarifying the ~~terms~~Scope of ~~their investment agreement.~~

~~Securitization transactions~~

~~The Company regularly engages in loan securitization transactions. Under ASC 810,~~ ~~Consolidation~~Disclosures about Offsetting Assets and Liabilities, the ~~Operating Partnership~~Company is required to ~~consolidate, as a VIE,~~disclose the ~~SPE/trust that was created~~impact of offsetting of assets and liabilities represented in the consolidated balance sheets to facilitate the transactions and to which the underlying loans in connection with the securitization were transferred. See Note 3 for a discussion of our accounting policies applied to the consolidationenable users of the ~~VIE~~consolidated financial statements to evaluate the effect or potential effect of netting arrangements on its financial position for recognized assets and ~~transfer~~liabilities. These recognized assets and liabilities are financial instruments and derivative instruments that are either subject to enforceable master netting arrangements or ISDA Master Agreements or meet the following right of setoff criteria: (a) the ~~loans in connection with the securitization.~~

~~The loans in the securitization trust are comprised of performing and non-performing SBC loans, Transitional loans, and SBA loans.~~

~~On a quarterly basis,~~amounts owed by the Company ~~completes an analysis~~ to determine whether the VIE should be consolidated. As part of this analysis, the Company’s involvement in the creation of the VIE, including the design and purpose of the VIE and whether such involvement reflects a controlling financial interest that results in the Company being deemed the primary beneficiary of the VIE is considered. In determining whether the Company would be considered the primary beneficiary, the following factorsanother party are ~~considered: (i) whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and (ii) whether~~determinable, (b) the Company has the right to ~~receive benefits or~~set off the ~~obligation~~amounts owed with the amounts owed by the counterparty, (c) the Company intends to ~~absorb losses~~offset, and (d) the Company’s right of offset is enforceable at law. As of June 30, 2021 and December 31, 2020, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the consolidated balances sheets.

The following tables provide details regarding the effect of offsetting the Company’s recognized assets and liabilities presented in the consolidated balance sheets:


							Gross amounts not offset in the Consolidated Balance Sheets⁽¹⁾
(in thousands)	Gross amounts of recognized Assets / Liabilities		Gross amounts offset in the Consolidated Balance Sheets		Amounts presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received / Paid		Net Amount
June 30, 2021
Assets
Derivative instruments - Interest rate lock commitments		6,130		—		6,130		—	$	—	$	6,130
Derivative instruments - FX forwards		470		—		470		—	$	—	$	470
Total	$	6,600	$	—	$	6,600	$	—	$	—	$	6,600
Liabilities
Derivative instruments - Interest rate swaps	$	5,704	$	3,139	$	2,565	$	—	$	2,565	$	—
Derivative instruments - Credit default swaps		153		—		153		—		153		—
Derivative instruments - TBA Agency Securities		999		—		999		—		—		999
Derivative instruments - FX forwards		—		—		—		—		—		—
Secured borrowings		1,703,034		—		1,703,034		1,703,034		—		—
Total	$	1,709,890	$	3,139	$	1,706,751	$	1,703,034	$	2,718	$	999
December 31, 2020
Assets
Derivative instruments - Interest rate lock commitments	$	16,363		—		16,363		—	$	—	$	16,363
Total	$	16,363	$	—	$	16,363	$	—	$	—	$	16,363
Liabilities
Derivative instruments - Interest rate swaps	$	11,670	$	5,017	$	6,653	$	—	$	6,653	$	—
Derivative instruments - TBA Agency Securities		174		—		174		—		174		—
Derivative instruments - Credit default swaps		4,004		—		4,004		—		—		4,004
Derivative instruments - FX forwards		773				773		—		—		773
Secured borrowings		1,294,243		—		1,294,243		1,294,243		—		—
Total	$	1,310,864	$	5,017	$	1,305,847	$	1,294,243	$	6,827	$	4,777

(1)

Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty that exceed the financial liabilities subject to a master netting repurchase arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

Note 24. Financial instruments with off-balance sheet risk, credit risk, and certain other risks

Market Risk — Market risk is the potential adverse changes in the values of the ~~entity that could be potentially significant~~financial instrument due to unfavorable changes in the level or volatility of interest rates, foreign currency exchange rates, or market values of the underlying financial instruments. We attempt to mitigate our exposure to market risk by entering into offsetting transactions, which may include purchase or sale of interest-bearing securities and equity securities.

Table of Contents

Credit Risk — The Company is subject to credit risk in connection with our investments in SBC loans and SBC MBS and other target assets we may acquire in the future. The credit risk related to these investments pertains to the ~~VIE. Based~~ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value−driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur, which could adversely impact operating results.

The Company is also subject to credit risk with respect to the ~~Company’s evaluation~~counterparties to derivative contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligation under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of ~~these factors, including~~creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In the ~~Company’s involvement~~event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the ~~design~~termination of the ~~VIE, it was determined~~derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. In addition, the business failure of a counterparty with whom we enter a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price.

The Company finances the acquisition of a significant portion of its loans and investments with repurchase agreements and borrowings under credit facilities and other financing agreements. In connection with these financing arrangements, the Company pledges its loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is ~~required~~exposed to ~~consolidate~~ the ~~VIE’s created to facilitate~~counterparty if, during the ~~securitization transaction.~~

~~For financial statement reporting purposes, since the underlying trust is consolidated, the securitization is effectively viewed as a financing~~term of the ~~loans that were securitized to enable the senior security to be created~~repurchase agreement financing, a lender should default on its obligation and sold to a third-party investor. As such, the senior security is presented on the unaudited interim consolidated balance sheets as securitized debt obligations of consolidated VIEs. The third-party beneficial interest holders in the VIE have no recourse against the Company, except that the Company has an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE. As previously stated, the Company is not ~~obligated~~able to ~~provide, nor has~~recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company ~~provided, any financial support to these consolidated securitization vehicles.~~

~~The securitization trust receives principal and~~plus interest ~~on the underlying loans and distributes those payments~~due to the ~~certificate holders. The assets~~counterparty and ~~other instruments held~~the fair value of the collateral pledged by the ~~securitization trust are restricted in that they can only be used to fulfill the obligations of the securitization trust. The risks associated with the Company’s involvement with the VIE is limited~~Company to the ~~risks and rights as a certificate holder~~lender including accrued interest receivable on such collateral.

GMFS sells loans to investors without recourse. As such, the investors have assumed the risk of ~~the securities retained~~loss or default by the ~~Company.~~

The activities of the trust are substantially set forth in the securitization transaction documents, primarily the loan trust agreement, the trust agreement, the indenture and the securitization servicing agreement (collectively, the “Securitization Agreements”). Neither the trust nor any other entity may sell or replace any assets of the trust except in connection with: (i)borrower. However, GMFS is usually required by these investors to make certain ~~loan defects or breaches of certain~~standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that GMFS does not comply with such representations, or there are early payment defaults, GMFS may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, GMFS may be required to refund a portion of the sales proceeds to the investors.

Liquidity Risk — Liquidity risk arises in our investments and the general financing of our investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at reasonable prices, in addition to potential increases in collateral requirements during times of heightened market volatility. If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss. We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in SBC loans, MBS and other financial instruments. Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements. While we may finance certain investment in security positions using traditional margin arrangements and borrowings under repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer term financing vehicles may be utilized to attempt to provide us with sources of long-term financing.

Table of Contents

Off-Balance Sheet Risk —The Company has undrawn commitments on outstanding loans which are disclosed in Note 25.

Interest Rate — Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Generally, our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, subject to a floor, as determined by the particular financing arrangement. In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have ~~a material~~an adverse effect on the ~~value~~spread between our interest-earning assets and interest-bearing liabilities.

~~Table of Contents~~

~~Securitized debt~~

~~The consolidation of the securitization transactions includes the senior securities issued to third parties~~improving economy, which ~~are shown as securitized debt obligations of consolidated VIEs~~might have a positive impact on commercial property values, resulting in increased gains on the ~~unaudited interim consolidated balance sheets. The following table presents additional information~~disposition of these assets.

Prepayment Risk — As we receive prepayments of principal on our investments, premiums paid on such investments will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the ~~Company’s securitized debt obligations:~~

September 30, 2017

December 31, 2016


Current



Weighted


Current



Weighted

Principal

Carrying

Average

Principal

Carrying

Average

(In Thousands)

Balance

value

Interest Rate

Balance

value

Interest Rate

Waterfall Victoria Mortgage Trust 2011-SBC2

$
16,461

$
16,461

5.3
%

$
24,472

$
24,472

5.2
%
Sutherland Commercial Mortgage Loans 2015-SBC4

11,419

10,919

4.0

39,464

38,402

3.9

Sutherland Commercial Mortgage Trust 2017-SBC6

133,370

131,891

3.3

—

—

—

ReadyCap Commercial Mortgage Trust 2014-1

50,059

50,032

3.5

84,320

83,885

3.4

ReadyCap Commercial Mortgage Trust 2015-2

159,347

154,526

4.1

166,232

160,699

4.0

ReadyCap Commercial Mortgage Trust 2016-3

105,329

102,272

3.5

133,774

129,914

3.5

Ready Capital Mortgage Financing 2017-FL1

187,862

183,142

2.6

—

—

—

ReadyCap Lending Small Business Trust 2015-1

31,457

31,039

2.4

56,055

55,570

2.0

Total

$
695,304

$
680,282

3.4
%

$
504,317

$
492,942

3.6
%

~~Repayment~~investments and this is also affected by interest rate movements. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of ~~our securitized debt will be dependent upon~~purchase discounts, thereby increasing the ~~cash flows generated by the loans in the securitization trust that collateralize such debt. The actual cash flows from the securitized loans are comprised of coupon~~ interest scheduled principal payments, prepayments and liquidations of the underlying loans. The actual term of the securitized debt may differ significantly from our estimate given that actual interest collections, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected.

~~VIE impact on unaudited interim consolidated financial statements~~

~~The following table reflects the securitized assets and liabilities recorded~~income earned on the ~~unaudited interim consolidated balance sheets:~~

(In Thousands)

September 30, 2017

December 31, 2016
Assets:

Cash and cash equivalents

$
26

$
131
Restricted cash

17,175

808
Loans, net

904,366

655,559
Real estate acquired in settlement of loans

3,439

4,103
Accrued interest

4,519

2,835
Due from servicers

15,369

27,660
Total assets

944,894

691,096
Liabilities:

Securitized debt obligations of consolidated VIEs, net

680,282

492,942
Total liabilities

680,282

492,942
Equity

$
264,612

$
198,154

~~Table of Contents~~

~~Note 23 – Stockholders’ Equity~~

~~Common stock dividends~~

~~The following table presents cash dividends declared by our board of directors on our common stock from July 1, 2016 through September 30, 2017:~~

Dividend per
Declaration Date

Record Date

Payment Date

Share
August 23, 2016

September 2, 2016

September 16, 2016

$
0.45
(1)
October 11, 2016

October 14, 2016

October 25, 2016

$
0.36
(1)
December 21, 2016

December 30, 2016

January 27, 2017

$
0.35

March 14, 2017

March 31, 2017

April 13, 2017

$
0.37

June 15, 2017

June 30, 2017

July 31, 2017

$
0.37

September 12, 2017

September 29, 2017

October 20, 2017

$
0.37

(1) Retrospectively adjusted for the equivalent number of shares after the reverse merger.

~~Incentive fee stock issuance~~

On January 8, 2016, the Company issued 27,199 shares at $17.74 per share to the Manager for the incentive distribution fee earned for the second and third quarters of 2015. As discussed above, the Manager is entitled to an incentive distribution fee as defined in the Management Agreement.

~~Stock incentive plan~~

In connection with the reverse merger, the Company adopted ZAIS’s 2012 equity incentive plan (“the 2012 Plan”). The 2012 Plan authorizes the Compensation Committee to approve grants of equity-based awards to our officers, directors, and employees of the Manager and its affiliates. The equity incentive plan provides for grants of equity-based awards up to an aggregate of 5% of the shares of the Company’s common stock issued and outstanding from time to time on a fully diluted basis.

During the first quarter of 2017, the Company issued restricted stock units (“RSUs”) to its independent directors as compensation for their service on the board of directors. RSUs are awarded at no cost to the recipient upon their grant. Each of our four independent directors received a one-time grant of 5,000 RSUs vesting immediately on a one-for-one basis for 5,000 shares of our common stock as compensation for service to date. Each independent director also received an annual grant of 5,000 RSUs that vested or will vest on a one-for-one basis for shares of our common stock in equal quarterly installments over a one year period ending December 31, 2017. The shares of stock associated with RSUs are not issued and are unvested until the directors, officers or employees meet certain vesting conditions and earn the right to those shares. Dividend equivalent rights will be paid on unvested RSUs at the same rate and at the same time as dividends on the Company’s common stock.

During the second quarter of 2017, the Company issued restricted stock awards (“RSAs”) to certain employees as compensation for their employment services. The RSAs are awarded at no cost to the recipient upon their grant. A total of 25,851 shares were awarded and will vest in equal installments over a three year period ending May 9, 2020. The shares of stock were issued during the second quarter of 2017, however, remain unvested until those service conditions are met, which they will then earn right to those shares. Dividend equivalent rights will be paid on unvested RSAs at the same rate and at the same time as dividends on the Company’s common stock.

~~The Company’s current policy for issuing shares upon settlement of stock-based incentive awards is to issue new shares.~~

~~The fair value of the RSUs and RSAs granted, which is determined based upon the stock price on the grant date, is recorded as compensation expense on a straight~~-~~line basis over the vesting periods for the awards, with an offsetting~~investments. An increase in ~~stockholders’ equity.~~

~~Table of Contents~~

~~The following table summarizes the Company’s RSU and RSA activity for the three and nine months ended September 30, 2017:~~

Independent Director RSUs

Employee RSAs
(In Thousands, except share data)
Number of shares

Weighted-average grant date fair value
Weighted-average grant date fair value (per share)

Number of shares

Weighted-average grant date fair value
Weighted-average grant date fair value (per share)
Outstanding, January 1

—

$
—
$
—

—

$
—
$
—
Granted

40,000

580

14.50

—

—

—
Vested

(25,000)

(363)

14.50

—

—

—
Forfeited

—

—

—

—

—

—
Canceled

—

—

—

—

—

—
Outstanding, March 31, 2017

15,000

$
217
$
14.50

—

$
—
$
—
Granted

—

—

—

25,851

380

14.70
Vested

(5,000)

(72)

14.50

—

—

—
Forfeited

—

—

—

—

—

—
Canceled

—

—

—

—

—

—
Outstanding, June 30, 2017

10,000

$
145
$
14.50

25,851

$
380
$
14.70
Granted

—

—

—

—

—

14.70
Vested

(5,000)

(72)

14.50

—

—

—
Forfeited

—

—

—

—

—

—
Canceled

—

—

—

—

—

—
Outstanding, September 30, 2017

5,000

$
73
$
14.50

25,851

$
380
$
14.70

During the three and nine months ended September 30, 2017, the Company recognized $0.1 million and $0.5 million of noncash compensation expense, respectively, related to its stock-based incentive plan in its unaudited interim consolidated statements of income.

At September 30, 2017, approximately $0.5 million of noncash compensation expense related to unvested awards had not yet been charged to net income. These costs are expected to be amortized into compensation expense ratably over the course of the remainder of the respective vesting periods.

~~Litigation settlement~~

~~On May 2, 2017, the Company issued approximately $4.0 million in shares of the Company's common stock (275,862 shares issued) to a counterparty in connection with a litigation settlement.~~

~~Table of Contents~~

~~Note 24 – Earnings per Share of Common Stock~~

The following table provides a reconciliation of both income from continuing operations and loss from discontinued operations, and the number of shares of common stock used in the computation of basic income per share. This reconciliation has been retrospectively adjusted for the equivalent number of shares after the reverse acquisition.

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands, except for share and per share amounts)

2017

2016

2017

2016
Basic Earnings

Continuing Operations

Income from continuing operations

$
12,374

$
9,571

$
33,084

$
27,683

Less: Income attributable to non-controlling interest

533

777

1,891

2,217

Less: Income attributable to participating shares

15

-

37

-

  Basic - Income from continuing operations

$
11,826

$
8,794

$
31,156

$
25,466

Discontinued Operations

Loss from discontinued operations

-

-

-

(351)

  Basic — Net income attributable to common stockholders after allocation to participating shares

$
11,826

$
8,794

$
31,156

$
25,115

Diluted Earnings

Continuing Operations

Basic — Income from continuing operations

$
12,374

$
9,571

$
33,084

$
27,683

Less: Income attributable to non-controlling interest

533

777

1,891

2,217

Less: Income attributable to participating shares

15

-

37

-

Add: Undistributed earnings to participating shares

-

-

-

-

Less: Undistributed earnings reallocated to participating shares

-

-

-

-

  Diluted — Income from continuing operations

$
11,826

$
8,794

$
31,156

$
25,466

Discontinued Operations

Basic — Loss from discontinued operations

-

-

-

(351)

  Diluted  — Net income attributable to common stockholders after allocation to participating shares

$
11,826

$
8,794

$
31,156

$
25,115

Number of Shares

Basic — Average shares outstanding

32,026,494

25,870,485
(1)

31,120,476

25,870,485
(1)
Effect of dilutive securities — Unvested participating shares

2,486

-

973

-

  Diluted — Average shares outstanding

32,028,980

25,870,485

31,121,449

25,870,485

Basic

Income from continuing operations

$
0.37

$
0.34

$
1.00

$
0.98

Loss from discontinued operations

-

-

-

(0.01)

Diluted

Income from continuing operations

$
0.37

$
0.34

$
1.00

$
0.98

Loss from discontinued operations

-

-

-

(0.01)

(1) Retroactively adjusted for the equivalent number of shares after the reverse acquisition using an exchange rate of 0.8356.

As of September 30, 2017, 5,000 participating unvested RSUs were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

Additionally, as of September 30, 2017, there are potential shares of common stock contingently issuable upon the conversion of the Convertible Notes in the future. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.Based on this assessment, we determined that it would be appropriate to apply a method similar to the treasury stock method and would be assessed each quarter, with our other potentially dilutive instruments. In order to compute the dilutive effect, the number of shares included in the denominator of diluted EPS is determined by dividing the “conversion spread value” of the share-settled portion (value above accreted value of face value and interest component) of the instrument by the share price. The “conversion spread value” is the value that would be delivered to investors in shares based on the terms of the bond upon an assumed conversion. As of September 30, 2017, the conversion spread value is currently zero, since the closing price of our common stock does not exceed the conversion rate (strike price) and are “out-of-the-money”, resulting in no impact on diluted EPS.

~~Table of Contents~~

Certain investors own OP units in our operating partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the operating partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: one share of the Company's common stock, or cash equal toprepayment rates will also adversely affect the fair value of a share of the Company's common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interests in the Operating Partnership is reduced and the Company's equity is increased. At September 30, 2017 and December 31, 2016, the non-controlling interest OP unit holders owned 1,150,827 and 2,349,561, OP units, respectively, or 3.5% and 7.1% of the OP units issued by our ~~operating partnership.~~MSRs.

Note 25. Commitments, contingencies and indemnifications

~~Note 25 – Interest Income~~

Litigation

The Company may be subject to litigation and ~~Interest Expense~~

~~Interest income and interest expense are recorded~~administrative proceedings arising in the ~~unaudited interim~~ordinary course of its business. The Company has entered into agreements, which provide for indemnifications against losses, costs, claims, and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to these agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on history and experience, the Company expects the risk of loss to be remote. Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated ~~statements~~financial statements.

Unfunded Loan Commitments

Unfunded loan commitments for SBC loans were as follows:


(In Thousands)	June 30, 2021		December 31, 2020
Loans, net	$	330,905	$	285,389
Loans, held for sale at fair value	$	18,616	$	7,809

Commitments to Originate Loans

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not economically hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the borrower does not perform. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon.

Table of ~~income~~Contents

Total commitments to originate loans were as follows:

Note 26. Income Taxes

The Company is a REIT pursuant to Internal Revenue Code Section 856. Our qualification as a REIT depends on our ability to meet various requirements imposed by the Internal Revenue Code, which relate to our organizational structure, diversity of stock ownership and ~~classified based on~~certain requirements with regard to the nature of our assets and the ~~underlying asset or liability.~~

~~The following table presents~~sources of our income. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the ~~components~~extent that we satisfy this distribution requirement, but distribute less than 100% of ~~interest~~our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and ~~expense:~~excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four taxable years. As of June 30, 2021 and December 31, 2020, we are in compliance with all REIT requirements.

Three Months Ended September 30,

Nine Months Ended September 30,
(In Thousands)

2017

2016

2017

2016
Interest income

Loans

   Acquired SBA 7(a) loans

$
8,807

$
10,186

$
28,349

$
36,066
   Acquired loans

7,335

10,238

26,065

35,103
   Originated Transitional loans

8,711

2,043

17,248

5,127
   Originated SBC loans, at fair value

1,531

3,950

5,361

9,784
   Originated SBC loans

5,703

4,527

16,924

13,899
   Originated SBA 7(a) loans

232

15

585

(77)
   Originated Residential Agency loans

11

—

236

—
Total loans (1)

$
32,330

$
30,959

$
94,768

$
99,902
Held for sale, at fair value, loans

   Originated Residential Agency loans

$
930

$
—

$
2,784

$
—
   Originated Freddie loans

713

164

1,137

352
   Originated SBA 7(a) loans

171

—

965

—
Total loans, held for sale, at fair value

$
1,814

$
164

$
4,886

$
352
Mortgage backed securities, at fair value

894

767

2,515

4,028
Total interest income

$
35,038

$
31,890

$
102,169

$
104,282
Interest expense

Secured short-term borrowings

$
(6,365)

$
(6,508)

$
(20,669)

$
(18,083)
Securitized debt obligations of consolidated VIEs

(6,292)

(4,233)

(16,174)

(13,174)
Guaranteed loan financing

(3,189)

(3,338)

(9,973)

(10,701)
Senior secured note

(2,744)

—

(5,311)

—
Convertible note

(1,260)

—

(1,260)

—
Promissory note

(58)

(18)

(192)

(85)
Total interest expense

$
(19,908)

$
(14,097)

$
(53,579)

$
(42,043)
Net interest income before provision for loan losses

$
15,130

$
17,793

$
48,590

$
62,239
(1) Includes interest income on loans in consolidated VIEs.

Certain of our subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities that would not be qualifying income if earned directly by the parent REIT, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Internal Revenue Code, and are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT. Our TRSs engage in various real estate - related operations, including originating and securitizing commercial and residential mortgage loans, and investments in real property. The majority of our TRSs are held within the SBC originations, Small Business Lending, and residential mortgage banking segments. Our TRSs are not consolidated for federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred income taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.

During 2020, the CARES Act and the Consolidated Appropriations Act of 2021 (the “CAA”) were signed into law. Among other things, the provisions of these laws relate to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, and technical corrections to tax depreciation methods for qualified improvement property. As of June 30, 2021 and December 31, 2020, we have recognized a benefit of $2.7 million due to changes in net operating loss carryback provisions which allow net operating losses from tax years beginning in 2018, 2019, or 2020 to be carried back for five years. We will continue to monitor the impacts on our business due to legislative developments related to the COVID-19 pandemic.

Note ~~26 –~~27. Segment ~~Reporting~~reporting

The Company reports its results of operations through the following ~~four~~4 business segments: i) ~~Loan~~ Acquisitions, ii) SBC Originations, iii) ~~SBA Originations, Acquisitions and Servicing~~Small Business Lending, and iv) Residential Mortgage Banking. The Company’s organizational structure is based on a number of factors that the Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, ~~(“CEO”),~~ uses to evaluate, view, and run its business operations, which includes customer base and nature of loan program types. The segments are based on this organizational structure and the information reviewed by the CODM and management to evaluate segment results.

~~Loan~~ Acquisitions

Through the ~~Loan Acquisitions~~acquisitions segment, the Company acquires performing and non-performing SBC loans and intends to continue to acquire these loans as part of the Company’s business strategy.

~~Table of Contents~~

SBC ~~Originations~~

originations

Through the SBC ~~Originations~~originations segment, the Company originates SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels. Additionally, as part of this segment, we originate and service multi-family loan products under the Freddie Mac program. This segment also reflects the impact of our SBC securitization activities.

Table of Contents

Small Business Lending

~~SBA Originations, Acquisitions, and Servicing~~

Through the ~~SBA Originations, Acquisitions, and Servicing~~Small Business Lending segment, the Company acquires, originates and services loans guaranteed by the SBA under the SBA Section 7(a) Program. This segment also reflects the impact of our SBA securitization activities.

In the second quarter of 2021, our CODM realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities and projections for Knight Capital. We have recast all prior period amounts and segment information to conform to this presentation.

Residential ~~Mortgage Banking~~

mortgage banking

Through the ~~Residential Mortgage Banking~~residential mortgage banking segment, the Company originates residential mortgage loans eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, USDA and VA through retail, correspondent and broker channels. The historical results of our Residential mortgage banking segment has been reclassified in the unaudited interim consolidated statements of income to conform to our current period’s presentation of gains on residential mortgage banking activities, net of variable loan expenses.

Corporate- Other

~~Corporate-~~Corporate - Other consists primarily of unallocated ~~corporate financing,~~activities including interest expense relating to our senior secured and convertible notes on funds yet to be deployed, allocated employee compensation from our Manager, management and incentive fees paid to our Manager ~~as well as~~and other general corporate overhead expenses.

~~Segment Realignment~~

~~Effective at~~Results of business segments and all other. Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the beginning of the third quarter of 2017, the Company implemented organizational changes to align its segment financial reporting more closely with its current business practices. These organizational changes resulted in securitization activities on originated SBC and SBA loans being transferred out of the Loan Acquisitions segment and into either the SBC originations or SBA originations, acquisitions, and servicing segment, based on loan type. These organizational changes also resultedthree months ended June 30, 2021, are summarized in the ~~Company presenting~~ below table.


					Small		Residential
	Loan		SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	18,763	$	46,117	$	36,133	$	2,034	$	—	$	103,047
Interest expense		(12,036)		(27,104)		(13,980)		(2,295)		—		(55,415)
Net interest income before provision for loan losses	$	6,727	$	19,013	$	22,153	$	(261)	$	—	$	47,632
Recovery of (provision for) loan losses		(74)		(4,649)		(794)		—		—		(5,517)
Net interest income after (provision for) recovery of loan losses	$	6,653	$	14,364	$	21,359	$	(261)	$	—	$	42,115
Non-interest income
Residential mortgage banking activities		—		—		—		36,690		—		36,690
Net realized gain on financial instruments and real estate owned		(2,615)		5,235		14,563		—		—		17,183
Net unrealized gain (loss) on financial instruments		4,936		1,908		2,467		(4,699)		—		4,612
Other income		1,217		1,536		(3,550)		38		71		(688)
Servicing income		—		796		3,666		7,466		—		11,928
Income on purchased future receivables, net of allowance for doubtful accounts		—		—		2,779		—		—		2,779
Income (loss) on unconsolidated joint ventures		3,361		—		—		—		—		3,361
Total non-interest income	$	6,899	$	9,475	$	19,925	$	39,495	$	71	$	75,865
Non-interest expense
Employee compensation and benefits		—		(4,294)		(9,335)		(10,127)		(514)		(24,270)
Allocated employee compensation and benefits from related party		(331)		—		—		—		(2,968)		(3,299)
Variable expenses on residential mortgage banking activities		—		—		—		(21,421)		—		(21,421)
Professional fees		(373)		(620)		(704)		(144)		(1,031)		(2,872)
Management fees – related party		—		—		—		—		(2,626)		(2,626)
Incentive fees – related party		—		—		—		—		(286)		(286)
Loan servicing expense		(1,345)		(3,276)		(144)		(2,086)		—		(6,851)
Merger related expenses		—		—		—		—		(1,266)		(1,266)
Other operating expenses		(2,809)		(3,833)		(7,405)		(2,213)		(930)		(17,190)
Total non-interest expense	$	(4,858)	$	(12,023)	$	(17,588)	$	(35,991)	$	(9,621)	$	(80,081)
Income (loss) before provision for income taxes	$	8,694	$	11,816	$	23,696	$	3,243	$	(9,550)	$	37,899
Total assets	$	1,106,199	$	3,861,289	$	2,860,365	$	588,435	$	560,604	$	8,976,892

Table of Contents

Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, ~~amounts separately and no longer reflecting these amounts as part of~~ for the ~~four business segments. Prior period numbers were revised to conform to the new segment alignment and to be consistent with our current period’s presentation.~~

~~In accordance with ASC 280,~~ ~~Segment Reporting, the Company has not included discontinued operations~~six months ended June 30, 2021, are summarized in the ~~segment reporting. The Company uses segment net income or loss from continuing operations as the measure of profitability of its reportable segments.~~below table.


					Small		Residential
	Loan		SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	33,297	$	85,810	$	51,565	$	4,078	$	1,668	$	176,418
Interest expense		(24,007)		(52,102)		(23,187)		(4,623)		(2,257)		(106,176)
Net interest income before provision for loan losses	$	9,290	$	33,708	$	28,378	$	(545)	$	(589)	$	70,242
Recovery of (provision for) loan losses		1,188		(6,258)		(439)		—		—		(5,509)
Net interest income after (provision for) recovery of loan losses	$	10,478	$	27,450	$	27,939	$	(545)	$	(589)	$	64,733
Non-interest income
Residential mortgage banking activities		—		—		—		78,099		—		78,099
Net realized gain on financial instruments and real estate owned		(4,108)		10,800		19,463		—		(126)		26,029
Net unrealized gain (loss) on financial instruments		5,832		4,941		2,981		10,657		1,197		25,608
Other income		2,040		2,824		(5,150)		53		116		(117)
Servicing income		—		1,522		11,469		14,572		—		27,563
Income on purchased future receivables, net of allowance for doubtful accounts		—		—		5,096		—		—		5,096
Income (loss) on unconsolidated joint ventures		2,552		—		—		—		—		2,552
Total non-interest income	$	6,316	$	20,087	$	33,859	$	103,381	$	1,187	$	164,830
Non-interest expense
Employee compensation and benefits		—		(6,546)		(15,381)		(23,715)		(1,405)		(47,047)
Allocated employee compensation and benefits from related party		(543)		—		—		—		(4,879)		(5,422)
Variable expenses on residential mortgage banking activities		—		—		—		(36,906)		—		(36,906)
Professional fees		(895)		(943)		(1,348)		(395)		(2,273)		(5,854)
Management fees – related party		—		—		—		—		(5,319)		(5,319)
Incentive fees – related party		—		—		—		—		(286)		(286)
Loan servicing expense		(3,096)		(5,328)		(42)		(4,450)		(39)		(12,955)
Merger related expenses		—		—		—		—		(7,573)		(7,573)
Other operating expenses		(3,793)		(7,749)		(15,070)		(4,417)		(1,645)		(32,674)
Total non-interest expense	$	(8,327)	$	(20,566)	$	(31,841)	$	(69,883)	$	(23,419)	$	(154,036)
Income (loss) before provision for income taxes	$	8,467	$	26,971	$	29,957	$	32,953	$	(22,821)	$	75,527
Total assets	$	1,106,199	$	3,861,289	$	2,860,365	$	588,435	$	560,604	$	8,976,892

~~Table of Contents~~

~~Results of Business Segments and All Other~~

Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the three months ended ~~September~~June 30, ~~2017~~2020 are summarized in the below table.


