Ready Capital (RC) 10-Q 2020 Q3 Quarterly report

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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 September 30, 2020

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.)

1251 Avenue of the Americas, 50^th Floor, New York, NY 10020

(Address of Principal Executive Offices, Including Zip Code)

(212) 257-4600

(Registrant's Telephone Number, Including Area Code)

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 6.20% Senior Notes due 2026	RC RCA RCP RCB	New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange

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 ⌧

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 54,466,581 shares of common stock, par value $0.0001 per share, outstanding as of October 30, 2020.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 1A.	Forward-Looking Statements	66
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	68
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	102
Item 4.	Controls and Procedures	106
PART II.	OTHER INFORMATION	107
Item 1.	Legal Proceedings	107
Item 1A.	Risk Factors	107
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	110
Item 3.	Defaults Upon Senior Securities	110
Item 4.	Mine Safety Disclosures	110
Item 5.	Other Information	110
Item 6.	Exhibits	110
SIGNATURES		113
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

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

READY CAPITAL CORPORATION

unaudited CONSOLIDATED BALANCE SHEETS

(In Thousands)	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	149,847	$	67,928
Restricted cash		46,204		51,728
Loans, net (including $119,965 and $20,212 held at fair value)		1,393,139		1,727,984
Loans, held for sale, at fair value		348,719		188,077
Mortgage backed securities, at fair value		90,427		92,466
Loans eligible for repurchase from Ginnie Mae		237,542		77,953
Investment in unconsolidated joint ventures		69,204		58,850
Purchased future receivables, net		16,659		43,265
Derivative instruments		20,849		2,814
Servicing rights (including $74,384 and $91,174 held at fair value)		110,045		121,969
Real estate, held for sale		45,063		58,573
Other assets		98,614		106,925
Assets of consolidated VIEs		2,691,198		2,378,486
Total Assets	$	5,317,510	$	4,977,018
Liabilities
Secured borrowings		1,176,621		1,189,392
Securitized debt obligations of consolidated VIEs, net		2,059,114		1,815,154
Convertible notes, net		111,855		111,040
Senior secured notes, net		179,572		179,289
Corporate debt, net		150,658		149,986
Guaranteed loan financing		421,183		485,461
Liabilities for loans eligible for repurchase from Ginnie Mae		237,542		77,953
Derivative instruments		7,774		5,250
Dividends payable		16,934		21,302
Accounts payable and other accrued liabilities		132,087		97,407
Total Liabilities	$	4,493,340	$	4,132,234
Stockholders’ Equity
Common stock, $0.0001 par value, 500,000,000 shares authorized, 54,175,648 and 51,127,326 shares issued and outstanding, respectively		5		5
Additional paid-in capital		846,960		822,837
Retained earnings		(31,779)		8,746
Accumulated other comprehensive loss		(9,916)		(6,176)
Total Ready Capital Corporation equity		805,270		825,412
Non-controlling interests		18,900		19,372
Total Stockholders’ Equity	$	824,170	$	844,784
Total Liabilities and Stockholders’ Equity	$	5,317,510	$	4,977,018

See Notes To Unaudited Consolidated Financial Statements

3

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, except share data)	2020		2019		2020		2019
Interest income	$	61,074	$	59,723	$	193,826	$	165,510
Interest expense		(43,823)		(39,390)		(134,162)		(110,919)
Net interest income before provision for loan losses	$	17,251	$	20,333	$	59,664	$	54,591
Provision for (Recovery of) loan losses		4,231		(693)		(34,984)		(2,559)
Net interest income after provision for (recovery of) loan losses	$	21,482	$	19,640	$	24,680	$	52,032
Non-interest income
Residential mortgage banking activities		75,524		29,013		192,757		64,621
Net realized gains on financial instruments and real estate owned		7,507		7,377		22,118		20,914
Net unrealized gain (losses) on financial instruments		3,420		(7,881)		(43,762)		(21,799)
Servicing income, net of amortization and impairment of $1,555 and $4,556 for the three and nine months ended September 30, 2020, and $1,609 and $1,425 for the three and nine months ended September 30, 2019, respectively		10,115		7,449		27,193		22,012
Income on purchased future receivables, net of allowance for doubtful accounts of $2,888 and $9,805 for the three and nine months ended September 30, 2020, and $0 and $0 for the three and nine months ended September 30, 2019, respectively		4,848		—		13,917		—
Income (loss) on unconsolidated joint ventures		1,996		1,047		(1,035)		6,059
Other income		4,496		2,979		40,163		6,671
Gain on bargain purchase		—		—		—		30,728
Total non-interest income	$	107,906	$	39,984	$	251,351	$	129,206
Non-interest expense
Employee compensation and benefits		(27,612)		(13,438)		(73,836)		(37,395)
Allocated employee compensation and benefits from related party		(2,250)		(1,500)		(4,750)		(3,603)
Variable expenses on residential mortgage banking activities		(30,918)		(17,318)		(87,494)		(39,995)
Professional fees		(4,158)		(2,030)		(8,632)		(5,445)
Management fees – related party		(2,714)		(2,495)		(7,941)		(6,987)
Incentive fees – related party		(1,134)		—		(4,640)		—
Loan servicing expense		(8,231)		(4,866)		(24,122)		(13,085)
Merger related expenses		(6)		(51)		(63)		(6,121)
Other operating expenses		(10,448)		(8,144)		(41,927)		(23,091)
Total non-interest expense	$	(87,471)	$	(49,842)	$	(253,405)	$	(135,722)
Income (loss) before provision for income taxes	$	41,917	$	9,782	$	22,626	$	45,516
Income tax (provision) benefit		(6,554)		2,645		(4,116)		8,604
Net income (loss)	$	35,363	$	12,427	$	18,510	$	54,120
Less: Net income (loss) attributable to non-controlling interest		805		323		551		1,580
Net income (loss) attributable to Ready Capital Corporation	$	34,558	$	12,104	$	17,959	$	52,540
Earnings (loss) per common share - basic	$	0.63	$	0.27	$	0.32	$	1.29
Earnings (loss) per common share - diluted	$	0.63	$	0.27	$	0.31	$	1.29
Weighted-average shares outstanding
Basic		54,626,995		44,438,652		53,534,497		40,517,231
Diluted		54,704,611		44,467,801		53,612,113		40,546,380
Dividends declared per share of common stock	$	0.30	$	0.40	$	0.95	$	1.20

See Notes To Unaudited Consolidated Financial Statements

4

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)		2020		2019		2020		2019
Net Income (loss)	$	35,363	$	12,427	$	18,510	$	54,120
Other comprehensive income (loss) - net change by component
Net change in hedging derivatives (cash flow hedges)	$	671	$	(2,614)	$	(2,478)	$	(9,611)
Foreign currency translation adjustment		(712)		—		(1,342)		—
Other comprehensive loss	$	(41)	$	(2,614)	$	(3,820)	$	(9,611)
Comprehensive income (loss)	$	35,322	$	9,813	$	14,690	$	44,509
Comprehensive income (loss) attributable to non-controlling interests		804		259		471		1,300
Comprehensive income (loss) attributable to Ready Capital Corporation	$	34,518	$	9,554	$	14,219	$	43,209

See Notes To Unaudited Consolidated Financial Statements

5

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Nine Months Ended September 30, 2019
						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 ($1.20 per share)	—		—		—		(48,639)		—		(48,639)		—		(48,639)
Dividend declared on OP units	—		—		—		—		—		—		(1,341)		(1,341)
Shares issued pursuant to merger transactions	12,223,552		1		179,320		—		—		179,321		—		179,321
Offering costs	—		—		(73)		—		—		(73)		(2)		(75)
Equity component of 2017 convertible note issuance	—		—		(261)		—		—		(261)		(7)		(268)
Distributions, net	—		—		—		—		—		—		70		70
Stock-based compensation	78,212		—		1,126		—		—		1,126		—		1,126
Manager incentive fee paid in stock	14,939		—		233		—		—		233		—		233
Net income	—		—		—		52,540		—		52,540		1,580		54,120
Other comprehensive loss	—		—		—		—		(9,331)		(9,331)		(280)		(9,611)
Balance at September 30, 2019	44,421,815	$	4	$	720,823	$	9,173	$	(10,253)	$	719,747	$	19,264	$	739,011

	Nine Months Ended September 30, 2020
						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, 2020	51,127,326	$	5	$	822,837	$	8,746	$	(6,176)	$	825,412	$	19,372	$	844,784
Cumulative-effect adjustment upon adoption of ASU 2016-13, net of taxes (Note 4)	—		—				(6,599)		—		(6,599)		(155)		(6,754)
Dividend declared on common stock ($0.95 per share)	—		—		—		(51,885)		—		(51,885)		—		(51,885)
Dividend declared on OP units	—		—		—		—		—		—		(1,093)		(1,093)
Stock issued in connection with stock dividend	2,764,487		—		17,033		—		—		17,033		362		17,395
Equity issuances	900,000		—		13,410		—		—		13,410		—		13,410
Offering costs	—		—		(49)		—		—		(49)		(1)		(50)
Distributions, net	—		—		—		—		—		—		(50)		(50)
Equity component of 2017 convertible note issuance	—		—		(283)		—		—		(283)		(6)		(289)
Stock-based compensation	103,424		—		1,441		—		—		1,441		—		1,441
Manager incentive fee paid in stock	212,844		—		1,806		—		—		1,806		—		1,806
Share repurchases	(932,433)		—		(9,235)				—		(9,235)		—		(9,235)
Net income	—		—		—		17,959		—		17,959		551		18,510
Other comprehensive loss	—		—		—		—		(3,740)		(3,740)		(80)		(3,820)
Balance at September 30, 2020	54,175,648	$	5	$	846,960	$	(31,779)	$	(9,916)	$	805,270	$	18,900	$	824,170

	Three Months Ended September 30, 2019
						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 July 1, 2019	44,415,479	$	4	$	720,812	$	14,914	$	(7,703)	$	728,027	$	19,379	$	747,406
Dividend declared on common stock ($0.40 per share)	—		—		—		(17,845)		—		(17,845)		—		(17,845)
Dividend declared on OP units	—		—		—		—		—		—		(447)		(447)
Equity component of 2017 convertible note issuance	—		—		(89)		—		—		(89)		(2)		(91)
Contributions, net	—		—		—		—		—		—		75		75
Stock-based compensation	6,336		—		100		—		—		100		—		100
Net income	—		—		—		12,104		—		12,104		323		12,427
Other comprehensive loss	—		—		—		—		(2,550)		(2,550)		(64)		(2,614)
Balance at September 30, 2019	44,421,815	$	4	$	720,823	$	9,173	$	(10,253)	$	719,747	$	19,264	$	739,011

	Three Months Ended September 30, 2020
						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 July 1, 2020	54,872,789	$	5	$	854,222	$	(49,755)	$	(9,876)	$	794,596	$	18,450	$	813,046
Dividend declared on common stock ($0.30 per share)	—		—		—		(16,582)		—		(16,582)		—		(16,582)
Dividend declared on OP units	—		—		—		—		—		—		(352)		(352)
Stock issued in connection with stock dividend	—				—		—		—		—		—		—
Contributions, net	—		—		—		—		—		—		—		—
Offering costs	—		—		(4)		—		—		(4)		—		(4)
Equity component of 2017 convertible note issuance	—		—		(96)		—		—		(96)		(2)		(98)
Stock-based compensation	26,602		—		320		—		—		320		—		320
Manager incentive fee paid in stock	208,690		—		1,753		—		—		1,753		—		1,753
Share repurchases	(932,433)		—		(9,235)		—		—		(9,235)		—		(9,235)
Net income	—		—		—		34,558		—		34,558		805		35,363
Other comprehensive loss	—		—		—		—		(40)		(40)		(1)		(41)
Balance at September 30, 2020	54,175,648	$	5	$	846,960	$	(31,779)	$	(9,916)	$	805,270	$	18,900	$	824,170

