Ready Capital (RC) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission File Number:  001‑35808

READY CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

1140 Avenue of the Americas, 7th Floor, New York, NY 10036

(Address of Principal Executive Offices, Including Zip Code)

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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  ☐

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‑2 of the Exchange Act).  Yes ☐   No ☒

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share 7.00% Convertible Senior Notes due 2023 6.50% Senior Notes due 2021	RC RCA RCP	New York Stock Exchange New York Stock Exchange New York Stock Exchange

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 44,395,713 shares of common stock, par value $0.0001 per share, outstanding as of April 30, 2019.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 1A.	Forward-Looking Statements	61
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	63
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	88
Item 4.	Controls and Procedures	92
PART II.	OTHER INFORMATION	92
Item 1.	Legal Proceedings	92
Item 1A.	Risk Factors	92
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 3.	Defaults Upon Senior Securities	93
Item 4.	Mine Safety Disclosures	94
Item 5.	Other Information	94
Item 6.	Exhibits	94
SIGNATURES		96
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

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

READY CAPITAL CORPORATION

unaudited CONSOLIDATED BALANCE SHEETS

(In Thousands)	March 31, 2019		December 31, 2018
Assets
Cash and cash equivalents	$	47,597	$	54,406
Restricted cash		29,979		28,921
Loans, net (including $22,595 and $22,664 held at fair value)		1,057,023		1,193,392
Loans, held for sale, at fair value		115,778		115,258
Mortgage backed securities, at fair value		91,435		91,937
Loans eligible for repurchase from Ginnie Mae		73,057		74,180
Investment in unconsolidated joint ventures		39,025		33,438
Derivative instruments		2,483		2,070
Servicing rights (including $88,218 and $93,065 held at fair value)		115,652		120,062
Receivable from third parties		718		8,888
Real estate acquired in settlement of loans, held for sale		75,517		7,787
Other assets		68,886		55,447
Assets of consolidated VIEs		1,561,864		1,251,057
Total Assets	$	3,279,014	$	3,036,843
Liabilities
Secured borrowings		848,225		834,547
Securitized debt obligations of consolidated VIEs, net		1,140,919		905,367
Convertible notes, net		110,241		109,979
Senior secured notes, net		178,979		178,870
Corporate debt, net		48,629		48,457
Guaranteed loan financing		34,047		229,678
Liabilities for loans eligible for repurchase from Ginnie Mae		73,057		74,180
Derivative instruments		3,392		3,625
Dividends payable		13,396		13,346
Accounts payable and other accrued liabilities		67,240		74,719
Total Liabilities	$	2,518,125	$	2,472,768
Stockholders’ Equity
Common stock, $0.0001 par value, 500,000,000 shares authorized, 44,395,713 and 32,105,112 shares issued and outstanding, respectively		4		3
Additional paid-in capital		720,680		540,478
Retained earnings		21,790		5,272
Accumulated other comprehensive loss		(1,328)		(922)
Total Ready Capital Corporation equity		741,146		544,831
Non-controlling interests		19,743		19,244
Total Stockholders’ Equity	$	760,889	$	564,075
Total Liabilities and Stockholders’ Equity	$	3,279,014	$	3,036,843

See Notes To Unaudited Consolidated Financial Statements

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READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,
(In Thousands, except share data)	2019		2018
Interest income	$	48,753	$	37,150
Interest expense		(35,775)		(22,666)
Net interest income before provision for loan losses	$	12,978	$	14,484
Provision for loan losses		(518)		(167)
Net interest income after provision for loan losses	$	12,460	$	14,317
Non-interest income
Residential mortgage banking activities		14,587		14,024
Net realized gain on financial instruments and real estate owned		7,282		12,232
Net unrealized gain (loss) on financial instruments		(6,912)		3,008
Other income		900		1,334
Servicing income, net of amortization and impairment of $1,763 and $1,350		6,752		6,410
Income on unconsolidated joint ventures		2,929		5,739
Gain on bargain purchase		30,728		—
Total non-interest income	$	56,266	$	42,747
Non-interest expense
Employee compensation and benefits		(11,448)		(15,320)
Allocated employee compensation and benefits from related party		(853)		(1,200)
Variable expenses on residential mortgage banking activities		(9,176)		(2,290)
Professional fees		(1,829)		(2,648)
Management fees – related party		(1,997)		(2,013)
Incentive fees – related party		—		(408)
Loan servicing expense		(3,648)		(4,093)
Merger related expenses		(5,467)		—
Other operating expenses		(6,861)		(8,011)
Total non-interest expense	$	(41,279)	$	(35,983)
Income before provision for income taxes	$	27,447	$	21,081
Provision for income (taxes) benefit		3,003		(2,563)
Net income	$	30,450	$	18,518
Less: Net income attributable to non-controlling interest		983		664
Net income attributable to Ready Capital Corporation	$	29,467	$	17,854
Earnings per common share - basic	$	0.90	$	0.56
Earnings per common share - diluted	$	0.90	$	0.56
Weighted-average shares outstanding
Basic		32,556,875		32,036,504
Diluted		32,563,644		32,045,844
Dividends declared per share of common stock	$	0.40	$	0.37

See Notes To Unaudited Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended March 31,
(In Thousands)		2019		2018
Net Income	$	30,450	$	—
Other comprehensive income (loss) - net change by component
Net change in hedging derivatives (cash flow hedges)	$	(420)	$	—
Other comprehensive income (loss)	$	(420)	$	—
Comprehensive income (loss)	$	30,030	$	—
Less: Comprehensive income attributable to non-controlling interests		(969)		—
Comprehensive income attributable to Ready Capital Corporation	$	29,061	$	—

See Notes To Unaudited Consolidated Financial Statements

5

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

						Retained			Accumulated Other	Total
	Common Stock			Additional Paid-		Earnings			Comprehensive	Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Shares	Par Value		In Capital		(Deficit)			Loss	Corporation equity		Interests		Equity
Balance at January 1, 2018	31,996,440	$	3	$	539,455	$	(3,385)	$	—	$	536,073	$	19,394	$	555,467
Dividend declared on common stock ($0.37 per share)	—		—		—		(11,910)		—		(11,910)		—		(11,910)
Dividend declared on OP units	—		—		—		—		—		—		(425)		(425)
Equity component of 2017 convertible note issuance	—		—		(78)		—		—		(78)		(3)		(81)
Contributions, net	—		—		—		—		—		—		107		107
Stock-based compensation	—		—		80		—		—		80		—		80
Net Income	—		—		—		17,854		—		17,854		664		18,518
Balance at March 31, 2018	31,996,440	$	3	$	539,457	$	2,559		—	$	542,019	$	19,737	$	561,756

						Retained			Accumulated Other	Total
	Common Stock			Additional Paid-		Earnings			Comprehensive	Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Shares	Par Value		In Capital		(Deficit)			Loss	Corporation equity		Interests		Equity
Balance at January 1, 2019	32,105,112	$	3	$	540,478	$	5,272	$	(922)	$	544,831	$	19,244	$	564,075
Dividend declared on common stock ($0.40 per share)	—		—		—		(12,949)		—		(12,949)		—		(12,949)
Dividend declared on OP units	—		—		—		—		—		—		(447)		(447)
Distributions, net	—		—		—		—		—		—		(20)		(20)
Shares issued pursuant to ORM merger	12,223,552		1		179,320		—		—		179,321		—		179,321
Equity component of 2017 convertible note issuance	—		—		(84)		—		—		(84)		—		(84)
Stock-based compensation	52,110		—		733		—		—		733		—		733
Manager incentive fee paid in stock	14,939		—		233		—		—		233		(3)		230
Net Income	—		—		—		29,467		—		29,467		983		30,450
Other comprehensive loss	—		—		—		—		(406)		(406)		(14)		(420)
Balance at March 31, 2019	44,395,713	$	4	$	720,680	$	21,790		(1,328)	$	741,146	$	19,743	$	760,889

See Notes To Unaudited Consolidated Financial Statements

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READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENT OF CASH FLOWS

	Three Months Ended March 31,
(In Thousands, except share information)	2019		2018
Cash Flows From Operating Activities:
Net income	$	30,450	$	18,518
Net income from continuing operations
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Discount accretion and premium amortization of financial instruments, net		345		(2,038)
Amortization of guaranteed loan financing, deferred financing costs, and intangible assets		7,630		3,492
Provision for loan losses		518		167
Charge off of real estate acquired in settlement of loans		305		19
Decrease in repair and denial reserve		89		110
Net settlement of derivative instruments		(795)		4,556
Origination of loans, held for sale, at fair value		(445,455)		(610,502)
Proceeds from disposition and principal payments of loans, held for sale, at fair value		458,503		677,401
Income on unconsolidated joint venture		(2,707)		1,048
Gain on sale of mortgages held for sale included in Residential mortgage banking activities		(10,199)		(6,279)
Gain (loss) on derivatives included in Residential mortgage banking activities		(364)		(1,162)
Creation of servicing rights, net of payoffs		(2,281)		(4,408)
Gain on bargain purchase		(30,728)		—
Net realized gains on financial instruments and real estate owned		(7,282)		(12,232)
Net unrealized gains on financial instruments		6,912		(3,008)
Net changes in operating assets and liabilities
Assets of consolidated VIEs (excluding loans, net), accrued interest and due from servicers		2,406		(8,261)
Receivable from third parties		8,170		(4,308)
Other assets		(7,814)		5,122
Accounts payable and other accrued liabilities		(6,647)		(10,013)
Net cash provided by operating activities		1,056		48,222
Cash Flow From Investing Activities:
Origination of loans		(245,367)		(118,945)
Purchase of loans		(128,991)		(142,000)
Purchase of mortgage backed securities, at fair value		—		(10,419)
Purchase of real estate		—		(191)
Proceeds on unconsolidated joint venture in excess of earnings recognized		5,739		4,092
Payment of liability under participation agreements, net of proceeds received		—		(81)
Proceeds from disposition and principal payment of loans		183,800		116,836
Proceeds from sale and principal payment of mortgage backed securities, at fair value		3,277		3,662
Proceeds from sale of real estate		285		614
Cash acquired in connection with the ORM merger		10,822		—
Net cash (used in) provided by investing activities		(170,435)		(146,432)
Cash Flows From Financing Activities:
Proceeds from secured borrowings		951,342		938,671
Proceeds from issuance of securitized debt obligations of consolidated VIEs		355,846		148,497
Proceeds from senior secured note offering		—		41,328
Payment of contingent consideration		(1,207)		—
Payment of secured borrowings		(949,703)		(912,948)
Payment of securitized debt obligations of consolidated VIEs		(118,893)		(65,111)
Payment of guaranteed loan financing		(20,526)		(17,360)
Payment of promissory note		(674)		—
Payment of deferred financing costs		(7,538)		(4,443)
Contributions, net		(20)		107
Dividend payments		(13,346)		(12,289)
Net cash (used in) provided by financing activities		195,281		116,452
Net increase (decrease) in cash, cash equivalents, and restricted cash		25,902		18,242
Cash, cash equivalents, and restricted cash at beginning of period		94,970		90,954
Cash, cash equivalents, and restricted cash at end of period	$	120,872	$	109,196
Supplemental disclosure of operating cash flow
Cash paid for interest	$	34,471	$	23,135
Cash paid (received) for income taxes	$	(3,125)	$	796
Stock-based compensation	$	733	$	151
Supplemental disclosure of non-cash investing activities
Loans transferred from Loans, held for sale, at fair value to Loans, net	$	—	$	333
Deconsolidation of assets in securitization trusts	$	177,815	$
Supplemental disclosure of non-cash financing activities
Common stock issued in connection with ORM Merger		12,223,552
Deconsolidation of borrowings in securitization trusts	$	177,815	$	—
Incentive shares issued to investment manager pursuant to management agreement	$	233	$	—
Cash and restricted cash reconciliation
Cash and cash equivalents	$	47,597	$	86,773
Restricted cash		29,979		13,964
Cash, cash equivalents, and restricted cash in Assets of consolidated VIEs		43,296		8,459
Cash, cash equivalents, and restricted cash at end of period	$	120,872	$	109,196

See Notes to Unaudited Consolidated Financial Statements

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READY CAPITAL CORPORATION

NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Organization

On September 26, 2018, Sutherland Asset Management Corporation filed Articles of Amendment to its charter (the “Articles of Amendment”) with the State Department of Assessments and Taxation of Maryland, to change its name to Ready Capital Corporation (the “Company” or “Ready Capital” and together with its subsidiaries “we”, “us” and “our”), a Maryland corporation.

In connection with the name change, the Company’s trading symbol on the New York Stock Exchange changed from “SLD” to “RC” for shares of the Company’s common stock.

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  March 31, 2019 and December 31, 2018, the Company owned approximately 97.6% and 96.5%, of the operating partnership units (“OP units”) of the Operating 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 is a multi-strategy real estate finance company that originates, acquires, finances and services small to medium 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 business segments: i) Loan Acquisitions, ii) SBC Originations, iii) SBA Originations, Acquisitions and Servicing, and iv) Residential Mortgage Banking, with the remaining amounts recorded in Corporate- Other. Our acquisition and origination platforms consist of the following four operating segments:

· Loan Acquisitions.  We acquire performing and non-performing SBC 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 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”). Additionally, as part of this segment, we originate and service multi-family loan products under the Federal Home Loan Mortgage Corporation (“Freddie Mac” and the “Freddie Mac program”). These originated loans are generally held-for-investment or placed into securitization structures.

· SBA Originations, Acquisitions, and Servicing. 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 (“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. In the future, we may originate SBC loans for real estate under the SBA 504 loan program, under which the SBA

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

· Residential Mortgage Banking. In connection with our merger with ZAIS Financial on October 31, 2016, 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.

On March 29, 2019, the Company completed the acquisition of Owens Realty Mortgageg, Inc. (“ORM”), through a merger of ORM with and into a wholly owned subsidiary of the Company, in exchange for approximately 12.2 million shares of the Company’s common stock. In accordance with the Merger Agreement, the number of shares of the Company’s common stock issued was based on an exchange ratio of 1.441 per share. The total purchase price for the merger of $179.3 million consists exclusively of the Company’s common stock issued in exchange for shares of ORM common stock and cash paid in lieu of fractional shares of the Company’s common stock, and was based on the $14.67 closing price of the Company’s common stock on March 29, 2019. Upon the closing of the transaction, the Company’s historical stockholders owned approximately 72% of the combined company’s stock, while historical ORM stockholders owned approximately 28% of the combined company’s stock.

The acquisition of ORM is expected to increase the Company’s equity capitalization, which will support continued growth of the Company’s platform and execution of the Company’s strategy, and provide the Company with improved scale, liquidity and capital alternatives, including additional borrowing capacity.  Also, the stockholder base resulting from the acquisition of ORM is expected to enhance the trading volume and liquidity for our stockholders and support a greater level of institutional investor interest in our businesses. The combination of the Company and ORM can potentially create cost savings and efficiencies over time resulting from the allocation of operating expenses over a larger portfolio and allow the Company to potentially harvest significant value from ORM's real property assets

The Company qualifies as a 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.

Note 2 – Basis of Presentation

The unaudited interim consolidated financial statements presented herein are as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.  These unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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.

The accompanying unaudited interim consolidated financial statements do not include all information and footnotes required by generally accepted accounting principles in the United States of America ("GAAP") for complete consolidated financial statements. These unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company's audited financial statements for the years ended December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, disclosed within the most recently filed 2018 annual report on Form 10-K.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all 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 period or the entire year.

Note 3 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s unaudited interim consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of

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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 differ from those estimates.

Basis of 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 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.

As described in Note 4, the impact of the retrospective adoption of Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows: Restricted Cash, resulted in revisions to prior period numbers to conform with the updated accounting standard and our current period’s presentation.

As described in further detail below, effective during the fourth quarter of 2018, the Company revised its presentation of residential mortgage banking activities and variable expenses on residential mortgage banking activities within our Consolidated Statements of Income and Note 10, which no longer presents these amounts as a net amount. Prior period numbers were revised to conform to the new presentation and to be consistent with our current period’s presentation.

Cash and Cash Equivalents

The Company has accounted 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 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 December 31, 2018, the Company had $0.6 million in money market mutual funds, and substantially all of the Company’s 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. As of March 31, 2019 this balance was zero.

Restricted Cash

Restricted cash represents cash held by the Company as collateral against its derivatives, borrowings under repurchase agreements, borrowings under credit facilities with counterparties, construction and mortgage escrows, as well as cash held for remittance on loans serviced for third 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 restriction requirements no longer exist or at the maturity of the swap or repurchase agreement.

Loans, net

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

Loans, held-for-investment

Loans, held-for-investment are loans acquired from third parties (“acquired loans”), loans originated by ReadyCap that we do not intend to sell, or securitized loans that were previously originated by ReadyCap. 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. 

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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 sell 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).

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 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 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 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 it 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

Loans, held at fair value represent certain loans originated by ReadyCap for which the Company has elected the fair value option. Interest is recognized as interest income on 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 the unaudited interim consolidated statements of income.

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Allowance for loan losses

The allowance for loan losses is intended to provide for credit losses inherent in the loans, held-for-investment portfolio and is 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 losses is increased through provisions for loan losses charged to earnings and reduced by charge-offs, net of recoveries.