					SBA Originations,		Residential
	Loan		SBC		Acquisitions,		Mortgage		Corporate-

																	Small		Residential
													Loan		SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		and Servicing		Banking		Other		Consolidated		Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	7,800	$	17,258	$	9,039	$	941	$	—	$	35,038	$	14,977	$	37,497	$	8,808	$	1,929	$	—	$	63,211
Interest expense		(3,937)		(10,252)		(3,795)		(797)		(1,127)		(19,908)		(10,654)		(23,507)		(6,839)		(2,036)		(372)		(43,408)
Net interest income before provision for loan losses	$	3,863	$	7,006	$	5,244	$	144	$	(1,127)	$	15,130	$	4,323	$	13,990	$	1,969	$	(107)	$	(372)	$	19,803
Provision for loan losses		(1,063)		168		429		—		—		(466)
Net interest income after provision for loan losses	$	2,800	$	7,174	$	5,673	$	144	$	(1,127)	$	14,664
Non-interest income (expense)
Gains on residential mortgage banking activities, net of variable loan expenses	$	—	$	—	$	—	$	10,735	$	—	$	10,735
Other income (loss)		402		961		444		46		—		1,853
Recovery of (provision for) loan losses														(1,965)		5,821		(2,765)		(500)		—		591
Net interest income after (provision for) recovery of loan losses													$	2,358	$	19,811	$	(796)	$	(607)	$	(372)	$	20,394
Non-interest income
Residential mortgage banking activities														—		—		—		80,564		—		80,564
Net realized gain on financial instruments														(396)		6,232		1,602		—		—		7,438
Net unrealized gain (loss) on financial instruments														(1,016)		(716)		31		(12,043)		—		(13,744)
Other income														544		1,439		29,549		46		16		31,594
Income on purchased future receivables, net														—		—		5,586		—		—		5,586
Servicing income		4		166		1,556		4,408		—		6,134		—		399		2,565		6,018		—		8,982
Income from unconsolidated joint ventures														507		—		—		—		—		507
Total non-interest income													$	(361)	$	7,354	$	39,333	$	74,585	$	16	$	120,927
Non-interest expense
Employee compensation and benefits		(106)		(1,879)		(2,862)		(8,735)		(133)		(13,715)		—		(4,689)		(6,123)		(15,843)		(633)		(27,288)
Allocated employee compensation and benefits from related party		(99)		—		—		—		(891)		(990)		(125)		—		—		—		(1,125)		(1,250)
Variable expenses on residential mortgage banking activities														—		—		—		(36,446)		—		(36,446)
Professional fees		(343)		(446)		(534)		(264)		(564)		(2,151)		(88)		(104)		(301)		(271)		(1,155)		(1,919)
Management fees – related party		—		—		—		—		(2,034)		(2,034)		—		—		—		—		(2,666)		(2,666)
Loan servicing expense		(787)		(661)		(228)		(1,712)		—		(3,388)
Incentive fees – related party														—		—		—		—		(3,506)		(3,506)
Loan servicing (expense) income														(1,500)		(1,711)		(247)		(6,861)		(8)		(10,327)
Merger related expenses														—		—		—		—		(11)		(11)
Other operating expenses		(1,467)		(2,750)		(993)		(1,677)		(560)		(7,447)		(808)		(4,429)		(9,794)		(1,973)		(741)		(17,745)
Total non-interest income (expense)	$	(2,396)	$	(4,609)	$	(2,617)	$	2,801	$	(4,182)	$	(11,003)
Net realized (loss) gain on financial instruments		(377)		2,768		3,304		—		—		5,695
Net unrealized gain (loss) on financial instruments		173		3,807		414		(1,728)		12		2,678
Total non-interest expense													$	(2,521)	$	(10,933)	$	(16,465)	$	(61,394)	$	(9,845)	$	(101,158)
Net income (loss) before provision for income taxes	$	200	$	9,140	$	6,774	$	1,217	$	(5,297)	$	12,034	$	(524)	$	16,232	$	22,072	$	12,584	$	(10,201)	$	40,163
Provision for income taxes		—		(352)		(2,169)		(282)		3,143		340
Net income (loss)	$	200	$	8,788	$	4,605	$	935	$	(2,154)	$	12,374
Total Assets	$	426,699	$	1,152,153	$	525,862	$	298,435	$	99,994	$	2,503,143
Total assets													$	1,077,811	$	2,620,406	$	851,579	$	568,353	$	342,783	$	5,460,932

Table of Contents

Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are summarized in the below table.


					SBA Originations,		Residential
	Loan		SBC		Acquisitions,		Mortgage		Corporate-

																	Small		Residential
													Loan		SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		and Servicing		Banking		Other		Consolidated		Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	28,242	$	41,972	$	28,935	$	3,020	$	—	$	102,169	$	31,470	$	76,766	$	21,279	$	3,247	$	—	$	132,762
Interest expense		(12,472)		(23,798)		(12,120)		(2,310)		(2,879)		(53,579)		(21,859)		(49,134)		(15,352)		(3,621)		(372)		(90,338)
Net interest income before provision for loan losses	$	15,770	$	18,174	$	16,815	$	710	$	(2,879)	$	48,590	$	9,611	$	27,632	$	5,927	$	(374)	$	(372)	$	42,424
Provision for loan losses		(1,787)		84		(154)		—		—		(1,857)
Net interest income after provision for loan losses	$	13,983	$	18,258	$	16,661	$	710	$	(2,879)	$	46,733
Non-interest income (expense)
Gains on residential mortgage banking activities, net of variable loan expenses	$	—	$	—	$	—	$	32,229	$	—	$	32,229
Other income (loss)		769		2,708		706		98		—		4,281
Recovery of (provision for) loan losses														(7,688)		(24,007)		(7,019)		(500)		—		(39,214)
Net interest income after (provision for) recovery of loan losses													$	1,923	$	3,625	$	(1,092)	$	(874)	$	(372)	$	3,210
Non-interest income
Residential mortgage banking activities														—		—		—		117,233		—		117,233
Net realized gain (loss) on financial instruments														(1,135)		9,881		5,864		—		—		14,610
Net unrealized gain (loss) on financial instruments														(10,439)		(7,207)		(1,051)		(28,481)		—		(47,178)
Other income														1,403		2,722		31,321		106		115		35,667
Income on purchased future receivables, net														—		—		9,069		—		—		9,069
Servicing income		37		(197)		3,598		12,770		—		16,208		—		931		3,994		12,154		—		17,079
Loss on unconsolidated joint ventures														(3,030)		—		—		—		—		(3,030)
Total non-interest income													$	(13,201)	$	6,327	$	49,197	$	101,012	$	115	$	143,450
Non-interest expense
Employee compensation and benefits		(386)		(5,713)		(7,457)		(26,359)		(715)		(40,630)		—		(7,399)		(12,866)		(24,584)		(1,375)		(46,224)
Allocated employee compensation and benefits from related party		(301)		—		—		—		(2,709)		(3,010)		(250)		—		—		—		(2,250)		(2,500)
Variable expenses on residential mortgage banking activities														—		—		—		(56,575)		—		(56,575)
Professional fees		(868)		(1,110)		(1,499)		(753)		(2,104)		(6,334)		(251)		(442)		(662)		(558)		(2,562)		(4,475)
Management fees – related party		—		—		—		—		(6,018)		(6,018)		—		—		—		—		(5,227)		(5,227)
Incentive fees – related party														—		—		—		—		(3,506)		(3,506)
Loan servicing expense		(2,155)		(1,724)		1,359		(4,993)		—		(7,513)		(2,866)		(3,291)		(582)		(9,119)		(40)		(15,898)
Merger related expenses														—		—		—		—		(58)		(58)
Other operating expenses		(2,871)		(6,486)		(2,951)		(5,116)		(1,759)		(19,183)		(4,095)		(7,886)		(14,311)		(3,758)		(1,437)		(31,487)
Total non-interest income (expense)	$	(5,775)	$	(12,522)	$	(6,244)	$	7,876	$	(13,305)	$	(29,970)
Net realized (loss) gain on financial instruments		(106)		6,082		6,714		—		461		13,151
Net unrealized gain (loss) on financial instruments		1,647		6,671		625		(3,953)		(57)		4,933
Total non-interest expense													$	(7,462)	$	(19,018)	$	(28,421)	$	(94,594)	$	(16,455)	$	(165,950)
Net income (loss) before provision for income taxes	$	9,749	$	18,489	$	17,756	$	4,633	$	(15,780)	$	34,847	$	(18,740)	$	(9,066)	$	19,684	$	5,544	$	(16,712)	$	(19,290)
Provision for income taxes		—		(10)		(4,999)		(1,252)		4,498		(1,763)
Net income (loss)	$	9,749	$	18,479	$	12,757	$	3,381	$	(11,282)	$	33,084
Total Assets	$	426,699	$	1,152,153	$	525,862	$	298,435	$	99,994	$	2,503,143
Total assets													$	1,077,811	$	2,620,406	$	851,579	$	568,353	$	342,783	$	5,460,932

Note 28. Subsequent events

~~Table~~

On July 9, 2021, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with JMP Securities LLC, (the “Sales Agent”), pursuant to which the Company may sell, from time to time, shares of ~~Contents~~the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $150 million, through the Sales Agent either as agent or principal, as defined in Rule 415 under the Securities (the “Equity ATM Program”). As of the filing date, the Company did 0t sell any amount of the Company’s common stock through the Equity ATM Program.

~~Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other,~~On July 15, 2021, pursuant to its option under the respective Articles Supplementary, the Company’s Series B and Series D Preferred Stock were redeemed. The redemption price for the ~~three months ended September 30, 2016 are summarized~~Series B Preferred Stock was $25.00 per share, plus accrued and unpaid dividends up to the redemption date. From and after the redemption date, dividends on the Series B Preferred Stock ceased to accrue and the only remaining right of the holders of the Series B Preferred Stock is to receive payment of the Series B Preferred Stock redemption price. The redemption price for the Series D Preferred Stock was $25.00 per share, plus accrued and unpaid dividends up to, but excluding, the redemption date. From and after the redemption date, dividends on the Series D Preferred Stock ceased to accrue and the only remaining right of the holders of the Series D Preferred Stock is to receive payment of the Series D Preferred Stock Redemption Price.

On July 31, 2021, the Company acquired Red Stone, a privately owned real estate finance and investment company that provides innovative financial products and services to the multifamily affordable housing industry, in exchange for an initial purchase price of $63 million paid in cash, retention payments to key executives aggregating $7 million in cash and 128,533 shares of common stock of the Company issued to Red Stone executives under the 2012 Plan. Additional purchase price payments may be made over the next few years if the Red Stone business achieves certain hurdles. Due to the close proximity of the acquisition date and the Company’s filing of its quarterly report on Form 10-Q, the initial accounting for the business combination is incomplete, and therefore the Company is unable to disclose the information required by ASC 805, Business Combinations. Such information will be included in the ~~below table.~~Company’s subsequent Form 10-Q.

SBA Originations,

Residential




Loan

SBC

Acquisitions,

Mortgage

Corporate-

(In Thousands)

Acquisitions

Originations

and Servicing

Banking

Other

Consolidated
Interest income

$
10,679

$
11,010

$
10,201

$
—

$
—

$
31,890
Interest expense

(4,398)

(5,152)

(4,199)

—

(348)

(14,097)
Net interest income before provision for loan losses

$
6,281

$
5,858

$
6,002

$
—

$
(348)

$
17,793
Provision for loan losses

153

—

(641)

—

—

(488)
Net interest income after provision for loan losses

$
6,434

$
5,858

$
5,361

$
—

$
(348)

$
17,305
Non-interest income (expense)

Gains on residential mortgage banking activities, net of variable loan expenses

$
—

$
—

$
—

$
—

$
—

$
—
Other income

494

1,582

(347)

—

—

1,729
Servicing income

6

135

1,520

—

—

1,661
Employee compensation and benefits

128

(2,351)

(2,567)

—

(32)

(4,822)
Allocated employee compensation and benefits from related party

(90)

—

—

—

(810)

(900)
Professional fees

(658)

(422)

(901)

—

(1,139)

(3,120)
Management fees – related party

—

—

—

—

(1,793)

(1,793)
Loan servicing (expense) income

(1,327)

(337)

(166)

—

—

(1,830)
Other operating expenses

(473)

(1,530)

(985)

—

(385)

(3,373)
Total non-interest income (expense)

$
(1,920)

$
(2,923)

$
(3,446)

$
—

$
(4,159)

$
(12,448)
Net realized gain on financial instruments

595

339

1,489

—

31

2,454
Net unrealized gain on financial instruments

284

3,158

—

—

115

3,557
Net income (loss) before provision for income taxes

$
5,393

$
6,432

$
3,404

$
—

$
(4,361)

$
10,868
Provision for income taxes

—

(297)

(973)

—

(27)

(1,297)
Net income (loss)

$
5,393

$
6,135

$
2,431

-

(4,388)

$
9,571
Total Assets

$
519,531

$
754,127

$
625,023

$
—

$
249,997

$
2,148,678

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~~Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the nine months ended September 30, 2016 are summarized in the below table.~~

SBA Originations,

Residential




Loan

SBC

Acquisitions,

Mortgage

Corporate-

(In Thousands)

Acquisitions

Originations

and Servicing

Banking

Other

Consolidated
Interest income

$
38,492

$
29,801

$
35,989

$
—

$
—

$
104,282
Interest expense

(13,235)

(14,998)

(13,309)

—

(501)

(42,043)
Net interest income before provision for loan losses

$
25,257

$
14,803

$
22,680

$
—

$
(501)

$
62,239
Provision for loan losses

(3,370)

—

(1,319)

—

—

(4,689)
Net interest income after provision for loan losses

$
21,887

$
14,803

$
21,361

$
—

$
(501)

$
57,550
Non-interest income (expense)

Gains on residential mortgage banking activities, net of variable loan expenses

$
—

$
—

$
—

$
—

$
—

$
—
Other income

778

3,161

1,396

—

—

5,335
Servicing income

41

371

4,008

—

—

4,420
Employee compensation and benefits

(94)

(6,689)

(7,105)

—

(117)

(14,005)
Allocated employee compensation and benefits from related party

(270)

—

—

—

(2,430)

(2,700)
Professional fees

(2,009)

(1,246)

(2,942)

—

(2,376)

(8,573)
Management fees – related party

—

—

—

—

(5,464)

(5,464)
Loan servicing expense

(3,382)

(939)

432

—

—

(3,889)
Other operating expenses

(1,703)

(5,049)

(2,993)

—

(1,440)

(11,185)
Total non-interest income (expense)

$
(6,639)

$
(10,391)

$
(7,204)

$
—

$
(11,827)

$
(36,061)
Net realized (loss) gain on financial instruments

(1,473)

1,687

3,426

—

80

3,720
Net unrealized gain on financial instruments

3,955

1,727

—

—

118

5,800
Net income before provision for income taxes

$
17,730

$
7,826

$
17,583

$
—

$
(12,130)

$
31,009
Provisions for income taxes

—

2,150

(5,637)

—

161

(3,326)
Net income (loss) from continuing operations

$
17,730

$
9,976

$
11,946

$
—

$
(11,969)

$
27,683
Loss from discontinued operations

(351)
Net income

$
27,332
Total Assets

$
519,531

$
754,127

$
625,023

$
—

$
249,997

$
2,148,678

~~Note 27 – Discontinued Operations~~

In the fourth quarter of 2015, the Company determined Silverthread should be classified as held-for-sale due to management’s intent to sell the segment, the availability and active marketing of the segment for immediate sale and the high probability of a successful sale.

The sale of Silverthread closed in May of 2016, with an effective economic date of March 1, 2016. We negotiated an agreement with the buyer to receive $4.0 million, $1.7 million of which was received in early March of 2017. The remaining balance is expected at the end of November 2017. The net estimated receivable of $2.3 million is included in Receivable from Third Parties on the unaudited interim consolidated Balance Sheet as September 30, 2017. The operating results during the three and nine months ended September 30, 2017 and 2016 did not have a material impact on our unaudited interim consolidated financial statements.

~~As of September 30, 2017 and December 31, 2016, there were no assets or liabilities of the discontinued segment.~~

~~Table of Contents~~

~~The primary components of discontinued operations are detailed in the table below:~~

Three Months Ended September 30,

Nine Months Ended September 30,

(In Thousands)

2017

2016

2017

2016

Non-interest income (expense)

Commission income

$
—

$
—

$
—

$
2,984

Property management income

—

—

—

263

Other

—

—

—

16

Total other income

$
—

$
—

—

3,263

Employee compensation and benefits

—

—

—

(1,071)

Professional fees

—

—

—

(138)

Management fees – related party

—

—

—

—

Operating expenses

Commission expense

—

—

—

(1,844)

Technology expense

—

—

—

(171)

Rent expense

—

—

—

(268)

Tax expense

—

—

—

(3)

Recruiting, training, and travel expenses

—

—

—

(46)

Marketing expense

—

—

—

(29)

Other

—

—

—

(536)

Total other operating expenses

$
—

$
—

—

(2,897)

Gain on sale

—

—

—

267

Loss before income tax benefit

—

—

—

(576)

Income tax benefit

—

—

—

225

Loss on discontinued operations presented on the statements of income

$
—

$
—

$
—

$
(351)

Item 1A. Forward-Looking Statements

~~Although~~ ~~Sutherland Asset Management Corporation (the “Company” or “Sutherland” and together with its subsidiaries~~Except where the context suggests otherwise, the terms “Company,” “we,” “us” and “our” refer to Ready Capital Corporation and its subsidiaries. We make forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)~~believes~~, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our operations, financial condition, liquidity, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” “potential” or other comparable terminology, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

●

our investment objectives and business strategy;

●

our ability to borrow funds or otherwise raise capital on favorable terms;

●

our expected leverage;

●

our expected investments;

●

estimates or statements relating to, and our ability to make, future distributions;

●

our ability to achieve the expected revenue synergies, cost savings and other benefits from the acquisition of Anworth Mortgage Asset Corporation, or Anworth;

●

our ability to compete in the marketplace;

●

the availability of attractive risk-adjusted investment opportunities in small to medium balance commercial loans (“SBC loans”), loans guaranteed by the U.S. Small Business Administration (the “SBA”) under its Section 7(a) loan program (the “SBA Section 7(a) Program”), mortgage backed securities (“MBS”), residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies;

●

market, industry and economic trends;

●

recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Department of the Treasury (“Treasury”) and the Board of Governors of the Federal Reserve System, the Federal Depositary Insurance Corporation, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac” and together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Administration (“FHA”) Mortgagee, U.S. Department of Agriculture (“USDA”), U.S. Department of Veterans Affairs (“VA”) and the U.S. Securities and Exchange Commission (“SEC”);

●

mortgage loan modification programs and future legislative actions;

●

our ability to maintain our qualification as a real estate investment trust (“REIT”);

●

our ability to maintain our exemption from qualification under the Investment Company Act of 1940, as amended (the “1940 Act” or “Investment Company Act”);

●

projected capital and operating expenditures;

●

availability of qualified personnel;

●

prepayment rates; and

●

projected default rates.

Table of Contents

Our beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control, including:

●

factors described in our annual report on Form 10-K, including those set forth under the captions “Risk Factors” and “Business”;

●

applicable regulatory changes;

●

risks associated with acquisitions, including the contemplated acquisition of Anworth;

●

risks associated with achieving expected revenue synergies, cost savings and other benefits from acquisitions, including the contemplated acquisition of Anworth, and the increased scale of our Company;

●

risks associated with our anticipated liquidation of certain assets within the portfolio of residential mortgage-backed securities and residential mortgage loans that we will own upon completion of our acquisition of Anworth;

●

general volatility of the capital markets;

●

changes in our investment objectives and business strategy;

●

the availability, terms and deployment of capital;

●

the availability of suitable investment opportunities;

●

our dependence on our external advisor, Waterfall Asset Management, LLC (“Waterfall” or our “Manager”), and our ability to find a suitable replacement if we or our Manager were to terminate the management agreement we have entered into with our Manager;

●

changes in our assets, interest rates or the general economy;

●

the severity and duration of the novel coronavirus (“COVID-19”) pandemic;

●

the impact of COVID-19 on our business and operations, financial condition, results of operations, liquidity and capital resources;

●

the impact of the COVID-19 pandemic on our borrowers, the real estate industry, and the United States and global economies;

●

actions taken by governmental authorities to contain the COVID-19 pandemic or treat its impact;

●

the efficacy of the vaccines or other remedies and the speed of their distribution and administration;

●

increased rates of default and/or decreased recovery rates on our investments;

●

changes in interest rates, interest rate spreads, the yield curve or prepayment rates; changes in prepayments of our assets;

●

limitations on our business as a result of our qualification as a REIT; and

●

the degree and nature of our competition, including competition for SBC loans, MBS, residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies.

Upon the occurrence of these or other factors, our business, financial condition, liquidity and consolidated results of operations may vary materially from those expressed in, or implied by, any such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, itwe cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this quarterly report on Form 10-Q. ~~The Company is~~We are not obligated, and ~~does~~do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item ~~1A, "Risk Factors,"~~1A. “Risk Factors” of the ~~Company's~~Company’s annual report on Form 10-K.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five main sections:

●

Overview

●

Results of Operations

●

Liquidity and Capital Resources

●

Off Balance Sheet Arrangements and Contractual Obligations

●

Critical Accounting Policies and Estimates

The following discussion should be read in conjunction with ~~the Company's~~our unaudited interim consolidated financial statements and accompanying Notes included in Item 1, "Financial Statements," of this quarterly report on Form 10-Q and with Items 6, 7, 8, and 9A of ~~the Company's~~our annual report on Form 10-K. See "Forward-Looking Statements" in this quarterly report on Form 10-Q and in ~~the Company's~~our annual report on Form 10-K and "Critical Accounting Policies and Use of Estimates" in ~~the Company's~~our annual report on Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this quarterly report on Form 10-Q.

Overview

Our Business

We are a multi-strategy real estate finance company that originates, acquires, ~~originates, manages,~~finances, and services ~~and finances primarily small balance commercial (“SBC”) loans.~~ SBC loans, SBA loans, residential mortgage loans, and to a lesser extent, MBS collateralized primarily by SBC loans, or other real estate-related investments. Our loans generally range in original principal ~~amount of between $500,000 and $10~~amounts up to $35 million and are used by ~~small~~ businesses to purchase real estate used in their operations or by investors seeking to acquire small multi-family, office, retail, mixed use or warehouse properties. Our ~~acquisition~~originations and ~~origination~~acquisition platforms consist of the following four operating segments:

●

~~Table of Contents~~

their unpaid principal balance (“UPB”) when we believe that resolution of the loans will provide attractive risk-adjusted returns.

●

SBC Originations. We originate SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels through our wholly-owned subsidiary, ReadyCap ~~Commercial.~~Commercial, LLC (“ReadyCap Commercial”). These originated loans are generally held-for-investment or placed into securitization structures. Additionally, as part of this segment, we originate and service multi-family loan products under the ~~newly launched small balance loan program of the~~ Federal Home Loan Mortgage ~~Corporation~~Corporation’s Small Balance Loan Program (“Freddie Mac” and the “Freddie Mac program”).

These originated loans are held for sale, then sold to Freddie Mac.

●

~~SBA Originations, Acquisitions and Servicing~~Small Business Lending. We acquire, originate and service owner-occupied loans guaranteed by the ~~Small Business Administration (“SBA”)~~ SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap ~~Lending.~~Lending, LLC (“ReadyCap Lending” or “RCL”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold. We also acquire purchased future receivables through our Knight Capital platform (“Knight Capital”). Knight Capital, which we acquired in 2019, is a technology-driven platform that provides working capital to small and medium sized businesses across the U.S. In the ~~future, we may originate SBC loans~~second quarter of 2021, our Chief Executive Officer as our Chief Operating Decision Maker (“CODM”), realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities of, and projections for, ~~real estate under the SBA 504 loan program, under which the SBA guarantees subordinated, long-term financing.~~

Knight Capital. We have recast all prior period amounts and segment information to conform to this presentation.

Table of Contents

●

Residential Mortgage Banking. ~~In connection with~~We operate our ~~merger with ZAIS Financial Corp. (“ZAIS”) on October 31, 2016, as described in greater detail below, we added a~~ residential mortgage loan origination segment through our wholly-owned subsidiary, GMFS, LLC ("GMFS"). GMFS originates residential mortgage loans eligible to be purchased, guaranteed or insured by the Federal National Mortgage Association (“Fannie Mae”), Freddie Mac, Federal Housing Administration (“FHA”), U.S. Department of Agriculture (“USDA”) and U.S. Department of Veterans Affairs (“VA”) through retail, correspondent and broker channels.

These originated loans are then sold to third parties, primarily agency lending programs.

Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. In order to achieve this objective, we intend to continue to grow our investment portfolio and we believe that the breadth of our full service real estate finance platform will allow us to adapt to market conditions and deploy capital in our asset classes and segments with the most attractive risk-adjusted returns.

We are organized and conduct our operations to qualify as a ~~real estate investment trust ("REIT")~~REIT under the ~~Internal Revenue Code of 1986, as amended (the “Code”).~~Code. So long as we qualify as a REIT, we are generally not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to stockholders. We are organized in a traditional ~~umbrella partnership REIT (“UpREIT”)~~UpREIT format pursuant to which we serve as the general partner of, and conduct substantially all of our business through Sutherland Partners, LP, or our operating partnership, which serves as our operating partnership subsidiary. We also intend to operate our business in a manner that will permit us to be excluded from registration as an investment company under the ~~Investment Company Act~~1940 Act.

For additional information on our business, refer to Part I, Item 1, “Business” in the Company’s Annual Report on Form 10-K.

Acquisition of ~~1940,~~Anworth Mortgage Asset Corporation

On March 19, 2021, we completed the acquisition of Anworth Mortgage Asset Corporation (“ANH”), through a merger of ANH with and into a wholly-owned subsidiary of ours, in exchange for approximately 16.8 million shares of our common stock (“ANH Merger”). In accordance with the Agreement and Plan of Merger, dated as ~~amended~~of December 6, 2020 (“the Merger Agreement”), by and among us, RC Merger Subsidiary, LLC and ANH, the number of shares of our common stock issued was based on an exchange ratio of 0.1688 per share plus $0.61 in cash. The total purchase price for the merger of $417.9 million consists of our common stock issued in exchange for shares of ANH common stock and cash paid in lieu of fractional shares of our common stock, which was based on a price of $14.28 of our common stock on the acquisition date and $0.61 in cash per share.

In addition, we issued 1,919,378 shares of newly designated 8.625% Series B Cumulative Preferred Stock, par value $0.0001 per share (the ~~“1940 Act”~~"Series B Preferred Stock"), 779,743 shares of newly designated 6.25% Series C Cumulative Convertible Preferred Stock, par value $0.0001 per share (the "Series C Preferred Stock") and 2,010,278 shares of newly designated 7.625% Series D Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the "Series D Preferred Stock"), in exchange for all shares of ANH’s 8.625% Series A Cumulative Preferred Stock, 6.25% Series B Cumulative Convertible Preferred Stock and 7.625% Series C Cumulative Redeemable preferred stock outstanding prior to the effective time of the ANH Merger.

Upon the closing of the transaction and after giving effect to the issuance of shares of common stock as consideration in the merger, our historical stockholders owned approximately 77% of our outstanding common stock, while historical ANH stockholders owned approximately 23% of our outstanding common stock.

The acquisition of ANH increased our equity capitalization, supported continued growth of our platform and execution of our strategy, and provided us with improved scale, liquidity and capital alternatives, including additional borrowing capacity. Also, the stockholder base resulting from the acquisition of ANH enhanced the trading volume and liquidity for our stockholders. In addition, part of our strategy in acquiring ANH was to manage the liquidation and runoff of certain assets within the ANH portfolio and repay certain indebtedness on the ANH portfolio following the completion of the ANH Merger, and to redeploy the capital into opportunities in our core SBC strategies and other assets we expect will generate attractive risk-adjusted returns and long-term earnings accretion. Consistent with this strategy, at June 30, 2021, we have liquidated approximately $1.8 billion of assets within the ANH portfolio, primarily consisting of Agency RMBS, and repaid approximately $1.6 billion of indebtedness on the portfolio.

Table of Contents

In addition, concurrently with entering into the Merger Agreement, we, the Operating Partnership and the Manager entered into the First Amendment to the Amended and Restated Management Agreement (the “Amendment”), pursuant to which, upon the closing of the ANH Merger, the Manager’s base management fee will be reduced by $1,000,000 per quarter for each of the first full four quarters following the effective time of the ANH Merger (the “Temporary Fee Reduction”). Other than the Temporary Fee Reduction set forth in the Amendment, the terms of the Management Agreement remain the same.

Factors Impacting Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on, among other things, the level of the interest income from our assets, the market value of our assets and the supply of, and demand for, SBC and SBA loans, residential loans, MBS and other assets we may acquire in the future and the financing and other costs associated with our business. Our net investment income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates, the rate at which our distressed assets are liquidated and the prepayment speed of our performing assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by conditions in the financial markets, credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose loans are held directly by us or are included in our MBS. Our operating results may also be impacted by difficult market conditions as well as inflation, energy costs, geopolitical issues, health epidemics and outbreaks of contagious diseases, such as the outbreak of COVID-19, unemployment and the availability and cost of credit. Our operating results will also be impacted by our available borrowing capacity.