See Notes To Unaudited Consolidated Financial Statements

6

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENT OF CASH FLOWS

	Nine Months Ended September 30,
(In Thousands, except share information)	2020		2019
Cash Flows From Operating Activities:
Net income (loss)	$	18,510	$	54,120
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization of premiums, discounts, and debt issuance costs, net		25,971		11,582
Provision for loan losses		34,984		2,559
Impairment loss on real estate, held for sale		3,075		824
Change in repair and denial reserve		2,452		221
Net settlement of derivative instruments		(10,226)		(4,068)
Purchase of loans, held for sale, at fair value		—		(4,458)
Origination of loans, held for sale, at fair value		(3,675,821)		(1,889,835)
Proceeds from disposition and principal payments of loans, held for sale, at fair value		3,680,537		1,859,478
Realized gains, net		(199,559)		(77,847)
Unrealized losses, net		45,786		21,799
Gain on bargain purchase		—		(30,728)
Net loss (income) of unconsolidated joint ventures, net of distributions		1,202		(5,687)
Foreign currency (gain) loss, net		(2,452)		—
Payoff of purchased future receivables, net of originations		16,801		—
Allowance for doubtful accounts on purchased future receivables		9,805		—
Net changes in operating assets and liabilities
Assets of consolidated VIEs (excluding loans, net), accrued interest and due from servicers		2,897		(3,188)
Receivable from third parties		114		8,183
Other assets		6,929		(17,185)
Accounts payable and other accrued liabilities		38,734		9,360
Net cash (used in) provided by operating activities		(261)		(64,870)
Cash Flows From Investing Activities:
Origination of loans		(555,028)		(918,805)
Purchase of loans		(121,990)		(569,254)
Purchase of mortgage backed securities, at fair value		(14,216)		(9,593)
Purchase of real estate		(329)		(117)
Funding of unconsolidated joint ventures		(16,294)		(14,726)
Purchase of servicing rights		—		(894)
Proceeds on unconsolidated joint venture in excess of earnings recognized		4,738		6,807
Proceeds from disposition and principal payment of loans		673,868		550,152
Proceeds from sale and principal payment of mortgage backed securities, at fair value		10,518		9,737
Proceeds from sale of real estate		11,045		15,626
Cash acquired in connection with the ORM Merger		—		10,822
Net cash (used in) provided by investing activities		(7,688)		(920,245)
Cash Flows From Financing Activities:
Proceeds from secured borrowings		5,321,953		3,956,325
Payment of secured borrowings		(5,336,010)		(3,486,916)
Proceeds from issuance of securitized debt obligations of consolidated VIEs		495,220		879,585
Proceeds from corporate debt		—		57,500
Payment of securitized debt obligations of consolidated VIEs		(252,276)		(315,474)
Payment of offering costs		—		(75)
Payment of guaranteed loan financing		(78,784)		(30,165)
Payment of deferred financing costs		(10,512)		(18,127)
Equity issuance, net of offering costs		13,360		—
Payment of contingent consideration		—		(1,207)
Payment of promissory note		—		(1,199)
Distributions from non-controlling interests, net		(50)		70
Dividend payments		(39,951)		(45,034)
Share repurchase program		(9,235)		—
Net cash (used in) provided by financing activities		103,715		995,283
Net increase (decrease) in cash, cash equivalents, and restricted cash		95,766		10,168
Cash, cash equivalents, and restricted cash at beginning of period		127,980		94,970
Cash, cash equivalents, and restricted cash at end of period	$	223,746	$	105,138
Supplemental disclosure of operating cash flow
Cash paid for interest	$	123,499	$	94,841
Cash (received) paid for income taxes	$	(5,878)	$	(2,609)
Stock-based compensation	$	1,121	$	1,126
Supplemental disclosure of non-cash investing activities
Loans transferred from loans, held for sale, at fair value to loans, net	$	509	$	750
Loans transferred to real estate owned	$	8,832	$	—
Deconsolidation of assets in securitization trusts	$	—	$	177,815
Supplemental disclosure of non-cash financing activities
Dividend paid in stock	$	17,395	$	—
Common stock issued in connection with merger transactions		—		12,223,552
Deconsolidation of borrowings in securitization trusts	$	—	$	177,815
Share-based component of incentive fees	$	1,806	$	233
Cash and restricted cash reconciliation
Cash and cash equivalents	$	149,847	$	52,727
Restricted cash		46,204		45,303
Cash, cash equivalents, and restricted cash in assets of consolidated VIEs		27,695		7,108
Cash, cash equivalents, and restricted cash at end of period	$	223,746	$	105,138

See Notes to Unaudited Consolidated Financial Statements

7

READY CAPITAL CORPORATION

NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Organization

Ready Capital Corporation (the “Company” or “Ready Capital” and together with its subsidiaries “we”, “us” and “our”) is a Maryland corporation. 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.

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

Sutherland Partners, LP (the “Operating Partnership”) holds substantially all of our assets and conducts substantially all of our business. As of September 30, 2020 and December 31, 2019, the Company owned approximately 97.9% of the operating partnership units (“OP units”) of the Operating Partnership. 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.

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 4 business segments: i) 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 4 operating segments:

● 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. We also acquire purchased future receivables through our Knight Capital, LLC (“Knight Capital”) funding platform.

● 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 (“ReadyCap Commercial”). These originated loans are generally held-for-investment or placed into securitization structures.  Additionally, as part of this segment, we originate and service multi-family loans under the Federal Home Loan Mortgage Corporation’s Small Balance Loan Program (“Freddie Mac” and the “Freddie Mac program”). These originated loans are held for sale, then sold to Freddie Mac.

● SBA Originations, Acquisitions, and Servicing. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap Lending, LLC (“ReadyCap Lending”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold.

● Residential Mortgage Banking. We operate our 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

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Veterans Affairs (“VA”) through retail, correspondent and broker channels. These originated loans are then sold to third parties, primarily agency lending programs.

On March 29, 2019, the Company completed the acquisition of Owens Realty Mortgage, 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 (“ORM Merger”). 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 increased the Company’s equity capitalization, supported continued growth of the Company’s platform and execution of the Company’s strategy, and provided the Company with improved scale, liquidity and capital alternatives, including additional borrowing capacity. Also, the stockholder base resulting from the acquisition of ORM enhanced the trading volume and liquidity for our stockholders. The combination of the Company and ORM created cost savings and efficiencies resulting from the allocation of operating expenses over a larger portfolio and has allowed the Company to harvest value from ORM's real property assets.

On October 25, 2019, the Company acquired Knight Capital. Knight Capital is a technology-driven platform that provides working capital to small and medium businesses across the U.S. Through its platform, Knight Capital supports business operations by offering a faster alternative to conventional bank funding. The total purchase price for the merger of $27.8 million consists of $17.5 million of cash and $10.3 million of Ready Capital common stock.

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 September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019. 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 interim consolidated financial statements, including the notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. 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. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission, or the SEC.

Note 3 – Summary of Significant Accounting Policies

Risks and uncertainties

      The outbreak of the coronavirus pandemic (“COVID-19”) around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The impact of the outbreak has been rapidly evolving around the globe, with several countries taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. While some of these restrictions have been relaxed

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or phased out, many of these or similar restrictions remain in place, continue to be implemented or additional restrictions are being considered. Such actions are creating significant disruptions to global supply chains, and adversely impacting several industries, including but not limited to, airlines, hospitality, retail and the broader real estate industry.

The major disruption caused by COVID-19 significantly reduced economic activity in most of the United States resulting in a significant increase in unemployment claims. COVID-19 has had a continued and prolonged adverse impact on economic and market conditions and has triggered a period of global economic slowdown which could have a material adverse effect on the Company’s results and financial condition.

The full impact of COVID-19 on the real estate industry, the credit markets and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, (vi) the availability of a treatment or vaccination for COVID-19, and (vii) the negative impact on our borrowers, real estate values and cost of capital.

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 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. Management makes subjective estimates to project cash flows the Company expects to receive on its loans and securities as well as the related market discount rates, which significantly impacts the interest income, impairments, allowance for loan loss, and fair values recorded or disclosed. The effects of COVID-19 may negatively and materially impact significant estimates and assumptions used by the Company including, but not limited to estimates of expected credit losses, valuation of our equity method investments and the fair value estimates of the Company’s assets and liabilities. The uncertainty over the ultimate impact COVID-19 will have on the U.S. economy and global economy generally, and on our business in particular, makes any estimates and assumptions as of September 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could materially 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.

Cash and cash equivalents

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

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

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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 the Company that we do not intend to sell, or securitized loans that were previously originated by us. Securitized loans remain on the Company’s balance sheet because the securitization vehicles are consolidated under ASC 810. Acquired loans are recorded at cost at the time they are acquired.  

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.

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

Loans, held at fair value

Loans, held at fair value represent certain loans originated by the Company for which we have elected the fair value option. Interest is recognized as interest income in 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.

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 (“LTV”) 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.

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost. The allowance for loan losses required under ASU 2016-13 is deducted from the respective loans’ amortized cost basis on our unaudited consolidated balance sheets. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

In connection with the Company’s adoption of ASU 2016-13 on January 1, 2020, the Company implemented new processes including the utilization of loan loss forecasting models, updates to the Company’s reserve policy documentation, changes to internal reporting processes and related internal controls. The Company has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method

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using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2020 and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. The Company might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.

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

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

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 interest income. Non-accrual loans include PCD (“purchased credit-deteriorated”) loans when principal or interest has been delinquent for 90 days or more.

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. Other than resolutions such as foreclosures and sales, we may remove loans held-for-investment from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.

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

Additionally, based on recently issued regulatory guidance provided by federal and state regulatory agencies, loan modifications made in response to the COVID-19 pandemic are not considered TDRs if loans were considered current at the date the modification program was implemented.

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 in 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

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recurring and are reported as net unrealized gain (loss) in the unaudited interim consolidated statements of income. For originated SBA loans, the guaranteed portion is held for sale, at fair value. For loans originated by GMFS, changes in fair value are reported as residential mortgage banking activities in the unaudited interim consolidated statements of income.

Mortgage backed securities, at fair value

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

Purchases and sales of MBS are recorded as of the trade date. Our MBS securities pledged as collateral against borrowings under repurchase agreements are included in mortgage backed securities, at fair value on our unaudited interim consolidated balance sheets.

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 in 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.

As of September 30, 2020, the Company has offset $7.7 million of cash collateral receivable against our gross derivative liability positions. As of September 30, 2020 and December 31, 2019, the cash collateral receivable for derivatives that has not been offset against our derivative liability positions is $11.2 million and $9.5 million, respectively, and is included in restricted cash in the unaudited interim consolidated balance sheets.

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.

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

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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 in the unaudited interim consolidated statements of income as residential mortgage banking activities. IRLCs are classified as Level 3 in the fair value hierarchy.

FX forwards

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

CDSs

CDSs are contracts between two parties, a protection buyer, who makes fixed periodic payments, and a protection seller, who collects the premium in exchange for making the protection buyer whole in the case of default. The fair value adjustments 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 change in the fair value of the derivative (the hedging instrument) is recorded in other comprehensive income (loss) ("OCI"), and is reclassified out of OCI and into the consolidated statements of income when the hedged cash flows affect earnings. These amounts are recognized consistent with the classification of the hedged item, primarily interest expense (for hedges of interest rate risk). If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income (loss) ("AOCI") is recognized in earnings when the cash flows that were hedged affect earnings, so long as the forecasted transaction remains probable of occurring. 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 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

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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) in the unaudited interim consolidated statements of income. For residential mortgage servicing rights, gains on servicing rights retained upon sale of a loan are included in residential mortgage banking activities in the unaudited interim consolidated statements of income.

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

Servicing rights – SBA and Freddie Mac

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

Servicing rights - Residential (carried at fair value)

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

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

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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, held for sale

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

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

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

Investment in unconsolidated joint ventures

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

Purchased future receivables

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

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

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

Intangible assets

The Company accounts for intangible assets under ASC 350, Intangibles- Goodwill and Other. The Company’s intangible assets include an SBA license, capitalized software, a broker network, trade names, and an acquired favorable lease. The Company capitalizes software costs expected to result in long-term operational benefits, such as replacement systems or new applications that result in significantly increased operational efficiencies or functionality. All other costs incurred in connection with internal use software are expensed as incurred. The Company initially records its intangible assets at cost or fair value and will test for impairment if a triggering event occurs. Intangible assets are included within

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other assets in the consolidated balance sheets. The Company amortizes intangible assets with identified estimated useful lives on a straight-line basis over their estimated useful lives.

Goodwill

The Company recorded goodwill in connection with the Company’s acquisition of Knight Capital. Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill represents the excess of the consideration paid over the fair value of net assets acquired in connection with the acquisition of Knight.

In testing goodwill for impairment, the Company follows ASC 350, Intangibles- Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, we compare the fair value of that reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss equal to the amount by which the carrying value of the goodwill exceeds the implied fair value of that goodwill.

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. 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 in 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 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

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and pursue collection of any outstanding debt amount from us. Interest paid and accrued in connection with credit facilities is recorded as interest expense in the unaudited interim consolidated statements of income.

Borrowings 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 September 30, 2020, NaN of our repurchase agreements have been accounted for as components of linked transactions. All securities financed through a repurchase agreement have remained on our unaudited interim consolidated balance sheets as an asset and cash received from the lender was recorded on our unaudited interim consolidated balance sheets as a liability. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense in the unaudited interim consolidated statements of income.

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, and this SPE issues 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 in the consolidated balance sheets.

Debt issuance costs related to securitizations are presented as a direct deduction from the carrying value of the related debt liability. Debt issuance costs are amortized using the effective interest method and are included in interest expense in the unaudited interim consolidated statements of income.

Convertible note, net

ASC 470 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. 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 in the unaudited interim consolidated statements of income.

Corporate debt, net

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

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Guaranteed loan financing

Certain partial loan sales do not qualify for sale accounting under ASC 860 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 in 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.

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 in 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

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.

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We have elected the fair value option for certain loans held-for-sale originated by the Company that we intend to sell in the near term. The fair value elections for loans, held for sale at fair value originated by the Company 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.

Share repurchase program

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

Earnings per share

We present both basic and diluted earnings per share (“EPS”) amounts in our unaudited interim consolidated financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our share-based compensation, consisting of unvested restricted stock units (“RSUs”), unvested restricted stock awards (“RSAs”), 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 September 30, 2020 and December 31, 2019, we accrued 0 taxes, interest or penalties related to uncertain tax positions. In addition, we do not anticipate a change in this position in the next 12 months.

Revenue recognition

Revenue 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.

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

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 loans, held at fair value and loans, held for sale, at fair value, are presented in the unaudited interim consolidated statements of income as components of 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 as a component of interest income.

Residential mortgage banking activities

Residential mortgage banking activities reflect 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 include 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.

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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.