We determine the allowance for loan losses by measuring 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. The allowance for loan losses on an individual basis is assessed when a loan is on non-accrual and the recoverability of the loan is less than its carrying value. The Company considers the loans to be collateral dependent and relies on the current fair value of the collateral as the basis for determining impairment. Loans that are not assessed individually for impairment are assessed on a collective basis. For the acquired loans we perform a historical analysis on both cumulative defaults and severity upon default for all 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 shows a minimal number of 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 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 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 loan losses.

Non-accrual loans

Non-accrual loans are the loans for which we are not accruing or accreting interest income. Non-accrual loans include non-PCI 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 for which the Company is unable to reasonably estimate the timing and amount of expected cash flows are considered to be non-accrual loans.

Troubled 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.

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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 a loan to be impaired when the Company does not expect to collect all of the contractual interest and principal payments as scheduled in the loan agreements. This includes certain non-PCI loans where we do not expect to collect all of the contractual interest and principal payments, as well as PCI loans, which experienced credit deterioration prior to acquisition.

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 on 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 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 residential mortgage banking activities on the unaudited interim consolidated statements of income.

Mortgage backed securities, at fair value

The Company accounts for MBS as trading securities and are carried 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.

Purchases and sales of MBS are recorded on 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.

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, and interest rate lock commitments (“IRLCs”) as part of our risk management. The Company accounts for derivative instruments under ASC 815, Derivatives and Hedges.

All derivatives are reported as either assets or liabilities on the unaudited interim consolidated balance sheets at the estimated fair value with the changes in the fair value recorded in earnings, unless hedge accounting is elected.

Although permitted under certain circumstances, generally the Company does not offset cash collateral receivable or payables against our gross derivative positions. As of March 31, 2019 and December 31, 2018, the cash collateral receivable for derivatives is $7.0 million and $11.6. million, respectively, and is included in restricted cash on the unaudited interim consolidated balance sheets.

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

Interest Rate Lock Commitments (“IRLCs”)

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 Fannie Mae, Freddie Mac, and the Government National Mortgage Association ((“Ginnie 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 on the unaudited interim consolidated statements of income as residential mortgage banking activities. IRLCs are classified as Level 3 in the fair value hierarchy.

CDS

CDS 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 are reported within net unrealized gain (loss) on financial instruments, while the related interest income or interest expense, are reported within net realized gain/(loss) on financial instruments in the unaudited interim consolidated statements of income. CDS 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 effective portion of the change in the fair value of the derivative 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). The ineffective portions of the cash flow hedges are immediately recognized in earnings. 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. For hedge relationships that are discontinued because a forecasted transaction is probable of not occurring according to the original hedge forecast (including an additional two month window), any related derivative values recorded in AOCI are immediately recognized in earnings. 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

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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.

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

The Company treats its servicing rights and residential mortgage servicing rights as two 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

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 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.

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.

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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.

The Company has elected to account for its portfolio of residential mortgage servicing rights (“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 rates, discount rates, default rates, and cost of servicing rates. Residential MSRs are classified as Level 3 in the fair value hierarchy.

Real estate acquired in settlement of loans, held for sale

Real estate acquired in settlement of loans, held for sale, includes 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.

Intangible assets

Intangible assets are accounted for under ASC 350, Intangibles-Goodwill and Other. As of March 31, 2019 and December 31, 2018, the Company’s identifiable intangible assets include SBA license for our lending operations as well as a trade name, a favorable lease, and other licenses relating to our residential mortgage banking segment, obtained as part of the ZAIS Financial merger transaction. The Company determined that its SBA license has an indefinite life, while the other intangibles acquired as part of the ZAIS Financial merger transaction are finite-lived. The Company amortizes intangible assets with identified estimated useful lives on a straight-line basis over their estimated useful lives. The Company initially records its intangible assets at cost and subsequently tests for impairment on an annual basis. Intangible assets are included within other assets on the unaudited interim consolidated balance sheets.

Investment in unconsolidated joint venture

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 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 earnings.  

Pursuant to the consolidation guidance, we determined our interest in the entity is a VIE, however, we do not consolidate the entity as we determined that we are not the primary beneficiary. The Company is determined to be the primary beneficiary only when it has a controlling financial interest in the VIE, which is defined as possessing both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the

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obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Deferred financing costs

Costs incurred in connection with our secured borrowings 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 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. Pursuant to the adoption of ASU 2015-03, unamortized deferred financing costs related to securitizations and note issuances are presented on the unaudited interim consolidated balance sheets as a direct deduction from the associated liability.

Due from Servicers

The loan servicing activities of the Company’s SBC Loan Acquisitions and SBC 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 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 borrowings include borrowings under credit facilities, borrowings under repurchase agreements, and promissory notes.

Borrowings under credit facilities

The Company accounts for borrowings under credit facilities under ASC 470, Debt. The Company partially finances its loans, net through credit 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 on the unaudited interim consolidated statements of income.

Borrowing under repurchase agreements

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 March 31, 2019, none 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 on the unaudited interim consolidated statements of income.

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Securitized debt obligations of consolidated VIEs, net

Since 2011, we have engaged in several securitization transactions, which the Company accounts for under ASC 810. Securitization involves transferring assets to an SPE, or securitization trust, to convert all 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. 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 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 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 are included in interest expense on the consolidated financial statements.

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 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.  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

The Company accounts for secured debt offerings under ASC 470, Debt. Pursuant to the adoption of ASU 2015-03, the Company’s senior secured notes are presented net of debt issuance 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 recorded as interest expense on the unaudited interim consolidated statements of income.

Corporate debt, net

The Company accounts for corporate debt offerings under ASC 470, Debt. 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 on the unaudited consolidated statements of income.

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 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.

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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 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.

Variable Interest Entities

VIEs are entities that, by design, either (i) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other 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 has a financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. An entity is deemed to be the primary beneficiary of a VIE if the entity 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.

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 rights and responsibilities, the design of the VIE, our economic interests, servicing fees and servicing responsibilities, and other factors.

We perform ongoing reassessments to evaluate whether changes in the entity’s capital structure or changes in the nature of our involvement with the entity result in a change to the VIE designation or a change to our consolidation conclusion.

Non-controlling Interests

Non-controlling interests, which are presented on the unaudited interim consolidated balance sheets and the unaudited interim consolidated statements of income, 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

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an 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 to sell in the near term. The fair value elections for loans, held for sale at fair value originated by ReadyCap were made due to the short-term nature of these instruments.

We have elected the fair value option for 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 residential mortgage servicing rights acquired as part of the merger transaction.

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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”), as well as “in-the-money” conversion options associated with our outstanding convertible senior notes. Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

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.

Income Taxes

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 March 31, 2019 and December 31, 2018, we accrued no 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

On January 1, 2018, new accounting rules regarding revenue recognition became effective for public companies with a calendar fiscal year.  Under the new accounting rules regarding revenue, revenue 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 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 updated 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 revenue streams, the adoption of this standard did not have a material impact on our unaudited interim consolidated financial statements. The revenue recognition guidance also included revisions to existing accounting rules regarding the determination of whether a company is acting as a principal or agent in an arrangement and accounting for sales of nonfinancial assets where the seller has continuing involvement.  These additional revisions also did not materially impact the Company.

Interest 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

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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 consecutive months. For PCI loans, the excess of the cash flows expected to be collected on these 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 accretion.

Realized 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.

Origination Income and 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 in other income and operating expenses. Origination fees for residential mortgage loans originated by GMFS are presented in the unaudited interim consolidated statements of income in residential mortgage banking activities, while origination expenses are presented within variable 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 in interest income.

Residential Mortgage Banking Activities

Residential mortgage banking activities, reflects revenue 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, Residential mortgage banking activities 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 residential mortgage banking activities, 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 the unrealized gains and losses associated with the mortgage loans held for sale and the realized and unrealized gains and losses from IRLCs.

Loan origination 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 within variable expenses on residential mortgage banking activities 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. Loan origination costs directly attributable to the processing, underwriting, and closing of a loan are included in the gain on sale of mortgage loans held for sale when loans are sold.

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Note 4 – Recently Issued Accounting Pronouncements

Financial Accounting Standards Board ("FASB") Standards adopted during 2019

Standard	Summary of guidance		Effects on financial statements
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.		The adoption did not affect the financial statement impact of hedge accounting, as the change would simplify hedge documentation requirements and presentation associated with hedging activities.
Issued August 2017			
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract		Provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.		The adoption of this standard did not have a material impact on our consolidated financial statements.
		An intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred.	
ASU 2018-11, Leases (Topic 842): Targeted Improvements to Accounting for Leases		Provides guidance on increasing the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions.		The modified retrospective adoption of this standard resulted in the Company recording a gross up of approximately $3.3 million on our unaudited interim consolidated balance sheet upon recognition of the right-of-use assets and lease liabilities. The right-of use-assets are recorded in Other assets and the corresponding lease liabilities are recorded in Accounts payable and other accrued liabilites within the unaudited consolidated balance sheets.
Issued July 2018			

FASB Standards issued, but not yet adopted

Standard	Summary of guidance		Effects on financial statements
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 consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement		Provides guidance on increasing the transparency and comparability of the disclosure requirements for fair value measurement.		Required effective date: The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
Issued August 2018				The Company is evaluating the impact ASU 2018-13 will have on our consolidated financial statements.

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Note 5 – Acquisition of Owens Realty Mortgage, Inc.

 On November 7, 2018, the Company entered into an Agreement and Plan of Merger as amended, (the “Merger Agreement”) with ORM, a specialty finance company that focused on the origination, investment, and management of commercial real estate loans, primarily in the Western U.S. Pursuant to the Merger Agreement, the Company would acquire ORM in a stock-for-stock transaction with an aggregate purchase price equal to 99.0% of ORM’s book value determined in accordance with the Merger Agreement. Upon the closing, each outstanding share of ORM’s common stock was converted into the right to receive 1.441 shares of the Company common stock, based on a fixed exchange ratio.  

On March 29, 2019, the Company completed the acquisition of ORM, through a merger of ORM with and into a wholly owned subsidiary of the Company, in exchange for approximately 12.2 million shares of the Company’s common stock. In accordance with the Merger Agreement, the number of shares of the Company’s common stock issued was based on an exchange ratio of 1.441 per share. The total purchase price for the merger of $179.3 million consisted exclusively of the Company’s common stock issued in exchange for shares of ORM common stock and cash paid in lieu of fractional shares of the Company’s common stock, and was based on the $14.67 closing price of the Company’s common stock on March 29, 2019. Upon the closing of the transaction, the Company’s historical stockholders owned approximately 72% of the combined company’s stock, while historical ORM stockholders owned approximately 28% of the combined company’s stock.

The following table summarizes the fair value of assets acquired and liabilities assumed from the merger:

(In Thousands)	March 29, 2019
Assets
Cash and cash equivalents	$	10,822
Loans, net		130,449
Real estate acquired in settlement of loans, held for sale		67,973
Investment in unconsolidated joint ventures		8,619
Other assets
Deferred tax assets		4,660
Accrued interest		1,209
Other		379
Total assets acquired	$	224,111
Liabilities
Secured borrowings		12,713
Other liabilities
Accounts payable and other accrued liabilities		1,000
Due to Manager		228
Deferred tax liabilities		123
Total liabilities assumed	$	14,064
Net assets acquired	$	210,047

        For acquired loan receivables, the gross contractual unpaid principal acquired is $134.8 million and we expect to collect all contractual amounts.

 The aggregate consideration transferred, net assets acquired, and the related bargain purchase gain was as follows:

Total Consideration Transferred (in thousands, except share and per share data)
FV of Net Assets Acquired	$	210,052
ORM shares outstanding at March 29, 2019		8,482,880
Exchange ratio	x	1.441
Shares issued		12,223,830
Market price as of March 29, 2019	$	14.67
Total consideration transferred based on value of shares issued	$	179,324
Bargain purchase gain	$	30,728

Based on the calculation, the Company has determined the transaction resulted in a bargain purchase gain, which is predominantly the result of changes in the market price of the Company’s common stock between the determination

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date and the closing date of the transaction. This gain is reflected separately within the unaudited interim Consolidated Statements of Income under gain on bargain purchase.

In a business combination, the initial allocation of the purchase price is considered preliminary and, therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of 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.

Acquisition-related costs directly attributable to the ORM Merger, including legal, accounting, valuation, and other professional or consulting fees, totaling $5.5 million for the three months ended March 31, 2019 were expensed as incurred and are reflected separately within the unaudited interim Consolidated Statements of Income.

The following pro-forma income and earnings (unaudited) of the Combined Company are presented as if the merger had occurred on January 1, 2018:

		For the three months ended
(In Thousands)		March 31, 2019		March 31, 2018
Selected Financial Data
Interest income	$	51,543	$	40,040
Interest expense		(36,323)		(23,202)
Provision for loan losses		(518)		(87)
Non-interest income		27,031		44,004
Non-interest expense		(37,721)		(39,021)
Income before provision for income taxes		4,012		21,734
Provision for income (taxes) benefit		2,996		(2,746)
Net income	$	7,008	$	18,988

Non-recurring pro-forma transaction costs directly attributable to the merger were $8.4 million for the three months ended March 31, 2019 and have been deducted from the non-interest expense amount above. The Company excluded the bargain purchase gain of $30.7 million from the amount above.

Note 6 – Loans and Allowance for Loan Losses

The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was credit-impaired 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 time of purchase.

· Loans at fair value – certain originated conventional SBC loans for which the Company has elected the fair value option

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

· PCI loans held-for-investment – acquired loans with signs of credit deterioration at time of purchase

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Loan Portfolio

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

	March 31, 2019				December 31, 2018
Loans (In Thousands)	Carrying Value		UPB		Carrying Value		UPB
Loans
Acquired SBA 7(a) loans	$	117,876	$	152,737	$	264,308	$	283,423
Acquired loans		156,343		164,871		206,983		215,213
Acquired Transitional loans		130,449		134,813		—		—
Originated Transitional loans		431,494		434,968		272,981		275,237
Originated SBC loans, at fair value		22,595		22,297		22,664		22,325
Originated SBC loans		110,265		109,251		345,100		342,751
Originated SBA 7(a) loans		91,892		96,474		85,569		89,733
Originated Residential Agency loans		2,818		2,868		1,899		1,900
Total Loans, before allowance for loan losses	$	1,063,732	$	1,118,279	$	1,199,504	$	1,230,582
Allowance for loan losses	$	(6,709)		—	$	(6,112)		—
Total Loans, net	$	1,057,023	$	1,118,279	$	1,193,392	$	1,230,582
Loans in consolidated VIEs
Loans
Originated SBC loans	$	719,200	$	709,287	$	432,308	$	422,897
Acquired loans		484,745		495,149		343,156		354,794
Acquired SBA 7(a) loans		—		—		55,966		74,554
Originated Transitional loans		300,333		301,330		391,752		393,116
Total Loans, in consolidated VIEs, before allowance for loan losses	$	1,504,278	$	1,505,766	$	1,223,182	$	1,245,361
Allowance for loan losses on loans in consolidated VIEs	$	(1,568)		—	$	(2,208)		—
Total Loans, net, in consolidated VIEs	$	1,502,710	$	1,505,766	$	1,220,974	$	1,245,361
Total Loans, net, and Loans, net in consolidated VIEs	$	2,559,733	$	2,624,045	$	2,414,366	$	2,475,943
Loans, held for sale, at fair value
Originated Residential Agency loans	$	93,840	$	90,435	$	67,775	$	65,586
Originated Freddie Mac loans		5,243		5,155		23,322		22,973
Originated SBA 7(a) loans		13,768		12,856		21,153		19,669
Acquired loans		2,927		2,828		3,008		2,935
Total Loans, held for sale, at fair value	$	115,778	$	111,274	$	115,258	$	111,163
Total Loan portfolio	$	2,675,511	$	2,735,319	$	2,529,624	$	2,587,106

Credit Quality Indicators

The Company monitors 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 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 clearer that the borrower is likely either unable or unwilling to pay.

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The following tables display delinquency information on loans, net as of the consolidated balance sheet dates:

	March 31, 2019
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	$	103,674	$	8,046	$	4,301	$	116,021	$	12,474	$	1,323
Acquired loans		620,000		2,504		14,170		636,674		14,415		1,501
Acquired Transitional loans		106,254		1,627		22,568		130,449		22,568		—
Originated Transitional loans		705,139		26,688		—		731,827		—		—
Originated SBC loans, at fair value		22,595		—		—		22,595		—		—
Originated SBC loans		812,707		4,253		12,505		829,465		15,549		—
Originated SBA 7(a) loans		90,399		912		273		91,584		2,448		159
Originated Residential Agency loans		684		—		2,134		2,818		2,134		—
Total Loans, before general allowance for loans losses	$	2,461,452	$	44,030	$	55,951	$	2,561,433	$	69,588	$	2,983
General allowance for loan losses							$	(1,700)
Total Loans, net							$	2,559,733
Percentage of outstanding		96.1%		1.7%		2.2%		100%		2.7%		0.1%
(1) Loan balances include specific allowance for loan losses.
(2) Includes Loans, net in consolidated VIEs

	December 31, 2018
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	$	299,080	$	14,943	$	4,465	$	318,488	$	17,916	$	1,043
Acquired loans		524,930		7,213		13,552		545,695		11,447		3,811
Originated Transitional loans		659,103		5,630		—		664,733		—		—
Originated SBC loans, at fair value		22,664		—		—		22,664		—		—
Originated SBC loans		748,146		12,367		16,895		777,408		16,895		—
Originated SBA 7(a) loans		83,076		2,178		162		85,416		1,666		—
Originated Residential Agency loans		337		—		1,562		1,899		1,562		—
Total Loans, before allowance for loans losses	$	2,337,336	$	42,331	$	36,636	$	2,416,303	$	49,486	$	4,854
General allowance for loan losses							$	(1,937)
Total Loans, net							$	2,414,366
Percentage of outstanding		96.7%		1.8%		1.5%		100%		2.0%		0.2%
(1) Loan balances include specific allowance for loan losses.
(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 Company monitors the loan-to-value ratio and associated risks on a monthly basis.