Changes in Market Interest ~~Rates~~

Rates.We own and expect to acquire or originate fixed rate mortgages (“FRMs”), and adjustable rate ~~mortgage loans~~mortgages (“ARMs”), with maturities ranging from five to 30 years. Our loans typically have amortization periods of 15 to 30 years or balloon payments due in five to ten years. ARM loans generally have a fixed interest rate for a period of five, seven or

~~Table of Contents~~

ten years and then an adjustable interest rate equal to the sum of an index rate, such as the LIBOR, plus a margin, while FRM loans bear interest that is fixed for the term of the loan. As of ~~September~~June 30, ~~2017,~~2021, approximately ~~55%~~66% of the loans ofin our portfolio were ARMs, and ~~45%~~34% were FRMs, based on UPB. ~~The weighted average margin, above the floating rate, on ARMs was approximately 3.4% and the weighted average coupon on FRMs was approximately 5.9% as of September 30, 2017.~~ We utilize derivative financial and hedging instruments in an effort to hedge the interest rate risk associated with our ARMs.

With respect to our business operations, increases in interest rates, in general, may over time cause:

●

the interest expense associated with our variable-rate borrowings to increase;

●

the value of fixed-rate loans, MBS and other real estate-related assets to decline;

●

coupons on variable-rate loans and MBS to reset to higher interest rates; and

●

prepayments on loans and MBS to slow.

Conversely, decreases in interest rates, in general, may over time cause:

●

the interest expense associated with variable-rate borrowings to decrease;

●

the value of fixed-rate loans, MBS and other real estate-related assets to increase;

●

coupons on variable-rate loans and MBS to reset to lower interest rates; and

●

prepayments on loans and MBS to increase.

Additionally, non-performing loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them. Because non-performing loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for loan financing.

Table of Contents

Changes in Fair Value of Our Assets

~~Our~~. Certain originated loans, mortgage backed securities, and servicing rights are carried at fair value and future ~~mortgage related~~ assets may also be carried at fair value. Accordingly, changes in the fair value of our assets may impact the results of our operations for the period in which such change in value occurs. The expectation of changes in real estate prices is a major determinant of the value of loans and ~~asset backed securities (“ABS”).~~ABS. This factor is beyond our control.

Prepayment ~~Speeds~~

Speeds.Prepayment speeds on loans ~~and ABS~~ vary according to interest rates, the type of investment, conditions in the financial markets, competition, foreclosures and other factors that cannot be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans and, as a result, prepayment speeds tend to decrease. This can extend the period over which we earn interest income. When interest rates fall, prepayment speeds on loans, and therefore, ABS and servicing rights tend to increase, thereby decreasing the period over which we earn interest income or servicing fee income. Additionally, other factors such as the credit rating of the borrower, the rate of property value appreciation or depreciation, financial market conditions, foreclosures and lender competition, none of which can be predicted with any certainty, may affect prepayment speeds on loans.

Credit Spreads.Our investment portfolio may be subject to changes in credit spreads. Credit spreads measure the yield demanded on loans and ~~ABS.~~

~~Table~~securities by the market based on their credit relative to a specific benchmark and is a measure of ~~Contents~~

~~Spreads~~the perceived risk of the investment. Fixed rate loans and securities are valued based on ~~ABS~~

~~Since~~a market credit spread over the ~~financial crisis that began~~rate payable on fixed rate swaps or fixed rate U.S. Treasuries of similar maturity. Floating rate securities are typically valued based on a market credit spread over LIBOR (or another floating rate index) and are affected similarly by changes in ~~2007,~~LIBOR spreads. Excessive supply of these loans and securities or reduced demand may cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such assets. Under such conditions, the value of our portfolios would tend to decline. Conversely, if the spread ~~between swap rates~~used to value such assets were to decrease, or “tighten,” the value of our loans and ~~ABS has been volatile. Spreads on these assets initially moved wider due~~securities would tend to increase. Such changes in the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatilitymarket value of these assets ~~also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment.~~ may affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses.

The spread between the yield on our assets and our funding costs is an important factor in the performance of this aspect of our business. Wider spreads imply greater income on new asset purchases but may have a negative impact on our stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply lower income on new asset purchases but may have a positive impact on our stated book value. Tighter spreads generally have a positive impact on asset prices. In this case, we may be able to reduce the amount of collateral required to secure borrowings.

Loan and ABS Extension ~~Risk~~

~~Waterfall Asset Management, LLC (“Waterfall” or the “Manager”)~~Risk.The Company estimates the projected weighted-average life of our investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages and/or the speed at which we are able to liquidate an asset. If the timeline to resolve non-performing assets extends, this could have a negative impact on our results of operations, as carrying costs may therefore be higher than initially anticipated. This situation may also cause the fair market value of our investment to decline if real estate values decline over the extended period. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Credit ~~Risk~~

Risk.We are subject to credit risk in connection with our investments in loans and ABS and other target assets we may acquire in the future. Increases in defaults and delinquencies will adversely impact our operating results, while declines in rates of default and delinquencies will improve our operating results from this aspect of our business. Default rates are influenced by a wide variety of factors, including, property performance, property management, supply and demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the United States economy and other factors beyond our control. All loans are subject to the possibility of default. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value-driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur which could adversely impact operating results.

Size of Investment ~~Portfolio~~

Portfolio. The size of our investment portfolio, as measured by the aggregate principal balance of our loans and ABS and the other assets we own, is also a key revenue driver. Generally, as the size of our investment portfolio grows, the amount of interest income and realized gains we receive increases. A larger investment portfolio, however, drives increased expenses, as we may incur additional interest expense to finance the purchase of our assets.

~~Market Conditions~~

With the onset of the global financial crisis, SBC origination volume fell approximately 42.5% from the 2006 peak through 2009 and the decline was accompanied by a reduction in the principal balance of outstanding SBC loans between 2008 and 2013. Based on publicly available data from Boxwood Means as of the first half of 2017, while commercial property prices have almost recovered to their 2007 peak, SBC property prices have increased only 21.5% from the 2012 trough. We believe this trend suggests continued tight credit in SBC lending and supports our belief that credit spreads in the SBC loan asset class should for the foreseeable future remain wider compared to large balance commercial mortgage loans. Since late 2008, we have seen substantial volumes of non-performing SBC loans available for purchase from U.S. banks at significant discounts to their UPBs. We believe that banks have been motivated to sell SBC loans in order to improve their regulatory capital ratios, reduce their troubled asset ratios, a key measure monitored by regulators, investors

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and other stakeholders in assessing bank safety and soundness, relieve the strain on their operations caused by managing distressed loan books and to demonstrate to regulators, investors and other stakeholders that they are addressing their distressed asset issues and the drag they place on operating performance through controlled sales of these assets over time. We believe that banks will continue to be motivated to divest their non-performing SBC loan assets to address these issues over the next several years. We believe that as the economic recovery continues the volume of short-term loan extensions and restructurings will be reduced, resulting in increased opportunities for us to originate first mortgage SBC loans in the market. We believe that the supply of new capital to meet this increasing demand will continue to be constrained by the historically low activity levels in the ABS market.

~~Critical Accounting Policies and Use of Estimates~~

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates” included within the Company's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the Company's critical accounting policies and use of estimates during the three or nine months ended September 30, 2017.

~~Third Quarter 2017 Highlights~~

~~Operating results:~~

~~Achieved Net Income of $12.4 million during the three months ended September 30, 2017.~~

~~Earnings per share of $0.37 for the three months ended September 30, 2017.~~

~~Core Earnings of $12.9 million, or $0.38 per share, during the three months ended September 30, 2017.~~

~~Declared dividends of $0.37 per share, during the quarter ended September 30, 2017, representing a 9.4% dividend yield, based on the the closing share price on September 30, 2017.~~

~~Loan originations and acquisitions:~~

Loan originations totaled $808.6 million including $278.8 million in SBC loans (66% of which are floating rate), $38.9 million of SBA Section 7(a) Program loans and $490.9 million of residential loans (based on fully committed amounts).

~~Acquired $16.0 million of SBC loans with a weighted average coupon of 7.0%~~

~~Completed the securitization of $154.9 million of acquired SBC owner-occuped loans and sold $139.4 million of senior bonds at a weighted average pass-through rate of 3.3%.~~

Completed issuance of a Collateralized Loan Obligation (“CLO”) of $243.8 million of originated transitional loans and sold $198.8 million of senior bonds at a floating rate of LIBOR plus 139 basis points.

~~Robust pipeline with substantial acquisition and origination opportunities (based on fully committed amounts):~~

~~Acquisition pipeline of $307.0 million in SBC loans and $15.0 million in SBA loans~~

~~Origination pipeline of:~~

~~$159.7 million SBC loans~~

~~$114.0 million of SBA Section 7(a) Program loans~~

~~$193.4 million of commitments to originate residential agency loans~~

We have a large and active pipeline of potential acquisition and origination opportunities that are in various stages of our investment process. We refer to assets as being part of our acquisition pipeline or our origination pipeline if: (i) an asset or portfolio opportunity has been presented to us and we have determined, after a preliminary analysis, that the assets fit within our investment strategy and exhibit the appropriate risk/reward characteristics and (ii) in the case of acquired loans, we have executed a non-disclosure agreement (“NDA”) or an exclusivity agreement and commenced the due

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Current market conditions. The COVID-19 pandemic around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The COVID-19 pandemic and preventative measures taken by local, state and federal authorities to alleviate the public health crisis significantly reduced economic activity in most of the United States resulting in a significant increase in unemployment claims. COVID-19 has had a continued and prolonged adverse impact on economic and market conditions and has caused a global economic slowdown which has had and could further have a material adverse effect on the Company’s results and financial condition. The pandemic continues to evolve, and the full impact of COVID-19 on the real estate industry, the commercial real estate market, the small business lending market and the credit markets generally, and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to, (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, including the administration of vaccines throughout the United States, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of governmental responses to the pandemic, including the PPP and other programs under the CARES Act and Economic Aid Act, (v) the timing and speed of economic recovery, (vi) the availability of a treatment or vaccination for COVID-19, and (vii) the negative impact on our borrowers, real estate values and cost of capital.

Results of Operations

Key Financial Measures and Indicators

As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared per share, distributable earnings, and net book value per share. As further described below, distributable earnings is a measure that is not prepared in accordance with GAAP. We use distributable earnings to evaluate our performance and determine dividends, excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicated of our current loan activity and operations. See “—Non-GAAP Financial Measures” below for reconciliation to distributable earnings.

The following table sets forth certain information on our operating results:


	Three Months Ended June 30,			Three Months Ended June 30,			Six Months Ended June 30,			Six Months Ended June 30,
($ in thousands, except share data)	2021			2020			2021			2020
Net Income	$	30,904		$	34,663		$	59,851		$	(16,853)
Earnings per common share - basic	$	0.38		$	0.62		$	0.85		$	(0.33)
Earnings per common share - diluted	$	0.38		$	0.62		$	0.85		$	(0.33)
Distributable Earnings	$	41,428		$	39,223		$	66,136		$	40,448
Distributable Earnings per common share - basic and diluted	$	0.52		$	0.70		$	0.95		$	0.73
Dividends declared per common share	$	0.42		$	0.25		$	0.82		$	0.65
Dividend yield⁽¹⁾		10.6%	%		11.5	%		10.3	%		11.5	%
Book value per common share	$	14.88		$	14.48		$	14.88		$	14.48
Adjusted net book value per common share⁽²⁾	$	14.87		$	14.46		$	14.87		$	14.46
(1) Based on the closing share price on June 30, 2021 and 2020, respectively.
(2) Excludes the equity component of our 2017 convertible note issuance.

The following table presents information on our investment portfolio activity (based on fully committed amounts):


	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Loan originations
SBC loan originations	$	1,101,326	$	157,945	$	1,924,519	$	627,677
SBA loan originations		145,745		20,824		195,968		66,371
Residential agency mortgage loan originations		1,071,745		1,191,165		2,311,828		1,882,474
Total loan originations	$	2,318,816	$	1,369,934	$	4,432,315	$	2,576,522
Total loan acquisitions	$	—	$	—	$	—	$	51,494
Total loan investment activity	$	2,318,816	$	1,369,934	$	4,432,315	$	2,628,016

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diligence process or we have executed more definitive documentation, such as a letter of intent (“LOI”), and in the case of originated loans, we have issued a LOI, and the borrower has paid a deposit. We operate in a competitive market for investment opportunities and competition may limit our ability to originate or acquire the potential investments in the pipeline. The consummation of any of the potential loans in the pipeline depends upon, among other things, one or more of the following: available capital and liquidity, our Manager’s allocation policy, satisfactory completion of our due diligence investigation and investment process, approval of our Manager’s Investment Committee, market conditions, our agreement with the seller on the terms and structure of such potential loan, and the execution and delivery of satisfactory transaction documentation. Historically, we have acquired less than a majority of the assets in our Manager’s pipeline at any one time and there can be no assurance the assets currently in its pipeline will be acquired or originated by our Manager in the future.

~~Quarterly Investment Allocation~~

~~The following tables set out our quarterly investment allocation for the three months ended September 30, 2017:~~

~~Three Months Ended September 30, 2017~~

~~(1) $ in thousands.~~

~~(2) Represents actual disbursements during the quarter. Loan acquisitions includes loans repurchased.~~

~~(3) Based on fully funded loan amount.~~

~~(4) Gross yield equals contractual interest rates and accretion of discount based on Sutherland’s estimates of loan performance where applicable.~~

~~(5) Weighted average advance rate of all assets of this loan type currently financed on our facilities.~~

~~(6) Weighted average debt cost of all assets of this loan type currently financed on the our facilities.~~

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Return Information

The following tables present certain information related to our SBC and ~~SBA~~Small Business Lending loan ~~portfolio~~portfolios as of ~~assets~~June 30, 2021, and per share information for the three months ended ~~September~~June 30, ~~2017:~~2021, which includes distributable earnings per share or return information. Distributable earnings is not a measure calculated in accordance with GAAP and is defined further within Item 7 – Non-GAAP Financial Measures in our Annual report on Form 10-K.

Investment Type

Average
Carrying Value(1)

Gross Yield(2)

Average Debt Balance

Debt. Cost(3)

Levered Yield(4)
Acquired portfolio

$
364,724

7.7%

$
280,852

5.7%

14.5%
SBC conventional origination portfolio

1,078,514

7.7%

831,906

4.9%

17.1%
SBA Originations, Acquisitions & Servicing

499,970

10.1%

383,761

4.0%

30.5%
Total

$
1,943,208

8.3%

$
1,496,519

4.8%

20.1%
(1) Average carrying value includes average quarterly carrying value of loan and servicing asset balances.
(2) Gross yields are based on interest income, MSR creation, realized and unrealized gains (losses) on loans, held for sale, and net servicing income for the applicable quarter ended on an annualized basis, which reflects contractual interest rates and accretion of discounts based on our estimates of loan performance, including the amount, timing and present value of cash flows, prepayment rates and loss severities. Premiums and discounts associated with the loans at the time of purchase are amortized into interest income over the life of such loans using the effective yield method. Subsequent increases or decreases in the fair value of estimated cash flows will result in an adjustment to a loan's gross yield.
(3) We finance the assets included in the Investment Type through securitizations, repurchase agreements, warehouse facilities, bank credit facilities, and other corporate debt. Interest expense is calculated based on interest expense and deferred financing amortization for the applicable quarter ended on an annualized basis
(4) Levered yields for the applicable quarter ended include interest income, accretion of discount, MSR creation, realized and unrealized gains (losses) on loans, held for sale, and servicing income net of interest expense and amortization of deferred financing costs on an annualized basis

~~The following table sets forth certain return information as of and for the three months ended September 30, 2017:~~


~~Returns~~	~~3Q 2017~~
~~Return on Equity(1)~~	~~8.9%~~
~~Core Return on Equity(2)~~	~~9.3%~~
~~Dividend Yield(3)~~	~~9.4%~~

~~(1) Return on equity is an annualized percentage equal to quarterly net income over the average monthly total stockholders’ equity for the period.~~
(2) Core return on equity is an annualized percentage equal to core earnings over the average monthly total stockholders’ equity for the period. Refer to “Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q for a reconciliation of GAAP Net Income to Core Earnings.
~~(3) Dividend yield for the period based on September 29, 2017 share price of $15.70 as applicable.~~

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The following table provides a detailed breakdown of our calculation of return on equity and distributable return on equity for the three months ended ~~September~~June 30, ~~2017:~~2021. Distributable return on equity is not a measure calculated in accordance with GAAP and is defined further within Item 7 – Non-GAAP Financial Measures in our Annual report on Form 10-K.

~~(1)~~

Levered yields for the applicable quarter ended include interest income, accretion of discount, MSR creation, realized gains (losses) on loans held for sale, unrealized gains (losses) on loans held for sale and servicing income net of interest expense and amortization of deferred financing costs on an annualized basis

~~(2)~~

~~Based on GAAP Net Income~~

~~(3)~~

~~Return on equity based on net income before tax of the Residential Mortgage Banking business line divided by the business line's equity~~

Portfolio Metrics

SBC ~~Originations~~

Originations. The following table includes certain portfolio metrics related to our SBC ~~Originations segment as of September 30, 2017:~~originations segment:


~~Number of loans~~		~~368~~
~~Unpaid principal balance(1)~~	$	~~1,067,684~~
~~Carrying value(1)~~	$	~~1,087,694~~
~~Weighted average LTV~~		~~60%~~
~~Weighted average interest rate~~		~~6.3%~~
~~Weighted average remaining maturity~~		~~5 years~~
~~Weighted average UPB~~	$	~~2,901,314~~
~~Percentage of loans fixed/floating~~		~~64% / 36%~~
~~Percentage of loans 30+ days delinquent~~		~~0.16%~~
~~(1) $ in thousands~~

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~~SBA Originations, Acquisitions, and Servicing~~

Small Business Lending. The following table includes certain portfolio metrics related to our ~~SBA Originations, Acquisitions and Servicing segment as of September 30, 2017:~~Small Business Lending segment:


~~Number of loans~~		~~2,194~~
~~Unpaid principal balance(1)~~	$	~~529,743~~
~~Carrying value(1)~~	$	~~471,280~~
~~Weighted average LTV~~		~~78%~~
~~Weighted average interest rate~~		~~5.9%~~
~~Weighted average remaining maturity~~		~~14 years~~
~~Weighted average UPB~~	$	~~241,451~~
~~Percentage of loans fixed/floating~~		~~1% / 99%~~
~~Percentage of loans 30+ days delinquent~~		6%
~~(1) $ in thousands~~

Acquired ~~Portfolio~~

Portfolio. The following table includes certain portfolio metrics related to our ~~Loan Acquisitions segment as~~acquisitions segment:

Table of ~~September 30, 2017:~~Contents


~~Number of loans~~		~~766~~
~~Unpaid principal balance(1)~~	$	~~378,151~~
~~Carrying value(1)~~	$	~~335,437~~
~~Weighted average LTV~~		~~52%~~
~~Weighted average interest rate~~		~~6.3%~~
~~Weighted average maturity~~		~~9 years~~
~~Weighted average UPB~~	$	~~493,670~~
~~Percentage of loans fixed/floating~~		~~46% / 54%~~
~~Percentage of loans performing /non-performing~~		~~93% / 7%~~
~~(1) $ in thousands.~~

Residential Mortgage ~~Banking~~

Banking. The following table includes certain portfolio metrics related to our ~~Residential Mortgage Banking segment~~residential mortgage banking segment:

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Balance Sheet Analysis and Metrics

The following table compares our consolidated balance sheets as of ~~September~~June 30, ~~2017:~~2021 and December 31, 2020:


~~Originations~~	~~Unpaid principal balance~~	~~$490.9 million~~
	~~% of Origination Purchased~~	~~78.8%~~
	~~% of Origination Refinanced~~	~~21.2%~~
	~~Channel - % Correspondent~~	~~37.7%~~
	~~Channel - % Retail~~	~~37.6%~~
	~~Channel - % Wholesale~~	~~24.7%~~
~~Sales~~	~~Unpaid principal balance~~	~~$503.9 million~~
	~~% of UPB- Fannie/ Freddie securitizations~~	~~62.0%~~
	~~% of UPB- Ginnie Mae securitizations~~	~~26.4%~~
	~~% of UPB – Other investors~~	~~11.6%~~


					$ Change		% Change
(In Thousands)	June 30, 2021		December 30, 2020		Q2'21 vs. Q4'20		Q2'21 vs. Q4'20
Assets
Cash and cash equivalents	$	200,723	$	138,975	$	61,748	44.4	%
Restricted cash		57,118		47,697		9,421	19.8
Loans, net (including $13,681 and $13,795 held at fair value)		2,222,284		1,550,624		671,660	43.3
Loans, held for sale, at fair value		470,184		340,288		129,896	38.2
Paycheck Protection Program loans (including $16,431 and $74,931 held at fair value)		2,178,586		74,931		2,103,655	2,807.5
Mortgage backed securities, at fair value		260,110		88,011		172,099	195.5
Loans eligible for repurchase from Ginnie Mae		173,437		250,132		(76,695)	(30.7)
Investment in unconsolidated joint ventures		86,994		79,509		7,485	9.4
Purchased future receivables, net		7,213		17,308		(10,095)	(58.3)
Derivative instruments		6,600		16,363		(9,763)	(59.7)
Servicing rights (including $100,820 and $76,840 held at fair value)		145,265		114,663		30,602	26.7
Real estate, held for sale		71,267		45,348		25,919	57.2
Other assets		120,214		89,503		30,711	34.3
Assets of consolidated VIEs		2,976,897		2,518,743		458,154	18.2
Total Assets	$	8,976,892	$	5,372,095	$	3,604,797	67.1	%
Liabilities
Secured borrowings		1,703,034		1,294,243		408,791	31.6
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		2,286,624		76,276		2,210,348	2,897.8
Securitized debt obligations of consolidated VIEs, net		2,309,217		1,905,749		403,468	21.2
Convertible notes, net		112,684		112,129		555	0.5
Senior secured notes, net		179,825		179,659		166	0.1
Corporate debt, net		333,669		150,989		182,680	121.0
Guaranteed loan financing		363,955		401,705		(37,750)	(9.4)
Liabilities for loans eligible for repurchase from Ginnie Mae		173,437		250,132		(76,695)	(30.7)
Derivative instruments		3,717		11,604		(7,887)	(68.0)
Dividends payable		33,968		19,746		14,222	72.0
Accounts payable and other accrued liabilities		180,018		135,655		44,363	32.7
Total Liabilities	$	7,680,148	$	4,537,887	$	3,142,261	69.2	%
Preferred stock Series C, liquidation preference $25.00 per share		8,361		—		8,361	100.0
Stockholders’ Equity
Preferred stock Series B, D, and E, liquidation preference $25.00 per share		209,619		—		209,619	100.0
Common stock, $0.0001 par value, 500,000,000 shares authorized, 71,231,422 and 54,368,999 shares issued and outstanding, respectively		7		5		2	40.0
Additional paid-in capital		1,090,162		849,541		240,621	28.3
Retained earnings (deficit)		(23,105)		(24,203)		1,098	(4.5)
Accumulated other comprehensive loss		(7,157)		(9,947)		2,790	(28.0)
Total Ready Capital Corporation equity		1,269,526		815,396		454,130	55.7
Non-controlling interests		18,857		18,812		45	0.2
Total Stockholders’ Equity	$	1,288,383	$	834,208	$	454,175	54.4	%
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity	$	8,976,892	$	5,372,095	$	3,604,797	67.1	%

~~Table~~As of ~~Contents~~

~~Business Outlook~~

Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. In order to achieve this objective, we will continue to grow our investment portfolio by originating new SBC, SBA, and residential mortgage loans, acquiring SBC and SBA loans from third parties and growing our SBA and residential servicing portfolio. We intend to finance theseJune 30, 2021, total assets in ~~a manner that is designed~~our consolidated balance sheet were $9.0 billion, an increase of $3.6 billion from December 31, 2020, primarily reflecting an increase in Paycheck Protection Program loans, Loans, net and Assets of consolidated VIEs. Paycheck Protection Program loans increased $2.1 billion, primarily due to ~~deliver attractive returns across a variety~~new originations. Loans, net increased $672 million, primarily reflecting originations, partially offset by paydowns. Assets of market conditions and economic cycles. Our ability to execute our business strategy is dependent upon many factors, including our ability to access capital and financing on favorable terms. While there can be no assurance we will continue to have accessconsolidated VIEs increased $458 million, primarily due to the equity and debt markets, we will continue to pursue these and other available market opportunities as a means to increase our liquidity and capital base. If we were to experience a prolonged downturn in the credit markets, it could cause us to seek alternative sourcestransfer of ~~potentially less attractive financing, and may require us to adjust our business plan accordingly.~~

Our business is affected by the macroeconomic conditions in the United States, including economic growth, unemployment rates, the political climate, interest rate levels and expectations. The recent economic environment has resulted in continued improvement in commercial real estate values which has generally increased payoffs and reduced credit exposure in our loan portfolios. Interest rates have risen recentlyloans as a result of improved labor markets, personal income growth and business investment. We believe a modest increase in interest rates is unlikely to deter most borrowers who enjoy low loan coupons and still-rising property incomes. Recent surveys indicate that banks remain optimistic about loan demand going forward even as they may be heading into a credit tightening cycle at this stage of market expansion. We believe that this environment should support loan origination volumes in 2017 and going forward.securitizations.

~~ZAIS Merger~~

On October 31, 2016, we became a publicly traded company through our merger with and into a subsidiary of ZAIS, with ZAIS surviving the merger and changing its name to Sutherland Asset Management Corporation. We were designated as the accounting acquirer because of our larger pre-merger size relative to ZAIS, the relative voting interests of our stockholders after consummation of the merger, and our senior management and board continuing on after the consummation of the merger. Because we were designated as the accounting acquirer, our historical financial statements (and not those of ZAIS) are the historical financial statements following the consummation of the merger and are included in this quarterly report on Form 10-Q.

~~Investment Activity~~

~~The following describes our investment activity based on actual cash disbursements during the periods indicated:~~

~~Investment Activity for the Three Months Ended September 30, 2017 and September 30, 2016~~

~~The following describes our investment activity based on actual cash disbursements:~~

~~Loan Acquisitions~~

~~During the current quarter:~~

~~Acquired $16.0 million of SBC loans and made advances of $5.0 million on loans originated in previous quarters.~~

~~Received proceeds from liquidations and principal payments on MBS of $3.2 million and loans of $101.9 million.~~

~~During the prior year quarter:~~

~~Acquired $25.8 million of SBC loans.~~

~~Received proceeds from liquidations and principal payments on loans of $180.6 million.~~

~~SBC Loan Originations~~

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~~During the current quarter:~~

Originated $126.9 million in Freddie Mac program loans, $85.3 million in transitional loans, and $36.2 million in SBC conventional loans, which includes additional funding on loans originated in previous quarters.

~~Received proceeds from liquidations and principal payments on loans of $129.2 million.~~

~~During the prior year quarter:~~

~~Originated $23.0 million in Freddie Mac program loans, $6.0 million in conventional loans, and $7.0 million in transitional loans.~~

~~Received proceeds from liquidations and principal payments on loans of $140.8 million.~~

~~SBA Loan Originations~~

~~During the current quarter:~~

~~Originated $41.3 million in SBA loans, which includes additional funding on loans originated in previous quarters.~~

~~Received proceeds from liquidations and principal payments on loans of $39.1 million, including $32.9 million of secondary market loan sales with an average sale premium of 11.9%.~~

~~During the prior year quarter:~~

~~Originated $15.0 million in SBA loans.~~

~~Received proceeds from liquidations and principal payments on loans of $20.3 million.~~

~~Residential Mortgage Loan Originations~~

~~Originated $490.9 million in residential agency loans and $11.3 million in other residential loans, including additional funding on loans originated in previous quarters.~~

~~Repurchased $0.3 million in residential loans previously originated and sold.~~

~~Received proceeds from liquidations and principal payments on loans of $534.9 million, including proceeds from sales of $503.9 million.~~

~~Investment Activity for the Nine Months Ended September 30, 2017 and September 30, 2016~~

~~Loan Acquisitions.~~

~~During the current year period:~~

~~Acquired $14.4 million of MBS and $88.3 million of SBC loans~~

~~Received proceeds from liquidations and principal payments on loans of $236.0 million.~~

~~During the prior year period:~~

~~Acquired $17.3 million of MBS and $89.0 million of SBC loans~~

~~Received proceeds from liquidations and principal payments on loans of $212.0 million.~~

~~Received proceeds from sale and principal payment on MBS of $197.1 million~~

~~SBC Loan Originations~~

~~During the current year period:~~

Originated $283.8 million in Freddie Mac program loans, $190.9 million in transitional loans, and $119.8 million in SBC conventional loans, which includes additional funding on loans originated in previous quarters.

~~Received proceeds from liquidations and principal payments on loans of $298.3 million.~~

~~During the prior year period:~~

~~Originated $86.0 million in Freddie loans, $33.0 million in conventional loans, and $20.0 million in transitional loans.~~

~~Received proceeds from liquidations and principal payments on loans of $182.6 million.~~

Table of Contents

As of June 30, 2021, total liabilities in our consolidated balance sheet were $7.7 billion, an increase of $3.1 billion from December 31, 2020, primarily reflecting an increase in Paycheck Protection Program Liquidity Facility borrowings of $2.2 billion due to proceeds to support originations of PPP loans.

~~SBA Loan Originations~~As of June 30, 2021, Stockholders’ Equity increased $454 million to $1.3 billion. The increase was primarily driven by the ANH merger and the issuance of preferred shares.