Foreign currency transactions

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

Note 4 – Recently issued accounting pronouncements

Financial Accounting Standards Board ("FASB") Standards adopted during 2020

Standard	Summary of guidance		Effects on financial statements
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments	u	Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost, which will reflect management's estimate of credit losses over the full remaining expected life of the financial assets and will consider expected future changes in macroeconomic conditions.	u	Adopted January 1, 2020.
Issued June 2016	u	Eliminates existing guidance for PCI loans, and requires recognition of the accretable difference as an increase to the allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination, with a corresponding increase in the recorded investment of related loans.	u	The Company adopted ASU 2016-13 using the modified retrospective method for all loans carried at amortized cost. We recorded a $6.8 million cumulative-effect adjustment to the opening retained earnings (net of taxes) in our consolidated statement of equity as of January 1, 2020. The Company's total increase in the allowance for loan losses was $11.1 million, which included a $3.6 million allowance for loan loss balance sheet gross up, relating to purchased credit deteriorated loans.
	u	Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the allowance for credit losses for in scope financial assets (including collateral dependent assets).
	u	Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.
ASU 2017-4, Intangibles — Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment	u	Requires an impairment loss to be recognized when the estimated fair value of a reporting unit falls below its carrying value.	u	Adopted January 1, 2020.
Issued January 2017	u	Eliminates the second condition in the current guidance that requires an impairment loss to be recognized only if the estimated implied fair value of the goodwill is below its carrying value.	u	Based on current impairment test results, the adoption did not have a material effect on the consolidated financial statements.
			u	The guidance may result in more frequent goodwill impairment losses in future periods due to the removal of the second condition.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement	u	Provides guidance on increasing the transparency and comparability of the disclosure requirements for fair value measurement.	u	Adopted in the first quarter of 2020.
Issued August 2018			u	The adoption did not have a material impact on our consolidated financial statements.

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Note 5 – Business Combinations

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. Pursuant to the Merger Agreement, the Company acquired ORM in a stock-for-stock transaction with an aggregate purchase price equal to 99.0% of ORM’s book value. 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. 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.

    The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used and key assumptions made to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates. 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		130,449
Real estate, 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
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	$	210,047
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 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.

Acquisition-related costs directly attributable to the ORM Merger, including legal, accounting, valuation, and other professional or consulting fees, totaling $0.1 million and $6.1 million for the three and nine months ended September 30, 2019, were expensed as incurred and are reflected separately within the unaudited interim consolidated statements of income.

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The following pro-forma income and earnings (unaudited) of the combined company are presented for the three months ended March 31, 2019, as if the merger had occurred on January 1, 2019:

		For the three months ended
(In Thousands)		March 31, 2019
Selected Financial Data
Interest income	$	51,543
Interest expense		(36,323)
Provision for loan losses		(518)
Non-interest income		27,031
Non-interest expense		(37,721)
Income before provision for income taxes		4,012
Income tax benefit (provision)		2,996
Net income	$	7,008

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. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the merger. The Company excluded the bargain purchase gain of $30.7 million from the amount above.

Acquisition of Knight Capital

On October 25, 2019, the Company acquired Knight Capital. Knight Capital is a technology-driven platform that provides working capital to small and medium businesses across the U.S. Through its platform, Knight Capital supports business operations by offering a faster alternative to conventional bank funding. The total purchase price for the merger of $27.8 million consists of $17.5 million of cash and $10.3 million of Ready Capital common stock.

The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The following table summarizes the fair value of assets acquired and liabilities assumed from the merger:

(In Thousands)	October 25, 2019
Assets
Cash and cash equivalents	$	1,673
Purchased future receivables,		39,540
Prepaid expenses and other		1,265
Intangible assets		5,880
Total assets acquired	$	48,358
Liabilities
Secured borrowings		30,600
Accounts payable and other accrued liabilities		1,173
Total liabilities assumed	$	31,773
Net assets acquired	$	16,585

The aggregate consideration transferred, net assets acquired, and the related goodwill was as follows:

Total Consideration Transferred (in thousands)
Cash consideration	$	17,500
Common stock consideration		10,290
Total consideration transferred	$	27,790
Net Tangible Assets	$	10,705
Identified Intangible Assets		5,880
FV of net assets acquired	$	16,585
Goodwill	$	11,205

The acquired intangible assets are definite-lived assets consisting of technology, brokers network and trade name. The estimated fair values of the technology and brokers network were determined using the cost replacement method, and the fair value of the trade name was determined using the relief from royalty method. The estimated fair values of the intangible assets are primarily based on cost assumptions such as replacement costs, which management believes are reasonable. The fair value of the intangible assets with definite lives is as follows):

(In Thousands)	Fair Value		Weighted Average Amortization Life
Internally developed software	$	3,800	6 years
Broker network		1,200	4.5 years
Trade name		880	6 years
Total Intangible Assets	$	5,880	6 years

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Goodwill of $11.2 million was recognized in connection with the Company’s acquisition of Knight Capital as the consideration paid exceeded the fair value of the net assets acquired.

The following pro-forma income and earnings (unaudited) of the combined company are presented for the three and nine months ended September 30, 2019, as if the merger had occurred on January 1, 2019:

		For the three months ended		For the nine months ended
(In Thousands)		September 30, 2019		September 30, 2019
Selected Financial Data
Interest income	$	59,723	$	165,510
Interest expense		(39,390)		(110,918)
Provision for loan losses		(693)		(2,559)
Non-interest income		54,145		174,693
Non-interest expense		(62,747)		(176,111)
Income before provision for income taxes		11,038		50,615
Income tax benefit		2,645		8,604
Net income	$	13,683	$	59,219

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-deteriorated at the date of acquisition. The Company accounts for loans based on the following loan program categories:

● Originated or purchased loans held-for-investment– originated transitional loans, originated conventional SBC and SBA loans, or acquired loans with no signs of credit deterioration at time of purchase.

● Loans at fair value – certain originated conventional SBC loans and PPP 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

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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:

	September 30, 2020				December 31, 2019
Loans (In Thousands)	Carrying Value		UPB		Carrying Value		UPB
Loans
Originated Transitional loans	$	393,069	$	396,639	$	593,657	$	600,226
Originated SBA 7(a) loans		307,450		310,454		297,934		299,580
Acquired SBA 7(a) loans		213,097		222,870		255,240		269,396
Originated SBC loans		177,870		174,286		133,118		132,227
Acquired loans		213,400		215,519		430,307		433,079
Originated PPP loans, at fair value		106,204		106,204		—		—
Originated SBC loans, at fair value		13,761		14,095		20,212		19,565
Originated Residential Agency loans		5,235		5,235		3,396		3,395
Total Loans, before allowance for loan losses	$	1,430,086	$	1,445,302	$	1,733,864	$	1,757,468
Allowance for loan losses	$	(36,947)	$	—	$	(5,880)	$	—
Total Loans, net	$	1,393,139	$	1,445,302	$	1,727,984	$	1,757,468
Loans in consolidated VIEs
Loans
Originated SBC loans	$	945,188	$	938,036	$	1,037,844	$	1,026,921
Originated Transitional loans		790,608		795,147		490,913		493,217
Acquired loans		781,997		787,399		666,226		671,698
Originated SBA 7(a) loans		71,871		75,718		79,457		83,559
Acquired SBA 7(a) loans		44,494		55,407		53,320		66,997
Total Loans, in consolidated VIEs, before allowance for loan losses	$	2,634,158	$	2,651,707	$	2,327,760	$	2,342,392
Allowance for loan losses on loans in consolidated VIEs	$	(15,709)	$	—	$	(1,561)	$	—
Total Loans, net, in consolidated VIEs	$	2,618,449	$	2,651,707	$	2,326,199	$	2,342,392
Total Loans, net, and Loans, net in consolidated VIEs	$	4,011,588	$	4,097,009	$	4,054,183	$	4,099,860
Loans, held for sale, at fair value
Originated Residential Agency loans	$	287,959	$	274,393	$	136,506	$	132,016
Originated Freddie Mac loans		20,486		20,242		21,775		21,513
Originated SBA 7(a) loans		39,764		36,581		28,551		26,669
Acquired loans		510		505		1,245		1,208
Total Loans, held for sale, at fair value	$	348,719	$	331,721	$	188,077	$	181,406
Loans, held for sale, at fair value in consolidated VIEs
Loans, held for sale, at fair value
Acquired loans	$	—	$	—	$	4,434	$	4,400
Total Loans, held for sale, at fair value in consolidated VIEs	$	—	$	—	$	4,434	$	4,400
Total Loans, held for sale, at fair value, and Loans, held for sale, at fair value in consolidated VIEs	$	348,719	$	331,721	$	192,511	$	185,806
Total Loan portfolio	$	4,360,307	$	4,428,730	$	4,246,694	$	4,285,666

Loan vintage and 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.

The following table summarizes the classification, UPB, and carrying value of loans by year of origination:

			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
September 30, 2020
Loans(1) (2)
Originated Transitional loans	$	1,191,786	$	213,519	$	602,045	$	314,862	$	25,295	$	26,981	$	1,077	$	1,183,779
Originated SBC loans		1,112,322		62,052		515,957		262,147		111,020		45,303		121,842		1,118,321
Acquired loans		1,002,918		3,690		29,935		23,680		29,017		15,972		889,906		992,200
Originated SBA 7(a) loans		386,172		34,566		99,871		140,433		74,017		21,924		4,277		375,088
Acquired SBA 7(a) loans		278,277		226		21,837		14,856		285		21		215,868		253,093
Originated PPP loans, at fair value		106,204		106,204		—		—		—		—		—		106,204
Originated SBC loans, at fair value		14,095		—		—		—		1,590		12,171		—		13,761
Originated Residential Agency loans		5,235		2,767		1,252		707		218		89		202		5,235
Total Loans, before general allowance for loans losses	$	4,097,009	$	423,024	$	1,270,897	$	756,685	$	241,442	$	122,461	$	1,233,172	$	4,047,681
General allowance for loan losses															$	(36,093)
Total Loans, net															$	4,011,588
(1) Loan balances include specific allowance for loan losses of $16.6 million.
(2) Includes Loans, net in consolidated VIEs

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The following table displays delinquency information on loans, net by year of origination:

			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
September 30, 2020
Loans(1) (2)
Current and less than 30 days past due	$	3,909,657	$	421,458	$	1,262,993	$	700,411	$	211,174	$	112,066	$	1,167,986	$	3,876,088
30 - 59 Days Past Due		34,672		—		—		29,777		—		13		4,358		34,148
60+ Days		152,680		1,566		7,904		26,497		30,268		10,382		60,828		137,445
Total Loans, before general allowance for loans losses	$	4,097,009	$	423,024	$	1,270,897	$	756,685	$	241,442	$	122,461	$	1,233,172	$	4,047,681
General allowance for loan losses															$	(36,093)
Total Loans, net															$	4,011,588

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

	September 30, 2020
Loans (In Thousands)	Current and less than 30 days past due		30-59 Days Past Due		60+ Days Past Due		Total Loans Carrying Value		Non-Accrual Loans		90+ Days Past Due but Accruing
Loans(1)(2)
Originated Transitional loans	$	1,131,075	$	29,777	$	22,927	$	1,183,779	$	13,926	$	—
Originated SBC loans		1,065,202		—		53,119		1,118,321		35,393		—
Acquired loans		933,993		3,939		54,268		992,200		43,350		—
Originated SBA 7(a) loans		374,331		—		757		375,088		5,406		—
Acquired SBA 7(a) loans		250,046		432		2,615		253,093		8,304		—
Originated PPP loans, at fair value		106,204		—		—		106,204		—		—
Originated SBC loans, at fair value		13,761		—		—		13,761		—		—
Originated Residential Agency loans		1,476		—		3,759		5,235		4,153		—
Total Loans, before general allowance for loans losses	$	3,876,088	$	34,148	$	137,445	$	4,047,681	$	110,532	$	—
General allowance for loan losses							$	(36,093)
Total Loans, net							$	4,011,588
Percentage of outstanding		95.8%		0.8%		3.4%		100%		2.7%		0.0%
(1) Loan balances include specific allowance for loan losses of $16.6 million.
(2) Includes Loans, net in consolidated VIEs

	December 31, 2019
Loans (In Thousands)	Current and less than 30 days past due		30-59 Days Past Due		60+ Days Past Due		Total Loans Carrying Value		Non-Accrual Loans		90+ Days Past Due but Accruing
Loans(1)(2)
Originated Transitional loans	$	1,074,955	$	5,728	$	5,645	$	1,086,328	$	24,587	$	—
Originated SBC loans		1,137,140		11,769		19,990		1,168,899		16,089		—
Acquired loans		1,032,259		41,830		20,194		1,094,283		23,500		3,382
Acquired SBA 7(a) loans		297,172		4,048		5,640		306,860		9,177		1,326
Originated SBC loans, at fair value		20,212		—		—		20,212		—		—
Originated SBA 7(a) loans		370,101		2,085		4,443		376,629		8,882		—
Originated Residential Agency loans		582		209		2,605		3,396		2,105		74
Total Loans, before allowance for loans losses	$	3,932,421	$	65,669	$	58,517	$	4,056,607	$	84,340	$	4,782
General allowance for loan losses							$	(2,424)
Total Loans, net							$	4,054,183
Percentage of outstanding		97.0%		1.6%		1.4%		100%		2.1%		0.1%
(1) Loan balances include specific allowance for loan losses of $4.0 million.
(2) Includes Loans, net in consolidated VIEs