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The following tables presents quantitative information on the credit quality of loans, net as of the consolidated balance sheet dates:

	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
March 31, 2019
Loans(1) (2)
Acquired SBA 7(a) loans	$	38,560	$	8,084	$	13,484	$	19,258	$	12,740	$	23,895	$	116,021
Acquired loans		101,242		182,122		150,382		78,697		102,814		21,417		636,674
Acquired Transitional loans		3,598		12,053		50,074		50,805		8,428		5,491		130,449
Originated Transitional loans		101		23,597		169,275		434,435		103,720		699		731,827
Originated SBC loans, at fair value		—		8,555		—		6,330		7,710		—		22,595
Originated SBC loans		—		53,064		330,728		445,673		—		—		829,465
Originated SBA 7(a) loans		279		4,087		11,652		31,949		12,482		31,135		91,584
Originated Residential Agency loans		—		—		111		1,096		1,192		419		2,818
Total Loans, before general allowance for loans losses	$	143,780	$	291,562	$	725,706	$	1,068,243	$	249,086	$	83,056	$	2,561,433
General allowance for loan losses													$	(1,700)
Total Loans, net													$	2,559,733
December 31, 2018
Loans(1) (2)
Acquired SBA 7(a) loans	$	6,337	$	38,150	$	100,578	$	93,411	$	33,750	$	46,262	$	318,488
Acquired loans		118,198		165,567		136,206		70,017		40,003		15,704		545,695
Originated Transitional loans		—		29,245		178,861		348,967		101,513		6,147		664,733
Originated SBC loans, at fair value		—		8,600		—		6,328		7,736		—		22,664
Originated SBC loans		—		48,259		271,311		457,838		—		—		777,408
Originated SBA 7(a) loans		393		3,200		10,642		24,387		16,473		30,321		85,416
Originated Residential Agency loans		—		—		111		952		734		102		1,899
Total Loans, before allowance for loans losses	$	124,928	$	293,021	$	697,709	$	1,001,900	$	200,209	$	98,536	$	2,416,303
General allowance for loan losses													$	(1,937)
Total Loans, net													$	2,414,366
(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 March 31, 2019 and December 31, 2018, the Company’s total carrying amount of loans in the foreclosure process was $1.6 million and $1.4 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.

Geographic Concentration (Unpaid Principal Balance)	March 31, 2019		December 31, 2018
California	18.4	%	14.1	%
Texas	13.7		11.3
Florida	8.9		10.8
New York	5.2		6.3
Georgia	5.2		5.3
Arizona	4.4		5.0
Illinois	4.1		3.8
Pennsylvania	3.5		3.8
North Carolina	3.3		3.7
Washington	2.8		2.8
Other	30.5		33.1
Total	100.0	%	100.0	%

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

Collateral Concentration (Unpaid Principal Balance)	March 31, 2019		December 31, 2018
Multi-family	30.0	%	23.3	%
Retail	20.8		18.5
Office	15.0		15.1
SBA(1)	9.5		18.1
Mixed Use	9.1		9.6
Industrial	7.1		8.2
Lodging/Residential	2.3		2.4
Other	6.2		4.8
Total	100.0	%	100.0	%
(1) Further detail provided on SBA collateral concentration is included in table below.

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

Collateral Concentration (Unpaid Principal Balance)	March 31, 2019		December 31, 2018
Offices of Physicians	14.4	%	17.7	%
Child Day Care Services	9.5		9.9
Eating Places	7.2		5.4
Hotels, Motels & Tourist Courts	6.7		3.8
Lodging	6.5		10.1
Veterinarians	5.5		6.8
Gasoline Service Stations	3.1		2.3
Funeral Service & Crematories	2.9		2.3
Grocery Stores	2.7		3.8
Auto	1.9		2.7
Other	39.6		35.2
Total	100.0	%	100.0	%

Allowance for Loan Losses

The allowance for loan losses represents the Company’s estimate of probable 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, 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 the allowance for loan losses by loan product and impairment methodology as of the unaudited interim consolidated balance sheet dates:

	March 31, 2019
(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
General	$	-	$	222	$	625	$	419	$	434	$	1,700
Specific		-		-		1,102		990		306		2,398
PCI		-		-		3,314		865		-		4,179
Ending balance	$	-	$	222	$	5,041	$	2,274	$	740	$	8,277

	December 31, 2018
(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
General	$	11	$	353	$	608	$	532	$	433	$	1,937
Specific		-		-		1,012		823		153		1,988
PCI		-		-		3,432		963		-		4,395
Ending balance	$	11	$	353	$	5,052	$	2,318	$	586	$	8,320

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

	Three Months Ended March 31, 2019
(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	$	11	$	353	$	5,052	$	2,318	$	586	$	8,320
Provision for (Recoveries of) loan losses		(11)		(131)		235		271		154		518
Charge-offs and sales		-		-		-		(329)		-		(329)
Recoveries		-		-		(246)		14		-		(232)
Ending balance	$	-	$	222	$	5,041	$	2,274	$	740	$	8,277

	Three Months Ended March 31, 2018
(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	$	637	$	-	$	7,264	$	3,527	$	318	$	11,746
Provision for (Recoveries of) loan losses		(241)		338		139		(185)		116		167
Charge-offs and sales		(169)		-		(224)		(449)		-		(842)
Recoveries		-		-		(635)		97		-		(538)
Ending balance	$	227	$	338	$	6,544	$	2,990	$	434	$	10,533

Impaired Loans- Non-PCI loans

The Company considers a loan to be impaired when the Company does not expect to collect all the contractual and principal payments as scheduled in the loan agreements. Impaired loans include loans that have been modified in a TDR 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)	March 31, 2019		December 31, 2018
Impaired loans
With an allowance	$	8,396	$	9,734
Without an allowance		53,336		33,082
Total recorded carrying value of impaired loans	$	61,732	$	42,816
Allowance for loan losses related to impaired loans	$	(2,398)	$	(1,989)
Unpaid principal balance of impaired loans	$	71,302	$	49,128
Impaired loans on non-accrual status	$	61,732	$	42,816
Average carrying value of impaired loans	$	52,275	$	36,675
	March 31, 2019		December 31, 2018
Interest income on impaired loans for the year ended	$	12	$	966

Troubled 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.

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

	March 31, 2019						December 31, 2018
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Recorded carrying value modified loans classified as TDRs	$	5,224	$	9,362	$	14,586	$	1,825	$	17,344	$	19,169
Allowance for loan losses on loans classified as TDRs	$	400	$	286	$	686	$	321	$	278	$	599
Carrying value of modified loans classified as TDRs
Carrying value of modified loans classified as TDRs on accrual status	$	1,401	$	4,776	$	6,177	$	1,696	$	7,375	$	9,071
Carrying value of modified loans classified as TDRs on non-accrual status		3,823		4,586		8,409		129		9,969		10,098
Total carrying value of modified loans classified as TDRs	$	5,224	$	9,362	$	14,586	$	1,825	$	17,344	$	19,169

The following table summarizes the TDR activity that occurred during the three months ended March 31, 2019 and 2018 and the financial effects of these modifications.

	Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		1		9		10		-		11		11
Pre-modification recorded balance (a)	$	103	$	1,265	$	1,368	$	-	$	1,120	$	1,120
Post-modification recorded balance (a)		103		1,250		1,353		-		1,223		1,223
Number of loans that remain in default as of March 31, 2019 (b)		1		1		2		-		4		4
Balance of loans that remain in default as of March 31, 2019 (b)	$	103	$	55	$	158	$	-	$	239	$	239
Concession granted (a):
Term extension	$	-	$	1,187	$	1,187	$	-	$	1,135	$	1,135
Interest rate reduction		103		-		103		-		-		-
Principal reduction		-		-		-		-		-		-
Foreclosure		-		55		55		-		64		64
Total	$	103	$	1,242	$	1,345	$	-	$	1,199	$	1,199
(a) Represents carrying value.
(b) Represents the March 31, 2019 carrying values of the TDRs that occurred during the three months ended March 31, 2019 and 2018 that remained in default as of March 31, 2019. 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.

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:

	March 31, 2019				December 31, 2018
	Non-PCI		PCI		Non-PCI		PCI
(In Thousands)	Loans		Loans		Loans		Loans
Unpaid principal balance	$	2,512,982	$	88,766	$	2,361,155	$	92,463
Non-accretable discount		—		(7,052)		—		(6,040)
Accretable discount		(35,189)		(14,092)		(31,533)		(16,023)
Loans, held-for-investment		2,477,793		67,622		2,329,622		70,400
Allowance for loan losses		(4,098)		(4,179)		(3,925)		(4,395)
Loans, held-for-investment	$	2,473,695	$	63,443	$	2,325,697	$	66,005

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PCI Loans

The following table details the activity 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.

	Three Months Ended March 31,
(In Thousands)	2019		2018
Beginning accretable discount- PCI loans	$	16,023	$	23,749
Purchases/Originations		11		0
Sales		(279)		(656)
Accretion		(917)		(1,709)
Other		142		411
Transfers		(888)		(801)
Ending accretable discount- PCI loans	$	14,092	$	20,994

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 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. Fair values for these investments are determined using valuation methodologies that consider a range of 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.

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The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of March 31, 2019:

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Loans, held for sale, at fair value	$	—	$	115,778	$	—	$	115,778
Loans, net, at fair value		—		—		22,595		22,595
Mortgage backed securities, at fair value		—		64,235		27,200		91,435
Derivative instruments, at fair value		—		—		2,483		2,483
Residential mortgage servicing rights, at fair value		—		—		88,218		88,218
Total assets	$	—	$	180,013	$	140,496	$	320,509
Liabilities:
Derivative instruments, at fair value	$	—	$	3,392	$	—	$	3,392
Total liabilities	$	—	$	3,392	$	—	$	3,392

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2018:

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash held in money market funds	$	586	$	—	$	—	$	586
Loans, held for sale, at fair value		—		115,258		—		115,258
Loans, net, at fair value		—		—		22,664		22,664
Mortgage backed securities, at fair value		—		79,789		12,148		91,937
Derivative instruments, at fair value		—		294		1,776		2,070
Residential mortgage servicing rights, at fair value		—		—		93,065		93,065
Total assets	$	586	$	195,341	$	129,653	$	325,580
Liabilities:
Derivative instruments, at fair value	$	—	$	3,625	$	—	$	3,625
Contingent consideration		—		—		1,207		1,207
Total liabilities	$	—	$	3,625	$	1,207	$	4,832

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

	Three Months Ended March 31,
(In Thousands)	2019		2018
Beginning Balance	$	22,664	$	188,150
Realized gains (losses), net		(1)		(3)
Unrealized gains (losses), net		(39)		(762)
Originations		—		150
Principal payments		(29)		(4,666)
Transfer to loans, held-for-investment		—		(142,439)
Ending Balance	$	22,595	$	40,430

Unrealized gains (losses) on loans, held at fair value held on March 31, 2019 and December 31, 2018 and classified as Level 3 were $0.3 million and $0.3 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 March 31,
(In Thousands)	2019		2018
Beginning Balance	$	12,148	$	8,063
Accreted discount, net		2		21
Realized gains, net		(20)		123
Unrealized gains (losses), net		89		230
Sales / Principal payments		(102)		(517)
Transfer to (from) Level 3		15,083		14,816
Ending Balance	$	27,200	$	22,736

Unrealized gains on MBS at fair value held on March 31, 2019 and December 31, 2018 and classified as Level 3 were $2.5 million and $0.1 million, respectively.

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Refer to “Note 9 – Servicing rights” for activity relating to the changes in the fair value of the Company’s residential mortgage servicing rights. Unrealized gains on residential mortgage servicing rights, at fair value held on March 31, 2019 and December 31, 2018 and classified as Level 3 were $1.5 million and $8.6 million, respectively. 

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

	Three Months Ended March 31,
(In Thousands)	2019		2018
Beginning Balance	$	1,776	$	1,827
Unrealized gains (losses)		707		1,643
Ending Balance	$	2,483	$	3,470

Unrealized gains on derivatives held on March 31, 2019 and December 31, 2018 and classified as Level 3 were $2.5 million and $1.8 million, respectively. 

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

	Three Months Ended March 31,
(In Thousands)	2019		2018
Beginning Balance	$	1,207	$	10,016
Earn-out payments		(1,207)		634
Amortization and adjustment for earn-out payments		—		82
Ending Balance	$	—	$	10,732

As of March 31, 2019 and December 31, 2018, there was no unrealized gain (loss) on contingent consideration.

The Company’s policy is to recognize transfers in and transfers out as of the 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. Transfers into or out of Level 3 of the fair value hierarchy are recorded at the end of the reporting period.

Valuation Process for 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 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. 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 and are carried at fair value. To the extent that there 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

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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.

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 March 31, 2019 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	$	22,595	SingleExternal Source	Third Party Mark	$	99.41 – 106.07	$	101.34
Mortgage backed securities, at fair value		27,085	Broker Quotes	Third Party Mark		79.50 – 97.50		85.50
Mortgage backed securities, at fair value		115	Transaction Price	Transaction Price		99.00 – 99.00		99.00
Residential mortgage servicing rights, at fair value		88,218	Single external source	Discounted cash flow		N/A		N/A

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

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, 2018 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	$	22,664	Single External Source	Third Party Mark	$	99.41 – 105.21	$	101.52
Mortgage backed securities, at fair value (b)		12,033	Broker Quotes	Third Party Mark		44.65 – 97.50		70.92
Mortgage backed securities, at fair value		115	Transaction Price	Transaction Price		99.00 – 99.00		99.00
Residential mortgage servicing rights, at fair value		93,065	Single external source	Discounted cash flow		N/A		N/A
Contingent consideration		1,207	Single external source	Discounted cash flow		N/A		N/A

(a) Prices are weighted based on 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 fair value of $0.5 million as of December 31, 2017.

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.

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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 on the unaudited interim consolidated balance sheets and are classified as Level 3:

	March 31, 2019				December 31, 2018
(In Thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Loans, net	$	2,537,138	$	2,583,268	$	2,391,702	$	2,434,185
Servicing rights		27,434		31,326		26,997		28,441
Total assets	$	2,564,572	$	2,614,594	$	2,418,699	$	2,462,626
Liabilities:
Secured borrowings	$	848,225	$	848,225	$	834,547	$	834,547
Securitized debt obligations of consolidated VIEs, net		1,140,919		1,165,544		905,367		918,536
Senior secured note, net		178,979		184,711		178,870		176,981
Guaranteed loan financing		34,047		36,461		229,678		236,804
Convertible notes, net		110,241		112,387		109,979		101,581
Total liabilities	$	2,312,411	$	2,347,328	$	2,258,441	$	2,268,449

Other assets totaling $15.3 million at March 31, 2019 and $14.5 million at December 31, 2018 are not carried at fair value and include due from servicers and accrued interest, which are reflected in Note 19. Receivable from third parties totaling $0.7 million at March 31, 2019 and $8.9 million at December 31, 2018 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 $13.7million at March 31, 2019 and $16.8 million at December 31, 2018 are not carried at fair value and include Payable to related parties and Accrued interest payable which are included in Note 19. For these instruments, carrying value approximates fair value and are classified as Level 3.

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 March 31, 2019 and December 31, 2018.

		Weighted
	Weighted	Average								Gross		Gross
	Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)	Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
March 31, 2019
Mortgage backed securities, at fair value
Freddie Mac Loans	05/2037	4.0	%	$	93,891	$	68,639	$	74,901	$	6,262	$	—
Commercial Loans	12/2049	5.6			20,541		16,111		16,419		334		(26)
Tax Liens	09/2026	6.0			116		116		115		—		(1)
Total Mortgage backed securities, at fair value	08/2039	4.3	%	$	114,548	$	84,866	$	91,435	$	6,596	$	(27)
December 31, 2018
Mortgage backed securities, at fair value
Freddie Mac Loans	05/2037	4.5	%	$	97,066	$	70,819	$	75,591	$	4,826	$	(54)
Commercial Loans	11/2049	5.5			20,666		16,228		16,231		30		(27)
Tax Liens	09/2026	6.0			116		116		115		—		(1)
Total Mortgage backed securities, at fair value	07/2039	4.7	%	$	117,848	$	87,163	$	91,937	$	4,856	$	(82)

(a) Weighted based on current principal balance

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The following table presents certain information about the maturity of the Company’s MBS portfolio as of March 31, 2019 and December 31, 2018.