~~During the current year period:~~

~~Originated $92.3 million in SBA loans, which includes additional funding on loans originated in previous quarters.~~

~~Received proceeds from liquidations and principal payments on loans of $112.3 million~~

~~During the prior year period:~~

~~Originated $15.0 million in loans~~

~~Received proceeds from liquidations and principal payments on loans of $145.1 million.~~

~~Residential Mortgage Loan Originations~~

~~During the current year period:~~

~~Originated $1,530.8 million in residential agency and other residential loans~~

~~Received proceeds from sales and principal payments on loans of $1,607.6 million, including proceeds of sales on loans of $1,532.6 million.~~

Selected Balance Sheet Information by Business ~~Segment and Corporate- Other~~

Segment. The following table presents certain selected balance sheet ~~information~~data by each of our four business segments, with the remaining amounts reflected in Corporate –Other, as of ~~September~~June 30, ~~2017:~~2021:


(in thousands)	Loan Acquisitions		SBC Originations		Small Business Lending		Residential Mortgage Banking		Total
Assets
Loans, net ⁽¹⁾⁽²⁾	$	953,442	$	3,665,924	$	590,089	$	3,342	$	5,212,797
Loans, held for sale, at fair value		84,169		65,721		36,573		283,721		470,184
Paycheck Protection Program loans		—		—		2,178,586		—		2,178,586
Mortgage backed securities, at fair value		191,879		68,231		—		—		260,110
Servicing rights		—		24,724		19,721		100,820		145,265
Investment in unconsolidated joint ventures		86,994		—		—		—		86,994
Purchased future receivables, net		7,213		—		—		—		7,213
Real estate, held for sale ⁽¹⁾		71,267		2,778		—		—		74,045

Liabilities
Secured borrowings	$	364,507	$	967,231	$	79,335	$	291,961	$	1,703,034
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		—		—		2,286,624		—		2,286,624
Securitized debt obligations of consolidated VIEs		517,872		1,700,757		90,588		—		2,309,217
Guaranteed loan financing		—		—		363,955		—		363,955
Senior secured notes, net		42,691		130,082		7,052		—		179,825
Corporate debt, net		184,959		148,710		—		—		333,669
Convertible notes, net		55,537		51,522		5,625		—		112,684
(1) Includes assets of consolidated VIEs (2) Excludes allowance for loan losses

(in thousands)

Loan Acquisitions

SBC Originations

SBA Originations, Acquisitions and Servicing

Residential Mortgage Banking

Corporate / Other

Total
Assets

Loans, net (1)

$
329,667

$
1,008,578

$
457,465

$
1,552

$
-

$
1,797,262
Loans, held for sale, at fair value

5,977

78,875

13,807

101,659

-

200,318

Liabilities

Secured short-term borrowings

$
148,756

$
248,368

$
30,960

$
94,683

$
-

$
522,767
Securitized debt obligations of consolidated VIEs

159,271

489,972

31,039

-

-

680,282
Guaranteed loan financing

-

-

313,388

-

-

313,388
Senior secured note, net

16,042

118,183

3,849

-

-

138,074
Convertible note, net

3,832

7,681

2,817

-

95,084

109,414
(1) Includes Loan assets of consolidated VIEs

Table of Contents

~~Results of Operations~~

Income Statement Analysis and Metrics

The following table compares our ~~summarized results~~consolidated statements of ~~operations for each~~income:



	Three Months Ended June 30,				$ Change		Six Months Ended June 30,				$ Change
(in thousands)	2021		2020		2021 vs. 2020		2021		2020		2021 vs. 2020
Interest income
Loan acquisitions	$	18,763	$	14,977	$	3,786	$	33,297	$	31,470	$	1,827
SBC originations		46,117		37,497		8,620		85,810		76,766		9,044
Small business lending		36,133		8,808		27,325		51,565		21,279		30,286
Residential mortgage banking		2,034		1,929		105		4,078		3,247		831
Corporate - other		—		—		—		1,668		—		1,668
Total interest income	$	103,047	$	63,211	$	39,836	$	174,750	$	132,762	$	41,988
Interest expense
Loan acquisitions	$	(12,036)	$	(10,654)	$	(1,382)	$	(24,007)	$	(21,859)	$	(2,148)
SBC originations		(27,104)		(23,507)		(3,597)		(52,102)		(49,134)		(2,968)
Small business lending		(13,980)		(6,839)		(7,141)		(23,187)		(15,352)		(7,835)
Residential mortgage banking		(2,295)		(2,036)		(259)		(4,623)		(3,621)		(1,002)
Corporate - other		—		(372)		372		(2,257)		(372)		(1,885)
Total interest expense	$	(55,415)	$	(43,408)	$	(12,007)	$	(106,176)	$	(90,338)	$	(15,838)
Net interest income before provision for loan losses	$	47,632	$	19,803	$	27,829	$	68,574	$	42,424	$	26,150
Provision for loan losses
Loan acquisitions	$	(74)	$	(1,965)	$	1,891		1,188		(7,688)		8,876
SBC originations		(4,649)		5,821		(10,470)		(6,258)		(24,007)		17,749
Small business lending		(794)		(2,765)		1,971		(439)		(7,019)		6,580
Residential mortgage banking		—		(500)		500		—		(500)		500
Total provision for loan losses	$	(5,517)	$	591		(6,108)		(5,509)		(39,214)		33,705
Net interest income after provision for loan losses	$	42,115	$	20,394	$	21,721	$	57,556	$	(36,004)	$	93,560
Non-interest income
Loan acquisitions	$	6,899	$	(361)	$	7,260	$	6,316	$	(13,201)	$	19,517
SBC originations		9,475		7,354		2,121		20,087		6,327		13,760
Small business lending		19,925		39,333		(19,408)		33,859		49,197		(15,338)
Residential mortgage banking		39,495		74,585		(35,090)		103,381		101,012		2,369
Corporate - other		71		16		55		1,187		115		1,072
Total non-interest income	$	75,865	$	120,927	$	(45,062)	$	164,830	$	143,450	$	21,380
Non-interest expense
Loan acquisitions	$	(4,858)	$	(2,521)	$	(2,337)	$	(8,327)	$	(7,462)	$	(865)
SBC originations		(12,023)		(10,933)		(1,090)		(20,566)		(19,018)		(1,548)
Small business lending		(17,588)		(16,465)		(1,123)		(31,841)		(28,421)		(3,420)
Residential mortgage banking		(35,991)		(61,394)		25,403		(69,883)		(94,594)		24,711
Corporate - other		(9,621)		(9,845)		224		(23,419)		(16,455)		(6,964)
Total non-interest expense	$	(80,081)	$	(101,158)	$	21,077	$	(154,036)	$	(165,950)	$	11,914
Net income (loss) before provision for income taxes
Loan acquisitions	$	8,694	$	(524)	$	9,218	$	8,467	$	(18,740)	$	27,207
SBC originations		11,816		16,232		(4,416)		26,971		(9,066)		36,037
Small business lending		23,696		22,072		1,624		29,957		19,684		10,273
Residential mortgage banking		3,243		12,584		(9,341)		32,953		5,544		27,409
Corporate - other		(9,550)		(10,201)		651		(22,821)		(16,712)		(6,109)
Total net income (loss) before provision for income taxes	$	37,899	$	40,163	$	(2,264)	$	75,527	$	(19,290)	$	94,817

Results of ~~our four operating segments for the three~~Operations – Supplemental Information. Realized and ~~nine months ended September 30, 2017 and 2016 (amounts in thousands):~~

For the Three Months Ended

For the Nine Months Ended

September 30,

$ Change

September 30,

$ Change

2017

2016

2017 vs. 2016

2017

2016

2017 vs. 2016
Interest income

Loan acquisitions

$
7,800

$
10,679

$
(2,879)

$
28,242

$
38,492

$
(10,250)
SBC originations

17,258

11,010

6,248

41,972

29,801

12,171
SBA originations, acquisitions and servicing

9,039

10,201

(1,162)

28,935

35,989

(7,054)
Residential mortgage banking

941

-

941

3,020

-

3,020
       Total interest income

35,038

31,890

3,148

102,169

104,282

(2,113)
Interest expense

Loan acquisitions

(3,937)

(4,398)

461

(12,472)

(13,235)

763
SBC originations

(10,252)

(5,152)

(5,100)

(23,798)

(14,998)

(8,800)
SBA originations, acquisitions and servicing

(3,795)

(4,199)

404

(12,120)

(13,309)

1,189
Residential mortgage banking

(797)

-

(797)

(2,310)

-

(2,310)
Corporate - other

(1,127)

(348)

(779)

(2,879)

(501)

(2,378)
       Total interest expense

(19,908)

(14,097)

(5,811)

(53,579)

(42,043)

(11,536)
Net interest income before provision for loan losses

15,130

17,793

(2,663)

48,590

62,239

(13,649)
   Provision for loan losses

(466)

(488)

22

(1,857)

(4,689)

2,832
Net interest income after provision for loan losses

14,664

17,305

(2,641)

46,733

57,550

(10,817)
Non-interest income

Loan acquisitions

406

500

(94)

806

819

(13)
SBC originations

1,127

1,717

(590)

2,511

3,532

(1,021)
SBA originations, acquisitions and servicing

2,000

1,173

827

4,304

5,404

(1,100)
Residential mortgage banking (1)

15,189

-

15,189

45,097

-

45,097
         Total non-interest income

18,722

3,390

15,332

52,718

9,755

42,963
Non-interest expense

Loan acquisitions

(2,802)

(2,420)

(382)

(6,581)

(7,458)

877
SBC originations

(5,736)

(4,640)

(1,096)

(15,033)

(13,923)

(1,110)
SBA originations, acquisitions and servicing

(4,617)

(4,625)

8

(10,548)

(12,608)

2,060
Residential mortgage banking

(12,388)

-

(12,388)

(37,221)

-

(37,221)
Corporate - other

(4,182)

(4,159)

(23)

(13,305)

(11,827)

(1,478)
         Total non-interest expense

(29,725)

(15,844)

(13,881)

(82,688)

(45,816)

(36,872)
Net realized gains (losses) on financial instruments

Loan acquisitions

(377)

595

(972)

(106)

(1,473)

1,367
SBC originations

2,768

339

2,429

6,082

1,687

4,395
SBA originations, acquisitions and servicing

3,304

1,489

1,815

6,714

3,426

3,288
Residential mortgage banking (2)

-

-

-

-

-

-
Corporate - other

-

31

(31)

461

80

381
         Total net realized gains (losses) on financial instruments

5,695

2,454

3,241

13,151

3,720

9,431
Net unrealized gains (losses) on financial instruments

Loan acquisitions

173

284

(111)

1,647

3,955

(2,308)
SBC originations

3,807

3,158

649

6,671

1,727

4,944

~~Table of Contents~~

SBA originations, acquisitions and servicing

414

-

414

625

-

625
Residential mortgage banking

(1,728)

-

(3,953)

-

(3,953)
Corporate - other

12

115

(103)

(57)

118

(175)
         Total net unrealized gains (losses) on financial instruments

2,678

3,557

849

4,933

5,800

(867)
Net income (loss) before income tax provisions

Loan acquisitions

200

5,393

(5,193)

9,749

17,730

(7,981)
SBC originations

9,140

6,432

2,708

18,489

7,826

10,663
SBA originations, acquisitions and servicing

6,774

3,404

3,370

17,756

17,583

173
Residential mortgage banking

1,217

-

1,217

4,633

-

4,633
Corporate - other

(5,297)

(4,361)

(936)

(15,780)

(12,130)

(3,650)
         Total net income before income tax provisions

12,034

10,868

1,166

34,847

31,009

3,838
Provisions for income taxes

340

(1,297)

1,637

(1,763)

(3,326)

1,563
Net income from continuing operations

12,374

9,571

2,803

33,084

27,683

5,401
Loss from discontinued operations, net of tax

-

-

-

-

(351)

351
Net income

12,374

9,571

2,803

33,084

27,332

5,752
(1) Includes  gains on sales of mortgage loans held for sale, net of direct loan expenses, changes in fair value on IRLCs, loan expenses, certain loan origination fee income, and income generated on new mortgage servicing rights.
(2) Realized gains (losses) on residential loans held for sale at fair value are included within "Gains on residential mortgage banking activities, net of variable loan expenses" on the Consolidated statements of Income and within "Other non-interest income" for purposes of the table above.

~~Loan Acquisition Segment Results~~

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

(In Thousands)

2017

2016

$ Change

2017

2016

$ Change
Interest income

$
7,800

$
10,679

$
(2,879)

$
28,242

$
38,492

$
(10,250)
Interest expense

(3,937)

(4,398)

461

(12,472)

(13,235)

763
Net interest income before provision for loan losses

$
3,863

$
6,281

$
(2,418)

$
15,770

$
25,257

$
(9,487)
Provision for loan losses

(1,063)

153

(1,216)

(1,787)

(3,370)

1,583
Net interest income after provision for loan losses

$
2,800

$
6,434

$
(3,634)

$
13,983

$
21,887

(7,904)
Non-interest income

406

500

(94)

806

819

(13)
Non-interest expense

(2,802)

(2,420)

(382)

(6,581)

(7,458)

877
Total non-interest income (expense)

$
(2,396)

$
(1,920)

$
(476)

$
(5,775)

$
(6,639)

$
864
Net realized gain (loss) on financial instruments

(377)

595

(972)

(106)

(1,473)

1,367
Net unrealized gain on financial instruments

173

284

(111)

1,647

3,955

(2,308)
Net income before provision for income taxes

$
200

$
5,393

$
(5,193)

$
9,749

$
17,730

$
(7,981)
Provision for income taxes

-

-

-

-
Net income

$
200

$
5,393

$
(5,193)

$
9,749

$
17,730

$
(7,981)

~~Interest income~~

Interest income of $7.8 million in the current quarter decreased $2.9 million from the prior year quarter primarily driven by a reduction in interest income generated by our acquired loan portfolio due to a lower average carrying value of the portfolio as a result of re-deploying capital to our origination businesses.

Interest income of $28.2 million in the current year period decreased $10.3 million from the prior year period primarily driven by a reduction in interest income generated by our acquired loan portfolio due to a lower average carrying value of the portfolio as a result of redeploying capital to our origination businesses. The reduction was also a result of sales of MBS during the second half of 2016, resulting in reduction in interest income generated on these assets.

~~Interest expense~~

~~Table of Contents~~

Interest expense of $3.9 million in the current quarter decreased $0.5 million from the prior year quarter primarily reflecting a reduction in borrowing needs, as a result of deploying capital to our origination businesses and a lower average carrying value of the acquired portfolio.

Interest expense of $12.5 million in the current year period decreased $0.8 million from the prior year period primarily reflecting a reduction in borrowing needs, as a result of deploying capital to our origination businesses and a lower average carrying value of the acquired portfolio.

~~Non-interest income~~

~~Non-interest income of $0.4 million and $0.8 million in the current quarter and current year period, respectively, were consistent with the prior year quarter and prior year period, respectively.~~

~~Non-interest expenses~~

Non-interest expense of $2.8 million in the current quarter decreased $0.4 million from the prior year quarter primarily due to a reduction in professional fee expense and other operating expenses attributable to this segment.

Non-interest expense of $6.6 million in the current year period decreased $0.9 million from the prior year period primarily due to a reduction in professional fee expense and other operating expenses attributable to this segment.

~~Realized~~unrealized gains (losses) on financial instruments

~~Realized losses of $0.4 million~~ are recorded in the ~~current quarter compared~~consolidated statements of income and classified based on the nature of the underlying asset or liability.

Table of Contents

The following table presents the components of realized and unrealized gains (losses) on financial instruments:


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2021		2020		Change		2021		2020		Change
Realized gains (losses) on financial instruments
Realized gains on loans - Freddie Mac	$	2,790	$	2,854		(64)	$	5,197	$	4,000		1,197
Creation of mortgage servicing rights - Freddie Mac		3,909		3,539		370		7,468		4,988		2,480
Realized gains on loans - SBA		11,828		1,215		10,613		15,716		4,489		11,227
Creation of mortgage servicing rights - SBA		2,741		374		2,367		3,700		1,335		2,365
Realized gain (loss) on derivatives, at fair value		(4,312)		(320)		(3,992)		(6,137)		(704)		(5,433)
Realized gain (loss) on mortgage backed securities, at fair value		1,479		379		1,100		1,772		1,589		183
Net realized gains (losses) - all other		(1,252)		(603)		(649)		(1,687)		(1,087)		(600)
Net realized gain on financial instruments	$	17,183	$	7,438		9,745	$	26,029	$	14,610		11,419
Unrealized gains (losses) on financial instruments
Unrealized gain (loss) on loans - Freddie Mac	$	36	$	(514)		550	$	(517)	$	23		(540)
Unrealized gain (loss) on loans - SBA		2,467		31		2,436		2,981		(1,051)		4,032
Unrealized gain (loss) on residential mortgage servicing rights, at fair value		(4,699)		(12,043)		7,344		10,657		(28,480)		39,137
Unrealized gain (loss) on derivatives, at fair value		1,727		(881)		2,608		7,559		(5,062)		12,621
Unrealized gain (loss) on mortgage backed securities, at fair value		3,741		(161)		3,902		5,569		(12,020)		17,589
Net unrealized gains (losses) - all other		1,340		(176)		1,516		(641)		(588)		(53)
Net unrealized gain (loss) on financial instruments	$	4,612	$	(13,744)		18,356	$	25,608	$	(47,178)		72,786

Acquisition Segment Results.

Q2 2021 versus Q2 2020. Interest income of $18.8 million represented an increase of $3.8 million, primarily due to ~~realized~~ gains ~~of $0.6 million~~from acquired residential loans and MBS, partially offset by a decrease in the ~~prior year quarter primarily driven by realized losses on derivatives~~weighted average coupon for acquired CRE loans. Interest expense of ~~$0.8~~$12.0 million ~~during the current quarter, offset by $0.4 million in gains generated on sales of acquired SBC loans, held-for-sale, at fair value.~~

~~Realized losses of $0.1 million in the current year period compared to realized losses~~represented an increase of $1.4 million, primarily due to additional corporate debt and junior subordinated debt. The provision for loan losses decreased $1.9 million, primarily due to impairments taken on specific loans in the ~~prior year period~~second quarter of 2020. Non-interest income of $6.9 million represented an increase of $7.3 million, primarily driven by realized losses of $2.4 million on MBS experienced during the prior year period. These losses compare to realized gains on MBS $0.1 million during the current year period. These losses during the prior year period were offset by additional gains generated on sales of acquired SBC loans of $1.5 million.

~~Unrealized gains on financial instruments~~

~~Unrealized gains of $0.2 million in the current quarter compared to unrealized gains of $0.3 million in the prior year quarter primarily driven by a reduction in unrealized gains on MBS~~ due to ~~sales during~~increased gains from unconsolidated subsidiaries and markups on the ~~second half~~residential MBS portfolio as yields tightened. Non-interest expense of ~~2016, reducing the size~~$4.9 million represented an increase of ~~the MBS portfolio.~~

~~Unrealized gains of $1.6~~$2.3 million, ~~in the current year period compared to unrealized gains of $4.0 million in the prior year quarter~~ primarily ~~driven by a reduction in unrealized gains of $2.9 million on MBS~~ due to ~~sales during the second half of 2016, reducing the size of the MBS portfolio.~~higher fixed operating expenses.

SBC Originations Segment ~~Results~~

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

(In Thousands)

2017

2016

$ Change

2017

2016

$ Change
Interest income

$
17,258

$
11,010

$
6,248

$
41,972

$
29,801

$
12,171
Interest expense

(10,252)

(5,152)

(5,100)

(23,798)

(14,998)

(8,800)
Net interest income before provision for loan losses

$
7,006

$
5,858

$
1,148

$
18,174

$
14,803

$
3,371
Provision for loan losses

168

-

168

84

-

84
Net interest income after provision for loan losses

$
7,174

$
5,858

$
1,316

$
18,258

$
14,803

3,455
Non-interest income

1,127

1,717

(590)

2,511

3,532

(1,021)
Non-interest expense

(5,736)

(4,640)

(1,096)

(15,033)

(13,923)

(1,110)
Total non-interest income (expense)

$
(4,609)

$
(2,923)

$
(1,686)

$
(12,522)

$
(10,391)

$
(2,131)
Net realized gain on financial instruments

2,768

339

2,429

6,082

1,687

4,395
Net unrealized gain on financial instruments

3,807

3,158

649

6,671

1,727

4,944
Net income before provision for income taxes

$
9,140

$
6,432

$
2,708

$
18,489

$
7,826

$
10,663

~~Table of Contents~~Results.

Provision for income taxes

(352)

(298)

(54)

(10)

2,150

(2,160)
Net income

$
8,788

$
6,134

$
2,654

$
18,479

$
9,976

$
8,503

~~Interest income~~

Q2 2021 versus Q2 2020. Interest income of ~~$17.3~~$46.1 million represented an increase of $8.6 million, primarily due to increased loan balances, partially offset by a decline in the ~~current quarter increased $6.2 million from the prior year quarter primarily reflecting an increase in SBC loan originations, resulting in higher~~portfolio’s weighted average loan balances. SBC loan originations increased $123.4 million in the current quarter, or 79%, compared to the same period in 2016, primarily driven by an increase in Freddie Mac loan originations of $78.1 million and transitional loan originations $44.5 million.

Interest income of $42.0 million in the current year period increased $12.2 million from the prior year period primarily reflecting an increase in SBC loan originations, resulting in higher average loan balances. SBC loan originations increased $222.3 million in the current year period, or 52%, compared to the same period in 2016, primarily driven by an increase in Freddie Mac loan originations of $110.0 million, transitional loan originations of $73.4 million, and Conventional loan originations of $39.0 million.

~~Interest expense~~

coupon. Interest expense of ~~$10.3~~$27.1 million ~~in the current quarter increased $5.0 million from the prior year quarter primarily reflecting~~represented an increase ~~in borrowing activities under secured short-term borrowings due to the need to finance a greater number~~ of ~~loan originations, which increased 79% in the current quarter, compared to the same period in 2016.~~

~~Interest expense of $23.8~~$3.6 million, ~~in the current year period increased $8.8 million from the prior year period~~ primarily reflecting an increase in borrowing activities under secured short-term borrowings due to the need to finance a greater number of loan originations, which increased 52% in the current year period, compared to the same period in 2016.

~~Non-interest income~~

~~Non-interest income of $1.1 million in the current quarter decreased $0.6 million from the prior year quarter primarily reflecting a decrease of origination income of $0.5 million~~ due to an increase in ~~the number~~debt borrowings to fund additional loan balances. The provision for loan losses of ~~transitional~~$4.6 million represented an increase of $10.5 million, primarily due to CECL reserves taken on bridge loan originations compared to conventional SBC loan originations in the current quarter compared to the prior year quarter. Origination fee income on transitional loans are accounted for as deferred fees, while origination fee income on conventional SBC loans are recognized when the loan funds. As a result, origination fee income on transitional loans will not have an immediate impact on income.

originations. Non-interest income of ~~$2.5~~$9.5 million ~~in the current year period decreased $1.0~~represented an increase of $2.1 million, ~~from the prior year period~~ primarily ~~reflecting a decrease of origination income~~ due to ~~the increase in the number of transitional loan originations compared to conventional SBC loan originations in the current year period compared to the prior year period.~~

~~Non-interest expense~~

unrealized gains on derivatives. Non-interest expense of ~~$5.7~~$12.0 million ~~in the current quarter increased~~represented an increase of $1.1 million, ~~from the prior year quarter~~ primarily ~~reflecting~~due to increased loan servicing and compensation expenses.

Small Business Lending Segment Results.

Q2 2021 versus Q2 2020. Interest income of $36.1 million represented an increase inof $27.3 million, primarily due to increased loan ~~origination expenses~~balances, including PPP loans. Interest expense of $14.0 million represented an increase of $7.1 million, primarily due to an increase in ~~broker~~costs associated with fundings on PPPLF borrowings to support PPP loan activities. The provision for loan losses of $0.8 million represented a decrease of $2.0 million, primarily due to higher CECL reserves taken in the second quarter of 2020, driven by the outlook towards COVID-19’s impact on small businesses. Non-interest income of $19.9 million represented a decrease of $19.4 million, primarily due to one-time PPP round 1 fees ~~paid on Freddie Mac loans as a result~~recognized in the second quarter of ~~an increase in Freddie Mac loan originations of approximately $23.0 million compared to the prior year quarter.~~

2020. Non-interest expense of ~~$15.0~~$17.6 million ~~in the current year period increased $1.1 million from the prior year period primarily reflecting~~represented an increase ~~in loan origination expenses due to an increase in broker fees paid on Freddie Mac loans as a result~~ of ~~an increase in Freddie Mac loan originations of approximately $35.0~~$1.1 million, ~~compared to the prior year period.~~

~~Realized gains on financial instruments~~

Realized gains of $2.8 million in the current quarter increased $2.4 million from the prior year quarter primarily driven by sales of SBC conventional loans and Freddie Mac loans, held-for-sale, resulting in gains of $1.8 million.

Realized gains of $6.0 million in the current year period increased $4.4 million from the period year period primarily driven by sales of Freddie Mac loans, which are held-for-sale at fair value, resulting in gains of $2.5 million.

~~Table of Contents~~

~~Unrealized gains on financial instruments~~

Unrealized gains of $3.8 million in the current quarter increased $0.6 million from the prior year quarter primarily driven by overall portfolio growth during the current year quarter, as well as changes in the fair value of the SBC conventional loans and Freddie Mac loans that are carried at fair value. The increase in average balances of our SBC loan portfolio are a result of an increase in loan originations during the current year quarter. As noted above, SBC loan originations increased $123.4 million in the current quarter, or 79%, compared to the same period in 2016, primarily driven by an increase in Freddie Mac loan originations of $78.1 million, which are carried at fair value.

Unrealized gains of $6.7 million in the current year period increased $4.9 million from the period year period primarily driven by the overall portfolio growth during the current year period, as well as changes in the fair value of the SBC and Freddie Mac loans that are carried at fair value. The increase in average balances of our SBC loan portfolio are a result of an increase in loan originations during the current year period. As noted above, SBC loan originations increased $222.3 million in the current year period, or 52%, compared to the same period in 2016, primarily driven by an increase in Freddie Mac loan originations of $110.0 million and Conventional SBC loan originations of $39.0 million, which are both carried at fair value.

~~SBA Originations, Acquisitions and Servicing Segment Results~~

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

(In Thousands)

2017

2016

$ Change

2017

2016

$ Change
Interest income

$
9,039

$
10,201

$
(1,162)

$
28,935

$
35,989

$
(7,054)
Interest expense

(3,795)

(4,199)

404

(12,120)

(13,309)

1,189
Net interest income before provision for loan losses

$
5,244

$
6,002

$
(758)

$
16,815

$
22,680

$
(5,865)
Provision for loan losses

429

(641)

1,070

(154)

(1,319)

1,165
Net interest income after provision for loan losses

$
5,673

$
5,361

$
312

$
16,661

$
21,361

(4,700)
Non-interest income

2,000

1,173

827

4,304

5,404

(1,100)
Non-interest expense

(4,617)

(4,625)

8

(10,548)

(12,608)

2,060
Total non-interest income (expense)

$
(2,617)

$
(3,452)

$
835

$
(6,244)

$
(7,204)

$
960
Net realized gain on financial instruments

3,304

1,489

1,815

6,714

3,426

3,288
Net unrealized gain on financial instruments

414

-

414

625

-

625
Net income before provision for income taxes

$
6,774

$
3,404

$
3,370

$
17,756

$
17,583

$
173
Provision for income taxes

(2,169)

(973)

(1,196)

(4,999)

(5,637)

638
Net income

$
4,605

$
2,431

$
2,174

$
12,757

$
11,946

$
811

~~Interest income~~

~~Interest income of $9.0 million in the current quarter decreased $1.2 million from the prior year quarter~~ primarily due to ~~a reduction of interest income generated on our acquired SBA 7(a) loan portfolio as we have shifted focus to SBA loan originations. Although our SBA loan originations~~ increased $25.3 million in the current quarter, or $187%, compared to the same period in 2016, this will not result in a direct, proportional increase in interest income, but rather, a realized gain on the sale of the SBA loan and increase in servicing income, as we sell a 75% pro-rata interest in the loan, while retaining 25%, at a premium and also retain the servicing rights on the loan.fixed operating expenses.

~~Interest~~Residential Mortgage Banking Segment Results.

Q2 2021 versus Q2 2020. Non-interest income of ~~$29.0~~$39.5 million ~~in the current year period decreased $7.1~~represented a decrease of $35.1 million, ~~from the prior year period~~ primarily due to a reduction of interest income generated on our acquired SBA 7(a) loan portfolio as we have shifted focus to SBA loan originations. The reduction in interest income is offset by an increase in realized gains on sales of SBA loanslower volumes and ~~an increase in servicing income, discussed further below.~~

~~Interest Expense~~

~~Interest~~margins. Non-interest expense of ~~$3.8~~$36.0 million ~~in the current quarter decreased $0.4~~represented a decrease of $25.4 million, ~~from the prior year quarter~~ primarily ~~reflecting an reduction in borrowing activities under secured short-term borrowings and guaranteed loan financing~~ due to the reduced need to finance acquired SBA 7(a) loans on our balance sheet and originated SBA 7(a) loans, due to sales of the 75% pro-rata interest of these loans, while only 25% is retained on our consolidated balance sheet.decreased operating expenses from lower production.

Table of Contents

Corporate – Other.

Q2 2021 versus Q2 2020. Interest expense ~~of $12.1~~decreased by $0.4 million in the current year period decreased $1.2 million from the prior year period primarily reflecting an reduction in borrowing activities under secured short-term borrowings and guaranteed loan financings due to the reduced need to finance acquired SBA 7(a) loans on our balance sheet and originated SBA 7(a) loans, due to sales of the 75% pro-rata interest of these loans, while only 25% is retained on our consolidated balance sheet.

~~Non-interest income~~

Non-interest income of $2.0 million in the current quarter increased $0.8 million from the prior year quarter primarily reflecting an increase in other income of $0.7 million and an increase in servicing income of $0.1 million. The increase in other income in the current quarter was the result of an increase in SBA loan originations.