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

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The following tables presents quantitative information on the credit quality of loans, net as of the unaudited interim 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
September 30, 2020
Loans(1) (2)
Originated Transitional loans	$	6,104	$	29,020	$	206,642	$	797,901	$	140,557	$	3,555	$	1,183,779
Originated SBC loans		—		63,989		486,118		545,201		12,882		10,131		1,118,321
Acquired loans		221,417		383,481		220,660		121,732		27,083		17,827		992,200
Originated SBA 7(a) loans		892		16,590		50,106		138,688		67,419		101,393		375,088
Acquired SBA 7(a) loans		8,308		37,983		94,666		59,547		28,124		24,465		253,093
Originated PPP loans, at fair value		—		—		—		—		—		106,204		106,204
Originated SBC loans, at fair value		—		7,345		—		6,416		—		—		13,761
Originated Residential Agency loans		—		—		89		924		3,455		767		5,235
Total Loans, before general allowance for loans losses	$	236,721	$	538,408	$	1,058,281	$	1,670,409	$	279,520	$	264,342	$	4,047,681
General allowance for loan losses													$	(36,093)
Total Loans, net													$	4,011,588
Percentage of outstanding		5.8	%	13.4	%	26.1	%	41.3	%	6.9	%	6.5	%
December 31, 2019
Loans(1) (2)
Originated Transitional loans	$	1,736	$	28,108	$	277,388	$	750,298	$	28,059	$	739	$	1,086,328
Originated SBC loans		—		60,601		431,312		660,733		8,045		8,208		1,168,899
Acquired loans		218,679		371,471		293,216		161,431		35,731		13,755		1,094,283
Acquired SBA 7(a) loans		7,712		39,566		103,590		83,954		39,726		32,312		306,860
Originated SBC loans, at fair value		—		8,192		—		6,422		5,598		—		20,212
Originated SBA 7(a) loans		865		13,843		41,166		130,177		78,544		112,034		376,629
Originated Residential Agency loans		—		51		—		830		2,393		122		3,396
Total Loans, before allowance for loans losses	$	228,992	$	521,832	$	1,146,672	$	1,793,845	$	198,096	$	167,170	$	4,056,607
General allowance for loan losses													$	(2,424)
Total Loans, net													$	4,054,183
Percentage of outstanding		5.6	%	12.9	%	28.3	%	44.2	%	4.9	%	4.1	%
(a) Loan-to-value is calculated as carrying amount as a percentage of current collateral value
(1) Loan balances include specific allowance for loan loss reserves.
(2) Includes Loans, net in consolidated VIEs

As of September 30, 2020 and December 31, 2019, the Company’s total carrying amount of loans in the foreclosure process was $1.9 million and $0.8 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 (% of Unpaid Principal Balance)	September 30, 2020		December 31, 2019
California	18.7	%	16.9	%
Texas	14.5		15.2
New York	8.6		8.3
Florida	8.0		8.3
Illinois	5.2		5.2
Georgia	4.8		4.8
North Carolina	3.4		3.2
Arizona	3.2		3.4
Washington	3.1		2.8
Colorado	2.5		2.8
Other	28.0		29.1
Total	100.0	%	100.0	%

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

Collateral Concentration (% of Unpaid Principal Balance)	September 30, 2020		December 31, 2019
Multi-family	24.1	%	26.6	%
SBA(1)	18.8		17.6
Retail	17.8		17.5
Office	12.1		12.9
Mixed Use	12.1		10.4
Industrial	6.6		6.4
Lodging/Residential	3.2		3.3
Other	5.3		5.3
Total	100.0	%	100.0	%
(1) Further detail provided on SBA collateral concentration is included in table below.

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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 (% of Unpaid Principal Balance)		September 30, 2020		December 31, 2019
Lodging		16.1	%	17.3	%
Offices of Physicians	��	12.2		14.1
Child Day Care Services		6.9		8.1
Eating Places		5.1		6.1
Veterinarians		3.3		4.1
Gasoline Service Stations		3.3		3.7
Funeral Service & Crematories		1.8		2.0
Grocery Stores		1.7		2.0
Auto		0.9		1.3
Other		48.7		41.3
Total		100.0	%	100.0	%

Allowance for loan losses

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

	Three Months Ended September 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	8,974	$	19,831	$	12,564	$	5,744	$	9,450	$	500	$	57,063
Provision for (Recoveries of) loan losses		(181)		(1,848)		(2,906)		(200)		904		—		(4,231)
Charge-offs and sales		—		—		—		(203)		(42)		—		(245)
Recoveries		—		—		—		22		47		—		69
Ending balance	$	8,793	$	17,983	$	9,658	$	5,363	$	10,359	$	500	$	52,656

	Three Months Ended September 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	421	$	367	$	5,138	$	2,194	$	694	$	—	$	8,814
Provision for (Recoveries of) loan losses		33		(79)		176		(183)		746		—		693
Charge-offs and sales		(127)		2		(783)		(93)		(126)		—		(1,127)
Recoveries		—		—		(537)		122		—		—		(415)
Ending balance	$	327	$	290	$	3,994	$	2,040	$	1,314	$	—	$	7,965

	Nine Months Ended September 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	304	$	188	$	3,054	$	2,114	$	1,781	$	—	$	7,441
Cumulative-effect adjustment upon adoption of ASU 2016-13		2,400		1,906		1,878		3,562		1,379		—		11,125
Provision for (recoveries of) loan losses		6,089		15,889		4,776		2		7,728		500		34,984
Charge-offs and sales		—		—		(50)		(431)		(577)		—		(1,058)
Recoveries		—		—		—		116		48		—		164
Ending balance	$	8,793	$	17,983	$	9,658	$	5,363	$	10,359	$	500	$	52,656

	Nine Months Ended September 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	11	$	353	$	5,052	$	2,318	$	586	$	—	$	8,320
Provision for (recoveries of) loan losses		443		(65)		737		590		854		—		2,559
Charge-offs and sales		(127)		2		(784)		(1,055)		(126)		—		(2,090)
Recoveries		—		—		(1,011)		187		—		—		(824)
Ending balance	$	327	$	290	$	3,994	$	2,040	$	1,314	$	—	$	7,965

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Non-accrual loans

The following table details information about the Company’s non-accrual loans:

(In Thousands)	September 30, 2020		December 31, 2019
Non-accrual loans
With an allowance	$	55,070	$	18,063
Without an allowance		55,462		60,036
Total recorded carrying value of non-accrual loans	$	110,532	$	78,099
Allowance for loan losses related to non-accrual loans	$	(15,725)	$	(2,093)
Unpaid principal balance of non-accrual loans	$	132,204	$	83,991
	September 30, 2020		September 30, 2019
Interest income on non-accrual loans for the three months ended	$	198	$	328
Interest income on non-accrual loans for the nine months ended	$	2,660	$	934

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.  

In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as non-accrual during the term of the modification. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest.

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

	September 30, 2020						December 31, 2019
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Recorded carrying value modified loans classified as TDRs	$	10,453	$	13,287	$	23,740	$	6,258	$	14,204	$	20,462
Allowance for loan losses on loans classified as TDRs	$	215	$	3,417	$	3,632	$	274	$	454	$	728
Carrying value of modified loans classified as TDRs
Carrying value of modified loans classified as TDRs on accrual status	$	296	$	7,009	$	7,305	$	333	$	7,437	$	7,770
Carrying value of modified loans classified as TDRs on non-accrual status		10,157		6,278		16,435		5,925		6,767		12,692
Total carrying value of modified loans classified as TDRs	$	10,453	$	13,287	$	23,740	$	6,258	$	14,204	$	20,462

30

The following table summarizes the TDR activity that occurred during the three and nine months ended September 30, 2020 and 2019 and the financial effects of these modifications.

	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		—		6		6		1		15		16
Pre-modification recorded balance (a)	$	—	$	713	$	713	$	596	$	1,843	$	2,439
Post-modification recorded balance (a)	$	—		730	$	730	$	596	$	1,658	$	2,254
Number of loans that remain in default as of September 30, 2020 (b)		—		4		4		1		3		4
Balance of loans that remain in default as of September 30, 2020 (b)	$	—	$	733	$	733	$	596	$	61	$	657
Concession granted (a):
Term extension	$	—	$	547	$	547	$	—	$	1,466	$	1,466
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		—		187		187		596		61		657
Total	$	—	$	734	$	734	$	596	$	1,527	$	2,123
(a) Represents carrying value.
(b) Represents the September 30, 2020 carrying values of the TDRs that occurred during the three months ended September 30, 2020 and 2019 that remained in default as of September 30, 2020. 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.

	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		3		16		19		2		27		29
Pre-modification recorded balance (a)	$	8,456	$	3,691	$	12,147	$	699	$	3,544	$	4,243
Post-modification recorded balance (a)	$	8,456		3,748	$	12,204	$	699	$	3,324	$	4,023
Number of loans that remain in default as of September 30, 2020 (b)		2		5		7		2		7		9
Balance of loans that remain in default as of September 30, 2020 (b)	$	8,422	$	874	$	9,296	$	704	$	323	$	1,027
Concession granted (a):
Term extension	$	—	$	2,371	$	2,371	$	—	$	2,843	$	2,843
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		8,422		327		8,749		704		116		820
Total	$	8,422	$	2,698	$	11,120	$	704	$	2,959	$	3,663
(a) Represents carrying value.
(b) Represents the September 30, 2020 carrying values of the TDRs that occurred during the nine months ended September 30, 2020 and 2019 that remained in default as of September 30, 2020. 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.

PCD loans

In the three and nine months ended September 30, 2020 and 2019, the Company did 0t acquire any PCD loans.

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

31

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 value 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.

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of September 30, 2020:

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Loans, held for sale, at fair value	$	—	$	348,719	$	—	$	348,719
Loans, net, at fair value		—		—		119,965		119,965
Mortgage backed securities, at fair value		—		77,777		12,650		90,427
Derivative instruments, at fair value		—		—		20,849		20,849
Residential mortgage servicing rights, at fair value		—		—		74,384		74,384
Total assets	$	—	$	426,496	$	227,848	$	654,344
Liabilities:
Derivative instruments, at fair value	$	—	$	7,774	$	—	$	7,774
Total liabilities	$	—	$	7,774	$	—	$	7,774

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

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Loans, held for sale, at fair value	$	—	$	192,510	$	—	$	192,510
Loans, net, at fair value		—		—		20,212		20,212
Mortgage backed securities, at fair value		—		92,006		460		92,466
Derivative instruments, at fair value		—		—		2,814		2,814
Residential mortgage servicing rights, at fair value		—		—		91,174		91,174
Total assets	$	—	$	284,516	$	114,660	$	399,176
Liabilities:
Derivative instruments, at fair value	$	—	$	5,250	$	—	$	5,250
Total liabilities	$	—	$	5,250	$	—	$	5,250

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The following tables present a summary of changes in our Level 3 assets and liabilities:

	Three Months Ended September 30, 2020
(In Thousands)	MBS		Derivatives		Loans, held at fair value		Residential MSRs, at fair value
Beginning Balance	$	411	$	19,037	$	124,298	$	73,645
Purchases or Originations		12,640		—		1,198		11,343
Sales / Principal payments		(11)		—		(5,911)		(5,916)
Realized gains, net		—		—		375		—
Unrealized gains (losses), net		(114)		1,812		5		(4,688)
Transfer to (from) Level 3		(276)		—		—		—
Ending Balance	$	12,650	$	20,849	$	119,965	$	74,384
Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	(82)	$	20,849	$	(333)	$	(43,123)

	Three Months Ended September 30, 2019
(In Thousands)	MBS		Derivatives		Loans, held at fair value		Residential MSRs, at fair value		Contingent consideration
Beginning Balance	$	36,655	$	3,670	$	20,409	$	85,658	$	—
Purchases or Originations		—		—		—		9,028		—
Additions due to loans sold, servicing retained		—		—		—		—		—
Sales / Principal payments		(673)		—		(45)		(2,466)		—
Realized gains, net		169		—		38		—		—
Unrealized gains (losses), net		87		511		32		(7,582)		—
Accreted discount, net		49		—		—		—		—
Transfer to (from) Level 3		(5,994)		—		—		—		—
Ending Balance	$	30,293	$	4,181	$	20,434	$	84,638	$	—
Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	2,946	$	4,181	$	363	$	(10,287)	$	—

	Nine Months Ended September 30, 2020
(In Thousands)	MBS		Derivatives		Loans, held at fair value		Residential MSRs, at fair value
Beginning Balance	$	460	$	2,814	$	20,212	$	91,174
Purchases or Originations		12,640		—		106,728		—
Additions due to loans sold, servicing retained		—		—		—		31,821
Sales / Principal payments		(13)		—		(6,207)		(15,443)
Realized gains, net		—		—		375
Unrealized gains (losses), net		(154)		18,035		(1,143)		(33,168)
Transfer to (from) Level 3		(283)		—		—		—
Ending Balance	$	12,650	$	20,849	$	119,965	$	74,384
Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	(82)	$	20,849	$	(333)	$	(43,123)

	Nine Months Ended September 30, 2019
(In Thousands)	MBS		Derivatives		Loans, held at fair value		Residential MSRs, at fair value		Contingent consideration
Beginning Balance	$	12,148	$	1,776	$	22,664	$	93,065	$	—
Purchases or Originations		9,593		—		—		18,482		—
Additions due to loans sold, servicing retained		—		—		—		—		—
Sales / Principal payments		(1,342)		—		(2,239)		(5,861)		—
Realized gains (losses), net		276		—		(128)		—		—
Unrealized gains (losses), net		376		2,405		137		(21,048)		—
Accreted discount, net		95		—		—		—		—
Amortization and adjustment for earn-out payments		—		—		—		—		—
Transfer to (from) Level 3		9,147		—		—		—		—
Ending Balance	$	30,293	$	4,181	$	20,434	$	84,638	$	—
Unrealized gains (losses), net on assets or liabilities held at the end of the period	$	2,946	$	4,181	$	363	$	(10,287)	$	—

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.