	Weighted
	Average
	Interest		Principal		Amortized
(In Thousands)	Rate (a)		Balance		Cost		Fair Value
March 31, 2019
Mortgage backed securities, at fair value
After five years through ten years	11.1	%	$	3,308	$	3,021	$	3,425
After ten years	4.1			111,240		81,845		88,010
Total Mortgage backed securities, at fair value	4.3	%	$	114,548	$	84,866	$	91,435
December 31, 2018
Mortgage backed securities, at fair value
After five years through ten years	10.6	%	$	3,406	$	3,103	$	3,520
After ten years	4.5			114,442		84,060		88,417
Total	4.7	%	$	117,848	$	87,163	$	91,937

(a) Weighted based on current principal balance

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

	Three Months Ended March 31,
(In Thousands)	2019		2018
SBA servicing rights, at amortized cost
Beginning net carrying amount	$	16,749	$	16,684
Additions due to loans sold, servicing retained		933		692
Amortization		(822)		(886)
Impairment		(412)		(172)
Ending net carrying value of SBA servicing rights	$	16,448	$	16,318
Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount	$	10,248	$	5,059
Additions due to loans sold, servicing retained		1,267		1,938
Amortization		(529)		(293)
Ending net carrying value of Freddie Mac multi-family servicing rights	$	10,986	$	6,704
Ending net carrying value of SBA and Freddie Mac multi-family servicing rights, at amortized cost	$	27,434	$	23,022
Residential mortgage servicing rights, at fair value
Beginning Balance	$	93,065	$	72,295
Additions due to loans sold, servicing retained		3,593		5,706
Loan pay-offs		(1,312)		(1,298)
Unrealized gains (losses)		(7,128)		4,888
Ending fair value of residential mortgage servicing rights	$	88,218	$	81,591
Total servicing rights	$	115,652	$	104,613

Servicing rights – SBA and Freddie 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 forward prepayment rates, forward default rates, discount rates, and servicing 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 rates, forward default rates and discount 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.

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

	As of March 31, 2019				As of December 31, 2018
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	510,789	$	16,448	$	506,155	$	16,749
Freddie Mac multi-family		1,023,109		10,986		964,377		10,248
Total	$	1,533,898	$	27,434	$	1,470,532	$	26,997

The significant assumptions used in the March 31, 2019 and December 31, 2018 estimated valuation of the Company’s SBA and Freddie Mac multi-family servicing rights carried at amortized cost include:

		March 31, 2019						December 31, 2018
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights (at amortized cost)
	• Forward prepayment rate	4.7	-	20.9	%	9.1	%	3.8	-	20.2	%	9.2	%
	• Forward default rate	0.0	-	12.0	%	6.9	%	0.0	-	12.2	%	6.4	%
	• 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 multi-family servicing rights (at amortized cost)
	• Forward prepayment rate	0.0	-	35.0	%	5.2	%	0.0	-	35.0	%	5.0	%
	• Forward default rate	0.0	-	2.0	%	2.0	%	0.0	-	2.0	%	1.3	%
	• Discount rate	6.0	-	6.0	%	6.0	%	12.0	-	12.0	%	12.0	%
	• Servicing expense	0.2	-	0.2	%	0.2	%	0.2	-	0.2	%	0.2	%

These 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)	March 31, 2019		December 31, 2018
SBA servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(467)	$	(470)
20% adverse change		(911)		(915)
• Default rate
10% adverse change	$	(68)	$	(63)
20% adverse change		(135)		(125)
• Discount rate
10% adverse change	$	(572)	$	(579)
20% adverse change		(1,105)		(1,118)
Freddie Mac multi-family servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(105)	$	(63)
20% adverse change		(208)		(124)
• Default rate
10% adverse change	$	(16)	$	(11)
20% adverse change		(32)		(22)
• Discount rate
10% adverse change	$	(314)	$	(490)
20% adverse change		(617)		(791)

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

(In Thousands)	March 31, 2019
2019	$	3,913
2020		4,657
2021		4,077
2022		3,562
2023		3,088
Thereafter		8,137
Total	$	27,434

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 March 31, 2019				As of December 31, 2018
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	2,898,628	$	32,420	$	2,848,435	$	34,562
Ginnie Mae		2,373,892		28,857		2,350,301		29,586
Freddie Mac		2,317,631		26,941		2,267,943		28,917
Total	$	7,590,151	$	88,218	$	7,466,679	$	93,065

The significant assumptions used in the March 31, 2019 and December 31, 2018 valuation of the Company’s residential mortgage servicing rights carried at fair value include:

		March 31, 2019						December 31, 2018
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights (at fair value)
	• Forward prepayment rate	6.4	-	15.7	%	9.4	%	6.1	-	13.9	%	8.4	%
	• Discount rate	9.0	-	11.0	%	9.6	%	9.0	-	11.1	%	9.7	%
	• Servicing expense	$ 70	-	$ 85		$ 75		$ 70	-	$ 85		$ 75

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)	March 31, 2019		December 31, 2018
Prepayment rate
10% adverse change	$	(3,166)	$	(3,281)
20% adverse change		(6,172)		(6,330)
Discount rate
10% adverse change	$	(3,399)	$	(3,716)
20% adverse change		(6,552)		(7,159)
Cost of servicing
10% adverse change	$	(1,618)	$	(1,683)
20% adverse change		(3,235)		(3,365)

Note 10 –Residential mortgage banking activities and variable expenses on residential mortgage banking activities

Residential mortgage banking activities, reflects revenue 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. Residential mortgage banking activities also consists of unrealized gains and

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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.

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

	Three Months Ended March 31,
(In Thousands)	2019		2018
Realized and unrealized gains and losses of residential mortgage loans held for sale, at fair value	$	10,199	$	6,279
Creation of new mortgage servicing rights, net of payoffs		2,281		4,408
Loan origination fee income on residential mortgage loans		1,743		2,175
Unrealized gains (loss) on IRLCs and other derivatives		364		1,162
Residential mortgage banking activities	$	14,587	$	14,024
Variable expenses on residential mortgage banking activities	$	(9,176)	$	(2,290)

Note 11 – Secured Borrowings

The following tables present certain characteristics of our secured borrowings:

					Pledged Assets Carrying Value at				Carrying Value of Borrowing at
(In Thousands)	Maturity	Pricing	Facility Size		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Borrowings under credit facilities
JPMorgan - Commercial (1)	May 2019	1M L + 2.50%	$	225,000	$	86,109	$	85,393	$	66,898	$	68,417
Keybank - Commercial (2)	February 2020	1M L + 1.50%		125,000		5,243		23,322		5,155		22,973
East West - Commercial (3)	July 2020	Prime - 0.821 to + 0.029%		50,000		42,864		37,255		32,982		27,443
Comerica - Residential (4)	April 2020	1M L + 1.75%		100,000		52,950		35,860		49,753		40,231
Associated Bank - Residential (4)	August 2019	1M L + 1.75%		40,000		9,264		13,653		8,685		15,907
Origin Bank - Residential (4)	July 2019	1M L + 2.00%		40,000		31,687		16,831		30,678		12,870
East West - Residential (4)	September 2023	1M L + 2.50%		50,000		59,361		63,479		41,100		8,500
Rabobank - Commercial (5)	January 2021	4.22%		14,500		19,950		—		12,713		—
FCB - Commercial (6)	June 2021	2.75%		2,343		2,807		3,219		2,299		2,974
Total borrowings under credit facilities (10)			$	646,843	$	310,235	$	279,012	$	250,262	$	199,315
Borrowings under repurchase agreements
Deutsche Bank- Commercial (6)	February 2020	3M L + 2.30 to 2.80%	$	300,000	$	180,824	$	310,797	$	131,540	$	239,972
JPMorgan - Commercial (7)	December 2020	1M L + 2.25 to 4.00%		200,000		257,575		144,337		175,307		96,343
Citibank - Commercial (8)	June 2019	1M L + 2.125 to 2.50%		500,000		118,386		230,140		102,713		194,117
JPMorgan - MBS (9)	July 2019	3.86 to 5.28%		40,803		59,496		39,882		40,803		24,881
Deutsche Bank - MBS (9)	May 2019	4.28 to 4.77%		39,529		58,874		24,536		39,529		17,425
Bank of America - MBS (9)	April 2019	3.13 to 3.48%		47,044		55,950		—		47,044		—
RBC - MBS (9)	August 2019	4.00 to 4.24%		61,026		83,112		83,818		61,026		62,494
Total borrowings under repurchase agreements (11)			$	1,188,402	$	814,219	$	833,510	$	597,963	$	635,232
Total secured borrowings			$	1,835,245	$	1,124,454	$	1,112,522	$	848,225	$	834,547

(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 SBA loan acquisitions and loan originations.

(4) Borrowings are used to finance Residential Agency loan originations.

(5) Borrowings are used to finance Real estate acquired in settlement of loans.

(6) Borrowings are used to finance SBC loan originations, Transitional loan originations, and SBC loan acquisitions.

(7) Borrowings are used to finance SBC loan originations and Transitional loan originations.

(8) Borrowings are used to finance SBC loan originations and SBC loan acquisitions.

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

(10) The weighted average interest rate of borrowings under credit facilities was 4.3% and 4.6% as of March 31, 2019 and December 31, 2018, respectively.

(11) The weighted average interest rate of borrowings under repurchase agreements was 5.4% and 4.0% as of March 31, 2019 and December 31, 2018, respectively.

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

	Pledged Assets Carrying Value at
(In Thousands)	March 31, 2019		December 31,  2018
Collateral pledged - borrowings under credit facilities
Loans, net	$	230,924	$	215,533
Mortgage servicing rights		59,361		63,479
Real estate acquired in settlement of loans		19,950		—
Total collateral pledged on borrowings under credit facilities	$	310,235	$	279,012
Collateral pledged - borrowings under repurchase agreements
Loans, net	$	556,785	$	685,274
Mortgage backed securities		87,530		112,552
Retained interest in assets of consolidated VIEs		169,904		35,684
Total collateral pledged on borrowings under repurchase agreements	$	814,219	$	833,510
Total collateral pledged on secured borrowings	$	1,124,454	$	1,112,522

The agreements governing the Company’s secured 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 March 31, 2019 and December 31, 2018.

Note 12 – Senior secured notes, Convertible notes, and Corporate debt, net

Senior secured notes, net

During 2017, ReadyCap Holdings LLC, a subsidiary of the Company, issued $140.0 million in 7.50% Senior Secured Notes due 2022. On January 30, 2018 ReadyCap Holdings LLC, issued an 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 issue price) to the notes issued during 2017 (collectively “the Senior Secured Notes”). The additional $40.0 million in Senior Secured Notes were priced with a yield to par call date of 6.5%. 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 were used to fund new SBC and SBA loan originations and new SBC loan acquisitions.

As of March 31, 2019, 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, 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 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

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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.

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 March 31, 2019, we were in compliance with all covenants with respect to the Convertible Notes.

Corporate debt, net

On April 27, 2018, the Company completed the public offer and sale of $50,000,000 aggregate principal amount of its 6.50% Senior Notes due 2021 (“Corporate debt” or “Notes”). The Company issued the Notes under a base indenture, dated August 9, 2017, 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 Notes bear 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, beginning on July 30, 2018. The Notes will mature on April 30, 2021, unless earlier redeemed or repurchased.

Prior to April 30, 2019, the Notes will not be redeemable by the Company. The Company may redeem for cash all or any portion of the Notes, at its option, on or after April 30, 2019 and before April 30, 2020 at a redemption price equal to 101% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On or after April 30, 2020, the Company may redeem for cash all or any portion of the Notes, at its option, at a redemption price equal to 100% of the principal amount of the 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 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 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 Indenture.

The Notes are the Company’s senior direct 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 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 March 31, 2019, we were in compliance with all covenants with respect to the corporate debt.

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

(in thousands, except rates)	Coupon Rate		Maturity Date	March 31, 2019
Senior secured notes principal amount(1)	7.50	%	2/15/2022	$	180,000
Unamortized premium - Senior secured notes					2,212
Unamortized deferred financing costs - Senior secured notes					(3,233)
Total Senior secured notes, net				$	178,979
Convertible notes - principal amount (2)	7.00	%	8/15/2023		115,000
Unamortized discount - Convertible notes (3)					(1,718)
Unamortized deferred financing costs - Convertible notes					(3,041)
Total Convertible notes, net				$	110,241
Corporate debt principal amount(4)	6.50	%	4/30/2021	$	50,000
Unamortized deferred financing costs - Corporate debt					(1,371)
Total Corporate debt, net				$	48,629
Total carrying amount of debt components				$	337,849
Total carrying amount of conversion option of equity components recorded in equity				$	1,718

(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.

(4) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018.

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The following table presents the contractual maturities of the Senior Secured Notes, Convertible Notes, and Corporate debt:

(In Thousands)	March 31, 2019
2019	$	—
2020		—
2021		48,629
2022		178,979
2023		110,241
Thereafter		—
Total	$	337,849

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 on the unaudited interim consolidated balance sheets and 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.

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

	Weighted		Range of
	Average		Interest	Range of
(In Thousands)	Interest Rate		Rates	Maturities (Years)	Ending Balance
March 31, 2019	3.67	%	3.46 – 8.25 %	2019 - 2038	$	34,047
December 31, 2018	4.46	%	1.70 – 8.00 %	2019 - 2038	$	229,678

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

(In Thousands)	March 31, 2019
2019	$	275
2020		594
2021		585
2022		161
2023		420
Thereafter		32,012
Total	$	34,047

Our guaranteed loan financings are secured by loans, net of $36.5 million and $249.2 million as of March 31, 2019 and December 31, 2018, respectively.

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 acquired SBC loans, originated transitional loans, and acquired SBA 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 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.

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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 on 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 securitization trust receives principal and interest on the underlying loans and distributes those payments to the certificate holders. The assets and 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 the Company’s involvement with the VIE is limited to the risks and rights as a certificate holder of the securities retained by the Company.

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

	March 31, 2019						December 31, 2018
	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	$	11,271	$	11,271	5.5	%	$	12,226	$	12,226	5.4	%
ReadyCap Lending Small Business Trust 2015-1		—		—	3.8			3,397		1,180	3.4
Sutherland Commercial Mortgage Trust 2017-SBC6		62,074		60,987	3.4			69,764		68,574	3.3
Sutherland Commercial Mortgage Trust 2018-SBC7		189,419		186,664	4.7			205,451		202,491	4.7
ReadyCap Commercial Mortgage Trust 2014-1		31,168		31,181	5.5			36,108		36,129	4.5
ReadyCap Commercial Mortgage Trust 2015-2		97,554		94,129	4.3			110,497		106,755	4.2
ReadyCap Commercial Mortgage Trust 2016-3		50,610		48,821	4.1			63,945		62,053	3.7
ReadyCap Commercial Mortgage Trust 2018-4		144,153		139,944	3.9			144,701		140,314	3.9
ReadyCap Commercial Mortgage Trust 2019-5		355,734		344,661	5.6			—		—	—
Ready Capital Mortgage Financing 2017-FL1		40,644		39,632	5.3			63,615		61,902	3.7
Ready Capital Mortgage Financing 2018-FL2		186,524		183,629	3.7			217,057		213,743	3.4
Total	$	1,169,151	$	1,140,919	4.6	%	$	926,761	$	905,367	4.0	%

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 Freddie Mac 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.

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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 reflects the securitized assets and liabilities for VIEs that we consolidate on our consolidated balance sheets:

(In Thousands)	March 31, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	—	$	—
Restricted cash		43,296		11,643
Loans, net		1,502,710		1,220,974
Real estate acquired in settlement of loans		—		176
Accrued interest		7,930		6,750
Due from servicers		7,928		11,514
Total assets	$	1,561,864	$	1,251,057
Liabilities:
Securitized debt obligations of consolidated VIEs, net		1,140,919		905,367
Total liabilities	$	1,140,919	$	905,367

Assets of Unconsolidated VIEs

The following table reflects our variable interests in identified VIEs, of which we are not the primary beneficiary, as of March 31, 2019 and December 31, 2018:

	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Assets:
Mortgage backed securities, at fair value(2)	$	74,901	$	75,591	$	74,901	$	75,591
Investment in unconsolidated joint venture		39,383		55,369		39,383		55,369
Total assets in unconsolidated VIEs	$	114,284	$	130,960	$	114,284	$	130,960
(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 sponsored securitizations.

Note 15 – Interest Income and Interest Expense

Interest income and interest expense are recorded in the unaudited interim consolidated statements of income and classified based on the nature of the underlying asset or liability.

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The following table presents the components of interest income and expense:

	Three Months Ended March 31,
(In Thousands)	2019		2018
Interest income
Loans
Acquired SBA 7(a) loans	$	7,181	$	7,872
Acquired loans		10,254		9,461
Originated Transitional loans		14,185		8,910
Originated SBC loans, at fair value		366		2,028
Originated SBC loans		12,282		5,740
Originated SBA 7(a) loans		1,928		843
Originated Residential Agency loans		6		12
Total loans (1)	$	46,202	$	34,866
Held for sale, at fair value, loans
Originated Residential Agency loans	$	776	$	877
Originated Freddie loans		257		512
Acquired loans		36		13
Total loans, held for sale, at fair value	$	1,069	$	1,402
Mortgage backed securities, at fair value		1,482		882
Total interest income	$	48,753	$	37,150
Interest expense
Secured borrowings	$	(9,909)	$	(7,223)
Securitized debt obligations of consolidated VIEs		(16,501)		(7,202)
Guaranteed loan financing		(2,710)		(2,815)
Senior secured note		(3,484)		(3,239)
Convertible note		(2,188)		(2,187)
Corporate debt		(983)		—
Total interest expense	$	(35,775)	$	(22,666)
Net interest income before provision for loan losses	$	12,978	$	14,484
(1) Includes interest income on loans in consolidated VIEs.