~~Non-interest income of $4.3 million in the current quarter decreased $1.1 million from the prior year period primarily reflecting~~ a decrease in ~~other income~~unallocated corporate debt. Non-interest expense of ~~$0.7~~$9.6 million and a decrease in servicing income of $0.4 million. The decrease in other income was primarily due to the release of the repair and denial reserve during the first half of 2016. The release of this reservedecreased by $0.2 million which was driven by a decrease in ~~defaults in the acquired SBA portfolio and decrease in the severity of repair claims on our section 7(a) loans by the SBA.~~

~~Non-interest expenses~~

~~Non-interest expense of $4.6 million in the current quarter remained unchanged from the prior year quarter.~~

~~Non-interest expense of $10.5 million in the current year period decreased by $2.1 million from the prior year period primarily reflecting a reduction in professional expenses of $1.4 million.~~

~~Realized gains on financial instruments~~

~~Realized gains of $3.3 million in the current quarter increased $1.8 million from the prior year quarter primarily driven by sales of SBA loans.~~

~~Realized gains of $6.7 million in the current year period increased $3.3 million from the period year period primarily driven by sales of SBA loans.~~

~~Unrealized gains on financial instruments~~

~~Unrealized gains of $0.4 million in the current quarter increased $0.4 million from the prior year quarter primarily driven by unrealized gains on SBA loans held-for-sale, at fair value.~~

~~Unrealized gains of $0.6 million in the current year period increased $0.6 million from the prior year period primarily driven by unrealized gains on SBA loans held-for-sale, at fair value.~~

~~Residential Mortgage Banking Segment Results~~

We acquired the GMFS business as part of the ZAIS merger on October 31, 2016 and, therefore, the following results relate to only the three and nine months ended September 30, 2017. See “Note 5 – Business Combinations” in Item 1. “Financial Statements” included in this quarterly report on Form 10-Q for the pro forma results of the combined company for the three and nine months ended September 30, 2016.

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

(In Thousands)

2017

2016

$ Change

2017

2016

$ Change
Interest income

$
941

$
-

$
941

$
3,020

$
-

$
3,020
Interest expense

(797)

-

(797)

(2,310)

-

(2,310)
Net interest income before provision for loan losses

$
144

$
-

$
144

$
710

$
-

$
710
Provision for loan losses

-

-

-

-

-

-
Net interest income after provision for loan losses

$
144

$
-

$
144

$
710

$
-

710
Non-interest income

15,189

-

15,189

45,097

-

45,097

~~Table of Contents~~

Non-interest expense

(12,388)

-

(12,388)

(37,221)

-

(37,221)
Total non-interest income (expense)

$
2,801

$
-

$
2,801

$
7,876

$
-

$
7,876
Net realized gain on financial instruments

-

-

-

-

-

-
Net unrealized gain (loss) on financial instruments

(1,728)

-

(1,728)

(3,953)

-

(3,953)
Net income before provision for income taxes

$
1,217

$
-

$
1,217

$
4,633

$
-

$
4,633
Provision for income taxes

(282)

-

(282)

(1,252)

-

(1,252)
Net income

$
935

$
-

$
935

$
3,381

$
-

$
3,381
(1) Includes gains on sales of mortgage loans held for sale, net of direct loan expenses, changes in fair value on IRLCs, loan expenses, certain loan origination fee income, and income generated on new mortgage servicing rights.

~~Interest income~~

~~Interest income of $0.9 million and $3.0 million in the current quarter and current year period, respectively, was generated on originated residential agency loans held-for-sale, at fair value.~~

~~Interest expense~~

Interest expense of $0.8 million and $2.3 million in the current quarter and current year period, respectively, reflects financing costs on secured short-term borrowings used to originate new loans and to hold on our consolidated balance sheet, until the loans are sold to a third party.

~~Non-interest income~~

Non-interest income of $15.2 million in the current quarter reflects realized gains and losses on sales of residential mortgage loans, of $16.6 million, gains and income generated on our residential mortgage servicing activities of $8.1 million, loan origination fee income on residential mortgage loans of $1.9 million,management incentive fees, partially offset by ~~correspondent fees and other direct loan expenses of $11.4 million.~~

Non-interest income of $45.1 million in the current year period reflects realized gains and losses on sales of residential mortgage loans, of $50.0 million, gains and income generated on our residential mortgage servicing activities of $24.2 million, loan origination fee income on residential mortgage loans of $6.0 million, offset by correspondent fees and other direct loan expenses of $35.1 million.

~~Non-interest expense~~

~~Non-interest expense of $12.4 million in the current quarter primarily reflects employee~~increased compensation and ~~benefits expense of $8.7 million, loan servicing~~merger expenses ~~of $1.7 million, and other operating expenses of $1.7 million.~~related to ANH.

Non-interest expense of $37.2 million in the current quarter primarily reflects employee compensation and benefits expense of $26.4 million, loan servicing expenses of $5.0 million, and other operating expenses of $5.1 million.

~~Unrealized gains (losses) on~~Non-GAAP financial ~~instruments~~

Net unrealized losses of $1.7 million and $4.0 million in the current quarter and current year period, respectively, reflects unrealized losses on our residential MSR, carried at fair value due to changes in interest rates.

~~Corporate- Other~~

~~Interest expense~~

Interest expense of $1.1 million in the current quarter increased $0.8 million from the prior year quarter primarily reflecting an increase in borrowing costs associated with unallocated funds generated by our senior secured notes and convertible notes, both of which were issued during 2017.

Interest expense of $2.9 million in the current year period increased $2.4 million from the prior year quarter primarily reflecting an increase in borrowing costs associated with our unallocated funds generated by our senior secured notes and convertible notes issuances during 2017.

~~Table of Contents~~

~~Non-interest expense~~

Non-interest expense of $4.2 million in the current quarter and prior year quarter consisting of management fees due to our Manager, allocated employee compensation from our Manager, as well as other general corporate overhead expenses not attributable to our four business segments.

Non-interest expense of $13.3 million in the current quarter increased $1.5 million from the prior year period primarily reflecting an increase in employee compensation and benefits of $0.9 million and an increase in management fees of $0.5 million as a result of overall growth in our asset base and business.

~~Non-GAAP Financial Measures~~

measures

We believe that providing investors with ~~Core Earnings, a non-U.S. GAAP financial measure, in addition~~distributable earnings, formerly referred to ~~the related U.S. GAAP measures,~~as core earnings, gives investors greater transparency into the information used by management in our financial and operational ~~decision-making. However,~~decision-making, including the determination of dividends. Distributable earnings is a non-U.S. GAAP financial measure and because ~~Core Earnings~~distributable earnings is an incomplete measure of our financial performance and involves differences from net income computed in accordance with U.S. GAAP, it should be considered along with, but not as an alternative to, our net income as a measure of our financial performance. In addition, because not all companies use identical calculations, our presentation of ~~Core Earnings~~distributable earnings may not be comparable to other similarly-titled measures of other companies.

We calculate ~~Core Earnings~~distributable earnings as GAAP net income (loss) excluding the following:

any unrealized gains or losses on certain MBS

ii)

any realized gains or losses on sales of certain MBS

iii)

any unrealized gains or losses on Residential MSRs

iv)

any unrealized current non-cash provision for credit losses on accrual loans

any unrealized gains or losses on de-designated cash flow hedges

vi)

one-time non-recurring gains or losses, such as gains or losses on discontinued operations, bargain purchase gains, or merger related expenses

In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains and losses on MBS acquired by us in the secondary market, but is not adjusted to exclude unrealized gains and losses on MBS retained by us as part of our loan origination businesses, where we transfer originated loans into an MBS securitization and retain an interest in the securitization. In calculating distributable earnings, we do not adjust net income (in accordance with GAAP) to take into account unrealized gains and losses on MBS retained by us as part of our loan origination businesses because we consider the unrealized gains and losses that are generated in the loan origination and securitization process to be a fundamental part of this business and an indicator of the ongoing performance and credit quality of our historical loan originations. In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude realized gains and losses on certain MBS securities due to a variety of reasons which may include collateral type, duration, and size. In 2016, we liquidated the majority of our MBS portfolio excluded from distributable earnings to fund our recurring operating segments.

In addition, in calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains or losses on residential MSRs, held at fair value. We treat our commercial MSRs and residential MSRs as two separate classes based on the nature of the underlying mortgages and our treatment of these assets as two separate pools for risk management purposes. Servicing rights relating to our small business commercial business are accounted for under ASC 860, Transfer and Servicing, while our residential MSRs are accounted for under the fair value option under ASC 825, Financial Instruments. In calculating distributable earnings, we do not exclude realized gains or losses on either commercial MSRs or residential MSRs, held at fair value, as servicing income is a fundamental part of our business and as an indicator of the ongoing performance.

To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. There are certain items, including net income generated from the creation of MSRs, that are included in distributable earnings but are not included in the calculation of the current year’s taxable income. These differences may result in certain items that are recognized in the current period’s calculation of distributable earnings not being included in taxable income, and thus not subject to the REIT dividend distribution requirement, until future years.

Table of Contents

The following table presents ~~our summarized consolidated results of operations and~~a reconciliation to ~~Core Earnings:~~distributable earnings:

Three Months Ended
September 30,

Nine Months Ended
September 30,

(in millions)
2017

2016

Change

2017

2016

Change
Net Income
$
12.4

$
9.6

$
2.8

$
33.2

$
27.3

$
5.9
Reconciling items:

  Unrealized (gain) loss on MBS

(0.2)

(0.7)

0.5

(1.4)

(4.3)

2.9
  Realized (gain) loss on MBS

-

-

-

-

3.6

(3.6)
  Unrealized (gain) loss on MSRs

1.7

-

1.7

4.5

-

4.5
  Merger transaction costs

-

0.9

(0.9)

0.1

2.6

(2.5)
  Employee severance

-

0.3

(0.3)

-

0.3

(0.3)
  Restricted Stock Unit (RSU) grant to Independent Directors

-

-

-

0.3

-

0.3
  Loss on discontinued operations

-

-

-

-

0.6

(0.6)
     Total reconciling items
$
1.5

$
0.5

$
1.0

$
3.5

$
2.8

$
0.7
Income tax adjustments

(1.0)

-

(1.0)

(1.7)

(0.3)

(1.4)
Core earnings
$
12.9

$
10.1

$
2.8

$
35.0

$
29.8

$
5.2


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2021		2020		Change		2021		2020		Change
Net Income	$	30,904	$	34,663	$	(3,759)	$	59,851	$	(16,853)	$	76,704
Reconciling items:
Unrealized (gain) loss on mortgage servicing rights		4,699		12,044		(7,345)		(10,657)		28,481		(39,138)
Impact of ASU 2016-13 on accrual loans		4,035		(5,076)		9,111		4,006		30,362		(26,356)
Non-recurring REO impairment		510		106		404		510		3,075		(2,565)
Merger transaction costs and other non-recurring expenses		2,971		967		2,004		10,234		2,222		8,012
Unrealized loss on mortgage-backed securities		—		(45)		45		—		185		(185)
Unrealized loss on de-designated cash flow hedges		—		—		—		—		2,118		(2,118)
Total reconciling items	$	12,215	$	7,996	$	4,219	$	4,093	$	66,443	$	(62,350)
Income tax adjustments		(1,691)		(3,436)		1,745		2,192		(9,142)		11,334
Distributable earnings	$	41,428	$	39,223	$	2,205	$	66,136	$	40,448	$	25,688
Less: Distributable earnings attributable to non-controlling interests		595		917		(322)		1,158		942		216
Less: Income attributable to participating shares		3,616		285		3,331		4,273		748		3,525
Distributable earnings attributable to common stockholders	$	37,217	$	38,021	$	(804)	$	60,705	$	38,758	$	21,947
Distributable earnings per common share - basic and diluted	$	0.52	$	0.70	$	(0.18)	$	0.95	$	0.73	$	0.22

~~Three Months Ended September 30, 2017 Compared to~~Q2 2021 versus Q2 2020. Consolidated net income of $30.9 million for the ~~Three Months Ended September 30, 2016~~

~~Consolidated Net Income increased by $2.8~~second quarter of 2021 represented a decrease of $3.8 million from ~~$9.6~~the second quarter of 2020, primarily due to a decrease in non-interest income from residential mortgage banking activities and an increase in CECL reserves, partially offset by a decrease in unrealized losses on certain assets. Consolidated distributable earnings of $41.4 million ~~during~~for the ~~three months ended September 30, 2016 to $12.4 million during the three months ended September 30, 2017. Core Earnings increased by $2.8~~second quarter of 2021 represented an increase of $2.2 million from ~~$10.1 million during~~ the ~~three months ended September 30, 2016 to $12.9 million during the three months ended September 30, 2017.~~

~~Table~~second quarter of ~~Contents~~

~~The increases in Consolidated Net Income and Core Earnings were~~2020, primarily due to an increase in ~~origination activities~~CECL reserves and merger costs incurred related to the Anworth transaction, partially offset by a decrease in unrealized losses on MSRs in our residential mortgage banking segment.

YTD 2021 versus YTD 2020. Consolidated net income of $59.9 million for the six months ended June 30, 2021 represented an increase of $76.7 million from the six months ended June 30, 2020, primarily due to a reduction in CECL reserves, an increase in PPP related income and a decrease in unrealized losses on certain assets. Consolidated distributable earnings of $66.1 million for the six months ended June 30, 2021 represented an increase of $25.7 million from the six months ended June 30, 2020, primarily due to unrealized gains on MSRs and a reduction in CECL reserves taken during the ~~three months ended September 30, 2017~~first half of 2021 as compared to the ~~three months ended September 30, 2016, the accretive effects of securitization activities undertaken during the second~~first half of ~~2016,~~2020.

COVID-19 Impact on Operating Results

The significant and wide-ranging response of international, federal, state and local public health and governmental authorities to the COVID-19 pandemic in regions across the United States and the world are expected to adversely impact our business, financial performance and operating results throughout 2021. Although we are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health efforts to contain and combat the spread of COVID-19 as well as ~~net income contributed by~~the efficacy of the vaccines or other remedies and the speed of their distribution and administration, we will likely experience continued adverse impacts on our ~~acquired residential mortgage banking business.~~

~~Nine Months Ended September 30, 2017 Compared to~~financial performance and operating results, revenues, cash flow and/or profitability in one or more of the ~~Nine Months Ended September 30, 2016~~

~~Consolidated Net Income increased by $5.9 million,~~upcoming periods in 2021. Further discussion of the potential impacts on our business from ~~$27.3 million during~~ the nine months ended September 30, 2016 to $33.2 million during the nine months ended September 30, 2017. Core Earnings increased by $5.2 million, from $29.8 million during the nine months ended September 30, 2016 to $35.0 million during the nine months ended September 30, 2017.

The increases in Consolidated Net Income and Core Earnings were primarily due to an increase in origination activities during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, the accretive effects of securitization activities undertaken during the second half of 2016, as well as net income contributed by our acquired residential mortgage banking business.

~~Incentive Distribution Payable to Our Manager~~

~~As disclosed~~COVID-19 pandemic is provided in the ~~Joint Proxy Statement Prospectus used~~section entitled “Risk Factors” in ~~connection with~~Part II, Item 1A of the ~~ZAIS merger transaction, under~~Company’s Annual Report on Form 10-K.

Incentive distribution payable to our manager

Under the partnership agreement of our operating partnership, our Manager, the holder of the Class A special unit in our operating partnership, is entitled to receive an incentive distribution, distributed quarterly in arrears in an amount not less than zero equal to the difference between (i) the product of (A) 15% and (B) the difference between (x) ~~core~~distributable earnings (as described below) of our operating partnership, on a rolling four-quarter basis and before the incentive distribution for the current quarter, and (y) the product of (1) the weighted average of the issue price per share of common stock or operating partnership unit (“OP unit”) (without double counting) in all of our offerings multiplied by the weighted average number of shares of common stock outstanding (including any restricted shares of common stock and any other shares of common stock underlying awards granted under our 2012 equity incentive plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters; provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative ~~core~~distributable earnings is greater than zero for the most recently completed 12 calendar ~~quarters, or the number~~quarters.

Table of ~~completed calendar quarters since the closing date of the ZAIS merger, whichever is less.~~ Contents

For purposes of calculating the incentive distribution prior to the completion of a 12-month period following the closing of the ZAIS merger, core earnings will be calculated on an annualized basis. In addition, for purposes of calculating the incentive distribution, the shares of common stock and OP units issued as of the closing of the ZAIS Financial merger in connection with the merger agreement ~~shall be~~were deemed to be issued at the per share price equal to (i) the sum of (A) the weighted average of the issue price per share of Sutherland common stock or Sutherland OP units (without double counting) issued prior to the closing of the ZAIS Financial merger multiplied by the number of shares of Sutherland common stock outstanding and Sutherland OP units (without double counting) issued prior to the closing of the merger plus (B) the amount by which the net book value of our Company as of the closing of the merger (after giving effect to the closing of the merger agreement) ~~exceeds~~exceeded the amount of the net book value of Sutherland immediately preceding the closing of the merger, divided by (ii) all of the shares of our common stock and OP units issued and outstanding as of the closing of the merger (including the date of the closing of the mergers).

The incentive distribution shall be calculated within 30 days after the end of each quarter and such calculation shall promptly be delivered to our Company. We are obligated to pay the incentive distribution 50% in cash and 50% in either common stock or OP units, as determined in our discretion, within five business days after delivery to our Company of the written statement from the holder of the Class A special unit setting forth the computation of the incentive distribution for such quarter. Subject to certain exceptions, our Manager may not sell or otherwise dispose of any portion of the incentive distribution issued to it in common stock or OP units until after the three year anniversary of the date that such shares of common stock or OP units were issued to our Manager. The price of shares of our common stock for purposes of determining the number of shares payable as part of the incentive distribution is the closing price of such shares on the last trading day prior to the approval by our board of the incentive distribution.

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For purposes of determining the incentive distribution payable to our Manager, ~~core~~distributable earnings is defined under the partnership agreement of our operating partnership in a manner that is similar to the definition of ~~Core Earnings~~distributable earnings described above under "Non-GAAP Financial Measures" but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d) depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of ~~Core Earnings~~distributable earnings described above under "Non-GAAP Financial Measures".

Liquidity and Capital Resources

Liquidity is a measure of our ability to turn non-cash assets into cash and to meet potential cash requirements. We use significant cash to purchase SBC loans and other target assets, originate new SBC loans, pay dividends, repay principal and interest on our borrowings, fund our operations and meet other general business needs. Our primary sources of liquidity will include our existing cash balances, borrowings, including securitizations, re-securitizations, repurchase agreements, warehouse facilities, bank credit facilities and other financing agreements (including term loans and revolving facilities), the net proceeds of ~~this and future~~ offerings of equity and debt securities, including our Senior Secured Notes, corporate debt, and Convertible Notes, and net cash provided by operating activities.

We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our real estate-related assets, the tenants in the properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences remain uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part II, Item 1A of the Company’s Annual Report on Form 10-K.

Cash ~~Flow Activity for the Three and Nine~~flow

Six Months Ended ~~September~~June 30, ~~2017 and September 30, 2016~~

~~The following table provides a summary of the net change in our cash and cash equivalents:~~

Three months ended September 30,

Nine months ended September 30,
(in thousands)

2017

2016

2017

2016
Cash flows provided by (used in) operating activities (1)

$
20,007

$
(5,436)

$
248,205

$
10,371
Cash flows provided by (used in) investing activities (1)

$
(55,895)

$
7,583

$
(141,135)

$
208,399
Cash flows provided by (used in) financing activities

$
42,547

$
(18,646)

$
(96,046)

$
(221,881)

Net increase in cash and cash equivalents

$
6,659

$
(16,499)

$
11,024

$
(3,111)
(1) Includes discontinued operations

~~Three months ended September 30, 2017 compared to the three months ended September 30, 2016~~

2021. Cash and cash equivalents as of June 30, 2021, increased by ~~$6.7~~$71.5 million ~~during the current quarter ended September 30, 2017, reflecting:~~

~~Net~~to $272.0 million from December 31, 2020, primarily due to net cash provided from financing and operating activities, partially offset by net cash used for investing activities. The net cash provided from financing activities primarily reflected proceeds from issuances of securitized debt, and net proceeds from corporate equity issuance, partially offset by paydowns of borrowings under repurchase agreements and dividend payments. The net cash ~~provided by operating activities of $20.0 million for the current quarter related primarily to:~~

~~Proceeds on sales of loans, held for sale, at fair value of $703.5 million, offset by $665.4 million of originations and purchases of loans, held for sale, at fair value.~~

~~Net cash used in investing activities of $55.9 million for the current quarter related primarily to:~~

Cash outflows of $147.7 million relating to originations and purchases of loans, held at fair value and held-for-investment loans, offset by cash inflows relating to repayments of loans, held at fair value and held-for-investment of $101.6 million.

~~Net cash provided by financing activities of $42.5 million for the current quarter related primarily to:~~

~~- proceeds~~ provided by ~~our convertible note~~operating activities primarily reflected gains on sale of ~~approximately $110 million,~~residential mortgages held for sale. The net cash used for investing activities primarily reflected loan originations and purchases, partially offset by ~~repayments of secured short-term borrowings.~~paydowns.

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Six Months Ended June 30, 2020. Cash and cash equivalents ~~decreased by $16.5 million during the previous year quarter ended September~~as of June 30, ~~2016, reflecting:~~

~~Net cash used in operating activities of $5.4 million for the previous year quarter as a result of general net changes in operating assets and liabilities.~~

~~Net cash provided by investing activities of $7.6 million for the previous year quarter ended September 30, 2016 related primarily to:~~

Proceeds on net sales and pay-downs of MBS and repayments of loans, held at fair value and held-for-investment offset cash outflows on originations and purchases of loans, held at fair value and held-for-investment

~~Net cash used in financing activities of $18.6 million for the three months ended September 30, 2016 related primarily to:~~

~~Net repayments of our secured short-term borrowings, dividend payments on our common stock, and net repayments of our guaranteed loan financing.~~

~~Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016~~

~~Cash and cash equivalents~~2020, increased by ~~$11.0~~$221.4 million ~~during the current year period ended September 30, 2017, reflecting:~~

~~Net~~to $349.4 million from December 31, 2019, primarily due to net cash ~~provided by operating activities of $248.2 million for the current year period related primarily to:~~

Proceeds from net sales of short-term investments of $220.4 million and to proceeds on sales on loans, held for sale, at fair value of $1,943.5 million offset by $1,882.6 million of originations and purchases of loans, held for sale, at fair value.

~~Net cash used in investing activities of $141.1 million for the current year period related primarily to:~~

Cash outflows of $426.3 million relating to originations and purchases of loans and cash outflows of $14.4 million relating to purchase of MBS, offset by cash inflows relating to repayments of loans of $303.3 million.

~~Net cash used by financing activities of $96.0 million for the current year period related primarily to:~~

~~- proceeds~~ provided ~~by our convertible note~~from financing and ~~senior secured note of approximately $250 million,~~operating activities, partially offset by net ~~repayments~~cash used for investing activities. The net cash provided from financing activities primarily reflected net proceeds from secured borrowings as a result of ~~secured short-term~~an increase in our origination and acquisition activities, proceeds from issuances of securitized debt, partially offset by paydowns of borrowings under repurchase agreements and dividend ~~payments~~payments. The net cash provided by operating activities primarily reflected net settlement of derivative instruments and gains on ~~our common stock.~~sale of residential mortgages held for sale. The net cash used for investing activities primarily reflected loan originations and purchases, partially offset by paydowns.

~~Cash and cash equivalents decreased by $3.1 million during the previous year period ended September 30, 2016, reflecting:~~

~~Net cash provided by operating activities of $10.4 million for the previous year period as a result of general net changes in operating assets and liabilities.~~

~~Net cash provided by investing activities of $208.4 million for the prior year period ended September 30, 2016 related primarily to:~~

~~Proceeds on net sales and pay-downs of MBS of $197.1 million and repayments of loans of $330.0 million offset by $304.2 million of originations and purchases of loans.~~

~~Net cash used in financing activities of $221.9 million for the current year period related primarily to:~~

~~Net repayments of our secured short-term borrowings of $62.0 million, dividend payments on our common stock of $36.8 million, and net repayments of our guaranteed loan financing of $94.5 million.~~

~~Securitization Activity~~

Our Manager’s extensive experience in loan acquisition, origination, servicing and securitization strategies has enabled us to complete several securitizations of SBC and SBA loan assets since January 2011. These securitizations allow us to match fund the SBC and SBA loans on a long-term, non-recourse basis. Four of these securitizations, including Waterfall

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Victoria Mortgage Trust 2011-1 (“SBC-1”), Waterfall Victoria Mortgage Trust 2011-3 (“SBC-3”), Sutherland Commercial Mortgage Trust 2015-4 (“SBC-4”), and Sutherland Commercial Mortgage Trust 2017 (“SBC-6”) are trusts collateralized by non-performing and re-performing acquired SBC loans and a fifth securitization Waterfall Victoria Mortgage Trust 2011-2 (“SBC-2”) is a real estate mortgage investment conduit (“REMIC”) collateralized by performing acquired SBC loans. We have completed three securitizations of newly originated SBC loans, each a REMIC, including ReadyCap Commercial Mortgage Trust 2014-1 (“RCMT 2014-1”), ReadyCap Commercial Mortgage Trust 2015-2 (“RCMT 2015-2”), and ReadyCap Commercial Mortgage Trust 2016-3 (“RCMT 2016-3”). We also completed Ready Capital Mortgage Financing 2017 (“RCMF 2017-FL1), a securitization collateralized by originated transitional loans, and ReadyCap Lending Small Business Trust 2015-1 (“RCLSBL 2015-1”), a securitization collateralized by SBA Section 7(a) Program loans].

In addition, we completed three securitizations of newly originated multi-family Freddie Mac loans, including Freddie Mac Small Balance Mortgage Trust 2016-SB11 (“FRESB 2016-SB11”), Freddie Mac Small Balance Mortgage Trust 2016-SB18 (“FRESB 2016-SB18”), and Freddie Mac Small Balance Mortgage Trust 2017-SB33 (“FRESB 2017-SB33”)].

The assets pledged as collateral for these securitizations were contributed from our portfolio of assets. By contributing these SBC and SBA assets to the various securitizations, these transactions created capacity for us to fund other investments.

Collateralized borrowings under repurchase agreements

The following table presents ~~information on~~ the ~~securitization structures~~amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount of collateralized borrowings outstanding under repurchase agreements during the quarter and ~~related issued tranches~~the highest balance of ~~notes~~any month end during the quarter (dollars in thousands):


Quarter End	Quarter End Balance		Average Balance in Quarter		Highest Month End Balance in Quarter
Q2 2018		443,263		444,963		447,751
Q3 2018		610,251		526,757		610,251
Q4 2018		635,233		622,742		635,233
Q1 2019		597,963		604,107		635,233
Q2 2019		612,383		605,173		612,383
Q3 2019		876,163		744,273		876,163
Q4 2019		809,189		842,676		876,163
Q1 2020		1,159,357		984,273		1,159,357
Q2 2020		714,162		936,760		1,057,522
Q3 2020		624,549		669,356		831,200
Q4 2020		827,569		726,059		827,569
Q1 2021		1,320,644		1,785,656		2,481,436
Q2 2021		1,223,527		1,145,354		1,223,527

The net decrease in the outstanding balances during the second quarter of 2021 was primarily due to ~~investors:~~the liquidation of ANH agency bonds.

82
~~Deal Name~~	~~Asset Class~~	~~Issuance~~	~~Ratings~~		~~Bonds Issued~~
~~WVMT 2011-SBC1~~	~~SBC Acquired Loans~~	~~February 2011~~	NR	$	~~40.5 million~~
~~WVMT 2011-SBC2~~	~~SBC Acquired Loans~~	~~March 2011~~	~~DBRS~~		~~97.6 million~~
~~WVMT 2011-SBC3~~	~~SBC Acquired Loans~~	~~October 2011~~	NR		~~143.4 million~~
~~SCML 2015-SBC4~~	~~SBC Acquired Loans~~	~~August 2015~~	NR		~~125.4 million~~
~~SCMT 2017-SBC6~~	~~SBC Acquired Loans~~	~~August 2017~~	NR		~~139.4 million~~
~~Total - SBC Acquired loan securitizations~~				$	~~546.3 million~~
~~RCMT 2014-1~~	~~SBC Originated Conventional~~	~~September 2014~~	~~MDY / DBRS~~	$	~~181.7 million~~
~~RCMT 2015-2~~	~~SBC Originated Conventional~~	~~November 2015~~	~~MDY / Kroll~~		~~218.8 million~~
~~RCMT 2016-3~~	~~SBC Originated Conventional~~	~~November 2016~~	~~MDY / Kroll~~		~~162.1 million~~
~~Total SBC Originated loan securitizations~~				$	~~562.6 million~~
~~RCMF 2017-FL1~~	~~SBC Originated Transitional~~	~~August 2017~~	~~MDY / Kroll~~		~~198.8 million~~
~~Total Transitional loan securitizations~~				$	~~198.8 million~~
~~FRESB 2016-SB11~~	~~Originated Agency Multi-family~~	~~January 2016~~	~~GSE Wrap~~		~~110.0 million~~
~~FRESB 2016-SB18~~	~~Originated Agency Multi-family~~	~~July 2016~~	~~GSE Wrap~~		~~118.0 million~~
~~FRESB 2017-SB33~~	~~Originated Agency Multi-family~~	~~June 2017~~	~~GSE Wrap~~		~~197.9 million~~
~~Total Freddie Mac Originated loan securitizations~~				$	~~425.9 million~~
~~RCLSBL 2015-1~~	~~SBA 7(a) Loans~~	~~June 2015~~	~~S&P~~	$	~~189.5 million~~
~~Total SBA loan securitizations~~				$	~~189.5 million~~
~~Total securitizations~~				$	~~1,923.1 million~~

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Debt facilities

We ~~used the proceeds from the sale~~maintain various forms of ~~the tranches issued to purchase~~short-term and ~~originate SBC~~long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by loans and ~~SBA loans. We are the primary beneficiary~~investments. The following is a summary of ~~SBC-1, SBC-2, SBC-3, RCMT 2014-1, RCMT 2015-2, RCMT 2016-3, RCMF 2017-FL1, RCLSBL 2015-1, SBC-4, and SBC-6, therefore they are consolidated in~~ our ~~financial statements.~~debt facilities:


									Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size			Pledged Assets Carrying Value		June 30, 2021		December 31, 2020
JPMorgan	Acquired loans, SBA loans	July 2021	1M L + 2.5% to 2.875%	$	200,000		$	57,147	$	42,488	$	36,604
Keybank	Freddie Mac loans	February 2022	SOFR + 1.41%		100,000			37,015		36,533		50,408
East West Bank	SBA loans	October 2022	Prime - 0.821% to + 0.00%		50,000			48,652		41,581		40,542
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50% to 3.00%		237,160	^(a)		63,261		43,554		36,840
Comerica Bank	Residential loans	September 2021	1M L + 1.75%		125,000			90,085		83,613		78,312
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000			124,670		121,761		123,951
Origin Bank	Residential loans	August 2021	Variable Pricing		60,000			28,305		27,186		27,450
Associated Bank	Residential loans	November 2021	1M L + 1.50%		60,000			40,686		38,000		15,556
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000			70,147		21,400		34,400
Credit Suisse	Purchased future receivables	October 2023	1M L + 4.50%		150,000			7,213		1,000		—
Bank of the Sierra	Real estate	August 2050	3.25% to 3.45%		22,770			32,438		22,391		22,611
Total borrowings under credit facilities and other financing agreements ^(b)				$	1,204,930		$	599,619	$	479,507	$	466,674
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 2.50% to 3.25%	$	500,000		$	101,862	$	66,184	$	210,735
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00% to 2.40%		350,000			334,503		187,050		190,567
JPMorgan	Transitional loans	November 2022	1M L + 2.00% to 2.75%		600,000			763,711		571,516		247,616
Performance Trust	Acquired loans	March 2024	1M T + 2.00%		123,000			40,886		35,625		—
Credit Suisse	Fixed rate, Transitional, Acquired loans	May 2022	1M L + 2.00% to 2.35%		500,000			10,066		7,607		—
Credit Suisse	Residential loans	July 2021	L + 3.00%		100,000			83,677		70,570		—
JPMorgan	MBS	September 2021	1.30% to 1.98%		59,794			93,489		59,794		65,407
Deutsche Bank	MBS	July 2021	2.44%		13,157			19,777		13,157		16,354
Citibank	MBS	July 2021	2.39%		47,878			84,189		47,878		58,076
RBC	MBS	October 2021	1.74% to 2.33%		41,006			60,419		41,006		38,814
CSFB	MBS	July 2021	2.40% to 2.95%		58,786			108,138		58,786		—
Various	MBS	July 2021	Variable Pricing		64,354			95,686		64,354		—
Total borrowings under repurchase agreements ^(c)				$	2,457,975		$	1,796,403	$	1,223,527	$	827,569
Total secured borrowings				$	3,662,905		$	2,396,022	$	1,703,034	$	1,294,243
(a) The current facility size is €200.0 million, but has been converted into USD for purposes of this disclosure.
(b) The weighted average interest rate of borrowings under credit facilities was 4.5% and 2.8% as of June 30, 2021 and December 31, 2020, respectively.
(c) The weighted average interest rate of borrowings under repurchase agreements was 2.2% and 3.3% as of June 30, 2021 and December 31, 2020, respectively.