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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 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 September 30, 2020 using third party information without adjustment:

			Predominant				Weighted
			Valuation				Average Price
(In Thousands, except price)	Fair Value		Technique	Type	Price Range		(a)
Loans, held at fair value	$	119,965	Single External Source	Third Party Mark	$	92.01 – 106.11	$	99.72
Mortgage backed securities, at fair value		12,650	Transaction Price	Transaction Price		14.34 – 99.00		48.02
Residential mortgage servicing rights, at fair value		74,384	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

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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, 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	$	20,212	Single External Source	Third Party Mark	$	100.47 – 110.83	$	103.31
Mortgage backed securities, at fair value (b)		357	Broker Quotes	Third Party Mark		1.00 – 1.00		1.00
Mortgage backed securities, at fair value		103	Transaction Price	Transaction Price		99.00 – 99.00		99.00
Residential mortgage servicing rights, at fair value		91,174	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 represent interest-only strips with a fair value of $0.4 million as of December 31, 2019

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.

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

	September 30, 2020				December 31, 2019
(In Thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Loans, net	$	3,891,623	$	3,980,896	$	4,033,972	$	4,147,831
Purchased future receivables, net		16,659		16,659		43,265		43,265
Servicing rights		35,661		40,189		30,795		34,723
Total assets	$	3,943,943	$	4,037,744	$	4,108,032	$	4,225,819
Liabilities:
Secured borrowings	$	1,176,621	$	1,176,621	$	1,189,392	$	1,189,392
Securitized debt obligations of consolidated VIEs, net		2,059,114		2,092,985		1,815,154		1,859,047
Senior secured note, net		179,572		186,419		179,289		190,923
Guaranteed loan financing		421,183		449,010		485,461		515,182
Convertible notes, net		111,855		79,975		111,040		116,654
Corporate debt, net		150,658		144,345		149,986		161,098
Total liabilities	$	4,099,003	$	4,129,355	$	3,930,322	$	4,032,296

Other assets totaling $20.7 million at September 30, 2020 and $20.7 million at December 31, 2019 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 $1.1 million at September 30, 2020 and $1.2 million at December 31, 2019 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 $18.0 million at September 30, 2020 and $20.0 million at December 31, 2019 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.

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Note 8 – Mortgage backed securities

The following table presents certain information about the Company’s MBS portfolio, which are classified as trading securities and carried at fair value, as of September 30, 2020 and December 31, 2019.

		Weighted
	Weighted	Average								Gross		Gross
	Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)	Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
September 30, 2020
Mortgage backed securities, at fair value
Freddie Mac Loans	01/2037	2.0	%	$	142,552	$	53,569	$	55,025	$	2,023	$	(567)
Commercial Loans	11/2050	4.5			73,160		39,284		35,311		26		(3,999)
Tax Liens	09/2026	6.0			92		92		91		—		(1)
Total Mortgage backed securities, at fair value	09/2041	2.8	%	$	215,804	$	92,945	$	90,427	$	2,049	$	(4,567)
December 31, 2019
Mortgage backed securities, at fair value
Freddie Mac Loans	06/2037	4.3	%	$	83,149	$	61,207	$	66,108	$	4,915	$	(14)
Commercial Loans	02/2051	5.4			35,984		25,358		26,255		924		(27)
Tax Liens	09/2026	6.0			104		104		103		—		(1)
Total Mortgage backed securities, at fair value	07/2041	4.6	%	$	119,237	$	86,669	$	92,466	$	5,839	$	(42)

(a) Weighted based on current principal balance

The following table presents certain information about the maturity of the Company’s MBS portfolio as of September 30, 2020 and December 31, 2019.

	Weighted
	Average
	Interest		Principal		Amortized
(In Thousands)	Rate (a)		Balance		Cost		Fair Value
September 30, 2020
Mortgage backed securities, at fair value
After five years through ten years	6.0	%	$	92	$	92	$	91
After ten years	2.8			215,712		92,853		90,336
Total Mortgage backed securities, at fair value	2.8	%	$	215,804	$	92,945	$	90,427
December 31, 2019
Mortgage backed securities, at fair value
After five years through ten years	3.8	%	$	2,869	$	2,641	$	2,825
After ten years	4.7			116,368		84,028		89,641
Total	4.6	%	$	119,237	$	86,669	$	92,466

(a) Weighted based on current principal balance.

(b)

(c)

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.

36

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
SBA servicing rights, at amortized cost
Beginning net carrying amount	$	17,318	$	18,000	$	17,660	$	16,749
Additions due to loans sold, servicing retained		993		550		2,328		2,431
Acquisitions		—		—		—		894
Amortization		(909)		(869)		(2,642)		(2,529)
Impairment		138		(149)		194		(13)
Ending net carrying value of SBA servicing rights	$	17,540	$	17,532	$	17,540	$	17,532
Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount	$	16,798	$	11,103	$	13,135	$	10,248
Additions due to loans sold, servicing retained		2,107		1,798		7,094		3,745
Amortization		(784)		(591)		(2,108)		(1,683)
Ending net carrying value of Freddie Mac multi-family servicing rights	$	18,121	$	12,310	$	18,121	$	12,310
Ending net carrying value of SBA and Freddie Mac multi-family servicing rights, at amortized cost	$	35,661	$	29,842	$	35,661	$	29,842
Residential mortgage servicing rights, at fair value
Beginning Balance	$	73,645	$	85,658	$	91,174	$	93,065
Additions due to loans sold, servicing retained		11,343		9,028		31,821		18,482
Loan pay-offs		(5,916)		(2,466)		(15,443)		(5,861)
Unrealized losses		(4,688)		(7,582)		(33,168)		(21,048)
Ending fair value of residential mortgage servicing rights	$	74,384	$	84,638	$	74,384	$	84,638
Total servicing rights	$	110,045	$	114,480	$	110,045	$	114,480

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.

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

	As of September 30, 2020				As of December 31, 2019
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	598,400	$	17,540	$	568,017	$	17,660
Freddie Mac multi-family		1,458,517		18,121		1,167,476		13,135
Total	$	2,056,917	$	35,661	$	1,735,493	$	30,795

The significant assumptions used in the September 30, 2020 and December 31, 2019 estimated valuation of the Company’s SBA and Freddie Mac multi-family servicing rights carried at amortized cost include:

		September 30, 2020						December 31, 2019
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights (at amortized cost)
	• Forward prepayment rate	6.4	-	21.0	%	8.7	%	6.3	-	21.2	%	9.3	%
	• Forward default rate	0.0	-	10.1	%	7.6	%	0.0	-	10.8	%	7.3	%
	• Discount rate	7.1	-	7.1	%	7.1	%	8.8	-	8.8	%	8.8	%
	• 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	0.5	-	15.9	%	6.9	%	0.5	-	15.9	%	6.6	%
	• Forward default rate	0.0	-	0.5	%	0.3	%	0.0	-	0.5	%	0.4	%
	• Discount rate	6.0	-	6.0	%	6.0	%	6.0	-	6.0	%	6.0	%
	• Servicing expense	0.2	-	0.3	%	0.2	%	0.2	-	0.3	%	0.2	%

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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)	September 30, 2020		December 31, 2019
SBA servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(585)	$	(563)
20% adverse change		(1,141)		(1,097)
• Default rate
10% adverse change	$	(111)	$	(94)
20% adverse change		(220)		(186)
• Discount rate
10% adverse change	$	(475)	$	(520)
20% adverse change		(927)		(1,011)
Freddie Mac multi-family servicing rights (at amortized cost)
• Forward prepayment rate
10% adverse change	$	(398)	$	(285)
20% adverse change		(778)		(558)
• Default rate
10% adverse change	$	(6)	$	(5)
20% adverse change		(13)		(10)
• Discount rate
10% adverse change	$	(494)	$	(381)
20% adverse change		(968)		(746)

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

(In Thousands)	September 30, 2020
2020	$	1,718
2021		6,320
2022		5,511
2023		4,787
2024		4,131
Thereafter		13,194
Total	$	35,661

Residential mortgage servicing rights

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

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

	As of September 30, 2020				As of December 31, 2019
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	3,625,230	$	28,011	$	3,388,630	$	37,309
Ginnie Mae		2,687,994		25,244		2,504,993		29,869
Freddie Mac		2,760,615		21,129		2,270,981		23,996
Total	$	9,073,839	$	74,384	$	8,164,604	$	91,174

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The significant assumptions used in the September 30, 2020 and December 31, 2019 valuation of the Company’s residential mortgage servicing rights carried at fair value include:

		September 30, 2020						December 31, 2019
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights (at fair value)
	• Forward prepayment rate	12.5	-	23.5	%	13.9	%	7.1	-	18.7	%	10.1	%
	• Discount rate	9.1	-	12.0	%	10.0	%	9.0	-	11.0	%	9.6	%
	• Servicing expense	$70	-	$85		$74		$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)	September 30, 2020		December 31, 2019
Prepayment rate
10% adverse change	$	(4,728)	$	(4,195)
20% adverse change		(9,077)		(8,091)
Discount rate
10% adverse change	$	(2,523)	$	(3,450)
20% adverse change		(4,876)		(6,654)
Cost of servicing
10% adverse change	$	(1,436)	$	(1,648)
20% adverse change		(2,873)		(3,297)

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

Residential mortgage banking activities reflect 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.

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 September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Realized and unrealized gain (loss) of residential mortgage loans held for sale, at fair value	$	61,131	$	17,229	$	143,747	$	41,314
Creation of new mortgage servicing rights, net of payoffs		5,427		6,562		16,378		12,621
Loan origination fee income on residential mortgage loans		6,021		3,320		15,529		7,688
Unrealized gain (loss) on IRLCs and other derivatives		2,945		1,902		17,103		2,998
Residential mortgage banking activities	$	75,524	$	29,013	$	192,757	$	64,621
Variable expenses on residential mortgage banking activities	$	(30,918)	$	(17,318)	$	(87,494)	$	(39,995)

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Note 11 – Secured borrowings

The following tables present certain characteristics of our secured borrowings:

									Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size			Pledged Assets Carrying Value		September 30, 2020		December 31, 2019
JPMorgan	Acquired loans, SBA loans	June 2021	1M L + 1.75 to 2.75%	$	250,000		$	44,840	$	30,742	$	88,972
Keybank	Freddie Mac loans	February 2021	1M L + 1.30%		100,000			20,486		20,242		21,513
East West Bank	SBA loans	October 2022	Prime - 0.821 to + 0.29%		50,000			40,550		33,184		13,294
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50%		234,420	(a)		53,021		32,267		37,646
FCB	Acquired loans	June 2021	2.75%		—			—		—		1,354
Comerica Bank	Residential loans	March 2021	1M L + 1.75%		125,000			90,515		83,704		56,822
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000			123,980		118,581		52,151
Origin Bank	Residential loans	June 2021	Variable Pricing		60,000			25,093		23,471		15,343
Associated Bank	Residential loans	November 2020	1M L + 1.50%		60,000			47,918		44,489		5,823
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000			49,140		37,700		39,900
Credit Suisse	Purchased future receivables, PPP loans	June 2021	1M L + 4.50%		150,000			—		—		34,900
Rabobank	Real estate	January 2021	4.22%		14,500			—		—		12,485
Federal Reserve Bank of Minneapolis	PPP loans	April 2022	0.35%		105,222			105,089		105,005		—
Bank of the Sierra	Real estate	August 2050	3.25%		22,750			37,562		22,687		—
Total borrowings under credit facilities (b)				$	1,371,892		$	638,194	$	552,072	$	380,203
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 1.875 to 2.125%	$	500,000		$	114,196	$	103,307	$	124,718
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00 to 2.40%		350,000			232,524		161,100		141,356
JPMorgan	Transitional loans	December 2020	1M L + 2.25 to 4.00%		400,000			265,599		175,764		250,466
JPMorgan	MBS	March 2021	1.54 to 4.75%		70,875			115,128		70,875		93,715
Deutsche Bank	MBS	January 2021	3.54%		16,354			20,189		16,354		44,730
Citibank	MBS	November 2020	3.25 to 3.76%		58,422			114,749		58,422		56,189
Bank of America	MBS	Matured	1.31 to 1.61%		—			—		—		38,954
RBC	MBS	February 2021	3.05 to 4.43%		38,727			61,595		38,727		59,061
Total borrowings under repurchase agreements (c)				$	1,434,378		$	923,980	$	624,549	$	809,189
Total secured borrowings				$	2,806,270		$	1,562,174	$	1,176,621	$	1,189,392

(a) The current facility size is €200.0 million but has been converted into USD for purposes of this disclosure.

(b) The weighted average interest rate of borrowings under credit facilities was 2.8% and 4.0% as of September 30, 2020 and December 31, 2019, respectively.

(c) The weighted average interest rate of borrowings under repurchase agreements was 3.3% and 4.2% as of September 30, 2020 and December 31, 2019, respectively.

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

	Pledged Assets Carrying Value at
(In Thousands)	September 30, 2020		December 31, 2019
Collateral pledged - borrowings under credit facilities
Loans, held for sale, at fair value	$	309,488	$	159,928
Loans, net		136,722		276,810
Loans, held at fair value		105,089		—
Mortgage servicing rights		49,140		61,304
Purchased future receivables		—		43,265
Real estate, held for sale		37,755		19,950
Total collateral pledged on borrowings under credit facilities	$	638,194	$	561,257
Collateral pledged - borrowings under repurchase agreements
Loans, net	$	612,319	$	721,887
Mortgage backed securities		73,888		113,436
Retained interest in assets of consolidated VIEs		237,773		271,880
Total collateral pledged on borrowings under repurchase agreements	$	923,980	$	1,107,203
Total collateral pledged on secured borrowings	$	1,562,174	$	1,668,460

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 September 30, 2020 and December 31, 2019.