Note 16 – Derivative Instruments

The Company is exposed to changing interest rates and market conditions, which affect cash flows associated with borrowings. The Company uses derivative instruments to manage interest rate risk and conditions in the commercial mortgage market and, 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 of the swap contract. CDS are executed in order to mitigate 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.

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 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 residential mortgage banking activities on the unaudited interim consolidated statements of income.

As described in Note 3, for qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income/(loss) ("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 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.

45

As of March 31, 2019 the Company had one open CDS contract and 100 open interest rate swap contracts with counterparties. As of December 31, 2018 the Company had one open credit default swap contract and 64 open interest rate swap contracts with counterparties.

		As of March 31, 2019						As of December 31, 2018
				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	$	—	$	(28)	$	15,000	$	295	$	—
Interest Rate Swaps - not designated as hedges	Interest rate risk		288,110		—		(3,112)		411,811		—		(2,349)
Interest Rate Swaps - designated as hedges	Interest rate risk		215,000		—		(252)		134,325		—		(1,276)
Interest rate lock commitments	Interest rate risk		209,105		2,483		—		144,799		1,775		—
Total		$	727,215	$	2,483	$	(3,392)	$	705,935	$	2,070	$	(3,625)

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

	Three Months Ended March 31, 2019
	Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	(323)
Interest rate swaps (1)		(796)		604
Residential mortgage banking activities interest rate swaps (2)		—		(343)
Interest rate lock commitments (2)		—		708
Total	$	(796)	$	646
(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 March 31, 2018
	Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	8
Interest rate swaps (1)		4,555		(1,346)
Residential mortgage banking activities interest rate swaps (2)		—		(482)
Interest rate lock commitments (2)		—		1,643
Total	$	4,555	$	(177)
(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.

The following tables summarize 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)	$	41	$	—	$	41	$	(461)	$	(420)
Total - Three months ended March 31, 2019	$	41	$	—	$	41	$	(461)	$	(420)
Hedge type
Interest rate - forecasted transactions (1)	$	—	$	—	$	—	$	—	$	—
Total - Three months ended March 31, 2018	$	—	$	—	$	—	$	—	$	—
(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.

46

Note 17 – Real Estate Acquired in Settlement of Loans

The following tables summarize the carrying amount of the Company’s real estate holdings as of the unaudited interim consolidated balance sheet dates:

(In Thousands)	March 31, 2019		December 31, 2018
Acquired ORM Portfolio:
Land	$	8,885	$	—
Lodging/Residential		6,545		—
Mixed Use		30,303		—
Office		1,256		—
Retail		19,950		—
Services		1,035		—
Total Acquired ORM REO	$	67,974	$	—
Other REO held for sale:
Mixed Use	$	279	$	279
Multi-Family		150		207
Office		6,414		6,719
Retail		191		191
SBA		328		23
Single Family		182		368
Total Other REO	$	7,544	$	7,787
Total Real estate acquired in settlement of loans, held for sale	$	75,517	$	7,787

Note 18 – 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 March 31,
	2019		2018
Management fee - total	$	2.0 million	$	2.0 million
Management fee - amount unpaid	$	4.1 million	$	2.6 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

47

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 Core 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 March 31,
	2019		2018
Incentive fee distribution - total	$	0.0 million	$	0.4 million
Incentive fee distribution - amount unpaid	$	0.2 million	$	0.4 million

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 incentive distribution 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 March 31,
	2019		2018
Reimbursable expenses payable to our Manager - total	$	0.8 million	$	0.9 million
Reimbursable expenses payable to our Manager - amount unpaid	$	1.0 million	$	0.8 million

Other

In March of 2018, the Company acquired 75 loans, net, from Waterfall Olympic Master Fund Grantor Trust, Series I, II, and III, which are also managed by our Manager for $51.6 million, including interest. The total unpaid principal balance of the loans was $51.8 million.

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Note 19 – Other Assets and Other Liabilities

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

(In Thousands)	March 31, 2019		December 31, 2018
Other assets:
Due from servicers	$	7,095	$	7,284
Accrued interest		8,185		7,253
Intangible assets		2,837		2,915
Deferred financing costs		2,030		2,564
Deferred tax asset		22,744		18,084
Deferred loan exit fees		8,985		8,668
Other		17,010		8,679
Total other assets	$	68,886	$	55,447
Accounts payable and other accrued liabilities:
Accrued salaries, wages and commissions	$	9,316	$	19,925
Servicing principal and interest payable		7,406		10,582
Repair and denial reserve		5,613		5,524
Liability under subservicing agreements		27		239
Unapplied cash		929		340
Accrued interest payable		9,314		14,244
Payable to related parties		4,368		2,580
Deferred tax liability		20,094		19,972
Other accounts payable and accrued liabilities		10,173		1,313
Total accounts payable and other accrued liabilities	$	67,240	$	74,719

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 variable expenses on residential mortgage banking activities, 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 March 31, 2019 and December 31, 2018, the loan indemnification reserve was $1.9 million and $1.7 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 March 31, 2019 and December 31, 2018, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

49

Note 20 – Other Income and Operating Expenses

The following table details the Company’s other income and operating expenses for the unaudited interim consolidated statements of income.

	Three Months Ended March 31,
(In Thousands)	2019		2018
Other income
Origination income	$	808		1,153
Release/ (Increase) of repair and denial reserve		(89)		(110)
Other		182		291
Total other income	$	900	$	1,334
Other operating expenses
Origination costs		1,189		1,856
Technology expense		1,101		783
Charge off of real estate acquired in settlement of loans		305		19
Rent expense		691		522
Recruiting, training and travel expenses		587		703
Loan acquisition costs		110		—
Other		2,878		4,128
Total other operating expenses	$	6,861	$	8,011

Note 21 – Stockholders’ Equity

Common stock dividends

The following table presents cash dividends declared by our board of directors on our common stock from March 14, 2017 through March 31, 2019:

			Dividend per
Declaration Date	Record Date	Payment Date	Share
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
December 13, 2017	December 29, 2017	January 31, 2018	$	0.37
March 14, 2018	March 30, 2018	April 30, 2018	$	0.37
June 12, 2018	June 29, 2018	July 31, 2018	$	0.40
September 11, 2018	September 28, 2018	October 31, 2018	$	0.40
December 12, 2018	December 31, 2018	January 31, 2019	$	0.40
March 12, 2019	March 28, 2019	April 30, 2019	$	0.40

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 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.

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 increase in stockholders’ equity.

50

The following table summarizes the Company’s RSU and RSA activity for the three months ended March 31, 2019:

	Restricted Stock Awards
(In Thousands, except share data)	Number of Shares	Grant date fair value		Weighted-average grant date fair value (per share)
Outstanding, January 1	118,904	$	1,661	$	13.97
Granted	111,097		1,784		16.06
Vested	(52,110)		(733)		14.06
Forfeited	—		—		—
Canceled	—		—		—
Outstanding, March 31, 2019	177,891	$	2,712	$	15.25

At March 31, 2019, there were 23,104 fully vested RSUs that were not yet issued as common stock.

During the three months ended March 31, 2019 and 2018, the Company recognized $0.7 million and $0.2 million of noncash compensation expense, respectively, related to its stock-based incentive plan in its unaudited interim consolidated statements of income.

At March 31, 2019 and 2018, approximately$1.5million and $1.5 million of noncash compensation expense related to unvested awards had not yet been charged to net income, respectively. These costs are expected to be amortized into compensation expense ratably over the course of the remainder of the respective vesting periods.

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 March 31,
(In Thousands, except for share and per share amounts)	2019		2018
Basic Earnings
Net income	$	30,450	$	18,518
Less: Income attributable to non-controlling interest		983		664
Less: Income attributable to participating shares		82		61
Basic earnings	$	29,385	$	17,793
Diluted Earnings
Continuing Operations
Net income	$	30,450	$	18,518
Less: Income attributable to non-controlling interest		983		664
Less: Income attributable to participating shares		82		61
Diluted earnings	$	29,385	$	17,793
Number of Shares
Basic — Average shares outstanding		32,556,875		32,036,504
Effect of dilutive securities — Unvested participating shares		6,769		9,340
Diluted — Average shares outstanding		32,563,644		32,045,844
Earnings Per Share Attributable to RC Common Stockholders:
Basic	$	0.90	$	0.56
Diluted	$	0.90	$	0.56

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 March 31, 2019, 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

51

conversion. As of March 31, 2019, the conversion spread value is currently zero, since the closing price of our common stock does not exceed the conversion rate (strike price) and is “out-of-the-money”, resulting in no 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: one 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. At March 31, 2019 and December 31, 2018, the non-controlling interest OP unit holders owned 1,117,169 and 1,117,169 OP units, respectively.

Note 23 – Offsetting Assets and Liabilities

In order to better define its contractual rights and 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 a termination event). 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 provisions 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 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 counterparty. As of March 31, 2019 and December 31, 2018 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 amount 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 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 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, entering into agreements with multiple counterparties.

In accordance with ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, the Company is required to disclose the impact of offsetting of assets and liabilities represented in the unaudited interim consolidated balance sheets to enable users of the unaudited interim consolidated financial statements to evaluate the effect or potential effect of netting arrangements on its financial position for recognized assets 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) the amounts owed by the Company to another party are determinable, (b) the Company has the right to set off 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 March 31, 2019 and December 31, 2018, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the unaudited interim consolidated balances sheets. 

52

The following table provides disclosure regarding the effect of offsetting of the Company’s recognized assets and liabilities presented in the unaudited interim consolidated balance sheet as of March 31, 2019:

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

$

—

$

—

$

—

$

—

$

—

$

—

Total

$

—

$

—

$

—

$

—

$

—

$

—

			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	$	3,364	$	—	$	3,364	$	—	$	3,364	$	—
Credit default swaps		28		—		28		—		28		—
Secured borrowings		848,225		—		848,225		848,225		—		—
Total	$	851,617	$	—	$	851,617	$	848,225	$	3,392	$	—

(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.

The following table provides disclosure regarding the effect of offsetting the Company’s recognized assets and liabilities presented in the unaudited interim consolidated balance sheet as of December 31, 2018:

			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	$	2,898	$	—	$	2,898	$	—	$	2,898	$	—
Total	$	2,898	$	—	$	2,898	$	—	$	2,898	$	—

					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	$	216	$	—	$	216	$	—	$	216	$	—
Credit default swaps		66		—		66		—		66		—
Secured borrowings		631,286		—		631,286		631,286		—		—
Promissory note		6,107		—		6,107		6,107		—		—
Total	$	637,675	$	—	$	637,675	$	637,393	$	282	$	—

(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.

Note 24 – 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.

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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.

The Company is also subject to credit risk with respect to the 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 creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding.  In the 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 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 the risk of loss or default by the borrower. However, GMFS is usually required by these investors to make 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

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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 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 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.

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 25 – 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.

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Unfunded Loan Commitments

As of March 31, 2019 and December 31, 2018, the Company had $179.0 and $161.7 million of unfunded loan commitments related to loans, held-for-investment, respectively.

As of March 31, 2019 and December 31, 2018, the Company had $5.9 million and $4.9 million of unfunded loan commitments related to loans, held for sale, at fair value, 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 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. As of March 31, 2019 and December 31, 2018, total commitments to originate loans were $198.7 million and $124.0 million, respectively.

Note 26 – 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 our 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 March 31, 2019 and December 31, 2018, we are in compliance with all REIT requirements.

Certain of our subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, 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. The accompanying unaudited interim consolidated financial statements include an interim tax provision for our TRS’ for the three months ended March 31, 2019 and 2018, respectively.

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, SBA Originations, Acquisitions and Servicing, 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 the three months ended March 31, 2019 and 2018, we recorded an income tax benefit of $3.0 million and an income tax expense of $2.6 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. There were no material changes to uncertain tax positions or valuation allowance assessments during the quarter.

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Note 27 – Segment Reporting

The Company reports its results of operations through the following four business segments: i) Loan Acquisitions, ii) SBC Originations, iii) SBA Originations, Acquisitions and Servicing, 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 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.

SBC Originations

Through the SBC 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.

SBA Originations, Acquisitions, and Servicing

Through the SBA Originations, Acquisitions, and Servicing 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.

Residential Mortgage Banking

Through the 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.

Corporate- Other

Corporate- Other consists primarily of unallocated corporate financing, 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 and other general corporate overhead expenses.

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Results of Business Segments and All Other

Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the three months ended March 31, 2019 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	$	10,674	$	28,188	$	9,109	$	782	$	—	$	48,753
Interest expense		(7,705)		(20,666)		(6,490)		(914)		—		(35,775)
Net interest income before provision for loan losses	$	2,969	$	7,522	$	2,619	$	(132)	$	—	$	12,978
Provision for loan losses		(133)		41		(426)		—		—		(518)
Net interest income after provision for loan losses	$	2,836	$	7,563	$	2,193	$	(132)	$	—	$	12,460
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	14,587	$	—	$	14,587
Net realized gain on financial instruments		(49)		3,540		3,791		—		—		7,282
Net unrealized gain on financial instruments		(19)		810		(575)		(7,128)		—		(6,912)
Other income		68		786		14		17		15		900
Servicing income		1		436		1,015		5,300		—		6,752
Income from unconsolidated joint venture		2,929		—		—		—		—		2,929
Gain on bargain purchase		—		—		—		—		30,728		30,728
Total non-interest income	$	2,930	$	5,572	$	4,245	$	12,776	$	30,743	$	56,266
Non-interest expense
Employee compensation and benefits		(1)		(2,260)		(3,768)		(4,595)		(824)		(11,448)
Allocated employee compensation and benefits from related party		(85)		—		—		—		(768)		(853)
Variable expenses on residential mortgage banking activities		—		—		—		(9,176)		—		(9,176)
Professional fees		(170)		(301)		(187)		(236)		(935)		(1,829)
Management fees – related party		—		—		—		—		(1,997)		(1,997)
Loan servicing expense		(801)		(1,215)		143		(1,740)		(35)		(3,648)
Merger related expenses		—		—		—		—		(5,467)		(5,467)
Other operating expenses		(421)		(2,117)		(1,050)		(2,073)		(1,200)		(6,861)
Total non-interest expense	$	(1,478)	$	(5,893)	$	(4,862)	$	(17,820)	$	(11,226)	$	(41,279)
Net income (loss) before provision for income taxes	$	4,288	$	7,242	$	1,576	$	(5,176)	$	19,517	$	27,447
Total assets	$	864,881	$	1,823,166	$	251,778	$	277,727	$	61,462	$	3,279,014

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Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the three months ended March 31, 2018 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	$	9,688	$	17,858	$	8,715	$	889	$	—	$	37,150
Interest expense		(5,831)		(12,470)		(3,620)		(745)		—		(22,666)
Net interest income before provision for loan losses	$	3,857	$	5,388	$	5,095	$	144	$	—	$	14,484
Provision for loan losses		(272)		36		69		—		—		(167)
Net interest income after provision for loan losses	$	3,585	$	5,424	$	5,164	$	144	$	—	$	14,317
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	14,024	$	—	$	14,024
Net realized gain on financial instruments		148		8,699		3,385		—		—		12,232
Net unrealized gain (loss) on financial instruments		(46)		(2,367)		533		4,888		—		3,008
Other income		156		1,259		(123)		42		—		1,334
Servicing income		5		252		1,252		4,901		—		6,410
Income from unconsolidated joint venture		5,739		—		—		—		—		5,739
Total non-interest income	$	6,002	$	7,843	$	5,047	$	23,855	$	—	$	42,747
Non-interest expense
Employee compensation and benefits		(173)		(2,637)		(3,255)		(9,114)		(141)		(15,320)
Allocated employee compensation and benefits from related party		(120)		—		—		—		(1,080)		(1,200)
Variable expenses on residential mortgage banking activities		—		—		—		(2,290)		—		(2,290)
Professional fees		(317)		(389)		(479)		(109)		(1,354)		(2,648)
Management fees – related party		—		—		—		—		(2,013)		(2,013)
Incentive fees – related party		—		—		—		—		(408)		(408)
Loan servicing (expense) income		(808)		(631)		76		(2,730)		—		(4,093)
Other operating expenses		(818)		(2,679)		(1,110)		(2,700)		(704)		(8,011)
Total non-interest expense	$	(2,236)	$	(6,336)	$	(4,768)	$	(16,943)	$	(5,700)	$	(35,983)
Net income (loss) before provision for income taxes	$	7,351	$	6,931	$	5,443	$	7,056	$	(5,700)	$	21,081
Total assets	$	609,997	$	1,223,608	$	503,512	$	283,000	$	20,837	$	2,640,954

Note 28 – Supplemental Financial Data

Summarized Financial Information of Our Unconsolidated Subsidiaries

In November of 2017, the Company acquired an interest in an SBC loan pool through a joint venture, WFLLA, LLC, which the Company has a 50% interest. Pursuant to the consolidation guidance, we determined our interest in the entity is a VIE, however, we do not consolidate the entity as we determined that we are not the primary beneficiary. WFLLA, LLC holds a 49.9% interest in another company, Girod HoldCo, LLC, whom owns and manages the day-to-day affairs and business associated with the SBC loan pool.

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In accordance with Regulation S-X section 10-01(b)-1, unconsolidated entities that meet certain significance tests are required to have supplemental disclosures included in our unaudited interim financial statements, including condensed financial information for the three months ended March 31, 2019 and 2018.