Financing facilities

Deutsche Bank ~~Loan Repurchase Facility~~

loan repurchase facility. Our subsidiaries, ReadyCap Commercial, LLC (“ReadyCap Commercial”), Sutherland Asset I, LLC (“Sutherland Asset I”), Ready Capital Subsidiary REIT I, LLC (“Ready Capital Sub-REIT”) and Sutherland Warehouse Trust II, LLC (“Sutherland Warehouse Trust II”) renewed their master repurchase agreement ~~on February 14, 2017,~~in January 2020, pursuant to which ReadyCap Commercial, Sutherland Asset I, Ready Capital Sub REIT and Sutherland Warehouse Trust II may be advanced an aggregate principal amount of up to ~~$275~~$350 million on originated mortgage loans (the “DB Loan Repurchase Facility”). As of ~~September~~June 30, ~~2017,~~2021, we had ~~$77.0~~$187.1 million outstanding under the DB Loan Repurchase Facility. The DB Loan Repurchase Facility is used to finance SBC loans, and the interest rate is LIBOR plus a spread, which varies depending on the type and age of the loan. The DB Loan Repurchase Facility has been extended through ~~February 2018~~November 2021 and our subsidiaries have an option to extend the DB Loan Repurchase Facility for an additional

~~Table of Contents~~

year, subject to certain conditions. ReadyCap Commercial’s, Sutherland Asset I’s, Ready Capital Sub REIT’s and Sutherland Warehouse Trust IIII’s obligations are fully guaranteed by us.

The eligible assets for the DB Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties subject to certain eligibility criteria, such as property type, geographical location, LTV ratios, debt yield and debt service coverage ratios. The principal amount paid by the bank for each mortgage loan is based on a percentage of the lesser of the mortgaged property value or the principal balance of such mortgage loan. ReadyCap Commercial, Sutherland Asset I, Ready Capital Sub REIT and Sutherland Warehouse Trust II paid the bank an up-front fee and are also required to pay the bank availability fees, and a minimum utilization fee for the DB Loan Repurchase Facility, as well as certain other administrative costs and expenses. The DB Loan Repurchase Facility also includes financial maintenance covenants, which include (i) an adjusted tangible net worth that does not decline by more than 25% in a quarter, 35% in a year or 50% from the highest adjusted tangible net worth, (ii) a minimum liquidity amount of the greater of (a) $5 million and (b) 3%

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of the sum of any outstanding recourse indebtedness plus the aggregate repurchase price of the mortgage loans on the Repurchase ~~Agreement,~~Agreement; provided however, that no less than two-thirds of the liquidity maintained by the Guarantor to satisfy this shall be cash liquidity, (iii) a debt-to-assets ratio no greater than 80% and (iv) a tangible net worth at least equal to the sum of (a) the product of 1/915 and the amount of all non-recourse indebtedness (excluding the aggregate repurchase price) and other securitization indebtedness and (b) the product of 1/3 and the sum of the aggregate repurchase price and all recourse indebtedness.

JPMorgan ~~Loan Repurchase Facility~~

loan repurchase facility. Our subsidiaries, ReadyCap Warehouse Financing, LLC (“ReadyCap Warehouse Financing”) and Sutherland Warehouse Trust, LLC (“Sutherland Warehouse Trust”) entered into a master repurchase agreement in December 2015, pursuant to which ReadyCap Warehouse Financing ~~LLC~~ and Sutherland Warehouse Trust, may sell, and later repurchase, mortgage loans in an aggregate principal amount of up to ~~$250 million~~$400 million. As of October 2019, Ready Capital Mortgage Depositor II, LLC (“Ready Capital Mortgage Depositor II”) was added to the agreement. Our subsidiaries renewed their master repurchase agreement with JPMorgan in November 2020 (the “JPM Loan Repurchase Facility”). In January 2021 the facility was amended for an upsize to $650 million from an effective date of January 14, 2021, through but excluding April 30, 2021, and thereafter downsized to $400 million. In June 2021, the facility was amended for an upsize to $600 million. As of ~~September~~June 30, ~~2017,~~2021, we had ~~$44.9~~$571.5 million outstanding under the JPM Loan Repurchase Facility. The JPM Loan Repurchase Facility is used to finance commercial transitional loans, conventional commercial loans and commercial mezzanine loans and securities and the interest rate is LIBOR plus a spread, which is determined by the lender on an asset-by-asset basis. The JPM Loan Repurchase Facility is committed ~~for a period~~through November 2022, and up to 25% of ~~two years, and~~the then current unpaid obligations of ReadyCap Warehouse Financing’s, ~~and~~ Sutherland Warehouse Trust’s and Ready Capital Mortgage Depositor II, LLC Trust’s obligations are ~~fully~~ guaranteed by us.

The eligible assets for the JPM Loan Repurchase Facility are loans secured by first and junior mortgage liens on commercial properties and subject to approval by JPM as the Buyer. The principal amount paid by the bank for each mortgage loan is based on the principal balance of such mortgage loan. ReadyCap Warehouse Financing and Sutherland Warehouse Trust paid the bank a structuring fee and are also required to pay the bank unused fees for the JPM Loan Repurchase Facility, as well as certain other administrative costs and expenses. The JPM Loan Repurchase Facility also includes financial maintenance covenants, which include (i) total stockholders’ equity must not be permitted to be less than the sum of (a) ~~60%~~65% of total ~~stockholders~~stockholders’ equity as of the ~~closing~~most recent renewal date of the facility plus (b) ~~50%~~65% of the net proceeds of any equity issuance after the ~~closing~~most recent renewal date (ii) maximum leverage of 2:3:1, ~~provided that as of the closing date of the facility the guarantor shall be required to maintain a leverage ratio of less than 2.5:1, of which 0.5 of the 2.5 comprising the~~excluding non-recourse indebtedness ~~in the leverage ratio for such date shall be comprised of short-term US Treasury securities~~ and (iii) liquidity equal to at least the lesser of (a) 4%5% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) ~~$25,000,000.~~$15.0 million.

~~Citibank~~Performance Trust repurchase agreement. Our subsidiaries, ReadyCap Commercial, LLC and Sutherland Asset I, LLC entered into a master repurchase agreement in March 2021, pursuant to which ReadyCap Commercial, LLC and Sutherland Asset I, LLC may be advanced an aggregate principal amount of up to $113 million on performing and non-performing acquired legacy small balance commercial loans (the “Performance Trust Loan Repurchase ~~Agreement~~Facility”). In June 2021, the facility was amended for an upsize to $123 million. As of June 30, 2021, we had $35.6 million outstanding under the Performance Trust Loan Repurchase Facility. The Performance Trust Loan Repurchase Facility is committed until March 2024, and up to 25% of the then current unpaid obligations of ReadyCap Commercial, LLC’s and Sutherland Asset I, LLC’s obligations are guaranteed by us.

Citibank loan repurchase agreement. Our subsidiaries, Waterfall Commercial Depositor, ~~and~~LLC, Sutherland Asset I, LLC, ReadyCap Commercial, LLC and Ready Capital Subsidiary REIT I, LLC renewed a master repurchase agreement in ~~June 2017~~October 2020 with Citibank, N.A. ~~(the "Citi Loan Repurchase Facility" and, together with the DB Loan Repurchase Facility and the JPM Loan Repurchase Facility, the "Loan Repurchase Facilities")~~, pursuant to ~~which Waterfall Commercial Depositor and Sutherland Asset I~~where these subsidiaries may sell, and later repurchase, a trust certificate ~~or the Trust Certificate,~~(the “Trust Certificate”), representing interests in mortgage loans in an aggregate principal amount of up to ~~$200 million, $125 million of which is committed.~~$500 million. As of ~~September~~June 30, ~~2017,~~2021, we had ~~$44.9~~$66.2 million outstanding under the Citi Loan Repurchase Facility. The Citi Loan Repurchase Facility is used to finance SBC loans, and the interest rate is one month LIBOR plus ~~3.00%.~~a spread, depending on asset characteristics. The Citi Loan Repurchase Facility is committed for a period of 364 days, and up to 25% of the then current unpaid obligations of Waterfall Commercial ~~Depositor and~~Depositor’s, Sutherland Asset I’s, Ready Capital Sub REIT’s and ReadyCap Commercial, LLC’s obligations are ~~fully~~ guaranteed by us.

The eligible assets for the Citi Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties, which, amongst other things, generally have ana UPB of less than $10 million. The principal amount paid by the bank for the Trust Certificate is based on a percentage of the lesser of the market value or the UPB of such mortgage loans

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backing the Trust Certificate. Waterfall Commercial Depositor, ~~and~~ Sutherland Asset I, ReadyCap Commercial, LLC and Ready Capital Sub REIT are ~~also~~ required to pay the bank a commitment fee for the Citi Loan Repurchase Facility, as well as

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certain other administrative costs and expenses. The Citi Loan Repurchase Facility ~~also~~ includes financial maintenance covenants, which include (i) our operating partnership’s net asset value not (A) declining more than 15% in any calendar month, (B) declining more than 25% in any calendar quarter, (C) declining more than 35% in any calendar year, or (D) declining more than 50% from our operating partnership’s highest net asset value set forth in any audited financial statement provided to the bank; (ii) our operating partnership maintaining liquidity in an amount equal to at least 1% of our outstanding ~~indebtedness;~~indebtedness(excluding non-recourse liabilities in connection with any securitization transaction) of which no more than 20% could be Marketable Securities; and (iii) the ratio of our operating partnership’s total indebtedness (excluding non-recourse liabilities in connection with any securitization transaction) to our net asset value not exceeding 4:1 at any time.

~~Securities Repurchase Agreements~~

~~We have also~~Credit Suisse repurchase agreement. Our subsidiaries, ReadyCap Warehouse Financing II, LLC and Sutherland Asset I-CS, LLC entered into a master repurchase ~~agreements with four counterparties~~agreement in May 2021, pursuant to ~~fund our acquisitions~~which Ready Cap Warehouse Financing II, LLC and Sutherland Asset I-CS, LLC may be advanced an aggregate principal amount of ~~SBC~~up to $500 million on newly originated and acquired commercial products (excluding SBA and Freddie Small Balance Loans) (the “Credit Suisse Loan Repurchase Facility”). As of June 30, 2021, we had $7.6 million outstanding under the Credit Suisse Loan Repurchase Facility. The Credit Suisse Loan Repurchase Facility is committed until May 2022, and obligations of ReadyCap Warehouse Financing II, LLC’s and Sutherland Asset I-CS, LLC’s obligations are guaranteed by us.

Securities repurchase agreements. As of June 30, 2021, we had $285.0 million of secured borrowings related to ABS and ~~short term investments,~~pledged Trust Certificates with various counterparties.

General statements regarding loan and ~~as of September~~securities repurchase facilities. At June 30, 2017, $148.8 million of borrowings were outstanding with four counterparties. We have master repurchase agreements with two additional counterparties to fund our retained interests in consolidated VIEs. As of September 30, 2017, $66.0 million of borrowings were outstanding with these counterparties.

~~General Statements Regarding Loan and Security Repurchase Facilities~~

~~At September 30, 2017,~~2021, we had ~~$323.0 million~~$1.3 billion in ~~fair~~carrying value of ~~Trust Certificates and~~ loans pledged against our borrowings under the ~~Loan Repurchase Facilities~~loan repurchase facilities and ~~$109.6~~$461.7 million in carrying value fair value of ~~SBC~~ ABS ~~and short term investments~~ pledged against our securities repurchase agreement borrowings.

Under the ~~Loan Repurchase Facilities~~loan repurchase facilities and securities repurchase agreements, we may be required to pledge additional assets to our counterparties ~~(lenders)~~ in the event that the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional assets or cash. Generally, the ~~Loan Repurchase Facilities~~loan repurchase facilities and securities repurchase agreements contain a LIBOR-based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. Further, at September 30, 2017, the average haircut provisions associated with our repurchase agreements was 33.0% for pledged Trust Certificates and loans and was 33.0% and 30.9% for pledged SBC ABS and short-term investments, respectively.

If the estimated fair ~~value~~values of the assets ~~increases~~increase due to changes in market interest rates or other market factors, lenders may release collateral back to us. Margin calls may result from a decline in the value of the investments securing the ~~Loan Repurchase Facilities~~loan repurchase facilities and securities repurchase agreements, prepayments on the loans securing such investments and from changes in the estimated fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of our Company and/or the performance of the assets in question. Historically, disruptions in the financial and credit markets have resulted in increased volatility in these levels, and this volatility could persist as market conditions continue to change. Should prepayment speeds on the mortgages underlying our investments or market interest rates suddenly increase, margin calls on the ~~Loan Repurchase Facilities~~loan repurchase facilities and securities repurchase agreements could result, causing an adverse change in our liquidity position. To date, we have satisfied all of our margin calls and have never sold assets in response to any margin call under these borrowings.

Our borrowings under repurchase agreements are renewable at the discretion of our lenders and, as such, our ability to roll-over such borrowings is not guaranteed. The terms of the repurchase transaction borrowings under our repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association, as to repayment, margin requirements and the segregation of all assets we have initially sold under the repurchase transaction. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction, and cross default and setoff provisions.

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JPMorgan ~~Credit Facility~~

credit facility. We ~~renewed~~amended our ~~master loan and security agreement~~credit facility with JPMorgan in June ~~2017~~2021 providing for a ~~credit facility~~total borrowing capacity of up to ~~$250~~$200 million. As of ~~September~~June 30, ~~2017,~~2021, we had ~~$31.0~~$42.5 million outstanding under this credit facility. ~~The credit facility~~

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~~is structured as a secured loan facility in which ReadyCap Lending LLC and Sutherland 2016‑1 JPM Grantor Trust act as borrowers.~~ Under this facility, ~~ReadyCap~~RCL and Sutherland 2016-1 JPM Grantor Trust pledge loans guaranteed by the SBA under the SBA Section 7(a) Loan Program, SBA 504 loans and other ~~loans which were part of the CIT loan acquisition.~~loans. We act as a guarantor under this facility. The agreement contains financial maintenance covenants, which include (i) ~~Total Stockholders’ Equity~~total stockholders’ equity must not be permitted to be less than the sum of (a) 60% of ~~Total Stockholders Equity~~total stockholders’ equity as of the ~~closing~~most recent renewal date of the facility plus (b) 50% of the net proceeds of any equity issuance after the ~~closing~~most recent renewal date (ii) maximum leverage of ~~2:1, provided that as of the closing date of the facility the guarantor shall be required to maintain a leverage ratio of less than 2.5:~~3:1, excluding ~~securitized debt obligations, of which 0.5 of the 2.5 comprising the~~non-recourse indebtedness ~~in the leverage ratio for such date shall be comprised of short-term US Treasury securities~~ and (iii) liquidity equal to at least the lesser of (a) 4% of the sum of (without duplication) (1) any outstanding recourse indebtedness plus (2) ~~amounts due~~the aggregate amount of indebtedness outstanding under the ~~repurchase agreement and (b) $25,000,000.~~agreement. The amended terms have an interest rate based on loan type ranging from 1one month LIBOR (reset daily), plus ~~3.25-3.5% per annum. The term of the facility is one year, with an option to extend for an additional year.~~a spread.

At ~~September~~June 30, ~~2017,~~2021, we had a leverage ratio of ~~2.3x~~1.8x on a recourse debt-to-equity basis.

We maintain certain assets, which, from time to time, may include cash, unpledged SBC loans, SBC ABS and short term investments (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by our counterparties, or collectively, the “Cushion”, to meet routine margin calls and protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of our investments, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. At ~~September~~June 30, ~~2017,~~2021, we were in compliance with all debt covenants.

East West Bank credit facility. RCL renewed a senior secured revolving credit facility with East West Bank in October 2020, which provides financing of up to $50.0 million. The agreement extends for two years, with an additional one year extension at the Company’s request and pays interest equal to the Prime Rate minus 0.821% on SBA 7(a) guaranteed loans and the Prime Rate plus 0.000% on non-guaranteed loans. At ~~September~~June 30, ~~2017,~~2021, we ~~had $1.6 million of restricted cash pledged against our derivative instruments and borrowings under repurchase agreements.~~were in compliance with all debt covenants.

Other credit ~~facilities~~

facilities. GMFS funds its origination platform through warehouse lines of credit with ~~four~~five counterparties with total borrowings outstanding of ~~$94.7~~$292.0 million at ~~September~~June 30, ~~2017.~~2021. GMFS ~~has a~~utilizes committed warehouse lines of credit agreements ranging from $50 million to $150 million, ~~committed warehouse line~~with expiration dates between August 2021 and September 2023. The lines of credit agreement expiring on March 14, 2018, a $40 million committed warehouse line of credit expiring on August 12, 2017, a $65 million committed warehouse line of credit expiring on November 24, 2017, and a $40 million committed warehouse line of credit expiring on May 31, 2018. The lines are collateralized by the underlying mortgages, ~~and~~ related documents, and instruments, and contain a LIBOR-based financing rate and term, haircut and collateral posting provisions which depend on the types of collateral and the counterparties involved. These agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. ~~We were~~In addition, in ~~compliance~~connection with ~~all significant debt covenants~~the acquisition of ANH, we assumed approximately $1.8 billion of secured borrowings, of which approximately $1.6 billion has been repaid as of June 30, 2021.

PPP borrowing facilities

On March 27, 2020, the U.S. Congress approved, and President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides approximately $2 trillion in financial assistance to individuals and businesses resulting from the outbreak of COVID-19. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing and loan forgiveness and/or forbearance. The primary catalyst of small business stimulus in the CARES Act is referred to as the Paycheck Protection Program (“PPP”), an SBA loan that temporarily supports businesses in order to retain their workforce during the COVID-19 pandemic.

In January 2021, PPP was reopened to provide funding to new borrowers and certain existing borrowers. We have elected to participate again in PPP in 2021 as both a direct lender and a service provider. We use the following two facilities in order to participate in funding PPP loans.

PPP Participant Bank financing agreements. In late January 2021 RCL entered into two agreements with a certain PPP participant bank, as follows:

Master PPP Loan Participation Purchase Agreement: ReadyCap Lending (“RCL”) sells to such PPP participant bank 100% undivided, beneficial ownership interests in certain PPP originated loans with RCL retaining the

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record legal title to each participated PPP Loan. RCL continues to service such loans. The purchase price equals 99.825% for the first one-billion dollars of PPP Loans originated and 99.55% for all subsequent PPP Loans originated by RCL; and provided that if a participation limit increase is in effect, the purchase price for any participation effected under such participation limit increase shall be 98.75%. The purchase commitment fee paid to such PPP participant bank is $2 million.

Letter Agreement Repurchase Option: RCL shall have the option to repurchase any participation that has been purchased by such PPP participant bank at a purchase price equal to the outstanding loan amount of the related PPP Loan as of the repurchase date plus any accrued interest. RCL may only exercise the repurchase option with respect to a participation during the seven Business Day period commencing on the business day immediately following the purchase date with respect to such participation. RCL established a bank account at the PPP participant bank, and is to maintain a balance of at least $10 million.

The termination date of the agreement shall mean the date as of which all of the PPP loans related to a participation sold have been paid in full and all collections with respect thereto have been paid, or when we no longer hold legal title to any PPP loan related to a participation sold. As of June 30, 2021, this financing agreement has been fully repaid.

Paycheck Protection Program Facility borrowings. RCL utilizes the ability to receive advances from the Federal Reserve through the Paycheck Protection Program Facility (“PPPLF”). Loans are participated with a PPP participant bank in accordance with the financing agreement described above, repurchased from such PPP participant bank, and then pledged using PPPLF. The program charges an interest rate of 0.35%. As of June 30, 2021, we had approximately $2.3 billion outstanding under this credit facility.

Public debt offerings

Convertible notes. On August 9, 2017, we closed an underwritten public sale of $115.0 million aggregate principal amount of its 7.00% convertible senior notes due 2023 (the “Convertible Notes”). The Convertible Notes will mature on August 15, 2023, unless earlier repurchased, redeemed or converted. During certain periods and subject to certain conditions, the Convertible Notes will be convertible by holders into shares of our common stock. As of June 30, 2021, the conversion rate was 1.6146 shares of common stock per $25 principal amount of the Convertible Notes, which equals conversion price of approximately $15.48 per share of our common stock. Upon conversion, holders will receive, at our discretion, cash, shares of our common stock or a combination thereof.

We may redeem all or any portion of the Convertible Notes on or after August 15, 2021, if the last reported sale price of our common stock has been at least 120% of the conversion price in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price payable in cash equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. Additionally, upon the occurrence of certain corporate transactions, holders may require us to purchase the Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.

Corporate debt

The 2021 Notes

On April 27, 2018, we completed the public offer and sale of $50.0 million aggregate principal amount of 6.50% Senior Notes due 2021 (the “2021 Notes”). We issued the 2021 Notes under a base indenture, dated August 9, 2017, (the “base indenture”) as supplemented by the second supplemental indenture, dated as of April 27, 2018, between us and U.S. Bank National Association, as trustee. The 2021 Notes accrued interest at a rate of 6.50% per annum, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year. The 2021 Notes matured on April 30, 2021.

On March 25, 2021, we redeemed all of the outstanding 2021 Notes, at a redemption price equal to 100% of the principal amount of the 2021 Notes plus accrued and unpaid interest, for cash.

The 6.20% 2026 Notes

On July 22, 2019, we completed the public offer and sale of $57.5 million aggregate principal amount of 6.20% Senior Notes due 2026 (the “6.20% 2026 Notes”), which includes $7.5 million aggregate principal amount of 6.20% 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of the 6.20% 2026 Notes were approximately $55.3 million, after deducting underwriters’ discount and estimated offering expenses. We

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contributed the net proceeds to Sutherland Partners, L.P. (the “Operating Partnership”), the operating partnership subsidiary, in exchange for the ~~three~~issuance by the Operating Partnership of a senior note with terms that are substantially equivalent to the terms of the 6.20% 2026 Notes.

The 6.20% 2026 Notes bear interest at a rate of 6.20% per annum, payable quarterly in arrears on January 30, April 30, July 30, and ~~nine~~October 30 of each year. The 6.20% 2026 Notes will mature on July 30, 2026, unless earlier repurchased or redeemed.

We may redeem for cash all or any portion of the 6.20% 2026 Notes, at our option, on or after July 30, 2022 and before July 30, 2025 at a redemption price equal to 101% of the principal amount of the 6.20% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On or after July 30, 2025, we may redeem for cash all or any portion of the 6.20% 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 6.20% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If we undergo a change of control repurchase event, holders may require us to purchase the 6.20% 2026 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 6.20% 2026 Notes to be purchased, plus accrued and unpaid interest.

The 6.20% 2026 Notes are our senior obligations and will not be guaranteed by any of our subsidiaries, except to the extent described in the Indenture upon the occurrence of certain events. The 6.20% 2026 Notes rank equal in right of payment to any of our existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by us) preferred stock, if any, of our subsidiaries.

On December 2, 2019, we completed an additional public offering and sale of $45.0 million aggregate principal amount of the 6.20% 2026 Notes. The new notes have the same terms (except with respect to issue date, issue price and the date from which interest will accrue) and are fully fungible with and are treated as a single series of debt securities as the 6.20% 2026 notes we issued on July 22, 2019.

The 5.75% 2026 Notes

On February 10, 2021, we completed the public offer and sale of $201.3 million aggregate principal amount of 5.75% Senior Notes due 2026 (the “5.75% 2026 Notes”) which includes $26.3 million aggregate principal amount of 5.75% 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of the 5.75% 2026 Notes were approximately $195.2 million, after deducting underwriters’ discount and estimated offering expenses. We contributed the net proceeds to the Operating Partnership in exchange for the issuance by the Operating Partnership of a senior note with terms that are substantially equivalent to the terms of the 5.75% 2026 Notes.

Prior to February 15, 2023, the 5.75% 2026 Notes will not be redeemable by us. On or after February 15, 2023, we may redeem for cash all or any portion of the 5.75% 2026 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 5.75% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If we undergo a change of control repurchase event, holders may require us to purchase the 5.75% 2026 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 5.75% 2026 Notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase, as described in greater detail in the base indenture, as supplemented by the fifth supplemental indenture dated as of February 10, 2021.

The 5.75% 2026 Notes are our senior unsecured obligations and will not be guaranteed by any of our subsidiaries, except to the extent described in the Indenture upon the occurrence of certain events. The 5.75% 2026 Notes rank equal in right of payment to any of our existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by us) preferred stock, if any, of our subsidiaries.

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Junior subordinated notes. On March 19, 2021, we completed the ANH Merger which included the Company taking on the outstanding junior subordinated notes (“Junior subordinated notes”) issued of ANH. On March 15, 2005 ANH issued $37,380,000 of junior subordinated notes to a newly formed statutory trust, Anworth Capital Trust I, organized by ANH under Delaware law. The trust issued $36,250,000 in trust preferred securities, of which $15,000,000 were for I-A notes and $21,250,000 for I-B notes, to unrelated third party investors. Both the junior subordinated notes and the trust preferred securities require quarterly payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. Both the junior subordinated notes and the trust preferred securities will mature in 2035 and are currently redeemable, at our option, in whole or in part, without penalty. ANH used the net proceeds of this issuance to invest in Agency MBS. In accordance with ASC 810-10, Anworth Capital Trust I does not meet the requirements for consolidation.

The Debt ATM Agreement

On May 20, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which we may offer and sell, from time to time, up to $100.0 million of the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) (the “Debt ATM Program”). The Agent is not required to sell any specific number of the notes, but the Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between the Agent and us. During the three months ended ~~September~~June 30, ~~2017.~~2021, we did not sell any amount of the 6.20% 2026 Notes or the 5.75% 2026 Notes through the Debt ATM Program.

Other long term financing

ReadyCap ~~Holdings’~~Holdings 7.50% senior secured notes due 2022. During 2017, ReadyCap Holdings LLC, a subsidiary of the Company, issued $140.0 million in 7.50% Senior Secured Notes due ~~2022~~

2022. On ~~February 13, 2017,~~January 30, 2018, ReadyCap Holdings LLC, ~~(“ReadyCap Holdings”) an indirect wholly-owned subsidiary of our Company, issued $75.0 million in aggregate principal amount of its 7.50% Senior Secured Notes due 2022 in a private placement.~~ ~~On June 13, 2017, ReadyCap Holdings,~~ issued an additional ~~$65.0~~$40.0 million in aggregate principal amount of 7.50% Senior Secured Notes due 2022, which have identical terms (other than issue date, issue price and ~~issue price)~~the date from which interest will accrue) to the notes issued ~~on February 13,~~during 2017 (collectively “the Senior Secured Notes”). The additional ~~$65.0~~$40.0 million in Senior Secured Notes were priced with a ~~yield-to-maturity~~yield to par call date of ~~6.75%~~6.5%. ~~The Senior Secured Notes are senior secured obligations of ReadyCap Holdings.~~ Payments of the amounts due on the Senior Secured Notes are fully and unconditionally guaranteed by the ~~Guarantors,~~ Company and its subsidiaries: Sutherland Partners LP, Sutherland Asset I, LLC, and ReadyCap ~~Commercial, LLC.~~.Commercial. The funds were used to fund new SBC and SBA loan originations and new SBC loan acquisitions.

The Senior Secured Notes bear interest at 7.50% per annum payable semiannually on each February 15 and August ~~15, beginning on August 15, 2017.~~15. The Senior Secured Notes will mature on February 15, 2022, unless redeemed or repurchased prior to such date. ReadyCap Holdings may redeem the Senior Secured Notes prior to November 15, 2021, at its option, in whole or in part at any time and from time to time, at a price equal to 100% of the outstanding principal

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amount thereof, plus the applicable “make-whole” premium as of, and unpaid interest, if any, accrued to, the redemption date. On and after November 15, 2021, ReadyCap Holdings may redeem the Senior Secured Notes, at its option, in whole or in part at any time and from time to time, at a price equal to 100% of the outstanding principal amount thereof plus unpaid interest, if any, accrued to the redemption date.