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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 September 30, 2020, 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 Convertible 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 redeem all or any portion of the Convertible Notes, at its option, on or after August 15, 2021, at a redemption price payable in cash equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest. Additionally, upon the occurrence of certain corporate transactions, holders may require the Company to purchase the Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.

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

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 September 30, 2020, 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 (the “2021 Notes”). The Company issued the 2021 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 2021 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 2021 Notes will mature on April 30, 2021, unless earlier redeemed or repurchased.

The Company may redeem for cash all or any portion of the 2021 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 2021 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 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of

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the 2021 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 2021 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 2021 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 2021 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 2021 Notes rank equal in right of payment to any of the Company’s existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of its existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness, other liabilities (including trade payables) and (to the extent not held by the Company) preferred stock, if any, of its subsidiaries.

On July 22, 2019, the Company completed the public offer and sale of $57.5 million aggregate principal amount of its 6.20% Senior Notes due 2026 (the “2026 Notes” and together with the 2021 Notes, the “Corporate Debt”), which includes $7.5 million aggregate principal amount of the 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of the 2026 Notes are approximately $55.3 million, after deducting underwriters’ discount and estimated offering expenses. The Company will contribute the net proceeds to Sutherland Partners, L.P. (the “Operating Partnership”), its operating partnership subsidiary, in exchange for the issuance by the Operating Partnership of a senior unsecured note with terms that are substantially equivalent to the terms of the 2026 Notes. The Operating Partnership intends to use the net proceeds to originate or acquire the Company’s target assets and for general business purposes.

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

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

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

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

As of September 30, 2020, we were in compliance with all covenants with respect to the corporate debt.

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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, in the consolidated balance sheet:

(in thousands, except rates)	Coupon Rate		Maturity Date	September 30, 2020
Senior secured notes - principal amount(1)	7.50	%	2/15/2022	$	180,000
Unamortized premium - Senior secured notes					1,093
Unamortized deferred financing costs - Senior secured notes					(1,521)
Total Senior secured notes, net				$	179,572
Convertible notes - principal amount (2)	7.00	%	8/15/2023	$	115,000
Unamortized discount - Convertible notes (3)					(1,157)
Unamortized deferred financing costs - Convertible notes					(1,988)
Total Convertible notes, net				$	111,855
Corporate debt - principal amount(4)	6.50	%	4/30/2021	$	50,000
Corporate debt - principal amount(5)	6.20	%	7/30/2026		104,250
Unamortized premium - Corporate debt					392
Unamortized deferred financing costs - Corporate debt					(3,984)
Total Corporate debt, net				$	150,658
Total carrying amount of debt components				$	442,085
Total carrying amount of conversion option of equity components recorded in equity				$	1,157

(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.

(5) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2019.

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

(In Thousands)	September 30, 2020
2020	$	—
2021		50,000
2022		180,000
2023		115,000
2024		—
Thereafter		104,250
Total contractual amounts		449,250
Unamortized deferred financing costs, discounts, and premiums, net		(7,165)
Total carrying amount of debt components	$	442,085

Note 13 – Guaranteed loan financing

Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment in the 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
September 30, 2020	3.77	%	0.99 - 6.50 %	2020 - 2044	$	421,183
December 31, 2019	5.45	%	1.70 - 7.50 %	2020 - 2044	$	485,461

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

(In Thousands)	September 30, 2020
2020	$	54
2021		642
2022		1,678
2023		2,718
2024		3,856
Thereafter		412,235
Total	$	421,183

Our guaranteed loan financings are secured by loans, net of $422.6 million and $487.2 million as of September 30, 2020 and December 31, 2019, 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 our acquired and originated loans, which provides a source of funding for us and has enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties.

We also transfer originated loans to securitization trusts sponsored by third parties, most notably Freddie Mac. Third-party securitizations are securitization entities in which we maintain an economic interest, but do not sponsor.

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we have been involved in are consolidated within our financial statements. See Note 3 for a discussion of our accounting policies applied to the consolidation of the VIE and transfer of the loans in connection with the securitization.

Securitization-related VIEs

Company sponsored securitizations

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

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

The 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.

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

	September 30, 2020						December 31, 2019
	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	$	4,802	$	4,802	5.5	%	$	6,399	$	6,399	5.5	%
ReadyCap Lending Small Business Trust 2019-2		108,558		106,892	3.2			131,032		129,007	4.3
Sutherland Commercial Mortgage Trust 2017-SBC6		31,449		30,901	3.6			42,309		41,486	3.4
Sutherland Commercial Mortgage Trust 2018-SBC7		93,516		92,228	4.7			138,235		136,212	4.7
Sutherland Commercial Mortgage Trust 2019-SBC8		186,854		184,179	2.9			219,617		216,981	2.9
Sutherland Commercial Mortgage Trust 2020-SBC9		154,919		151,994	3.8			—		—	—
ReadyCap Commercial Mortgage Trust 2014-1		17,974		17,979	5.8			18,626		18,632	5.6
ReadyCap Commercial Mortgage Trust 2015-2		38,669		36,417	4.8			64,239		61,443	4.5
ReadyCap Commercial Mortgage Trust 2016-3		26,646		25,497	4.7			32,269		30,777	4.7
ReadyCap Commercial Mortgage Trust 2018-4		94,853		91,546	4.0			121,179		117,428	3.9
ReadyCap Commercial Mortgage Trust 2019-5		259,647		250,726	4.1			309,296		299,273	4.1
ReadyCap Commercial Mortgage Trust 2019-6		374,368		367,598	3.2			379,400		371,939	3.2
Ready Capital Mortgage Financing 2018-FL2		50,491		50,322	2.5			115,381		114,057	3.8
Ready Capital Mortgage Financing 2019-FL3		243,849		241,823	2.1			267,904		264,249	3.5
Ready Capital Mortgage Financing 2020-FL4		324,221		318,400	3.1			—		—	—
Total (1)	$	2,010,816	$	1,971,304	3.3	%	$	1,845,886	$	1,807,883	3.7	%

(1) Excludes non-company sponsored securitized debt obligations of $87.8 million and $7.3 million that are consolidated in the unaudited interim consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively.

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

Third-party sponsored securitizations

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

Other VIEs

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

Assets and liabilities of consolidated VIEs

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

(In Thousands)	September 30, 2020		December 31, 2019
Assets:
Cash and cash equivalents	$	14,268	$	23
Restricted cash		13,427		8,301
Loans, net		2,618,449		2,326,199
Loans, held for sale, at fair value		—		4,434
Real estate, held for sale		8,422		—
Due from servicers		20,065		27,964
Accrued interest		16,567		11,565
Total assets	$	2,691,198	$	2,378,486
Liabilities:
Securitized debt obligations of consolidated VIEs, net		2,059,114		1,815,154
Total liabilities	$	2,059,114	$	1,815,154

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Assets of unconsolidated VIEs

The following table reflects our variable interests in identified VIEs, of which we are not the primary beneficiary, as of September 30, 2020 and December 31, 2019:

	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Assets:
Mortgage backed securities, at fair value (2)	$	67,584	$	66,108	$	67,584	$	66,108
Investment in unconsolidated joint ventures		69,204		58,850		69,204		58,850
Total assets in unconsolidated VIEs	$	136,788	$	124,958	$	136,788	$	124,958
(1) Maximum exposure to loss is limited to the greater of the fair value or carrying value of the assets as of the consolidated balance sheet date. (2) Retained interest in Freddie Mac and third party 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.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Interest income
Loans
Originated Transitional loans	$	21,366	$	20,157	$	65,953	$	51,398
Originated SBC loans		12,784		10,499		42,712		34,679
Acquired loans		13,611		18,306		42,938		46,348
Acquired SBA 7(a) loans		4,014		4,609		14,165		16,078
Originated SBA 7(a) loans		4,715		2,626		15,649		7,390
Originated SBC loans, at fair value		639		331		1,470		1,052
Originated Residential Agency loans		40		30		89		52
Total loans (1)	$	57,169	$	56,558	$	182,976	$	156,997
Held for sale, at fair value, loans
Originated Residential Agency loans	$	2,178	$	1,224	$	5,376	$	3,047
Originated Freddie loans		221		351		911		806
Acquired loans		39		50		166		123
Total loans, held for sale, at fair value (1)	$	2,438	$	1,625	$	6,453	$	3,976
Mortgage backed securities, at fair value		1,467		1,540		4,397		4,537
Total interest income	$	61,074	$	59,723	$	193,826	$	165,510
Interest expense
Secured borrowings	$	(9,949)	$	(13,360)	$	(36,247)	$	(34,809)
Securitized debt obligations of consolidated VIEs		(21,351)		(17,978)		(58,196)		(51,516)
Guaranteed loan financing		(4,110)		(645)		(14,506)		(3,873)
Senior secured note		(3,466)		(3,478)		(10,407)		(10,444)
Convertible note		(2,188)		(2,188)		(6,564)		(6,564)
Corporate debt		(2,759)		(1,741)		(8,242)		(3,713)
Total interest expense	$	(43,823)	$	(39,390)	$	(134,162)	$	(110,919)
Net interest income before provision for loan losses	$	17,251	$	20,333	$	59,664	$	54,591
(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

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

The following tables summarize the Company’s use of derivatives and their effect in the 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.

The following table summarizes our derivatives, by type, as of September 30, 2020 and December 31, 2019:

		As of September 30, 2020						As of December 31, 2019
				Asset		Liability				Asset		Liability
		Notional		Derivatives		Derivatives		Notional		Derivatives		Derivatives
(In Thousands)	Primary Underlying Risk	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Interest rate lock commitments	Interest rate risk	$	735,936		20,849	$	—	$	238,283	$	2,814	$	—
Interest Rate Swaps - not designated as hedges	Interest rate risk		760,391		—		(1,713)		291,001		—		(3,181)
Interest Rate Swaps - designated as hedges	Interest rate risk		121,325		—		(5,564)		158,325		—		(1,709)
Credit Default Swaps	Credit risk		15,000		—		(51)		15,000		—		(110)
FX forwards	Foreign exchange rate risk		22,856		—		(446)		15,000		—		(250)
Total		$	1,655,508	$	20,849	$	(7,774)	$	717,609	$	2,814	$	(5,250)

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

	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	(2)	$	—	$	59
Interest rate swaps (1)(2)		(1,189)		1,310		(2,185)		(9,194)
Residential mortgage banking activities interest rate swaps (3)		—		957		—		(1,148)
Interest rate lock commitments (3)		—		1,988		—		18,251
FX forwards (1)		(593)		(98)		(302)		(196)
Total	$	(1,782)	$	4,155	$	(2,487)	$	7,772
(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 September 30, 2019				Nine Months Ended September 30, 2019
			Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit default swaps (1)	$	—	$	2	$	—	$	(352)
Interest rate swaps (1)(2)		132		(4,268)		(4,068)		(8,817)
Residential mortgage banking activities interest rate swaps (3)		—		1,392		—		593
Interest rate lock commitments (3)		—		510		—		2,405
Total	$	132	$	(2,364)	$	(4,068)	$	(6,171)
(1) Gains (losses) are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income. (2) For qualifying hedges of interest rate risk, the effective portion relating to the unrealized gain (loss) on derivatives are recorded in accumulated other comprehensive income (loss). (3) Gains (losses) are recorded in residential mortgage banking activities in the consolidated statements of income.

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The following 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)	$	(371)	$	—	$	(371)	$	300	$	671
Total - Three Months Ended September 30, 2020	$	(371)	$	—	$	(371)	$	300	$	671
Hedge type
Interest rate - forecasted transactions (1)	$	(169)	$	—	$	(169)	$	(2,783)	$	(2,614)
Total - Three Months Ended September 30, 2019	$	(169)	$	—	$	(169)	$	(2,783)	$	(2,614)
Hedge type
Interest rate - forecasted transactions (1)	$	(1,104)	$	(1,694)	$	(2,798)	$	(5,276)	$	(2,478)
Total - Nine Months Ended September 30, 2020	$	(1,104)	$	(1,694)	$	(2,798)	$	(5,276)	$	(2,478)
Hedge type
Interest rate - forecasted transactions (1)	$	(269)	$	—	$	(269)	$	(9,880)	$	(9,611)
Total - Nine Months Ended September 30, 2019	$	(269)	$	—	$	(269)	$	(9,880)	$	(9,611)
(1) Consists of benchmark interest rate hedges of LIBOR-indexed floating-rate liabilities.
(2) Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.
(3) Represents after tax amounts recorded in OCI.

Note 17 – Real estate, held for sale

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

(In Thousands)	September 30, 2020		December 31, 2019
Acquired ORM Portfolio:
Retail	$	18,953	$	19,950
Mixed Use		14,440		17,478
Land		7,257		7,919
Lodging/Residential		3,229		6,280
Office		—		1,256
Total Acquired ORM REO	$	43,879	$	52,883
Other REO held for sale:
Retail	$	660		660
SBA		524		286
Office		—		4,465
Multi-family		—		—
Mixed Use		—		279
Total Other REO(1)	$	1,184	$	5,690
Total Real estate, held for sale	$	45,063	$	58,573
(1) Excludes $8.4 million of real estate, held for sale within consolidated VIEs.