Statements of Income	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(In Thousands)		Girod HoldCo, LLC		WFLLA, LLC		Girod HoldCo, LLC		WFLLA, LLC
Interest income	$	1,157	$	577	$	7,847	$	3,916
Realized gains		201		100		13,903		6,938
Unrealized gains		11,278		5,628		3,263		1,628
Servicing expense and other		(898)		(447)		(2,005)		(1,003)
Income before provision for income taxes	$	11,738	$	5,858	$	23,008	$	11,479

During the three months ended March 31, 2019 and 2018, the Company recorded $2.9 million and $5.7 million of income, respectively, which is based on our proportional ownership interest in the entities above. This amount is reflected in Income on unconsolidated joint venture within the interim unaudited statement of income.

Note 29 – Subsequent Events

In April 2019, the Company completed the securitization of $320.8 million of transitional loans and issued $267.9 million of senior bonds at a weighted average pass-through rate of LIBOR + 1.33%.

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Item 1A. Forward-Looking Statements

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”), 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 the negative of these terms 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 obtain future financing arrangements;

· our expected leverage;

· our expected investments;

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

· our ability to compete in the marketplace;

· the availability of attractive risk-adjusted investment opportunities in small 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; 

· our ability to borrow funds at favorable rates;

· 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

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· projected default rates.

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 2018 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 acquisition of ORM;

· risks associated with achieving expected revenue synergies, cost savings and other benefits from the merger with ORM and the increased scale of our Company;

· 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 the “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;

· 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 Ready Capital Corporation (the “Company” or “Ready Capital” and together with its subsidiaries “we,” “us” and “our”) believes that the expectations reflected in the forward-looking statements are reasonable, it 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 not obligated, and does 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," of the Company's annual report on Form 10-K.

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

The following discussion should be read in conjunction with the Company's 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 annual report on Form 10-K. See "Forward-Looking Statements" in this quarterly report on Form 10-Q and in the Company's annual report on Form 10-K and "Critical Accounting Policies and Use of Estimates" in the Company's 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

We are a multi-strategy real estate finance company that originates, acquires, finances, and services 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 range in original principal amounts up to $35 million and are used by 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 origination and acquisition platforms consist of the following four operating segments:

· Loan Acquisitions. We acquire performing and non-performing small balance commercial (“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.  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”). 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 (“Freddie Mac” and the “Freddie Mac program”). These originated loans are generally held-for-investment or placed into securitization structures.

· SBA Originations, Acquisitions and Servicing.  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 (“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. In the future, we may originate SBC loans for real estate under the SBA 504 loan program, under which the SBA guarantees subordinated, long-term financing. These originated loans are either held-for-investment, placed into securitization structures, or sold.

· Residential Mortgage Banking.  In connection with our merger with ZAIS Financial on October 31, 2016, 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.

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 REIT under the Internal Revenue Code. As 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 UpREIT format pursuant to which we serve as the general partner of, and conduct substantially all of our business through Sutherland Partners, LP,

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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 1940 Act.

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 will also be impacted by our available borrowing capacity.

Changes in Market Interest Rates

We own and expect to acquire or originate fixed rate mortgages (“FRMs”), and adjustable rate 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 ten years and then an adjustable interest rate equal to the sum of an index rate, such as the London Inter-bank Offered Rate (“LIBOR”), plus a margin, while FRM loans bear interest that is fixed for the term of the loan. As of March 31, 2019, approximately 51% of the loans in our portfolio were ARMs, and 49% were FRMs, based on carrying value. The weighted average margin, above the floating rate, on ARMs was approximately 3.6% and the weighted average coupon on FRMs was approximately 6.2% as of March 31, 2019. 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

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small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for loan financing.

Changes in Fair Value of Our Assets

Certain of our originated loans 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”). This factor is beyond our control.

Prepayment 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 tend to increase, thereby decreasing the period over which we earn interest 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 and ABS. Prepayment speeds significantly affect excess mortgage servicing fees. If prepayment speeds are significantly greater than expected, the carrying value of MSRs could exceed their estimated fair value. If the fair value of MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from MSRs, and we could ultimately receive substantially less than what we paid for such assets.

Spreads on ABS

Since the financial crisis that began in 2007, the spread between swap rates and ABS has been volatile. Spreads on these assets initially moved wider due to 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 volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. 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”) 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

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

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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

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 end of 2018, 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 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, 2018. There have been no material changes to the Company's critical accounting policies and use of estimates during the three months ended March 31, 2019.

First Quarter 2019 Highlights

Operating results: 

· Achieved Net Income of $30.5 million during the three months ended March 31, 2019

· Earnings per share of $0.90 for the three months ended March 31, 2019

· Core Earnings1 of $11.3 million, or $0.34 per share, during the three months ended March 31, 2019

1 We calculate Core Earnings, a non-GAAP measure, as GAAP net income (loss) excluding the following: i) 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 MSRs; and, iv) one-time non-recurring gains or losses, such as gains or losses on discontinued operations, bargain purchase gains, or merger related expenses. Refer to “Non-GAAP Financial Measures” below for additional details.

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· Declared dividends of $0.40 per share, during the quarter ended March 31, 2019, representing a 10.9% dividend yield, based on the closing share price on March 29, 2019

Loan originations and acquisitions:

· Loan originations totaled $680.5 million including $292.0 million in SBC loans, $44.1 million of SBA Section 7(a) Program loans and $344.4 million of residential loans (based on fully committed amounts)

· Acquired $128.7 million of SBC loans

· Robust pipeline with substantial acquisition and origination opportunities (based on fully committed amounts):

o Acquisition pipeline of $573.3 million in SBC loans

o Origination pipeline of:

§ $458.4 million SBC loans

§ $138.2 million of SBA Section 7(a) Program loans

§ $198.7 million of commitments to originate residential agency loans

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.

Return Information

The following tables present certain information related to our SBC and SBA loan portfolio as of March 31, 2019 and per share information for the three months ended March 31, 2019, which includes core earnings per share or return information. Core earnings is not a measure calculated in accordance with GAAP and is defined further within Item 7 – Non-GAAP Financial Measures in our 2018 Annual report on Form 10-K.

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The following table provides a detailed breakdown of our calculation of return on equity and core return on equity for the three months ended March 31, 2019. Core 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 2018  Annual report on Form 10-K.

Portfolio Metrics

SBC Originations

The following table includes certain portfolio metrics related to our SBC Originations segment:

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SBA Originations, Acquisitions, and Servicing

The following table includes certain portfolio metrics related to our SBA Originations, Acquisitions and Servicing segment:

Acquired Portfolio

The following table includes certain portfolio metrics related to our Loan Acquisitions segment:

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Residential Mortgage Banking

The following table includes certain portfolio metrics related to our Residential Mortgage Banking segment:

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 these assets in a manner that is designed to deliver attractive returns across a variety 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 that we will continue to have access 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 sources 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 recently 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 2019.

ORM Merger

On March 29, 2019, we completed the acquisition of ORM, through a merger of ORM with and into a wholly owned subsidiary of us, in exchange for approximately 12.2 million shares of our common stock. In accordance with the Merger

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Agreement, the number of shares of our common stock issued was based on an exchange ratio of 1.441 per share. The total purchase price for the merger of $179.3 million consists exclusively of our common stock issued in exchange for shares of ORM' common stock and cash paid in lieu of fractional shares of our common stock, and was based on the $14.67 closing price of our common stock on March 29, 2019. Upon the closing of the transaction, our historical stockholders owned approximately 72% of the combined company’s stock, while historical ORM stockholders owned approximately 28% of the combined company’s stock.

The acquisition of ORM is expected to increase our equity capitalization, which will support continued growth of our platform and execution of our strategy, and provide us with improved scale, liquidity and capital alternatives, including additional borrowing capacity.  Also, the stockholder base resulting from the acquisition of ORM is expected to enhance the trading volume and liquidity for our stockholders and support a greater level of institutional investor interest in our businesses. The combination of us and ORM can potentially create cost savings and efficiencies over time resulting from the allocation of operating expenses over a larger portfolio and allow us to potentially harvest significant value from ORM's real property assets

U.S. Federal Income Tax Legislation.

On December 22, 2017, the Tax Cuts and Jobs Act, H.R. 1 (the "Tax Act") was signed into law. The Tax Act made significant changes to U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders, including the reduction of the tax rates applicable to individuals and subchapter C corporations, a reduction or elimination of certain deductions (including new limitations on the deductibility of interest expense), limitations on the use of net operating losses and requiring certain items of income to be recognized for U.S. federal income tax purposes no later than those items are reported on our financial statements. The effect of the significant changes made by the Tax Act is highly uncertain, and additional administrative guidance is still required in order to fully evaluate the effect of many provisions, but these changes may lessen the relative competitive advantage of operating as a REIT rather than as a C corporation. Technical corrections or other amendments to the new rules, and additional administrative guidance interpreting these new rules, may be forthcoming at any time but may also be significantly delayed. 

Prospective investors are urged to consult with their tax advisors regarding the effects of the Tax Act or other legislative, regulatory or administrative developments on an investment in our common stock.

Changes in Financial Condition

The following table compares our consolidated balance sheets as of March 31, 2019 and December 31, 2019 (amounts in thousands):

	March 31,		December 31,		$ Change		% Change
(In Thousands)	2019		2018		Q1'19 vs. Q4'18		Q1'19 vs. Q4'18
Assets
Cash and cash equivalents	$	47,597	$	54,406	$	(6,809)	(12.5)	%
Restricted cash		29,979		28,921		1,058	3.7
Loans, net (including $22,664 and $22,664 held at fair value)		1,057,023		1,193,392		(136,369)	(11.4)
Loans, held for sale, at fair value		115,778		115,258		520	0.5
Mortgage backed securities, at fair value		91,435		91,937		(502)	(0.5)
Loans eligible for repurchase from Ginnie Mae		73,057		74,180		(1,123)	(1.5)
Investment in unconsolidated joint ventures		39,025		33,438		5,587	16.7
Derivative instruments		2,483		2,070		413	20.0
Servicing rights (including $93,065 and $93,065 held at fair value)		115,652		120,062		(4,410)	(3.7)
Receivable from third parties		718		8,888		(8,170)	(91.9)
Real estate acquired in settlement of loans, held for sale		75,517		7,787		67,730	869.8
Other assets		68,886		55,447		13,439	24.2
Assets of consolidated VIEs		1,561,864		1,251,057		310,807	24.8
Total Assets	$	3,279,014	$	3,036,843	$	242,171	8.0	%
Liabilities
Secured borrowings	$	848,225	$	834,547	$	13,678	1.6	%
Securitized debt obligations of consolidated VIEs, net		1,140,919		905,367		235,552	26.0
Convertible notes, net		110,241		109,979		262	0.2

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Senior secured notes, net		178,979		178,870		109	0.1
Corporate debt, net		48,629		48,457		172	-
Guaranteed loan financing		34,047		229,678		(195,631)	(85.2)
Liabilities for loans eligible for repurchase from Ginnie Mae		73,057		74,180		(1,123)	(1.5)
Derivative instruments		3,392		3,625		(233)	(6.4)
Dividends payable		13,396		13,346		50	0.4
Accounts payable and other accrued liabilities		67,240		74,719		(7,479)	(10.0)
Total Liabilities	$	2,518,125	$	2,472,768	$	45,357	1.8	%
Stockholders’ Equity
Common stock	$	4	$	3	$	1	33.3	%
Additional paid-in capital		720,680		540,478		180,202	33.3
Retained earnings (Deficit)		21,790		5,272		16,518	313.3
Accumulated other comprehensive (loss)		(1,328)		(922)		(406)	-
Total Ready Capital Corporation equity		741,146		544,831		196,315	36.0	%
Non-controlling interests		19,743		19,244		499	2.6
Total Stockholders’ Equity	$	760,889	$	564,075	$	196,814	34.9	%
Total Liabilities and Stockholders’ Equity	$	3,279,014	$	3,036,843	$	242,171	8.0	%

Assets - Comparison of balances at March 31, 2019 to December 31, 2018

Cash and cash equivalents decreased $6.8 million, primarily due to funding new loan originations, loan acquisitions, and other investment activity, offset by proceeds from our securitization activities and loan sales and pay-offs.

Loans, net decreased by $136.3 million as a result of loan transferred to VIEs as part of the Ready Capital Mortgage Trust 2019-5 (“RCMT 2019-5”) securitization that was completed in January 2019. This was offset by new loan originations and acquisitions during the quarter, particularly $130.2 million of loans acquired as part of the ORM merger.

Investment in unconsolidated joint ventures increased by $5.6 million during the quarter as a result of a $8.7 million joint venture acquired as part of the ORM merger, offset by income and distributions on our other unconsolidated joint venture.

Our servicing rights asset decreased by $4.4 million, primarily due to unrealized losses due to the changes in the fair value of our residential MSRs of $7.1 million, offset by increases due to loan sales and retention of servicing activities of across our SBA, Freddie Mac, and residential servicing portfolio.

Real estate acquired in settlement of loans, held for sale increased $67.7 million as a result of acquired real estate as part of the ORM merger.

Assets in consolidated VIEs increased by $310.8 million, which included a net increase in loans, net due to the transfer of loans into our securitizations during the year, as noted above. These increases were partially offset by a decrease in these amounts due to pay-downs on existing loans within the securitizations.

Liabilities

Secured borrowings associated with our repurchase agreements and credit facilities increased by $13.7 million due to an increased need of shorter-term financings on acquired loans and REO, resulting in increased leverage.

Securitized debt obligations of consolidated VIEs, net increased by $235.6 million, as a result of the issuance of the RCMT 2019-5 during January of 2019, offset by pay-downs on other issued securitized debt.

Guaranteed loan financing decreased by $195.6 million as a result of the unwind of the RCL Trust securitization.

Equity

Total equity attributable to our company increased by $196.3 million, primarily the result of equity issued as part of the ORM merger.

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Selected Balance Sheet Information by Business Segment and Corporate – Other

The following table presents certain selected balance sheet information by each of our four business segments, with the remaining amounts reflected in Corporate –Other, as of March 31, 2019:

(in thousands)	Loan Acquisitions		SBC Originations		SBA Originations, Acquisitions and Servicing		Residential Mortgage Banking		Corporate / Other		Total
Assets
Loans, net (1)	$	771,537	$	1,583,887	$	209,768	$	2,818	$	-	$	2,568,010
Loans, held for sale, at fair value		2,927		5,243		13,768		93,840		-		115,778
Mortgage backed securities, at fair value		16,534		74,901		-		-		-		91,435
Servicing rights		-		10,986		16,448		88,218		-		115,652
Investment in consolidated joint ventures		39,383		-		-		-		-		39,383
Real estate acquired in settlement of loans, held for sale		75,159		-		-		-		-		75,159
Liabilities
Secured borrowings	$	157,254	$	527,773	$	32,982	$	130,216	$	-	$	848,225
Securitized debt obligations of consolidated VIEs		258,922		881,997		-		-		-		1,140,919
Guaranteed loan financing		-		-		34,047		-		-		34,047
Senior secured notes, net		42,623		129,311		7,045		-		-		178,979
Corporate debt, net		24,258		24,371		-		-		-		48,629
Convertible notes, net		54,050		50,593		5,598		-		-		110,241
(1) Includes Loan assets of consolidated VIEs (2) Excludes allowance for loan losses.

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Results of Operations

The following table compares our summarized results of operations for each of our four operating segments for the three months ended March 31, 2019 and 2018 (amounts in thousands):

	For the Three Months Ended
	March 31,				$ Change
	2019		2018		2019 vs. 2018
Interest income
Loan acquisitions	$	10,674	$	9,688	$	986
SBC originations		28,188		17,858		10,330
SBA originations, acquisitions and servicing		9,109		8,715		394
Residential mortgage banking		782		889		(107)
Total interest income	$	48,753	$	37,150	$	11,603
Interest expense
Loan acquisitions	$	(7,705)	$	(5,831)	$	(1,874)
SBC originations		(20,666)		(12,470)		(8,196)
SBA originations, acquisitions and servicing		(6,490)		(3,620)		(2,870)
Residential mortgage banking		(914)		(745)		(169)
Total interest expense	$	(35,775)	$	(22,666)	$	(13,109)
Net interest income before provision for loan losses	$	12,978	$	14,484	$	(1,506)
Provision for loan losses		(518)		(167)		(351)
Net interest income after provision for loan losses	$	12,460	$	14,317	$	(1,857)
Non-interest income
Loan acquisitions	$	2,930	$	6,002	$	(3,072)
SBC originations		5,572		7,843		(2,271)
SBA originations, acquisitions and servicing		4,245		5,047		(802)
Residential mortgage banking		12,776		23,855		(11,079)
Corporate - other		30,743		-		30,743
Total non-interest income	$	56,266	$	42,747	$	13,519
Non-interest expense
Loan acquisitions	$	(1,478)	$	(2,236)	$	758
SBC originations		(5,893)		(6,336)		443
SBA originations, acquisitions and servicing		(4,862)		(4,768)		(94)
Residential mortgage banking		(17,820)		(16,943)		(877)
Corporate - other		(11,226)		(5,700)		(5,526)
Total non-interest expense	$	(41,279)	$	(35,983)	$	(5,296)
Net income (loss) before provision for income taxes
Loan acquisitions	$	4,288	$	7,351	$	(3,063)
SBC originations		7,242		6,931		311
SBA originations, acquisitions and servicing		1,576		5,443		(3,867)
Residential mortgage banking		(5,176)		7,056		(12,232)
Corporate - other		19,517		(5,700)		25,217
Total net income before provision for income taxes	$	27,447	$	21,081	$	6,366

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Results of Operations – Supplemental Information

Realized and unrealized gains/(losses) on financial instruments are recorded in the unaudited interim consolidated statements of income and classified based on the nature of the underlying asset or liability.