ReadyCap Holdings’ and the Guarantors’ respective obligations under the Senior Secured Notes and the Guarantees are secured by a perfected first-priority lien on the capital stock of ReadyCap Holdings and ReadyCap Commercial and certain other assets owned by certain of our Company’s subsidiaries as described in greater detail in our Current Report on Form 8-K filed on June 15, 2017. The Senior Secured Notes were issued pursuant to an indenture (the "Indenture") and a first supplemental indenture (the "First Supplemental Indenture"), which contains covenants that, among other things: (i) limit the ability of our Company and its subsidiaries (including ReadyCap Holdings and the other Guarantors) to incur additional indebtedness; (ii) require that our Company maintain, on a consolidated basis, quarterly compliance with the applicable consolidated recourse indebtedness to equity ratio of our Company and consolidated indebtedness to equity ratio of our Company and specified ratios of our Company’s stockholders’ equity to aggregate principal amount of the outstanding Senior Secured Notes and our Company's consolidated unencumbered assets to aggregate principal amount of the outstanding Senior Secured Notes; (iii) limit the ability of ReadyCap Holdings and ReadyCap Commercial to pay dividends or distributions on, or redeem or repurchase, the capital stock of ReadyCap Holdings or ReadyCap Commercial; (iv) limit (1) ~~ReadyCap's Holdings~~ReadyCap Holdings’ ability to create or incur any lien on the collateral and (2) unless the Senior Secured Notes are equally and ratably secured, (a) ~~ReadyCap's Holdings~~ReadyCap Holdings’ ability to create or incur any lien on the capital stock of its wholly-owned subsidiary, ReadyCap Lending and (b) ~~ReadyCap's Holdings~~ReadyCap Holdings’ ability to permit ReadyCap Lending to create or incur any lien on its assets to secure indebtedness of its affiliates other than its subsidiaries or any securitization entity;

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and (v) limit ReadyCap ~~Holding's~~Holdings’ and the Guarantors' ability to consolidate, merge or transfer all or substantially all of ~~ReadyCap' Holdings~~ReadyCap Holdings’ and the Guarantors’ respective properties and assets. The First Supplemental Indenture also requires that our Company ensure that the Replaceable Collateral Value (as defined therein) is not less than the aggregate principal amount of the Senior Secured Notes outstanding as of the last day of each of our Company's fiscal quarters.

AsSecuritization transactions

Our Manager’s extensive experience in loan acquisition, origination, servicing and securitization strategies has enabled us to complete several securitizations of ~~September 30, 2017, we are in compliance with all covenants with respect~~SBC and SBA loan assets since January 2011. These securitizations allow us to match fund the SBC and SBA loans on a long-term, non-recourse basis. The assets pledged as collateral for these securitizations were contributed from our portfolio of assets. By contributing these SBC and SBA assets to the ~~Senior Secured Notes.~~various securitizations, these transactions created capacity for us to fund other investments.

~~Convertible Notes~~The following table presents information on the securitization structures and related issued tranches of notes to investors:


Deal Name	Collateral Asset Class	Issuance	Active / Collapsed	Bonds Issued (in $ millions)
Trusts (Firm sponsored)
Waterfall Victoria Mortgage Trust 2011-1 (SBC1)	SBC Acquired loans	February 2011	Collapsed	$	40.5
Waterfall Victoria Mortgage Trust 2011-3 (SBC3)	SBC Acquired loans	October 2011	Collapsed		143.4
Sutherland Commercial Mortgage Trust 2015-4 (SBC4)	SBC Acquired loans	August 2015	Collapsed		125.4
Sutherland Commercial Mortgage Trust 2018 (SBC7)	SBC Acquired loans	November 2018	Collapsed		217.0
ReadyCap Lending Small Business Trust 2015-1 (RCLT 2015-1)	Acquired SBA 7(a) loans	June 2015	Collapsed		189.5
ReadyCap Lending Small Business Loan Trust 2019-2 (RCLT 2019-2)	Originated SBA 7(a) loans, Acquired SBA 7(a) loans	December 2019	Active		131.0

Real Estate Mortgage Investment Conduits (REMICs)
ReadyCap Commercial Mortgage Trust 2014-1 (RCMT 2014-1)	SBC Originated conventional	September 2014	Active	$	181.7
ReadyCap Commercial Mortgage Trust 2015-2 (RCMT 2015-2)	SBC Originated conventional	November 2015	Active		218.8
ReadyCap Commercial Mortgage Trust 2016-3 (RCMT 2016-3)	SBC Originated conventional	November 2016	Active		162.1
ReadyCap Commercial Mortgage Trust 2018-4 (RCMT 2018-4)	SBC Originated conventional	March 2018	Active		165.0
Ready Capital Mortgage Trust 2019-5 (RCMT 2019-5)	SBC Originated conventional	January 2019	Active		355.8
Ready Capital Mortgage Trust 2019-6 (RCMT 2019-6)	SBC Originated conventional	November 2019	Active		430.7
Waterfall Victoria Mortgage Trust 2011-2 (SBC2)	SBC Acquired loans	March 2011	Active		97.6
Sutherland Commercial Mortgage Trust 2018 (SBC6)	SBC Acquired loans	August 2017	Active		154.9
Sutherland Commercial Mortgage Trust 2019 (SBC8)	SBC Acquired loans	June 2019	Active		306.5
Sutherland Commercial Mortgage Trust 2020 (SBC9)	SBC Acquired loans	June 2020	Active		203.6
Sutherland Commercial Mortgage Trust 2021 (SBC10)	SBC Acquired loans	May 2021	Active		232.6

Collateralized Loan Obligations (CLOs)
Ready Capital Mortgage Financing 2017– FL1	SBC Originated transitional	August 2017	Collapsed	$	198.8
Ready Capital Mortgage Financing 2018 – FL2	SBC Originated transitional	June 2018	Collapsed		217.1
Ready Capital Mortgage Financing 2019 – FL3	SBC Originated transitional	April 2019	Active		320.2
Ready Capital Mortgage Financing 2020 – FL4	SBC Originated transitional	June 2020	Active		405.3
Ready Capital Mortgage Financing 2021 – FL5	SBC Originated transitional	March 2021	Active		628.9

Trusts (Non-firm sponsored)
Freddie Mac Small Balance Mortgage Trust 2016-SB11	Originated agency multi-family	January 2016	Active	$	110.0
Freddie Mac Small Balance Mortgage Trust 2016-SB18	Originated agency multi-family	July 2016	Active		118.0
Freddie Mac Small Balance Mortgage Trust 2017-SB33	Originated agency multi-family	June 2017	Active		197.9
Freddie Mac Small Balance Mortgage Trust 2018-SB45	Originated agency multi-family	January 2018	Active		362.0
Freddie Mac Small Balance Mortgage Trust 2018-SB52	Originated agency multi-family	September 2018	Active		505.0
Freddie Mac Small Balance Mortgage Trust 2018-SB56	Originated agency multi-family	December 2018	Active		507.3
Key Commercial Mortgage Trust 2020-S3⁽¹⁾	SBC Originated conventional	September 2020	Active		263.2
⁽¹⁾ Contributed portion of assets into trust

~~On August 9, 2017,~~We used the ~~Company closed an underwritten public~~proceeds from the sale of $115.0 million aggregate principal amount of its 7.00% convertible senior notes due 2023 (“Convertible Notes”). The Convertible Notes will mature on August 15, 2023, unless earlier repurchased, redeemed or converted. During certain periods and subject to certain conditions, the notes will be convertible by holders into shares of the Company's common stock at an initial conversion rate of 1.4997 shares of common stock per $25 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $16.67 per share of common stock. Upon conversion, holders will receive, at the Company's discretion, cash, shares of the Company's common stock or a combination thereof.

The Company may, upon the satisfaction of certain conditions, redeem all or any portion of the Convertible Notes, at its option, on or after August 15, 2021, at a redemption price payable in cash equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. Additionally, upon the occurrence of certain corporate transactions, holders may require the Companytranches issued to purchase and originate SBC and SBA loans. We are the ~~Convertible Notes for cash at a purchase price equal to 100%~~primary beneficiary of ~~the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.~~

~~GMFS Settlement Agreement~~

A counterparty (the “Counterparty”) whose predecessor purchased mortgage loans from GMFS, which is currently our subsidiary, asserted claims (the “Claims”) against GMFS for breach of representations and warranties arising out these mortgage loan sales. We estimate that dating back to a period that began in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold and servicing was released by GMFS to the predecessor to the Counterparty. GMFS entered into a statute of limitations tolling agreement with the Counterparty on December 12, 2013 related to the Claims, which was further amended to extend the expiration date, most recently to May 15, 2017.

~~On April 25, 2017, the Company and GMFS entered into a definitive agreement (the “Settlement Agreement”) to settle~~ all Claims with the Counterparty and provide for mutual releases. Pursuant to the Settlement Agreement, the Company has paid a total of $6.0 million in cash and issued approximately $4.0 million in shares of the Company's common stock (275,862 shares issued) to the Counterparty (the “Shares”), resulting in a total of $10.0 million of

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consideration paid. The Shares were issued on May 2, 2017, in a private placement transaction. As part of the settlement, the Company has granted the Counterparty customary resale registration rights.

During the period beginning on the 24-month anniversary of the date of the Settlement Agreement (and ending 30 days thereafter), the Counterparty will have the right, but not the obligation, to require that the Company repurchase any and all the Shares that the Counterparty then owns at a price per share equal to 65% of the then last reported book value per share of the Company's common stock.

GMFS was an indirect subsidiary of ZAIS when the Company completed its merger transaction with ZAIS on October 31, 2016. As disclosed in the Joint Proxy Statement Prospectus used in connection with the merger transaction andfirm sponsored securitizations, therefore they are consolidated in our annual report on Form 10-K for the year ended December 31, 2016, ZAIS had originally acquired GMFS on October 31, 2014 (the “GMFS 2014 acquisition”) from investment partnerships that were advised by our Manager,financial statements.

Contractual Obligations and from certain other entities controlled by GMFS management (together, the “2014 GMFS sellers”). The terms of the GMFS 2014 acquisition provided for the payment of both cash consideration and the possible payment of additional contingent consideration based on the achievement by GMFS of certain financial milestones specified in the GMFS 2014 acquisition agreement.Off-Balance Sheet Arrangements

The 2014 GMFS acquisition agreement contained representations and warranties related to GMFS, as well as indemnification obligations to cover breaches of representations and warranties, repurchase claims or demands from investors in respect of mortgage loans originated, purchased or sold by GMFS prior to the closing date of the acquisition. The 2014 GMFS acquisition agreement also established an escrow fund to support the payment of indemnification claims and allowed for indemnification claims to be offset against the contingent consideration that would otherwise be payable to the 2014 GMFS sellers under the 2014 GMFS acquisition agreement.

Under the terms of the indemnification provisions contained in the GMFS 2014 acquisition agreement, the 2014 GMFS sellers are liable for amounts paid in settlement of Claims made with their consent, which consent was not to be unreasonably withheld or delayed. Certain of the 2014 GMFS sellers did not consent to the settlement, and as a result, there can be no assurance that the exercise of the right to indemnification by the Company under the terms of the 2014 acquisition agreement would be successful.

Since the resolution of the Claims and related settlement occurred subsequent to the March 31, 2017 balance sheet date, but before the issuance of the Q1 2017 financial statements, the effects had been reflected and recognized in the consolidated financial statements as of March 31, 2017 included in the quarterly report on Form 10-Q filed on May 10, 2017.

~~The settlement did not result in a charge to our earnings or otherwise adversely impact our results of operations.~~

~~Contractual Obligations~~

Other than the ~~Senior Secured Notes and Convertible Notes~~items referenced above, there have been no material changes to our contractual obligations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~ 2021. See Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations" in the Company's annual report on Form 10-K for further details.

~~Off-Balance Sheet Arrangements~~

As of the date of this quarterly report on Form 10-Q, we had no off-balance sheet ~~arrangements.~~arrangements, other than as disclosed.

~~Inflation~~Critical Accounting Policies and Use of Estimates

Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our

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financial statements are based were reasonable at the time made, based upon information available to us at that time. The following discussion describes the critical accounting estimates that apply to our operations and require complex management judgment. This summary should be read in conjunction with our accounting policies and use of estimates included in “Notes to Consolidated Financial Statements, Note 3 – Summary of Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s annual report on Form 10-K.

Allowance for credit losses

The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value (“LTV”) ratio and economic conditions. The allowance for credit losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost. The allowance for credit losses required under ASU 2016-13 is deducted from the respective loans’ amortized cost basis on our consolidated balance sheets. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

In connection with the Company’s adoption of ASU 2016-13 on January 1, 2020, the Company implemented new processes including the utilization of loan loss forecasting models, updates to the Company’s reserve policy documentation, changes to internal reporting processes and related internal controls. The Company has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2019 and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. The Company might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.

The Company estimates the CECL expected credit losses for its loan portfolio at the individual loan level. Significant inputs to the Company’s forecasting methods include (i) key loan-specific inputs such as LTV, vintage year, loan-term, underlying property type, occupancy, geographic location, and others, and (ii) a macro-economic forecast. These estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.

In certain instances, the Company considers relevant loan-specific qualitative factors to certain loans to estimate its CECL expected credit losses. The Company considers loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that the Company determines that foreclosure of the collateral is probable, the Company measures the expected losses based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that the Company determines foreclosure is not probable, the Company applies a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan.

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While we have a formal methodology to determine the adequate and appropriate level of the allowance for credit losses, estimates of inherent loan losses involve judgment and assumptions as to various factors, including current economic conditions. Our determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for loan losses will vary from period to period based on management's ongoing assessment of the adequacy of the allowance for credit losses.

Significant judgment is required when evaluating loans for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 6 – Loans and Allowance for Credit Losses” included in this Form 10-Q for results of our loan impairment evaluation.

Valuation of financial assets and liabilities carried at fair value

We measure our MBS, derivative assets and liabilities, residential mortgage servicing rights, and any assets or liabilities where we have elected the fair value option at fair value, including certain loans we have originated that are expected to be sold to third parties or securitized in the near term.

We have established valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, that the valuation approaches are consistently applied, and the assumptions and inputs are reasonable. We also have established processes to provide that the valuation methodologies, techniques and approaches for investments that are categorized within Level 3 of the ASC 820 Fair Value Measurement fair value hierarchy (the “fair value hierarchy”) are fair, consistent and verifiable. Our processes provide a framework that ensures the oversight of our fair value methodologies, techniques, validation procedures, and results.

When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Refer to “Notes to Consolidated Financial Statements, Note 7 – Fair Value Measurements” included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K for a more complete discussion of our critical accounting estimates as they pertain to fair value measurements.

Servicing rights impairment

Servicing rights, at amortized cost, are initially recorded at fair value and subsequently carried at amortized cost. We have elected the fair value option on our residential mortgage servicing rights, which are not subject to impairment.

For purposes of testing our servicing rights, carried at amortized cost, for impairment, we first determine whether facts and circumstances exist that would suggest the carrying value of the servicing asset is not recoverable. If so, we then compare the net present value of servicing cash flow with its carrying value. The estimated net present value of servicing cash flows of the intangibles is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted loan prepayment rates, delinquency rates and anticipated maturity defaults. If the carrying value of the servicing rights exceeds the net present value of servicing cash flows, the servicing rights are considered impaired and an impairment loss is recognized in earnings for the amount by which carrying value exceeds the net present value of servicing cash flows. We monitor the actual performance of our servicing rights by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.

Significant judgment is required when evaluating servicing rights for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 9 – Servicing Rights” included in this Form 10-Q for a more complete discussion of our critical accounting estimates as they pertain to servicing rights impairment.

Refer to “Notes to Consolidated Financial Statements, Note 4– Recently Issued Accounting Pronouncements” included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s annual report on Form 10-K for a discussion of recent accounting developments and the expected impact to the Company.

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Inflation. Virtually all of our assets and liabilities are and will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with U.S. GAAP and our activities and balance sheet shall be measured with reference to historical cost and/or fair market value without considering inflation.

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Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk

In the normal course of business, we enter into transactions in various financial instruments that expose us to various types of risk, both on and ~~off balance~~off-balance sheet, which are associated with such financial instruments and markets for which we invest. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, ~~off balance~~off-balance sheet risk and prepayment risk. Many of these risks have been augmented due to the continuing economic disruptions caused by the COVID-19 pandemic which remain uncertain and difficult to predict. We continue to monitor the impact of the pandemic and the effect of these risks in our operations.

Market ~~Risk~~

risk.Market risk is the potential adverse changes in the values of the financial instrument due to unfavorable changes in the level or volatility of interest rates, foreign currency exchange rates, or market values of the underlying financial instruments. We attempt to mitigate our exposure to market risk by entering into offsetting transactions, which may include purchase or sale of interest bearing securities and equity securities.

Credit ~~Risk~~

risk. We are subject to credit risk in connection with our investments in SBC loans and SBC ABS and other target assets we may acquire in the future. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value-driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur which could adversely impact operating results.

The COVID-19 pandemic has adversely impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in property renovations currently planned or underway. These negative conditions may persist into the future and impair borrower’s ability to pay principal and interest due under our loan agreements. We maintain robust asset management relationships with our borrowers and have leveraged these relationships to address the potential impact of the COVID-19 pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality and retail assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans. Accordingly, we have discussed with our borrowers potential near-term defensive loan modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic, and which would typically be coupled with an additional equity commitment and/or guaranty from sponsors. As of June 30, 2021, approximately 0.7% of the loans in our commercial real estate portfolio are in forbearance plans. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments.

Interest ~~Rate Risk~~

rate risk. Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

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Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, subject to a floor, as determined by the particular financing arrangement. The general impact of changing interest rates are discussed above under “— Factors Impacting Operating Results — Changes in Market Interest Rates.” In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest-earning assets and interest-bearing liabilities.

Additionally, non-performing SBC loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them. Because non-performing SBC loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for SBC financing.

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The following table projects the impact on our interest income and expense for the twelve month period following ~~September~~June 30, ~~2017,~~2021, assuming an immediate increase or decrease of 25, 50, 75, and 100 basis points in LIBOR:

12-month pretax net interest income sensitivity profiles

Instantaneous change in rates
(in thousands)

25 basis point increase

50 basis point increase

75 basis point increase

100 basis point increase

25 basis point decrease

50 basis point decrease

75 basis point decrease

100 basis point decrease
Assets:

   Acquired loans
$
511
$
1,022
$
1,534
$
2,051
$
(281)
$
(566)
$
(839)
$
(1,109)
   Originated SBC loans

38

76

114

151

(38)

(76)

(113)

(140)
   Originated Transitional loans

773

1,546

2,319

3,113

(569)

(1,043)

(1,379)

(1,481)
   Originated Freddie Mac loans

58

115

173

230

-

-

-

-
   Acquired SBA 7(a) loans

413

827

1,240

1,654

(413)

(826)

(1,239)

(1,653)
   Originated SBA 7(a) loans

98

196

293

391

(98)

(196)

(293)

(391)
   Originated Residential Agency loans

-

-

-

-

-

-

-

-
Total

$ 1,891

$ 3,782

$ 5,672

$ 7,590

$ (1,399)

$ (2,706)

$ (3,864)

$ (4,774)
Liabilities

    Repurchase agreements
$
506
$
1,012
$
1,518
$
2,024
$
(506)
$
(1,012)
$
(1,518)
$
(2,024)
    Credit facilities

429

858

1,287

1,716

(429)

(858)

(1,287)

(1,716)
    Securitized debt obligations

620

1,240

1,860

2,479

(620)

(1,240)

(1,860)

(2,479)
Total

$ 1,555

$ 3,110

$ 4,665

$ 6,220

$ (1,555)

$ (3,110)

$ (4,665)

$ (6,220)

Total Net Impact to Net Interest Income (Expense)
$ 336

$ 672

$ 1,008

$ 1,371

$ 156

$ 404

$ 801

$ 1,446


		12-month pretax net interest income sensitivity profiles
		Instantaneous change in rates
(in thousands)		25 basis point increase		50 basis point increase		75 basis point increase		100 basis point increase		25 basis point decrease		50 basis point decrease		75 basis point decrease		100 basis point decrease
Assets:
Loans held for investment	$	6,923	$	13,827	$	20,732	$	27,636	$	(1,046)	$	(1,903)	$	(2,667)	$	(3,423)
Interest rate swap hedges		757		1,515		2,272		3,030		(757)		(1,515)		(2,272)		(3,030)
Mortgage backed securities		357		715		1,072		1,429		(182)		(351)		(520)		(689)
Total	$	8,037	$	16,057	$	24,076	$	32,095	$	(1,985)	$	(3,769)	$	(5,459)	$	(7,142)
Liabilities:
Recourse debt	$	(3,489)	$	(6,867)	$	(10,337)	$	(13,827)	$	1,197	$	1,447	$	1,619	$	1,753
Non-recourse debt		(2,922)		(5,844)		(8,767)		(11,689)		1,401		1,779		2,156		2,534
Total	$	(6,411)	$	(12,711)	$	(19,104)	$	(25,516)	$	2,598	$	3,226	$	3,775	$	4,287
Total Net Impact to Net Interest Income (Expense)	$	1,626	$	3,346	$	4,972	$	6,579	$	613	$	(543)	$	(1,684)	$	(2,855)

Such hypothetical impact of interest rates on our variable rate debt does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in our financial structure.

Liquidity ~~Risk~~

risk. Liquidity risk arises in our investments and the general financing of our investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at a reasonable price, in addition to potential increases in collateral requirements during times of heightened market volatility. If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss. We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in SBC loans, ABS and other financial instruments. Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements. While we may finance certain investment in security positions using traditional margin arrangements and reverse repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer-term financing vehicles may be utilized to attempt to provide us with sources of long-term financing.

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Prepayment ~~Risk~~

risk. Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

SBC ~~Loan~~loan and ABS ~~Extension Risk~~

extension risk.Our Manager computes the projected ~~weighted‑average~~weighted-average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the mortgages or extend. If prepayment rates decrease in a rising interest rate environment or extension options are exercised, the life of the ~~fixed‑rate~~fixed-rate assets could extend beyond the term of the secured debt

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agreements. This could have a negative impact on our results of operations. In some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Real ~~Estate Risk~~

estate risk. The market values of commercial mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.

Fair ~~Value Risk~~

value risk. The estimated fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of the ~~fixed‑rate~~fixed-rate investments would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the ~~fixed‑rate~~fixed-rate investments would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our assets recorded and/or disclosed may be adversely impacted. Our economic exposure is generally limited to our net investment position as we seek to fund fixed rate investments with fixed rate financing or variable rate financing hedged with interest rate swaps.

Counterparty ~~Risk~~

risk. We finance the acquisition of a significant portion of our commercial and residential mortgage loans, MBS and other assets with our repurchase agreements, credit facilities, and ~~credit facilities.~~other financing agreements. In connection with these financing arrangements, we pledge our mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings ( ~~i.e.~~(i.e. the haircut) such that the borrowings will be over-collateralized. As a result, we are exposed to the counterparty if, during the term of the financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.

We are exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. We enter into derivative instruments, such as interest rate swaps and credit default swaps (“CDS”), to mitigate these risks. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for us making payments based on a fixed interest rate over the life of the swap contract. CDSs are executed in order to mitigate the risk of deterioration in the current credit health of the commercial mortgage market.

Certain of our subsidiaries have entered into over-the-counter interest rate swap agreements to hedge risks associated with movements in interest rates. Because certain interest rate swaps were not cleared through a central counterparty, we remain exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an over-the-counter swap counterparty cannot perform under the terms of an interest rate swap, our subsidiary would not receive payments due under that agreement, we may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While we would seek to terminate the relevant over-the-counter swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that we would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, we could be forced to cover our unhedged liabilities at the then current market price. We may also be at risk for any collateral we have pledged to secure our obligations under the over-the-counter interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.

9695

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The following table summarizes the Company’s exposure to its repurchase agreements and credit facilities counterparties at ~~September~~June 30, ~~2017:~~2021:



(in thousands)	Borrowings under repurchase agreements and credit facilities (1)	Assets pledged on borrowings under repurchase agreements and credit facilities	Net Exposure (2)	Exposure as a Percentage of Total Assets		Borrowings under repurchase agreements and credit facilities ⁽¹⁾	Assets pledged on borrowings under repurchase agreements and credit facilities	Net Exposure	Exposure as a Percentage of Total Assets
Total Counterparty Exposure	$ 522,767	$ 654,975	$ 132,208	5.3	%	$ 1,703,034	$ 2,396,022	$ 692,988	7.7	%
(1) Includes accrued interest payable
(2) The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and credit facilities, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets
(1) The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and credit facilities, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets						(1) The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and credit facilities, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets

The following table presents information with respect to any counterparty for repurchase agreements for which our Company had greater than 5% of stockholders’ equity at risk in the aggregate at ~~September~~June 30, ~~2017:~~2021:



(in thousands)	Counterparty Rating (1)	Amount of Risk (2)	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity			Counterparty Rating ⁽¹⁾	Amount of Risk ⁽²⁾	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity
Credit Suisse AG							A+ / A1	$ 75,312	1	5.8%
Deutsche Bank AG							BBB+/A3	$ 154,073	4	12.0%
JPMorgan Chase Bank, N.A.	A+ / Aa3	$ 50,647	3	9.1	%		A+ / Aa2	$ 234,535	16	18.2%
Deutsche Bank AG	A- / Baa2	$ 42,753	5	7.7	%
(1) The counterparty rating presented is the long-term issuer credit rating as rated at September 30, 2017 by S&P and Moody’s, respectively.
(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities
Citibank, N.A.							A+ / Aa3	$ 71,989	2	5.6%
(1) The counterparty ratings presented are the long-term issuer credit rating for JP Morgan, Credit Suisse and Deutsche Bank the long-term bank deposits rating for Citibank, as rated June 30, 2021 by S&P and Moody’s, respectively.						(1) The counterparty ratings presented are the long-term issuer credit rating for JP Morgan, Credit Suisse and Deutsche Bank the long-term bank deposits rating for Citibank, as rated June 30, 2021 by S&P and Moody’s, respectively.
(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities.						(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities.

Capital ~~Market Risk~~

market risk.We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other financing arrangements. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.

~~Off Balance Sheet Risk~~

~~Off balance~~Off-balance sheet risk. Off-balance sheet risk refers to situations where the maximum potential loss resulting from changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of the reported amounts of such assets and liabilities currently reflected in the accompanying ~~Consolidated Balance Sheets.~~consolidated balance sheets.

Inflation ~~Risk~~

risk.Most of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. Changes in interest rates may correlate with inflation rates and/or changes in inflation rates. Our consolidated financial statements are prepared in accordance with U.S. GAAP and our distributions are determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering ~~inflation~~inflation.

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Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as

~~Table of Contents~~

appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of ~~September~~June 30, ~~2017.~~2021. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

Changes in Internal ~~Controls~~Control over Financial Reporting

There have been no changes into the Company’s ~~“internal~~internal control over financial ~~reporting” (as~~reporting as defined in Exchange Act Rule ~~13a‑15(f) of the Exchange Act) that occurred~~13a-15(f) during the ~~three months~~quarter ended ~~September~~June 30, ~~2017~~2021, that ~~have~~has materially affected, or ~~were~~is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. ~~See “Liquidity~~

On February 24, 2021, Sheila Baker and ~~Capital Resources – GMFS Settlement Agreement”~~Merle W. Bundick purported shareholders of Anworth, filed lawsuits in ~~Item 2. “Management’s Discussion~~the California Superior Court, styled Baker v. McAdams, et al., No. 21STCV07569 (the “Baker Action”) and ~~Analysis~~Bundick v. McAdams, et al., No. 21STCV07571 (the “Bundick Action”). On March 2, 2021, Benjamin Gigli, a purported shareholder of ~~Financial Condition~~Anworth, also filed a lawsuit in California Superior Court, styled Gigli v. McAdams, et al., No. 21STCV08413 (the “Gigli Action,” and ~~Results of Operations” included~~together with the Baker Action and the Bundick Action, the “California State Court Actions”). The California State Court Actions were filed against the Anworth Board. The complaints in ~~this quarterly report on Form 10-Q for a discussion relating~~the California State Court Actions assert that the Anworth Board breached their fiduciary duties by failing to properly consider acquisition proposals that were purportedly superior to the ~~tolling agreement executed by GMFS~~Merger, agreeing to purportedly unreasonable deal protections in connection with the Merger, and authorizing the ~~related settlement agreement reached~~issuance of the Form 424B3 filed on ~~April 25, 2017.~~February 9, 2021, which allegedly contained materially misleading information. The California State Court Actions seek, among other things, rescissory damages and an award of attorneys’ and experts’ fees.

~~Currently, no other material legal proceedings are pending or,~~Ready Capital intends to ~~our knowledge, threatened~~vigorously defend against ~~us.~~the California State Court Actions.

Item 1A. Risk Factors

See the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016. There have been no material changes to the Company's~~2020. You should be aware that these risk factors ~~during the three~~and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or ~~nine months ended September 30, 2017.~~that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Shares Repurchase Program

The table below provides information with respect to common purchases by the Company during the first half of 2021.


Period	Total Number of Shares		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program⁽¹⁾⁽²⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program⁽¹⁾
January	—	$	—	—	$	15,097,598
February	20,672		16.36	20,672		14,759,404
March	16,569		15.11	16,569		14,508,964
April	—		—	—		14,508,964
May	—		—	—		14,508,964
June	—		—	—		14,508,964
Totals / Averages	37,241	$	15.81	37,241	$	14,508,964
(1) On March 6, 2018, the Company's Board of Directors approved a share repurchase program authorizing, but not obligating, the repurchase of up to $20.0 million of its common stock, which was increased by an additional $5.0 million on August 4, 2020, bringing the total authorized and available under the program to $25.0 million. The Company expects to acquire shares through open market or privately negotiated transactions. The timing and amount of repurchase transactions will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors.
(2) During the six months ended June 30, 2021, certain of our employees surrendered common stock owned by them to satisfy their tax and other compensation related withholdings associated with the vesting of restricted stock units. The price paid per share is based on the price of our common stock as of the date of the withholding.