Note 18 – Agreements and transactions with related parties

Management agreement

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

Management fee

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

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Management fee - total	$	2.7 million	$	2.5 million	$	7.9 million	$	7.0 million
Management fee - amount unpaid	$	2.7 million	$	2.5 million	$	2.7 million	$	2.5 million

Incentive distribution

Our Manager is entitled to an incentive distribution in an amount equal to the product of (i) 15% and (ii) the excess of (a) core earnings (as defined in the partnership agreement or the operating partnership) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that core earnings over the prior twelve calendar quarters (or the period since the closing of the ZAIS Merger, whichever is shorter) is greater than 0. For purposes of determining the incentive distribution payable to our Manager, core earnings is defined under the partnership agreement of the operating partnership in a manner that is similar to the definition of Core Earnings described below under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, 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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Incentive fee distribution - total	$	1.1 million	$	—	$	4.6 million	$	—
Incentive fee distribution - amount unpaid	$	1.1 million	$	—	$	1.1 million	$	—

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

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

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Expense reimbursement

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

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Reimbursable expenses payable to our Manager - total	$	0.8 million	$	0.9 million	$	2.8 million	$	2.8 million
Reimbursable expenses payable to our Manager - amount unpaid	$	1.0 million	$	1.0 million	$	1.0 million	$	1.0 million

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)	September 30, 2020		December 31, 2019
Other assets:
Deferred tax asset	$	31,803	$	31,803
Tax receivable		—		4,019
Deferred loan exit fees		12,933		13,039
Accrued interest		10,266		10,583
Goodwill		11,206		11,206
Due from servicers		10,451		10,127
Right-of-use lease asset		3,608		4,531
Intangible assets		7,317		8,309
Deferred financing costs		1,770		2,046
Other assets		9,260		11,262
Other assets	$	98,614	$	106,925
Accounts payable and other accrued liabilities:
Deferred tax liability	$	18,757	$	18,757
Accrued salaries, wages and commissions		34,734		21,146
Accrued interest payable		14,369		17,305
Servicing principal and interest payable		10,543		14,145
Repair and denial reserve		7,631		5,179
Payable to related parties		3,680		2,697
Accrued professional fees		2,483		1,809
Lease payable		4,140		4,618
Deferred PPP loan revenue		12,976		—
Other liabilities		22,774		11,751
Total accounts payable and other accrued liabilities	$	132,087	$	97,407

Intangible assets

The following table presents information about the intangible assets held by the Company:

(In Thousands)	September 30, 2020		December 31, 2019		Estimated Useful Life
Internally developed software - Knight Capital	$	3,219	$	3,694	6 years
Broker network - Knight Capital		956		1,156	4.5 years
SBA license		1,000		1,000	Indefinite life
Favorable lease		802		905	12 years
Trade name - Knight Capital		746		855	6 years
Trade name - GMFS		594		699	15 years
Total Intangible Assets	$	7,317	$	8,309

Amortization expense related to the intangible assets previously acquired for the three months ended September 30, 2020 and 2019 was $0.3 million and $0.1 million, respectively. Amortization expense related to the intangible assets previously acquired for the nine months ended September 30, 2020 and 2019 was $1.0 million and $0.3 million, respectively. Such amounts are recorded as other operating expenses in the consolidated statements of income.

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At September 30, 2020, accumulated amortization for finite-lived intangible assets is as follows:

(In Thousands)	September 30, 2020
Favorable lease	$	678
Trade name - GMFS		629
Internally developed software - Knight Capital		581
Broker network - Knight Capital		244
Trade name - Knight Capital		134
Total Accumulated Amortization	$	2,266

Amortization expense related to the finite-lived intangible assets for the five years subsequent to September 30, 2020 is as follows:

(In Thousands)	September 30, 2020
2020	$	331
2021		1,295
2022		1,268
2023		1,242
2024		1,210
Thereafter		971
Total	$	6,317

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 September 30, 2020 and December 31, 2019, the loan indemnification reserve was $4.0 million and $2.1 million, respectively.  

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At September 30, 2020 and December 31, 2019, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

Note 20 – Other income and operating expenses

Paycheck protection program

On March 27, 2020, the U.S. Congress approved, and President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides approximately $2 trillion in financial assistance to individuals and businesses resulting from the outbreak of COVID-19. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief in the form of financing and loan forgiveness and/or forbearance. The primary catalyst of small business stimulus in the CARES Act is referred to as the Paycheck Protection Program (“PPP”), an SBA loan that temporarily supports businesses in order to retain their workforce during the COVID-19 pandemic.

Through the CARES Act, the initiative calls for existing SBA lenders to extend loans to small businesses to cover payroll, occupancy and operating expenses through the PPP. Furthermore, the PPP includes a 100% guarantee from the federal government for loans up to $10 million and principal forgiveness for borrowers if the funds are used primarily for retaining employees. Beginning in April 2020 the Company, as one of 14 non-bank SBA lenders, emerged as a prominent player in the market, facilitating access for small businesses to PPP loans throughout the United States. In the aggregate, the Company has facilitated the fundings of approximately $2.7 billion of loans through this program.

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Based on pricing set forth by the SBA, processing fees paid to PPP lenders are based on the outstanding balance of the note and are tiered as follows:

• 5% for loans of not more than $350,000;

• 3% percent for loans of more than $350,000 and less than $2,000,000; and

• 1% percent for loans of at least $2,000,000

During April 2020, the Company funded loans totaling approximately $114.7 million in outstanding balance, through our online loan application platform. The Company has elected fair value option for these loans that are held-for-investment. As a result of these activities, the Company recognized approximately $5.2 million in processing fees based on the outstanding loan balance of loans originated during April 2020.

On April 28, 2020, the Company entered into a Lender Service Provider (“LSP”) agreement with a third-party. Under this agreement, the Company agreed to provide the following services:

a. assistance and services to the third-party in the underwriting, marketing, processing and funding of loans

b. processing forgiveness of the loans with the SBA

c. servicing and management of subsequently resulting PPP loan portfolios

The Company received a fee for providing such services, which represents one-half of the total fees received by the third-party from the SBA, less any agent fees paid directly by the third-party for referrals.

The Company sourced and underwrote approximately $2.5 billion of PPP loans, which were sold to the third-party as part of the LSP agreement, for $43.3 million in total fees. $27.8 million of the total fees have been recognized at the time of origination, and the remaining $15.5 million are recognized as servicing and forgiveness are performed. As of September 30, 2020, $13.0 million of fees were unearned.

The following table details the Company’s income and expenses related to its PPP activities:

(In Thousands)	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020		Financial statement account
Income
LSP origination fees	$	1,652	$	27,768	Other income - origination fees
PPP processing fees		7		5,162	Other income - origination fees
LSP fee income		1,700		2,553	Servicing income
Interest income		302		496	Interest income
Total PPP related income	$	3,661	$	35,979
Expense
Direct operating expenses	$	125	$	5,650	Other operating expenses - origination costs
R&D reserve		111		2,430	Other income - change in repair and denial reserve
Interest expense		687		2,089	Interest expense
Total PPP related expenses (direct)	$	923	$	10,169
Net PPP related income	$	2,738	$	25,810

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Other income and expenses

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Other income
Origination income	$	3,144	$	1,213	$	39,256	$	3,729
Change in repair and denial reserve		316		573		(2,199)		221
Other		1,036		1,193		3,106		2,721
Total other income	$	4,496	$	2,979	$	40,163	$	6,671
Other operating expenses
Origination costs		2,717		3,042		15,172		6,964
Technology expense		1,650		1,155		4,973		3,313
Impairment on real estate		—		144		3,075		824
Rent and property tax expense		1,545		968		3,929		2,762
Recruiting, training and travel expense		254		366		1,113		1,252
Marketing expense		400		391		1,331		1,519
Loan acquisition costs		353		359		806		464
Financing costs on purchased future receivables		63		—		1,476		—
Other		3,466		1,719		10,052		5,993
Total other operating expenses	$	10,448	$	8,144	$	41,927	$	23,091

Note 21 – Stockholders’ Equity

Equity offering

In December 2019, we completed a public offering of 6,000,000 shares of our common stock at a public offering price of $15.30 per share and an additional 900,000 shares of common stock at a public offering price of $15.30 per share pursuant to the underwriter’s full exercise of the over-allotment option in January 2020. Proceeds, net of offering costs and expenses were $91.8 million and $13.8 million for December 2019 and January 2020, respectively. There were 0 equity offerings during 2018.

Common stock dividends

The following table presents cash dividends declared by our board of directors on our common stock from December 12, 2018 through September 30, 2020:

			Dividend per
Declaration Date	Record Date	Payment Date	Share
December 12, 2018	December 31, 2018	January 31, 2019	$	0.40
March 12, 2019	March 28, 2019	April 30, 2019	$	0.40
June 11, 2019	June 28, 2019	July 31, 2019	$	0.40
September 10, 2019	September 30, 2019	October 31, 2019	$	0.40
December 11, 2019	December 31, 2019	January 31, 2020	$	0.40
March 11, 2020	March 31, 2020	April 30, 2020	$	0.40	(1)
June 15, 2020	June 30, 2020	July 31, 2020	$	0.25
September 16, 2020	September 30, 2020	October 30, 2020	$	0.30

(1) Dividends paid in a combination of cash, not to exceed 20% in the aggregate, and common stock.

Stock incentive plan

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

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

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The following table summarizes the Company’s RSA activity for the three and nine months ended September 30, 2020:

	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, 2020	1,009,617	$	15,722	$	15.57
Granted	208,514		3,298		15.82
Vested	(60,370)		(894)		14.81
Forfeited	—		—		—
Outstanding, March 31, 2020	1,157,761	$	18,126	$	15.66
Granted	—		—		—
Vested	(16,452)		(227)		13.78
Forfeited	—		—		—
Canceled	—		—		—
Outstanding, June 30, 2020	1,141,309	$	17,900	$	15.68
Granted	17,200		200		11.63
Vested	(26,602)		(320)		12.03
Forfeited	(2,258)		(37)		16.26
Canceled	—		—		—
Outstanding, September 30, 2020	1,129,649	$	17,743	$	15.71

During the three and nine months ended September 30, 2020, the Company recognized $1.5 million and $4.4 million of noncash compensation expense, respectively, related to its stock-based incentive plan in our unaudited interim consolidated statements of income. During the three and nine months ended September 30, 2019, the Company recognized $0.1 million and $1.1 million of noncash compensation, respectively.

At September 30, 2020 and 2019, approximately $17.7 million and $2.5 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.

Share repurchase program

The Company’s share repurchase program is intended to help maintain the appropriate level of common equity. The share repurchase program is conducted through regular open-market purchases, the amounts and timing of which are determined primarily through the Company’s current and projected capital position, and capital deployment opportunities, but which also may be influenced by general market conditions and the prevailing price and trading volumes of the Company’s common stock.

For the three and nine months ended September 30, 2020, 932,433 shares of common stock were repurchased under our share repurchase program at an average price per share of $9.96 per share.

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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 September 30,				Nine Months Ended September 30,
(In Thousands, except for share and per share amounts)	2020		2019		2020		2019
Basic Earnings
Net income (loss)	$	35,363	$	12,427	$	18,510	$	54,120
Less: Income (loss) attributable to non-controlling interest		805		323		551		1,580
Less: Income attributable to participating shares		339		79		1,087		240
Basic earnings	$	34,219	$	12,025	$	16,872	$	52,300
Diluted Earnings
Net income (loss)	$	35,363	$	12,427	$	18,510	$	54,120
Less: Income (loss) attributable to non-controlling interest		805		323		551		1,580
Less: Income attributable to participating shares		339		79		1,087		240
Diluted earnings	$	34,219	$	12,025	$	16,872	$	52,300
Number of Shares
Basic — Average shares outstanding		54,626,995		44,438,652		53,534,497		40,517,231
Effect of dilutive securities — Unvested participating shares		77,616		29,149		77,616		29,149
Diluted — Average shares outstanding		54,704,611		44,467,801		53,612,113		40,546,380
Earnings Per Share Attributable to RC Common Stockholders:
Basic	$	0.63	$	0.27	$	0.32	$	1.29
Diluted	$	0.63	$	0.27	$	0.31	$	1.29

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

Additionally, as of September 30, 2020, there are potential shares of common stock contingently issuable upon the conversion of the Convertible Notes in the future. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash. Based on this assessment, the Company determined that it would be appropriate to apply a method similar to the treasury stock method, such that contingently issuable common stock is assessed quarterly along with our other potentially dilutive instruments. In order to compute the dilutive effect, the number of shares included in the denominator of diluted EPS is determined by dividing the “conversion spread value” of the share-settled portion (value above accreted value of face value and interest component) of the instrument by the share price. The “conversion spread value” is the value that would be delivered to investors in shares based on the terms of the bond upon an assumed conversion. As of September 30, 2020, the conversion spread value is currently 0, since the closing price of our common stock does not exceed the conversion rate (strike price) and is “out-of-the-money”, resulting in 0 impact on diluted EPS.

Certain investors own OP units in our operating partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the operating partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: 1 share of the Company's common stock, or cash equal to the fair value of a share of the Company's common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interests in the operating partnership is reduced and the Company's equity is increased. At September 30, 2020 and December 31, 2019, the non-controlling interest OP unit holders owned 1,175,205 units 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

55

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 September 30, 2020 and December 31, 2019 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 in 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 offset, and (d) the Company’s right of offset is enforceable at law.  As of September 30, 2020 and December 31, 2019, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the unaudited interim consolidated balances sheets.  