The following table presents the components of realized and unrealized gains / (losses) on financial instruments:

	Three Months Ended March 31,
(In Thousands)	2019		2018
Realized gains (losses) on financial instruments
Realized gains on loans - Freddie Mac	$	1,096	$	2,078
Creation of mortgage servicing rights - Freddie Mac		1,267		1,938
Realized gains on loans - SBA		2,821		2,542
Creation of mortgage servicing rights - SBA		933		692
Realized gain (loss) on derivatives, at fair value		772		4,555
Realized gain (loss) on mortgage backed securities, at fair value		786		538
Net realized gains (losses) - all other		(393)		(111)
Net realized gain on financial instruments	$	7,282	$	12,232
Unrealized gains (losses) on financial instruments
Unrealized gain (loss) on loans - Freddie Mac	$	(261)	$	(196)
Unrealized gain (loss) on loans - SBA		(575)		533
Unrealized gain (loss) on residential mortgage servicing rights, at fair value		(7,128)		4,888
Unrealized gain (loss) on derivatives, at fair value		(742)		(1,338)
Unrealized gain (loss) on mortgage backed securities, at fair value		1,796		(149)
Net unrealized gains (losses) - all other		(2)		(730)
Net unrealized gain (loss) on financial instruments	$	(6,912)	$	3,008

Loan Acquisition Segment Results

	For the Three Months Ended
	March 31,
(In Thousands)	2019		2018		$ Change
Interest income	$	10,674	$	9,688	$	986
Interest expense		(7,705)		(5,831)		(1,874)
Net interest income before provision for loan losses	$	2,969	$	3,857	$	(888)
Provision for loan losses		(133)		(272)		139
Net interest income after provision for loan losses	$	2,836	$	3,585	$	(749)
Non-interest income		2,930		6,002		(3,072)
Non-interest expense		(1,478)		(2,236)		758
Total non-interest income (expense)	$	1,452	$	3,766	$	(2,314)
Net income before provision for income taxes	$	4,288	$	7,351	$	(3,063)

Interest income

Interest income of $10.7 million for the quarter ended March 31, 2019 in our loan acquisitions segment represented an increase of $1.0 million from the prior year quarter, primarily driven by the re-investment of capital into acquired loans throughout 2018. As of March 31, 2019, the carrying value of the acquired loan portfolio was $770.0 million, compared to $488.0 million as of March 31, 2018.  

Interest expense

Interest expense of $7.7 million for the quarter ended March 31, 2019 in our loan acquisitions segment represented an increase of $1.9 million from the prior year quarter, reflecting an increase in borrowing needs, as a result of deploying capital back into the acquired loan business and a higher average carrying value of the acquired loan portfolio.

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Provision for loan losses

Provision for loan losses of $0.1 million for the quarter ended March 31, 2019 in our loan acquisitions segment represented a reduction of $0.3 million from the prior year quarter, reflecting a reduction in our credit deteriorated loan portfolio due to pay-downs and sales and our increased focus on new loan vintages with better credit qualities.

Non-interest income

Non-interest income of $2.9 million for the quarter ended March 31, 2019 in our loan acquisitions segment represented a decrease of $3.1 million from the prior year quarter, primarily due to income generated on our equity method investment in a joint venture acquired in November 2017. The joint venture interest is in an SBC loan pool, which generates interest income and realized and unrealized gains and losses and these amounts are earned by us, based on our proportional interest. This investment generated $5.7 million of income during the quarter ended March 31, 2018 compared to $2.9 million of income during the quarter ended March 31, 2019.

Non-interest expense

Non-interest expense of $1.5 million for the quarter ended March 31, 2019 in our loan acquisitions segment represented a decrease of $0.8 million from the prior year quarter ended March 31, 2018, primarily reflecting a reduction in generating overhead and operating expenses allocated to this segment. 

SBC Originations Segment Results

	For the Three Months Ended
	March 31,
(In Thousands)	2019		2018		$ Change
Interest income	$	28,188	$	17,858	$	10,330
Interest expense		(20,666)		(12,470)		(8,196)
Net interest income before provision for loan losses	$	7,522	$	5,388	$	2,134
Recoveries of loan losses		41		36		5
Net interest income after provision for loan losses	$	7,563	$	5,424	$	2,139
Non-interest income		5,572		7,843		(2,271)
Non-interest expense		(6,010)		(6,336)		326
Total non-interest income (expense)	$	(438)	$	1,507	$	(1,945)
Net income before provision for income taxes	$	7,125	$	6,931	$	194

Interest income

Interest income of $28.2 million for the quarter ended March 31, 2019 in our SBC originations segment represented an increase of $10.3 million from the prior year quarter primarily reflecting an increase in SBC loan originations, resulting in higher average loan balances. Originated transitional loans contributed $14.2 million in interest income during the quarter ended March 31, 2019, representing a $5.3 million increase from the quarter ended March 31, 2018. Originated SBC loans contributed $12.6 million in interest income during the quarter ended March 31, 2019, representing a $4.9 million decrease from the quarter ended March 31, 2018. Originated Freddie Mac loans contributed $0.3 million in interest income during the quarter ended March 31, 2019, representing a $0.2 million decrease from the quarter ended March 31, 2018.

Interest expense

Interest expense of $20.7 million in our SBC originations segment represented an increase of $8.2 million from the prior year quarter ended March 31, 2018, primarily reflecting an increase in borrowing activities under our shorter-term secured borrowings and borrowings under our senior secured notes and convertible notes allocated to the SBC originations segment, due to the need to finance a greater number of loan originations and higher average carrying value.

Non-interest income

Non-interest income of $5.6 million for the quarter ended March 31, 2019 in our SBC originations segment represented a decrease of $2.3 million from the prior quarter ended March 31, 2018 primarily reflecting a decrease in

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realized gains on Freddie Mac loans of $1.0 million and a decrease in servicing income generated on the Freddie Mac loan portfolio of $0.8 million.

Non-interest expense

Non-interest expense of $6.0 million for the quarter ended March 31, 2019 in our SBC originations segment represented a decrease of $0.3 million from the prior year quarter ended March 31, 2018, primarily reflecting a decrease in general operating expenses of $0.6 million, a decrease in employee compensation expense of $0.2 million, partially offset by an increase in servicing expense of $0.6 million.

SBA Originations, Acquisitions and Servicing Segment Results

	For the Three Months Ended
	March 31,
(In Thousands)	2019		2018		$ Change
Interest income	$	9,109	$	8,715	$	394
Interest expense		(6,490)		(3,620)		(2,870)
Net interest income before provision for loan losses	$	2,619	$	5,095	$	(2,476)
Provision for loan losses		(426)		69		(495)
Net interest income after provision for loan losses	$	2,193	$	5,164	$	(2,971)
Non-interest income		4,245		5,047		(802)
Non-interest expense		(4,862)		(4,768)		(94)
Total non-interest income (expense)	$	(617)	$	279	$	(896)
Net income before provision for income taxes	$	1,576	$	5,443	$	(3,867)

Interest income

Interest income of $9.1 million for the quarter ended March 31, 2019 in our SBA originations, acquisitions, and servicing segment represented an increase of $0.4 million from the prior year quarter ended March 31, 2018 primarily due to an increase in interest income earned on our originated SBA loan portfolio of $1.1 million, offset by a reduction in interest income earned on our legacy acquired SBA loan portfolio of $0.7 million.  

Interest Expense

Interest expense of $6.5 million for the quarter ended March 31, 2019 in our SBA originations, acquisitions, and servicing segment represented an increase of  $2.9 million from the prior year quarter ended March 31, 2018 primarily reflecting a one-time $1.9 million increase in interest expense relating to the acceleration of deferred financing costs relating to the early pay-off of the RCLSBL 2015-1 securitization. Additionally, the increase was also the result of an increase in borrowing activities under secured borrowings due to the growth of our SBA originations business.

Non-interest income

Non-interest income of $4.2 million for the quarter ended March 31, 2019 in our SBA originations, acquisitions, and servicing segment represented a decrease of $0.8 million from the prior year quarter ended March 31, 2018, reflecting a decrease in gains on sales of SBA loans.

Non-interest expense

Non-interest expense of $4.8 million for the quarter ended March 31, 2019 in our SBA originations, acquisitions, and servicing segment remained flat compared to the prior year quarter ended March 31, 2018.

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Residential Mortgage Banking Segment Results

	For the Three Months Ended
	March 31,
(In Thousands)	2019		2018		$ Change
Interest income	$	782	$	889	$	(107)
Interest expense		(914)		(745)		(169)
Net interest income before provision for loan losses	$	(132)	$	144	$	(276)
Provision for loan losses		-		-		-
Net interest income after provision for loan losses	$	(132)	$	144	$	(276)
Non-interest income		12,776		23,855		(11,079)
Non-interest expense		(17,820)		(16,943)		(877)
Total non-interest income (expense)	$	(5,044)	$	6,912	$	(11,956)
Net income before provision for income taxes	$	(5,176)	$	7,056	$	(12,232)

Interest income

Interest income of $0.8 million in our residential mortgage banking segment for each of the quarters ended March 31, 2019 and 2018 was generated on originated residential agency loans held-for-sale, at fair value. This remained approximately flat relative to the prior years’ quarter.

Interest expense

Interest expense of $0.9 million in our residential mortgage banking segment for the quarters ended March 31, 2019 and 2018 remained approximately flat. 

Non-interest income

Non-interest income of $12.8 million in our residential mortgage banking segment for the quarter ended March 31, 2019 represented a decrease of $11.1 million from the prior year quarter ended March 31, 2018 primarily reflecting unrealized losses on residential MSRs of $7.1 million during the quarter ended March 31, 2019 compared to unrealized gains of $4.9 million of unrealized gains during the quarter ended March 31, 2018. This was partially offset by an increase in revenue on residential mortgage banking activities of $0.5 million as a result of a higher serviced loan UPB during the current year.

Non-interest expense

Non-interest expense of $17.8 million in our residential mortgage banking segment for the quarter ended March 31, 2019 represented an increase of $0.9 million from the prior year quarter ended March 31, 2018, primarily reflecting an increase in variable expenses on residential mortgage banking activities and employee compensation of $2.4 million, offset by a decrease in loan servicing expense of $1.0 million and a decrease in other generating operating expenses of $0.6 million.

Corporate- Other

Non-interest income

Non-interest income of $30.7 million in our Corporate – Other segment for the quarter ended March 31, 2019 represented a bargain purchase gain associated with the ORM merger.

Non-interest expense

Non-interest expense of $11.1 million for the quarter ended March 31, 2019 increased $5.4 million from the prior year quarter ended March 31, 2018 as a result of a merger related expenses of $5.5 million.

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Non-GAAP Financial Measures

We believe that providing investors with Core Earnings, a non-U.S. GAAP financial measure, in addition to the related U.S. GAAP measures, gives investors greater transparency into the information used by management in our financial and operational decision-making. However, because Core 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 may not be comparable to other similarly-titled measures of other companies.

We calculate Core Earnings as GAAP net income (loss) excluding the following:

i) 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) one-time non-recurring gains or losses, such as gains or losses on discontinued operations, bargain purchase gains, or merger related expenses

In calculating Core 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 Core 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 Core Earnings, Net Income (in accordance with GAAP) is adjusted to exclude realized gains and losses on certain MBS securities considered to be non-core.  Certain MBS positions are considered to be non-core due to a variety of reasons which may include collateral type, duration, and size. In 2016, we liquidated the majority of our non-core MBS portfolio to fund our core and recurring operating segments. 

In addition, in calculating Core 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 Core 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.

The following table presents our summarized consolidated results of operations and reconciliation to Core Earnings:

	Three Months Ended
(in thousands)	March 31, 2019		March 31, 2018		Change
Net Income	$	30,450	$	18,518	$	11,932
Reconciling items:
Unrealized loss on mortgage-backed securities		14		79		(65)
Unrealized loss on mortgage servicing rights		7,128		(4,155)		11,283
Gain on bargain purchase		(30,728)		-		(30,728)
Merger transaction costs		5,467		-		5,467
Non-recurring expenses		726		-		726
Total reconciling items	$	(17,393)	$	(4,076)	$	(13,317)
Income tax adjustments		(1,782)		1,047		(2,829)
Core earnings	$	11,275	$	15,489	$	(4,214)

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Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

Consolidated Net Income increased by $11.9 million, from $18.5 million during the three months ended March 31, 2018 to $30.5 million during the three months ended March 31, 2019. Core Earnings decreased by $4.2 million, from $15.5 million during the three months ended March 31, 2018 to $11.3 million during the three months ended March 31, 2019.

The increase in Consolidated Net Income was the result of a bargain purchase gain of $30.7 million, offset by merger related expenses of $5.5 million and unrealized losses of $7.1 million on residential MSRs carried at fair value. Core earnings decreased by $4.2 million as a result of a reduction in income generated by our joint venture investment of $2.8 million, a  reduction in gains on sales of SBA loans of $0.8 million, and a reduction in net interest income of $1.5 million.

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 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 ofp 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 earnings is greater than zero for the most recently completed 12 calendar quarters, or the number of completed calendar quarters since the closing date of the ZAIS Financial merger, whichever is less.

For purposes of calculating the incentive distribution prior to the completion of a 12-month period following the closing of the ZAIS Financial merger, core earnings was 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 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) 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.

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 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

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realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of Core 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 (including term loans and revolving facilities), the net proceeds of this and future offerings of equity and debt securities, including our Senior Secured Notes and Convertible Notes, and net cash provided by operating activities.

Cash Flow Activity for the Three Months Ended March 31, 2019 and March 31, 2018

The following table provides a summary of the net change in our cash and cash equivalents and restricted cash:

	Three months ended March 31,
(in thousands)	2019		2018
Cash flows provided by (used in) operating activities	$	1,056	$	48,222
Cash flows provided by (used in) investing activities	$	(170,435)	$	(146,432)
Cash flows provided by (used in) financing activities	$	195,281	$	116,452
Net increase in cash and cash equivalents and restricted cash	$	25,902	$	18,242

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

Cash and cash equivalents increased by $25.9 million during the current quarter ended March 31, 2019, reflecting:

· Net cash provided by operating activities of $1.1 million for the current quarter related primarily to:

- Cash inflows from proceeds on sales and pay-downs on loans, held-for-sale, at fair value of $458.5 million,   offset by cash outflows on originations and purchases of new loans of $445.5 million.

· Net cash used in investing activities of $170.4 million for the current quarter related primarily to:

- Cash outflows of $374.4 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 $183.8 million and sales and repayments of MBS of $3.8 million. 

· Net cash provided by financing activities of $195.3 million for the current quarter related primarily to:

- Net proceeds from securitized debt obligations of $236.9 million, offset by net repayments of guaranteed loan financing of $20.5 million and dividend payments of $13.3 million.

Cash and cash equivalents increased by $18.2 million during the previous year quarter ended March 31, 2018, reflecting:

· Net cash provided by operating activities of $48.2 million for the current quarter related primarily to:

- Proceeds on sales of loans, held for sale, at fair value of $677.4 million, offset by $610.5 million of originations and purchases of loans, held for sale, at fair value.

· Net cash used in investing activities of $146.4 million for the current quarter related primarily to:

- Cash outflows of $260.9 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 $116.8 million.

· Net cash provided by financing activities of $116.4 million for the current quarter related primarily to:

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- Proceeds provided by issuances of securitized debt of $156.0 million, issuance of our senior secured notes of approximately $40.0 million, offset by repayments of securitized debt of $65.2 million and net repayments of secured borrowings of $25.9 million.

Collateralized Borrowings Under Repurchase Agreements

The following table presents the 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 the highest balance of any month end during the quarter (dollars in thousands):

Quarter End	Quarter End Balance		Average Balance in Quarter		Highest Month End Balance in Quarter
Q4 2015	$	644,137	$	706,555	$	768,972
Q1 2016		614,613		629,375		614,613
Q2 2016		568,837		591,725		568,837
Q3 2016		581,773		575,305		592,180
Q4 2016		600,852		591,313		745,573
Q1 2017		632,951		616,902		632,951
Q2 2017		520,169		576,560		520,169
Q3 2017		320,371		420,270		433,183
Q4 2017		382,612		351,492		382,612
Q1 2018		446,663		414,638		446,663
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

The net decrease in the outstanding balances during 2016 was primarily due to the repayment of borrowings under repurchase facilities as a result of proceeds provided by our securitization activities during 2016 and a reduced need for short-term borrowings.

The net decrease in the outstanding balances during 2017 was primarily due to the proceeds provided by our convertible note issuance of approximately $115.0 million and proceeds provided by our senior secured notes of approximately $142.0 million, which were used to pay-down borrowings under repurchase agreements of approximately $218.2 million.

The net increase in the outstanding balances during 2018 was primarily due to the increased loan and MBS investment activity, which resulted in a greater need to finance these assets, which was accomplished using borrowings under repurchase agreements. These balances are typically paid down as we securitize our acquired and originated loan assets and issue senior bonds.