~~None.~~

Item 3. ~~Defaults~~Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit number		Exhibit description
~~Exhibit No.~~2.1
~~2.1~~**	Agreement and Plan of Merger, by and among Ready Capital Corporation, ReadyCap Merger Sub LLC and Owens Realty Mortgage, Inc., dated as of April 6, 2016, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Merger Sub, LLC, Sutherland Asset Management Corporation and Sutherland Partners, L.P. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed AprilNovember 7, ~~2016)~~
~~2.2~~**	Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 9, 2016, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Merger Sub, LLC, Sutherland Asset Management Corporation and Sutherland Partners, L.P.2018 (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed ~~May~~November 9, ~~2016)~~2018)
	~~2.3~~
2.2	**	~~Amendment No. 2 to the~~ Agreement and Plan of Merger, dated as of ~~August 4, 2016,~~December 6, 2020, by and among ~~ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS~~Ready Capital Corporation, RC Merger ~~Sub,~~Subsidiary, LLC ~~Sutherland~~and Anworth Mortgage Asset ~~Management~~ Corporation ~~and Sutherland Partners, L.P.~~ (incorporated by reference to Exhibit ~~2.3~~2.1 of the Registrant's Current Report on Form 8-K filed ~~November 4, 2016)~~December 8, 2020)

3.1	**	Articles of Amendment and Restatement of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)

3.2	**	Articles Supplementary of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)

3.3	**	Articles of Amendment and Restatement of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed November 4, 2016)

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3.4	**	~~Amended and Restated Bylaws~~Articles of ~~ZAIS Financial Corp. (incorporated by reference to Exhibit 3.3~~Amendment of ~~the Registrant’s Annual Report on Form 10-K filed on March 13, 2014)~~
~~3.5~~**	~~Amended and Restated Bylaws of Sutherland Asset Management~~Ready Capital Corporation (incorporated by reference to Exhibit ~~3.5~~3.1 of the Registrant's ~~Annual~~Current Report on Form ~~10-K~~8-K filed on September 26, 2018)

3.5	*	Amended and Restated Bylaws of Ready Capital Corporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on September 26, 2018)


3.6	*	Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.7 to the Registrant's Registration Statement on Form 8-A filed on March ~~15, 2017)~~19, 2021).
~~4.1~~
3.7	**	Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 10, 2021).

4.1	*	Specimen Common Stock Certificate of ~~Sutherland Asset Management~~Ready Capital Corporation (incorporated by reference to Exhibit 4.1 ofto the ~~Registrant's Annual Report on~~Registrant’s Form ~~10-K~~S-4 filed on ~~March 15, 2017)~~December 13, 2018)

4.2	**	Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC and ReadyCap Commercial, LLC, each as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on February 13, 2017)

4.3	**	First Supplemental Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC, ReadyCap Commercial, LLC, each as guarantors and U.S. Bank National Association, as trustee and as collateral agent, including the form of 7.5% Senior Secured Notes due 2022 and the related guarantees (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on February 13, 2017)

4.4	**	Indenture, dated as of August 9, 2017, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on August 9, 2017)

4.5	**	First Supplemental Indenture, dated as of August 9, 2017, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on August 9, 2017)

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~~Exhibit No.~~
4.6
~~10.1~~**	~~Amended and Restated Agreement of Limited Partnership of Sutherland Partners, L.P.,~~Third Supplemental Indenture, dated as of ~~October 31, 2016,~~February 26, 2019, by and ~~among Sutherland Asset Management~~between Ready Capital Corporation and U.S. Bank National Association, as ~~General Partner, and the limited partners listed on Exhibit A thereto~~trustee (incorporated by reference to Exhibit ~~10.1~~4.7 of the Registrant's Current Report on Form 10-K filed on March 13, 2019)

4.7	*	Amendment No. 1, dated as of February 26, 2019, to the First Supplemental Indenture, dated as of August 9, 2017, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.8 of the Registrant's Current Report on Form 10-K filed March on 13, 2019)


4.8	*	Fourth Supplemental Indenture, dated as of July 22, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed ~~November 4, 2016)~~on July 22, 2019)
~~31.1~~+
4.9	*	Fifth Supplemental Indenture, dated as of February 10, 2021, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed February on 10, 2021)

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4.10	*	Specimen Preferred Stock Certificate representing the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.13 of the Registrant's Registration Statement on Form 8-A filed on March 19, 2021).

4.1	1*	Specimen Preferred Stock Certificate representing the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on June 10, 2021).


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.

31.2+		Certification of ~~the~~ Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.
32.1*
32.1	**	Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.
	32.2*
32.2	**	Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.
	~~101.INS+~~
101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

~~101.SCH+~~101.SCH		Inline XBRL Taxonomy Extension Scheme Document
	~~101.CAL+~~
101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document
~~101.DEF+~~
101.DEF		Inline XBRL Extension Definition Linkbase Document
	~~101.LAB+~~
101.LAB		Inline XBRL Taxonomy Extension Linkbase Document
	~~101.PRE+~~
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded with the Inline XBRL document)

** Filed previously. Previously filed.

~~+ Filed herewith.~~

** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation ~~S-K~~.S-K.

100

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SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~Sutherland Asset Management~~Ready Capital Corporation


Date: ~~November 9, 2017~~August 6, 2021	By:	/s/ Thomas E. Capasse
		Thomas E. Capasse
		Chairman of the Board and Chief Executive
		(Principal Executive Officer)


Date: ~~November 9, 2017~~August 6, 2021	By:	/s/ ~~Frederick C. Herbst~~Andrew Ahlborn
	~~Frederick C. Herbst~~	Andrew Ahlborn
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

101


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, except share data)	2017		2016		2017		2016
Interest income	$	35,038	$	31,890	$	102,169	$	104,282
Interest expense		(19,908)		(14,097)		(53,579)		(42,043)
Net interest income before provision for loan losses	$	15,130	$	17,793	$	48,590	$	62,239
Provision for loan losses		(466)		(488)		(1,857)		(4,689)
Net interest income after provision for loan losses	$	14,664	$	17,305	$	46,733	$	57,550
Non-interest income (expense)
Gains on residential mortgage banking activities, net of variable loan expenses		10,735		—		32,229		—
Other income		1,853		1,729		4,281		5,335
Servicing income, net of amortization and impairment of $976 and $5,252 for the three and nine months ended September 30, 2017, and $1,850 and $6,079 for the three and nine months ended September 30, 2016, respectively		6,134		1,661		16,208		4,420
Employee compensation and benefits		(13,715)		(4,822)		(40,630)		(14,005)
Allocated employee compensation and benefits from related party		(990)		(900)		(3,010)		(2,700)
Professional fees		(2,151)		(3,120)		(6,334)		(8,573)
Management fees – related party		(2,034)		(1,793)		(6,018)		(5,464)
Loan servicing expense		(3,388)		(1,830)		(7,513)		(3,889)
Other operating expenses		(7,447)		(3,373)		(19,183)		(11,185)
Total non-interest income (expense)	$	(11,003)	$	(12,448)	$	(29,970)	$	(36,061)
Net realized gain on financial instruments		5,695		2,454		13,151		3,720
Net unrealized gain on financial instruments		2,678		3,557		4,933		5,800
Income from continued operations before provision for income (taxes) benefit	$	12,034	$	10,868	$	34,847	$	31,009
Provision for income (taxes) benefit		340		(1,297)		(1,763)		(3,326)
Net income from continuing operations	$	12,374	$	9,571	$	33,084	$	27,683
Discontinued operations
Loss from discontinued operations (including gain on disposal of $267 in the nine months ended September 30, 2016)		—		—		—		(576)
Income tax benefit		—		—		—		225
Loss from discontinued operations		—		—		—		(351)
Net income	$	12,374	$	9,571	$	33,084	$	27,332
Less: Net income attributable to non-controlling interest		533		777		1,891		2,217
Net income attributable to Sutherland Asset Management Corporation	$	11,841	$	8,794	$	31,193	$	25,115

Earnings (loss) per basic common share
Continuing operations	$	0.37	$	0.34	$	1.00	$	0.98
Discontinued operations		—		—		—		(0.01)
Earnings per basic common share	$	0.37	$	0.34	$	1.00	$	0.97

Earnings (loss) per diluted common share
Continuing operations	$	0.37	$	0.34	$	1.00	$	0.98
Discontinued operations	$	—	$	—	$	—	$	(0.01)
Earnings per diluted common share	$	0.37	$	0.34	$	1.00	$	0.97

Weighted-average shares outstanding
Basic		32,026,494		25,870,485		31,120,476		25,870,485
Diluted		32,028,980		25,870,485		31,121,449		25,870,485

Dividends declared per share of common stock	$	0.37	$	0.45	$	1.11	$	0.90


									Retained		Total Sutherland
	Common Stock			Preferred Stock			Additional Paid-		Earnings		Asset Management		Non-controlling		Total Stockholders'
(in thousands, except share data)	Shares	Par Value		Shares	Par Value		In Capital		(Deficit)		Corporation equity		Interests		Equity
Balance at January 1, 2016	25,739,847	$	2	125	$	125	$	447,093	$	(5,899)	$	441,321	$	38,892	$	480,213
Dividend declared on common stock ($0.90 per share)	—		—	—		—		—		(23,484)		(23,484)		—		(23,484)
Dividend reinvestment in common stock	103,440		1	—		—		1,806		—		1,807		—		1,807
Incentive shares issued	27,199		—	—		—		482		—		482		—		482
Dividend declared on preferred stock	—		—	—		—		—		(8)		(8)		—		(8)
Dividend declared on OP units	—		—	—		—		—		—		—		(2,072)		(2,072)
Dividend reinvestment in OP units	—		—	—		—		—		—		—		359		359
Net Income	—		—	—		—		—		25,115		25,115		2,217		27,332
Balance at September 30, 2016	25,870,486	$	3	125	$	125	$	449,381	$	(4,276)	$	445,233	$	39,396	$	484,629


		For the three months ended		For the nine months ended
(In Thousands)		September 30, 2016		September 30, 2016
Selected Financial Data
Interest income	$	34,945	$	112,712
Interest expense		(17,074)		(50,393)
Provision for loan losses		(488)		(4,689)
Non-interest income (expense)		(8,977)		(29,282)
Realized gain (loss)		2,161		2,767
Unrealized gain (loss)		6,644		(5,559)
Net income from continuing operations before income taxes	$	17,211	$	25,556


	Loan-to-Value (a)
(In Thousands)	0.0 – 20.0%		20.1 – 40.0%		40.1 – 60.0%		60.1 – 80.0%		80.1 – 100.0%		Greater than 100.0%		Total
September 30, 2017
Loans(1) (2)
Acquired SBA 7(a) loans	$	9,243	$	41,208	$	130,248	$	116,684		60,720	$	67,449	$	425,552
Acquired loans		51,041		81,451		100,840		54,317		24,906		18,184		330,739
Originated Transitional loans		—		38,073		170,268		189,063		14,234		6,325		417,963
Originated SBC loans, at fair value		—		17,364		20,034		104,196		16,799		—		158,393
Originated SBC loans		2,673		56,347		185,800		180,146		7,743		—		432,709
Originated SBA 7(a) loans		268		515		4,754		11,709		5,775		9,781		32,802
Originated Residential Agency loans		—		60		95		422		972		3		1,552
Total Loans, before general allowance for loans losses	$	63,225	$	235,018	$	612,039	$	656,537	$	131,149	$	101,742	$	1,799,710
General allowance for loan losses													$	(2,448)
Total Loans, net													$	1,797,262
December 31, 2016
Loans(1) (2)
Acquired SBA 7(a) loans	$	9,301	$	42,617	$	153,710	$	141,586		86,085	$	94,657	$	527,956
Acquired loans		46,776		90,574		109,330		106,432		20,335		20,382		393,829
Originated Transitional loans, at fair value		—		—		1,475		13,030		—		—		14,505
Originated Transitional loans		—		17,187		78,219		44,730		32,967		15,476		188,579
Originated SBC loans, at fair value		—		11,303		5,728		34,150		15,906		—		67,087
Originated SBC loans		2,709		56,050		187,823		190,473		20,258		1,770		459,083
Originated SBA 7(a) loans		145		375		2,995		3,351		2,456		6,092		15,414
Originated Residential Agency loans		—		—		217		434		1,399		188		2,238
Total Loans, before allowance for loans losses	$	58,931	$	218,106	$	539,497	$	534,186	$	179,406	$	138,565	$	1,668,691
General allowance for loan losses													$	(2,011)
Total Loans, net													$	1,666,680
(a) Loan-to-value is calculated as carrying amount as a percentage of current collateral value
(1) Loan balances include specific allowance for loan loss reserves.
(2) Includes Loans, net in consolidated VIEs


	Nine months ended September 30, 2016
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses
Beginning balance	$	-	$	-	$	10,967	$	6,155	$	-	$	17,122
Provision for (Recoveries of) loan losses		-		-		3,369		906		414		4,689
Charge-offs and sales		-		-		(876)		(1,451)		-		(2,327)
Recoveries		-		-		(4,504)		1		-		(4,503)
Ending balance	$	-	$	-	$	8,956	$	5,611	$	414	$	14,981


	September 30, 2017				December 31, 2016
	Non-PCI		PCI		Non-PCI		PCI
(In Thousands)	Loans		Loans		Loans		Loans
Unpaid principal balance	$	1,599,354	$	128,720	$	1,536,245	$	172,298
Non-accretable discount		—		(8,838)		—		(24,784)
Accretable discount		(43,633)		(24,010)		(55,563)		(26,978)
Loans, held-for-investment		1,555,721		95,872		1,480,682		120,536
Allowance for loan losses		(5,018)		(7,706)		(5,677)		(10,453)
Loans, held-for-investment	$	1,550,703	$	88,166	$	1,475,005	$	110,083


	September 30, 2017
			Weighted
		Weighted	Average								Gross		Gross
		Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)		Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
MBS
Freddie Mac Loans		12/2036	3.6	%	$	42,035	$	29,916	$	30,039	$	1,428	$	(1,305)
Commercial Loans		11/2031	8.2			15,106		10,306		11,206		899		—
Tax Liens		09/2026	6.0			127		127		126		—		—
Total			4.8	%	$	57,268	$	40,349	$	41,371	$	2,327	$	(1,305)


					Pledged Assets Carrying Value at				Carrying Value of Borrowing at
(in 000s)	Maturity	Pricing	Facility Size		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Borrowings under credit facilities
JPMorgan - Commercial (1)	June 2018	L+ 3.25 to 3.50%	$	250,000	$	43,407	$	226,253	$	30,960	$	190,066
Keybank - Commercial (2)	September 2018	L + 1.75%		100,000		78,872		17,311		76,753		17,162
Comerica - Residential (3)	March 2018	L + 2.125%		150,000		65,460		35,102		61,332		33,575
UBS - Residential loans (3)	November 2017	L + 2.30%		65,000		—		43,121		—		39,750
Associated Bank - Residential loans (3)	August 2018	L + 2.25%		40,000		15,446		28,575		14,345		27,869
Origin Bank - Residential loans (3)	May 2018	L + 2.25%		40,000		20,191		18,910		19,006		18,188
Total borrowings under credit facilities (9)			$	645,000	$	223,376	$	369,272	$	202,396	$	326,610
Borrowings under repurchase agreements
Deutsche Bank- Commercial (4)	February 2018	L + 2.50 to 3.50%	$	275,000	$	119,707	$	118,962	$	76,954	$	82,716
JPMorgan - Commercial (5)	December 2017	L + 2.50 to 4.50%		250,000		77,343		93,691		44,883		52,169
Citibank - Commercial (6)	June 2018	L + 2.25% to 3.00%		200,000		59,911		119,376		49,778		102,576
JPMorgan - MBS (7)	November 2017	2.56 to 3.94%		36,331		54,518		42,253		36,331		30,363
Citibank - MBS (7)	November 2017	3.37%		5,957		11,496		11,496		5,957		5,226
Bank of America - MBS (7)	January 2018	3.38 - 3.48%		8,112		9,630		11,815		6,568		8,112
Mizuho - STI (8)	N/A	N/A		99,950		—		100,000		—		99,950
Societe Generale - STI (8)	N/A	N/A		19,940		—		19,994		—		19,940
RBC - STI (8)	October 2017	1.50%		199,800		99,994		199,990		99,900		199,800
Total borrowings under repurchase agreements (10)			$	1,095,090	$	432,599	$	717,577	$	320,371	$	600,852
Total secured short-term borrowings			$	1,740,090	$	655,975	$	1,086,849	$	522,767	$	927,462

Promissory note payable
FCB - Commercial	June 2021	2.75%	$	9,164	$	8,233	$	9,144	$	6,494	$	7,378
Total promissory note payable			$	9,164	$	8,233	$	9,144	$	6,494	$	7,378


			Gross		Assets
			Amounts		Presented in		Gross Amounts Not Offset in the Consolidated
	Gross		Offset in the		the		Balance Sheets (1)
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral
(In Thousands)	Assets		Sheets		Sheets		Instruments		Received		Net Amount
Interest rate swaps	$	1,562	$	—	$	1,562	$	—	$	1,562	$	—
Total	$	1,562	$	—	$	1,562	$	—	$	1,562	$	—


		As of September 30, 2017						As of December 31, 2016
				Asset		Liability				Asset		Liability
		Notional		Derivatives		Derivatives		Notional		Derivatives		Derivatives
(In Thousands)	Primary Underlying Risk	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Credit Default Swaps	Credit Risk	$	15,000	$	—	$	(55)	$	15,000	$	(173)	$	–
Interest Rate Swaps	Interest rate risk		373,850		1,562		(303)		378,050		(2,922)		(643)
Interest rate lock commitments (IRLCs)	Interest rate risk		206,988		2,569		—		212,530		(2,690)		—
Total		$	595,838	$	4,131	$	(358)	$	605,580	$	(5,785)	$	(643)


	Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	(150)	$	(230)	$	(227)
Interest rate swaps (1)		(742)		870		(855)		901
Residential mortgage banking activities interest rate swaps (2)		—		(53)		—		(1,922)
Interest rate lock commitments (IRLCs) (2)		—		(149)		—		(121)
Total	$	(742)	$	518	$	(1,085)	$	(1,369)
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) Gains (losses) are recorded in gains on residential mortgage banking activities, net of variable loan expenses, in the consolidated statements of income.


	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	(195)	$	—	$	(360)
Interest rate swaps (1)		(347)		1,004		(1,476)		(1,868)
Total	$	(347)	$	809	$	(1,476)	$	(2,228)
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the unaudited interim consolidated statements of income.


(in thousands, except rates)	Coupon Rate		Maturity Date	September 30, 2017
2017 Senior Secured Notes principal amount(1)	7.50	%	2/15/2022	$	140,000
Unamortized premium - Senior Secured Notes					1,827
Unamortized deferred financing costs - Senior Secured Notes					(3,753)
Total Senior secured notes, net				$	138,074
2017 Convertible Notes- principal amount (2)	7.00	%	8/15/2023		115,000
Unamortized discount - Convertible Notes (3)					(2,218)
Unamortized deferred financing costs - Convertible Notes					(3,368)
Total Convertible Notes, net				$	109,414
Total carrying amount of debt components				$	247,488
Total carrying amount of conversion option of equity components recorded in additional paid-in capital				$	2,147


	Weighted		Range of
	Average		Interest	Range of
(In Thousands)	Interest Rate		Rates	Maturities (Years)	Ending Balance
September 30, 2017	3.48	%	1.62 – 7.00 %	2017 - 2038	$	313,388
December 31, 2016	2.79	%	3.50 – 8.75 %	2017 - 2038	$	390,555


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Management fee - total	$	2.0 million	$	1.8 million	$	6.0 million	$	5.5 million
Management fee - amount unpaid	$	2.0 million	$	2.5 million	$	2.0 million	$	2.5 million


	September 30, 2017						December 31, 2016
	Current				Weighted		Current				Weighted
	Principal		Carrying		Average		Principal		Carrying		Average
(In Thousands)	Balance		value		Interest Rate		Balance		value		Interest Rate
Waterfall Victoria Mortgage Trust 2011-SBC2	$	16,461	$	16,461	5.3	%	$	24,472	$	24,472	5.2	%
Sutherland Commercial Mortgage Loans 2015-SBC4		11,419		10,919	4.0			39,464		38,402	3.9
Sutherland Commercial Mortgage Trust 2017-SBC6		133,370		131,891	3.3			—		—	—
ReadyCap Commercial Mortgage Trust 2014-1		50,059		50,032	3.5			84,320		83,885	3.4
ReadyCap Commercial Mortgage Trust 2015-2		159,347		154,526	4.1			166,232		160,699	4.0
ReadyCap Commercial Mortgage Trust 2016-3		105,329		102,272	3.5			133,774		129,914	3.5
Ready Capital Mortgage Financing 2017-FL1		187,862		183,142	2.6			—		—	—
ReadyCap Lending Small Business Trust 2015-1		31,457		31,039	2.4			56,055		55,570	2.0
Total	$	695,304	$	680,282	3.4	%	$	504,317	$	492,942	3.6	%


			Dividend per
Declaration Date	Record Date	Payment Date	Share
August 23, 2016	September 2, 2016	September 16, 2016	$	0.45	(1)
October 11, 2016	October 14, 2016	October 25, 2016	$	0.36	(1)
December 21, 2016	December 30, 2016	January 27, 2017	$	0.35
March 14, 2017	March 31, 2017	April 13, 2017	$	0.37
June 15, 2017	June 30, 2017	July 31, 2017	$	0.37
September 12, 2017	September 29, 2017	October 20, 2017	$	0.37
(1) Retrospectively adjusted for the equivalent number of shares after the reverse merger.


	Independent Director RSUs						Employee RSAs
(In Thousands, except share data)	Number of shares		Weighted-average grant date fair value		Weighted-average grant date fair value (per share)		Number of shares		Weighted-average grant date fair value		Weighted-average grant date fair value (per share)
Outstanding, January 1		—	$	—	$	—		—	$	—	$	—
Granted		40,000		580		14.50		—		—		—
Vested		(25,000)		(363)		14.50		—		—		—
Forfeited		—		—		—		—		—		—
Canceled		—		—		—		—		—		—
Outstanding, March 31, 2017		15,000	$	217	$	14.50		—	$	—	$	—
Granted		—		—		—		25,851		380		14.70
Vested		(5,000)		(72)		14.50		—		—		—
Forfeited		—		—		—		—		—		—
Canceled		—		—		—		—		—		—
Outstanding, June 30, 2017		10,000	$	145	$	14.50		25,851	$	380	$	14.70
Granted		—		—		—		—		—		14.70
Vested		(5,000)		(72)		14.50		—		—		—
Forfeited		—		—		—		—		—		—
Canceled		—		—		—		—		—		—
Outstanding, September 30, 2017		5,000	$	73	$	14.50		25,851	$	380	$	14.70


	Three Months Ended September 30,					Nine Months Ended September 30,
(In Thousands, except for share and per share amounts)	2017		2016			2017		2016
Basic Earnings
Continuing Operations
Income from continuing operations	$	12,374	$	9,571		$	33,084	$	27,683
Less: Income attributable to non-controlling interest		533		777			1,891		2,217
Less: Income attributable to participating shares		15		-			37		-
Basic - Income from continuing operations	$	11,826	$	8,794		$	31,156	$	25,466

Discontinued Operations
Loss from discontinued operations		-		-			-		(351)
Basic — Net income attributable to common stockholders after allocation to participating shares	$	11,826	$	8,794		$	31,156	$	25,115

Diluted Earnings
Continuing Operations
Basic — Income from continuing operations	$	12,374	$	9,571		$	33,084	$	27,683
Less: Income attributable to non-controlling interest		533		777			1,891		2,217
Less: Income attributable to participating shares		15		-			37		-
Add: Undistributed earnings to participating shares		-		-			-		-
Less: Undistributed earnings reallocated to participating shares		-		-			-		-
Diluted — Income from continuing operations	$	11,826	$	8,794		$	31,156	$	25,466

Discontinued Operations
Basic — Loss from discontinued operations		-		-			-		(351)
Diluted — Net income attributable to common stockholders after allocation to participating shares	$	11,826	$	8,794		$	31,156	$	25,115

Number of Shares
Basic — Average shares outstanding		32,026,494		25,870,485	(1)		31,120,476		25,870,485	(1)
Effect of dilutive securities — Unvested participating shares		2,486		-			973		-
Diluted — Average shares outstanding		32,028,980		25,870,485			31,121,449		25,870,485

Basic
Income from continuing operations	$	0.37	$	0.34		$	1.00	$	0.98
Loss from discontinued operations		-		-			-		(0.01)

Diluted
Income from continuing operations	$	0.37	$	0.34		$	1.00	$	0.98
Loss from discontinued operations		-		-			-		(0.01)
(1) Retroactively adjusted for the equivalent number of shares after the reverse acquisition using an exchange rate of 0.8356.


Investment Type		Average Carrying Value(1)	Gross Yield(2)		Average Debt Balance	Debt. Cost(3)	Levered Yield(4)
Acquired portfolio	$	364,724	7.7%	$	280,852	5.7%	14.5%
SBC conventional origination portfolio		1,078,514	7.7%		831,906	4.9%	17.1%
SBA Originations, Acquisitions & Servicing		499,970	10.1%		383,761	4.0%	30.5%
Total	$	1,943,208	8.3%	$	1,496,519	4.8%	20.1%
(1) Average carrying value includes average quarterly carrying value of loan and servicing asset balances.
(2) Gross yields are based on interest income, MSR creation, realized and unrealized gains (losses) on loans, held for sale, and net servicing income for the applicable quarter ended on an annualized basis, which reflects contractual interest rates and accretion of discounts based on our estimates of loan performance, including the amount, timing and present value of cash flows, prepayment rates and loss severities. Premiums and discounts associated with the loans at the time of purchase are amortized into interest income over the life of such loans using the effective yield method. Subsequent increases or decreases in the fair value of estimated cash flows will result in an adjustment to a loan's gross yield.
(3) We finance the assets included in the Investment Type through securitizations, repurchase agreements, warehouse facilities, bank credit facilities, and other corporate debt. Interest expense is calculated based on interest expense and deferred financing amortization for the applicable quarter ended on an annualized basis
(4) Levered yields for the applicable quarter ended include interest income, accretion of discount, MSR creation, realized and unrealized gains (losses) on loans, held for sale, and servicing income net of interest expense and amortization of deferred financing costs on an annualized basis


	For the Three Months Ended						For the Nine Months Ended
	September 30,				$ Change		September 30,				$ Change
	2017		2016		2017 vs. 2016		2017		2016		2017 vs. 2016
Interest income
Loan acquisitions	$	7,800	$	10,679	$	(2,879)	$	28,242	$	38,492	$	(10,250)
SBC originations		17,258		11,010		6,248		41,972		29,801		12,171
SBA originations, acquisitions and servicing		9,039		10,201		(1,162)		28,935		35,989		(7,054)
Residential mortgage banking		941		-		941		3,020		-		3,020
Total interest income		35,038		31,890		3,148		102,169		104,282		(2,113)
Interest expense
Loan acquisitions		(3,937)		(4,398)		461		(12,472)		(13,235)		763
SBC originations		(10,252)		(5,152)		(5,100)		(23,798)		(14,998)		(8,800)
SBA originations, acquisitions and servicing		(3,795)		(4,199)		404		(12,120)		(13,309)		1,189
Residential mortgage banking		(797)		-		(797)		(2,310)		-		(2,310)
Corporate - other		(1,127)		(348)		(779)		(2,879)		(501)		(2,378)
Total interest expense		(19,908)		(14,097)		(5,811)		(53,579)		(42,043)		(11,536)
Net interest income before provision for loan losses		15,130		17,793		(2,663)		48,590		62,239		(13,649)
Provision for loan losses		(466)		(488)		22		(1,857)		(4,689)		2,832
Net interest income after provision for loan losses		14,664		17,305		(2,641)		46,733		57,550		(10,817)
Non-interest income
Loan acquisitions		406		500		(94)		806		819		(13)
SBC originations		1,127		1,717		(590)		2,511		3,532		(1,021)
SBA originations, acquisitions and servicing		2,000		1,173		827		4,304		5,404		(1,100)
Residential mortgage banking (1)		15,189		-		15,189		45,097		-		45,097
Total non-interest income		18,722		3,390		15,332		52,718		9,755		42,963
Non-interest expense
Loan acquisitions		(2,802)		(2,420)		(382)		(6,581)		(7,458)		877
SBC originations		(5,736)		(4,640)		(1,096)		(15,033)		(13,923)		(1,110)
SBA originations, acquisitions and servicing		(4,617)		(4,625)		8		(10,548)		(12,608)		2,060
Residential mortgage banking		(12,388)		-		(12,388)		(37,221)		-		(37,221)
Corporate - other		(4,182)		(4,159)		(23)		(13,305)		(11,827)		(1,478)
Total non-interest expense		(29,725)		(15,844)		(13,881)		(82,688)		(45,816)		(36,872)
Net realized gains (losses) on financial instruments
Loan acquisitions		(377)		595		(972)		(106)		(1,473)		1,367
SBC originations		2,768		339		2,429		6,082		1,687		4,395
SBA originations, acquisitions and servicing		3,304		1,489		1,815		6,714		3,426		3,288
Residential mortgage banking (2)		-		-		-		-		-		-
Corporate - other		-		31		(31)		461		80		381
Total net realized gains (losses) on financial instruments		5,695		2,454		3,241		13,151		3,720		9,431
Net unrealized gains (losses) on financial instruments
Loan acquisitions		173		284		(111)		1,647		3,955		(2,308)
SBC originations		3,807		3,158		649		6,671		1,727		4,944


	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017		2016		Change		2017		2016		Change
Net Income	$	12.4	$	9.6	$	2.8	$	33.2	$	27.3	$	5.9
Reconciling items:
Unrealized (gain) loss on MBS		(0.2)		(0.7)		0.5		(1.4)		(4.3)		2.9
Realized (gain) loss on MBS		-		-		-		-		3.6		(3.6)
Unrealized (gain) loss on MSRs		1.7		-		1.7		4.5		-		4.5
Merger transaction costs		-		0.9		(0.9)		0.1		2.6		(2.5)
Employee severance		-		0.3		(0.3)		-		0.3		(0.3)
Restricted Stock Unit (RSU) grant to Independent Directors		-		-		-		0.3		-		0.3
Loss on discontinued operations		-		-		-		-		0.6		(0.6)
Total reconciling items	$	1.5	$	0.5	$	1.0	$	3.5	$	2.8	$	0.7
Income tax adjustments		(1.0)		-		(1.0)		(1.7)		(0.3)		(1.4)
Core earnings	$	12.9	$	10.1	$	2.8	$	35.0	$	29.8	$	5.2

(In Thousands)

June 30, 2021

December 31, 2020

Commitments to originate residential agency loans