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 Victoria Mortgage Trust 2011-1 (“SBC-1”), Waterfall Victoria Mortgage Trust 2011-3 (“SBC-3”), Sutherland Commercial Mortgage Trust 2015-4 (“SBC-4”), Sutherland Commercial Mortgage Trust 2017 (“SBC-6”), and Sutherland Commercial Mortgage Trust 2018 (“SBC-7”) are trusts, whose debt is 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”) whose debt is collateralized by performing acquired SBC loans. We have completed four 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”), ReadyCap Commercial Mortgage Trust 2016-3 (“RCMT 2016-3”), ReadyCap Commercial Mortgage Trust 2018-4 (“RCMT 2018-4”), and Ready Capital Mortgage Trust 2019-5 (“RCMT 2019-5”). We also completed Ready Capital Mortgage Financing 2017 (“RCMF 2017-FL1”) and Ready Capital Mortgage Financing 2018 – FL2 (“RCMF 2018-FL2”), securitizations whose debt is 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.

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In addition, we completed several 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”), Freddie Mac Small Balance Mortgage Trust 2017-SB33 (“FRESB 2017-SB33”), Freddie Mac Small Balance Mortgage Trust 2018-SB45 (“FRESB 2018-SB45”), Freddie Mac Small Balance Mortgage Trust 2018-SB52 (“FRESB 2018-SB52”) and Freddie Mac Small Balance Mortgage Trust 2018-SB56 (“FRESB 2018-SB56”).

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.

The following table presents information on the securitization structures and related issued tranches of notes to investors:

Deal Name	Asset Class	Issuance	Ratings		Bonds Issued (in $ millions)
WVMT 2011-SBC1	SBC Acquired loans	February 2011	NR	$	40.5
WVMT 2011-SBC2	SBC Acquired loans	March 2011	DBRS		97.6
WVMT 2011-SBC3	SBC Acquired loans	October 2011	NR		143.4
RCMT 2014-1	SBC Originated Conventional	September 2014	MDY / DBRS		181.7
RCLSBL 2015-1	Acquired SBA 7(a) loans	June 2015	S&P		189.5
SCML 2015-SBC4	SBC Acquired loans	August 2015	NR		125.4
RCMT 2015-2	SBC Originated Conventional	November 2015	MDY / Kroll		218.8
FRESB 2016-SB11	Originated Agency Multi-family	January 2016	GSE Wrap		110.0
FRESB 2016-SB18	Originated Agency Multi-family	July 2016	GSE Wrap		118.0
RCMT 2016-3	SBC Originated Conventional	November 2016	MDY / Kroll		162.1
FRESB 2017-SB33	Originated Agency Multi-family	June 2017	GSE Wrap		197.9
RCMF 2017-FL1	SBC Originated Transitional	August 2017	MDY / Kroll		198.8
SCMT 2017-SBC6	SBC Acquired loans	August 2017	NR		139.4
FRESB 2018-SB45	Originated Agency Multi-family	January 2018	GSE Wrap		362.0
RCMT 2018-4	SBC Originated Conventional	March 2018	MDY / DBRS		165.0
RCMF 2018-FL2	SBC Originated Transitional	June 2018	MDY / Kroll		217.1
FRESB 2018-SB52	Originated Agency Multi-family	September 2018	GSE Wrap		505.0
SCMT 2018-SBC7	SBC Acquired Loans	November 2018	DBRS		217.0
FRESB 2018-SB56	Originated Agency Multi-family	December 2018	GSE Wrap		507.3
RCMT 2019-5	SBC Originated Conventional	January 2019	MDY / DBRS		355.8
Cumulative loan securitizations (inception to date)				$	4,252.3

We used the proceeds from the sale of the tranches issued to purchase and originate SBC and SBA loans.  We are the primary beneficiary of SBC-1, SBC-2, SBC-3, RCMT 2014-1, RCMT 2015-2, RCMT 2016-3, RCMT 2018-4, RCMT 2019-5, RCMF 2017-FL1, RCMF 2018-FL2, RCLSBL 2015-1, SBC-4, SBC-6, and SBC-7, therefore they are consolidated in our financial statements.

Deutsche Bank Loan Repurchase Facility

Our subsidiaries, ReadyCap Commercial, Sutherland Asset I, and Sutherland Warehouse Trust II renewed their master repurchase agreement on February 14, 2018, pursuant to which ReadyCap Commercial, Sutherland Asset I and Sutherland Warehouse Trust II may be advanced an aggregate principal amount of up to $300 million on originated mortgage loans (the “DB Loan Repurchase Facility”). As of March 31, 2019, we had $131.5 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 2020 and our subsidiaries have an option to extend the DB Loan Repurchase Facility for an additional year, subject to certain conditions. ReadyCap Commercial’s, Sutherland Asset I’s, and Sutherland Warehouse Trust II’s obligations are fully guaranteed by us.

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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, 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% of the sum of any outstanding recourse indebtedness plus the aggregate repurchase price of the mortgage loans on the Repurchase Agreement, (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 1/9 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

Our subsidiaries, ReadyCap Warehouse Financing LLC (“ReadyCap Warehouse Financing”) and Sutherland Warehouse Trust entered into master repurchase agreement in December 2015, pursuant to which ReadyCap Warehouse Financing and Sutherland Warehouse Trust, may sell, and later repurchase, mortgage loans in an aggregate principal amount of up to $200 million. Our subsidiaries renewed their master repurchase agreement with JPMorgan on December 8, 2017 (the “JPM Loan Repurchase Facility”). As of March 31, 2019, we had $175.3 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 through December 10, 2020, and ReadyCap Warehouse Financing’s and Sutherland Warehouse 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% of total stockholders equity as of the closing date of the facility plus (b) 50% of the net proceeds of any equity issuance after the closing date (ii) maximum leverage of 3:1 and (iii) liquidity equal to at least the lesser of (a) 4% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) $15,000,000.

Citibank Loan Repurchase Agreement

Our subsidiaries, Waterfall Commercial Depositor, Sutherland Asset I, and ReadyCap Commercial, LLC renewed a master repurchase agreement in June 2018 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 may sell, and later repurchase, a trust certificate (the “Trust Certificate”), representing interests in mortgage loans in an aggregate principal amount of up to $500 million. As of March 31, 2019, we had $102.7 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 2.125 to 2.50% per annum, depending on asset vintage. The Citi Loan Repurchase Facility is committed for a period of 364 days, and Waterfall Commercial Depositor’s, Sutherland Asset I’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 a 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 backing the Trust Certificate. Waterfall Commercial Depositor, Sutherland Asset I, and ReadyCap Commercial, LLC  are also required to pay the bank a commitment fee for the Citi Loan Repurchase Facility, as well as certain other administrative costs and expenses. The Citi Loan Repurchase Facility also includes financial maintenance covenants,

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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; 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

As of March 31, 2019, we had $598.0 million of secured borrowings related to SBC ABS and pledged Trust Certificates, respectively, with two counterparties (lenders).

General Statements Regarding Loan and Security Repurchase Facilities

At March 31, 2019, we had $726.7 million in fair value of Trust Certificates and loans pledged against our borrowings under the Loan Repurchase Facilities and $87.5 million in fair value of SBC ABS and short term investments pledged against our securities repurchase agreement borrowings.

Under the Loan Repurchase Facilities and securities repurchase agreements, we may be required to pledge additional assets to our counterparties 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 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 December 31, 2018, the average haircut provisions associated with our repurchase agreements was 33.0% for pledged Trust Certificates and loans and was 26.0% and 30.9% for pledged SBC ABS and short-term investments, respectively.

If the estimated fair value of the assets increases due to changes in market interest rates or 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 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 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.

JPMorgan Credit Facility

We renewed our master loan and security agreement with JPMorgan in June 2018 providing for a credit facility of up to $175 million. As of March 31, 2019, we had $66.9 million outstanding under this credit facility. The credit facility is structured as a secured loan facility in which ReadyCap Lending and Sutherland 2016‑1 JPM Grantor Trust act as borrowers. Under this facility, ReadyCap 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. We act as a guarantor under this facility. The agreement contains financial maintenance covenants, which include (i) total stockholders’ equity must not be permitted to be less than the sum of (a) 60% of total stockholders equity as of the closing

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date of the facility plus (b) 50% of the net proceeds of any equity issuance after the closing date (ii) maximum leverage of 3:1 and (iii) liquidity equal to at least the lesser of (a) 4% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) $25,000,000. The amended terms have an interest rate based on loan type ranging from one month LIBOR (reset daily), plus 2.50% per annum. The term of the facility is one year, with an option to extend for an additional year.

At March 31, 2019, we had a leverage ratio of 2.1x 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 March 31, 2019, we were in compliance with all debt covenants.

East West Bank Credit Facility

Our subsidiary, ReadyCap Lending, LLC entered into a senior secured revolving credit facility with East West Bank on July 13, 2018, which provides financing of up to $30.0 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 0.029% on unguaranteed loans.

Other credit facilities

GMFS funds its origination platform through warehouse lines of credit with three counterparties with total borrowings outstanding of $89.1 million at March 31, 2019. GMFS utilizes a $125 million committed warehouse line of credit agreement which expires on March 11, 2019, a $40 million committed warehouse line of credit expiring in August 2019, and a $40 million committed warehouse line of credit expiring in July 2019. 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 compliance with all significant debt covenants as of and for the twelve months ended March 31, 2019.

ReadyCap 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. On January 30, 2018 ReadyCap Holdings LLC, issued an 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 issue price) to the notes issued during 2017 (collectively “the Senior Secured Notes”). The additional $40.0 million in Senior Secured Notes were priced with a yield to par call date of 6.5%. 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 RCC. 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. 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 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

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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 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 ability to create or incur any lien on the capital stock of its wholly-owned subsidiary, ReadyCap Lending and (b) ReadyCap's 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; and (v) limit ReadyCap Holding's and the Guarantors' ability to consolidate, merge or transfer all or substantially all of 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.

As of March 31, 2019, we were in compliance with all covenants with respect to the Senior Secured Notes.

Convertible Notes

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. 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 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.

As of March 31, 2019, we were in compliance with all covenants with respect to the Convertible notes.

Corporate Debt

On April 27, 2018, the Company completed the public offer and sale of $50,000,000 aggregate principal amount of its 6.50% Senior Notes due 2021 (“Corporate debt” or the “Notes”). The Company issued the Notes under a base indenture, dated August 9, 2017, 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 Notes bear 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, beginning on July 30, 2018. The Notes will mature on April 30, 2021, unless earlier redeemed or repurchased.

Prior to April 30, 2019, the Notes will not be redeemable by the Company. The Company may redeem for cash all or any portion of the Notes, at its option, on or after April 30, 2019 and before April 30, 2020 at a redemption price equal to 101% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On or after April 30, 2020, the Company may redeem for cash all or any portion of the Notes, at its option, at a redemption price equal to 100% of the principal amount of the 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 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 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 Indenture.

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The Notes are the Company’s senior direct 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 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 March 31, 2019, we were in compliance with all covenants with respect to the Corporate Debt.

Contractual Obligations

Other than the items referenced above, there have been no material changes to our contractual obligations for the three months ended March 31, 2019.  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.

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.

Item 3. Quantitative and Qualitative Disclosures 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 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 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

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.

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Interest 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.

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.

The following table projects the impact on our interest income and expense for the twelve month period following March 31, 2019, 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:
Loans held for investment	$	2,534	$	5,283	$	7,798	$	9,903	$	(2,174)	$	(4,119)	$	(5,733)	$	(7,204)
Interest rate swap hedges		743		1,486		2,228		2,971		(743)		(1,486)		(2,228)		(2,971)
Total	$	3,277	$	6,769	$	10,026	$	12,874	$	(2,917)	$	(5,605)	$	(7,961)	$	(10,175)
Liabilities
Recourse debt	$	(1,274)	$	(2,547)	$	(3,821)	$	(5,094)	$	1,274	$	2,547	$	3,821	$	5,094
Non-recourse debt		(822)		(1,644)		(2,466)		(3,288)		822		1,644		2,466		3,288
Total	$	(2,096)	$	(4,191)	$	(6,287)	$	(8,382)	$	2,096	$	4,191	$	6,287	$	8,382
Total Net Impact to Net Interest Income (Expense)	$	1,181	$	2,578	$	3,739	$	4,492	$	(821)	$	(1,414)	$	(1,674)	$	(1,793)

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

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

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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.

Prepayment 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 and ABS Extension Risk

Our Manager computes the projected 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 assets could extend beyond the term of the secured debt 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

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

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 investments would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the 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

We finance the acquisition of a significant portion of our commercial and residential mortgage loans, MBS and other assets with our repurchase agreements and credit facilities. 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. 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

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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.

The following table summarizes the Company’s exposure to its repurchase agreements and credit facilities counterparties at March 31, 2019:

(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
Total Counterparty Exposure	$ 848,225	$ 1,108,236	$ 260,011	7.9	%
(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 March 31, 2019:

(in thousands)	Counterparty Rating (1)	Amount of Risk (2)	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity
Deutsche Bank AG	BBB+ / A3	$ 83,942	12	11.0	%
JPMorgan Chase Bank, N.A.	A- / A2	$ 56,897	11	7.5	%
(1) The counterparty rating presented is the long-term issuer credit rating as rated at March 31, 2018 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

Capital 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 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.

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Inflation 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.

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 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 March 31, 2019. 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 over Financial Reporting

There have been no changes in the Company’s “internal control over financial reporting” (as defined in Rule 13a‑15(f) of the Exchange Act) that occurred during the three months ended March 31, 2019 that have materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Currently, no material legal proceedings are pending or, to our knowledge, threatened against us.

Item 1A. Risk Factors

See the Company's Annual Report on Form 10-K for the year ended December 31, 2018.  The following risk factors are added to the Company’s risk factors previously disclosed. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Real estate properties acquired through our acquisition of ORM or through foreclosure subject us to additional risks associated with owning real estate.

We have acquired real estate properties through our acquisition of ORM. These assets expose us to additional risks, including, without limitation:

· facing difficulties in integrating these properties with our existing business operations;

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· incurring costs to carry, and in some cases make repairs or improvements to these assets, which requires additional liquidity and results in additional expenses that could exceed our original estimates and impact our operating results;  

· not being able to realize sufficient amounts from sales of the properties to avoid losses;

· not being able to sell properties, which are not liquid assets, in a timely manner, or at all, when we need to increase liquidity through asset sales;

· properties being acquired with one or more co-owners (called tenants-in-common) where development or sale requires written agreement or consent by all; without timely agreement or consent, we could suffer a loss from being unable to develop or sell the property;

· maintaining occupancy of the properties;

· controlling operating expenses;

· coping with general and local market conditions;

· complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection;

· possible liability for injury to persons and property;

· possible uninsured losses related to environmental events such as earthquakes, floods and/or mudslides; and

· possible liability for environmental remediation.

If any of our properties incurs a vacancy, it could be difficult to sell or re-lease.

One or more of our properties we acquired through our acquisition of ORM may incur a vacancy by either the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse), and major renovations and expenditures may be required in order for us to re-lease vacant space for other uses. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues, resulting in less cash available to be distributed to you. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

Our properties may be subject to impairment charges.

We will periodically evaluate our real estate investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and legal structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded.

We would face potential adverse effects from tenant defaults, bankruptcies or insolvencies.

The bankruptcy of our tenants may adversely affect the income generated by our properties. If our tenant files for bankruptcy, we generally cannot evict the tenant solely because of such bankruptcy. In addition, a bankruptcy court could authorize a bankrupt tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes us under the lease. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our cash flow and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit number		Exhibit description
2.1	*	Agreement and Plan of Merger, 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 April 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. (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed May 9, 2016)
2.3	*	Amendment No. 2 to the Agreement and Plan of Merger, dated as of August 4, 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 2.3 of the Registrant's Current Report on Form 8-K filed November 4, 2016)
2.4	*	Agreement and Plan of Merger, by and among Ready Capital Corporation, ReadyCap Merger Sub LLC and Owens Realty Mortgage, Inc., dated as of November 7, 2018  (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed November 9, 2018)
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)
3.4	*	Articles of Amendment of Ready Capital Corporation (incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 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)
4.1	*	Specimen Common Stock Certificate of Ready Capital Corporation (incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-4 filed on 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 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 February 13, 2017)

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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 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 August 9, 2017)
4.6	*	Second Supplemental Indenture, dated as of April 27, 2018, 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 April 27, 2018)
4.7	*	Third Supplemental Indenture, dated as of February 26, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.7 to the Registrant’s Form 10-K filed on March 13, 2019)
4.8	*	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 to the Registrant’s Form 10-K filed on March 13, 2019)
4.9	*	Amendment No. 1, dated as of February 26, 2019, to the Second Supplemental Indenture, dated as of April 27, 2018, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.9 to the Registrant’s Form 10-K filed on March 13, 2019)
10.1	*	Third Amended and Restated Agreement of Limited Partnership of Sutherland Partners, L.P., dated as of March 5, 2019, by and among Ready Capital Corporation, as General Partner, and the limited partners listed on Exhibit A thereto  (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K filed on March 13, 2019)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	**	Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	**	Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Scheme Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

*     Previously filed.

**   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.

+     Filed herewith.

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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.

Ready Capital Corporation

Date:  May 9, 2019	By:	/s/ Thomas E. Capasse
	Thomas E. Capasse
	Chairman of the Board and Chief Executive
	(Principal Executive Officer)

Date:  May 9, 2019	By:	/s/ Frederick C. Herbst
	Frederick C. Herbst
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

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