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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 sheets:

							Gross amounts not offset in the Consolidated Balance Sheets(1)
(in thousands)	Gross amounts of recognized Assets / Liabilities		Gross amounts offset in the Consolidated Balance Sheets		Amounts presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received / Paid
September 30, 2020
Assets
Derivative instruments - Credit default swaps	$	—	$	—	$	—	$	—	$	—
Derivative instruments - FX forwards		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—
Liabilities
Derivative instruments - Interest rate swaps	$	15,015	$	7,738	$	7,277	$	—	$	7,277
Derivative instruments - Credit default swaps		51		—		51		—		51
Derivative instruments - FX forwards		446		—		446		—		—
Secured borrowings		1,176,621		—		1,176,621		1,176,621		—
Total	$	1,192,133	$	7,738	$	1,184,395	$	1,176,621	$	7,328
December 31, 2019
Assets
Derivative instruments - Interest rate swaps	$	2,814	$	—	$	2,814	$	—	$	2,814
Total	$	2,814	$	—	$	2,814	$	—	$	2,814
Liabilities
Derivative instruments - Interest rate swaps	$	4,890	$	—	$	4,890	$	—	$	4,890
Derivative instruments - Credit default swaps		110		—		110		—		110
Derivative instruments - FX forwards		250		—		250		—		250
Secured borrowings		1,189,392		—		1,189,392		1,189,392		—
Total	$	1,194,642	$	—	$	1,194,642	$	1,189,392	$	5,250

(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.

(1)

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.

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

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

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The Company is also subject 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 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

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

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.

Unfunded loan commitments

As of September 30, 2020 and December 31, 2019, unfunded loan commitments for SBC and SBA loans were as follows:

	September 30,		December 31,
(In Thousands)	2020		2019
Loans, net	$	287,978	$	128,719
Loans, held for sale at fair value	$	5,401	$	6,982

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.

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Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. As of September 30, 2020 and December 31, 2019, total commitments to originate loans were as follows:

	September 30,		December 31,
(In Thousands)	2020		2019
Commitments to originate residential agency loans	$	691,962	$	190,806

Note 26 – Income Taxes

The Company is a REIT pursuant to Internal Revenue Code Section 856. Our qualification as a REIT depends on our ability to meet various requirements imposed by the Internal Revenue Code, which relate to our organizational structure, diversity of stock ownership and 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 September 30, 2020 and December 31, 2019, 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 that would not be qualifying income if earned directly by the parent REIT, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Internal Revenue Code, and are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.

Our TRSs engage in various real estate ­related operations, including originating and securitizing commercial and residential mortgage loans, and investments in real property. The majority of our TRSs are held within the SBC originations, 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.

On March 27, 2020, President Trump signed into law the ‘Coronavirus Aid, Relief, and Economic Security Act’ (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impact the CARES Act may have on our business. As of September 30, 2020, we have recognized a benefit of $2.9 million due to changes in net operating loss carryback provisions which allow net operating losses from tax years beginning in 2018, 2019, or 2020 to be carried back for five years.

During the three months ended September 30, 2020 and 2019, we recorded an income tax expense of $6.6 million and an income tax benefit of $2.6 million, respectively. During the nine months ended September 30, 2020 and 2019, we recorded an income tax expense of $4.1 million and an income tax benefit of $8.6 million, respectively. The income tax expense for the above periods primarily related to activities of our taxable REIT subsidiaries, including the impact of our ability to carry back net operating losses to pre-tax reform years as a result of the CARES Act in the first quarter of 2020, 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 4 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, 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.

Acquisitions

Through the 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. The Company also acquires purchased future receivables through our Knight Capital platform.

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 loans 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 September 30, 2020 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	$	14,532	$	35,287	$	9,037	$	2,218	$	—	$	61,074
Interest expense		(11,011)		(23,342)		(6,414)		(2,157)		(899)		(43,823)
Net interest income before provision for loan losses	$	3,521	$	11,945	$	2,623	$	61	$	(899)	$	17,251
Provision for loan losses		4,824		117		(710)		—		—		4,231
Net interest income after provision for loan losses	$	8,345	$	12,062	$	1,913	$	61	$	(899)	$	21,482
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	75,524	$	—	$	75,524
Net realized gain on financial instruments		(2,244)		5,309		4,442		—		—		7,507
Net unrealized gain on financial instruments		2,295		3,459		2,353		(4,687)		—		3,420
Other income		1,609		688		2,170		30		(1)		4,496
Servicing income		139		610		3,055		6,311		—		10,115
Income on purchased future receivables, net of allowance for doubtful accounts		4,848		—		—		—		—		4,848
Income from unconsolidated joint ventures		1,996		—		—		—		—		1,996
Total non-interest income	$	8,643	$	10,066	$	12,020	$	77,178	$	(1)	$	107,906
Non-interest expense
Employee compensation and benefits		(3,192)		(4,046)		(4,378)		(15,118)		(878)		(27,612)
Allocated employee compensation and benefits from related party		(225)		—		—		—		(2,025)		(2,250)
Variable expenses on residential mortgage banking activities		—		—		—		(30,918)		—		(30,918)
Professional fees		(514)		(449)		(270)		(960)		(1,965)		(4,158)
Management fees – related party		—		—		—		—		(2,714)		(2,714)
Incentive fees – related party		—		—		—		—		(1,134)		(1,134)
Loan servicing expense		(1,528)		(2,394)		(106)		(4,206)		3		(8,231)
Merger related expenses		—		—		—		—		(6)		(6)
Other operating expenses		(3,095)		(2,450)		(1,590)		(2,618)		(695)		(10,448)
Total non-interest expense	$	(8,554)	$	(9,339)	$	(6,344)	$	(53,820)	$	(9,414)	$	(87,471)
Net income (loss) before provision for income taxes	$	8,434	$	12,789	$	7,589	$	23,419	$	(10,314)	$	41,917
Total assets	$	1,131,321	$	2,515,234	$	806,856	$	640,112	$	223,987	$	5,317,510

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

					SBA Originations,		Residential
			SBC		Acquisitions,		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		and Servicing		Banking		Other		Consolidated
Interest income	$	45,993	$	112,052	$	30,316	$	5,465	$	—	$	193,826
Interest expense		(32,871)		(72,476)		(21,766)		(5,778)		(1,271)		(134,162)
Net interest income before provision for loan losses	$	13,122	$	39,576	$	8,550	$	(313)	$	(1,271)	$	59,664
Provision for loan losses		(2,865)		(23,890)		(7,729)		(500)		—		(34,984)
Net interest income after provision for loan losses	$	10,257	$	15,686	$	821	$	(813)	$	(1,271)	$	24,680
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	192,757	$	—	$	192,757
Net realized gain (loss) on financial instruments		(3,378)		15,190		10,306		—		—		22,118
Net unrealized gain (loss) on financial instruments		(8,148)		(3,748)		1,302		(33,168)		—		(43,762)
Servicing income		665		1,541		6,522		18,465		—		27,193
Income on purchased future receivables, net of allowance for doubtful accounts		13,917		—		—		—		—		13,917
Loss from unconsolidated joint ventures		(1,035)		—		—		—		—		(1,035)
Other income		5,364		3,410		31,139		136		114		40,163
Total non-interest income (loss)	$	7,385	$	16,393	$	49,269	$	178,190	$	114	$	251,351
Non-interest expense
Employee compensation and benefits	$	(8,663)	$	(11,445)	$	(11,773)	$	(39,702)	$	(2,253)	$	(73,836)
Allocated employee compensation and benefits from related party		(475)		—		—		—		(4,275)		(4,750)
Variable expenses on residential mortgage banking activities		—		—		—		(87,494)		—		(87,494)
Professional fees		(999)		(891)		(697)		(1,518)		(4,527)		(8,632)
Management fees – related party		—		—		—		—		(7,941)		(7,941)
Incentive fees – related party		—		—		—		—		(4,640)		(4,640)
Loan servicing expense		(4,387)		(5,685)		(688)		(13,325)		(37)		(24,122)
Merger related expenses		—		—		—		—		(63)		(63)
Other operating expenses		(13,402)		(10,336)		(9,679)		(6,376)		(2,134)		(41,927)
Total non-interest expense	$	(27,926)	$	(28,357)	$	(22,837)	$	(148,415)	$	(25,870)	$	(253,405)
Net income (loss) before provision for income taxes	$	(10,284)	$	3,722	$	27,253	$	28,962	$	(27,027)	$	22,626
Total assets	$	1,131,321	$	2,515,234	$	806,856	$	640,112	$	223,987	$	5,317,510

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Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the three months ended September 30, 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	$	18,880	$	32,354	$	7,235	$	1,254	$	—	$	59,723
Interest expense		(11,076)		(23,835)		(2,739)		(1,740)		—		(39,390)
Net interest income before provision for loan losses	$	7,804	$	8,519	$	4,496	$	(486)	$	—	$	20,333
Provision for loan losses		(94)		(33)		(566)		—		—		(693)
Net interest income after provision for loan losses	$	7,710	$	8,486	$	3,930	$	(486)	$	—	$	19,640
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	29,013	$	—	$	29,013
Net realized gain on financial instruments		(437)		5,065		2,749		—		—		7,377
Net unrealized gain (loss) on financial instruments		(206)		(865)		772		(7,582)		—		(7,881)
Other income		925		1,118		812		80		44		2,979
Servicing income		—		488		1,180		5,781		—		7,449
Income from unconsolidated joint ventures		1,047		—		—		—		—		1,047
Total non-interest income	$	1,329	$	5,806	$	5,513	$	27,292	$	44	$	39,984
Non-interest expense
Employee compensation and benefits	$	(26)	$	(1,420)	$	(4,070)	$	(7,091)	$	(831)	$	(13,438)
Allocated employee compensation and benefits from related party		(150)		—		—		—		(1,350)		(1,500)
Variable expenses on residential mortgage banking activities		—		—		—		(17,318)		—		(17,318)
Professional fees		(195)		(571)		(279)		(344)		(641)		(2,030)
Management fees – related party		—		—		—		—		(2,495)		(2,495)
Incentive fees – related party		—		—		—		—		—		—
Loan servicing (expense) income		(1,461)		(1,495)		(205)		(1,672)		(33)		(4,866)
Merger related expenses		—		—		—		—		(51)		(51)
Other operating expenses		(770)		(3,369)		(1,508)		(1,691)		(806)		(8,144)
Total non-interest expense	$	(2,602)	$	(6,855)	$	(6,062)	$	(28,116)	$	(6,207)	$	(49,842)
Net income (loss) before provision for income taxes	$	6,437	$	7,437	$	3,381	$	(1,310)	$	(6,163)	$	9,782
Total assets	$	1,165,470	$	2,266,076	$	273,217	$	327,162	$	91,094	$	4,123,019

Reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other, for the nine months ended September 30, 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	$	47,761	$	91,182	$	23,468	$	3,099	$	—	$	165,510
Interest expense		(29,383)		(65,903)		(11,529)		(4,104)		—		(110,919)
Net interest income before provision for loan losses	$	18,378	$	25,279	$	11,939	$	(1,005)	$	—	$	54,591
Provision for loan losses		(771)		(342)		(1,446)		—		—		(2,559)
Net interest income after provision for loan losses	$	17,607	$	24,937	$	10,493	$	(1,005)	$	—	$	52,032
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	64,621	$	—	$	64,621
Net realized gain (loss) on financial instruments		(33)		10,232		10,715		—		—		20,914
Net unrealized gain (loss) on financial instruments		(886)		(131)		268		(21,050)		—		(21,799)
Servicing income		—		1,386		4,013		16,613		—		22,012
Income on unconsolidated joint ventures		6,059		—		—		—		—		6,059
Other income		1,950		3,565		865		182		109		6,671
Gain on bargain purchase		—		—		—		—		30,728		30,728
Total non-interest income	$	7,090	$	15,052	$	15,861	$	60,366	$	30,837	$	129,206
Non-interest expense
Employee compensation and benefits	$	(53)	$	(5,454)	$	(12,262)	$	(17,131)	$	(2,495)	$	(37,395)
Allocated employee compensation and benefits from related party		(360)		—		—		—		(3,243)		(3,603)
Variable expenses on residential mortgage banking activities		—		—		—		(39,995)		—		(39,995)
Professional fees		(412)		(1,185)		(635)		(809)		(2,404)		(5,445)
Management fees – related party		—		—		—		—		(6,987)		(6,987)
Loan servicing expense		(3,379)		(4,185)		(322)		(5,089)		(110)		(13,085)
Merger related expenses		—		—		—		—		(6,121)		(6,121)
Other operating expenses		(2,073)		(8,198)		(4,635)		(5,818)		(2,367)		(23,091)
Total non-interest expense	$	(6,277)	$	(19,022)	$	(17,854)	$	(68,842)	$	(23,727)	$	(135,722)
Net income (loss) before provision for income taxes	$	18,420	$	20,967	$	8,500	$	(9,481)	$	7,110	$	45,516
Total assets	$	1,165,470	$	2,266,076	$	273,217	$	327,162	$	91,094	$	4,123,019

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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.

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 and nine months ended September 30, 2020 and 2019.

Statements of Income	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
(In Thousands)		Girod HoldCo, LLC		WFLLA, LLC		Girod HoldCo, LLC		WFLLA, LLC
Interest income	$	661	$	330	$	1,108	$	553
Realized gains		(178)		(89)		364		182
Unrealized gains (losses)		1,117		557		2,074		1,035
Servicing expense and other		(711)		(355)		(1,224)		(615)
Income (loss) before provision for income taxes	$	889	$	443	$	2,322	$	1,155

Statements of Income	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
(In Thousands)		Girod HoldCo, LLC		WFLLA, LLC		Girod HoldCo, LLC		WFLLA, LLC
Interest income	$	1,310	$	654	$	5,943	$	2,966
Realized gains		(28)		(14)		995		497
Unrealized gains (losses)		(3,104)		(1,549)		18,442		9,203
Servicing expense and other		(3,141)		(1,567)		(3,581)		(1,792)
Income (loss) before provision for income taxes	$	(4,963)	$	(2,476)	$	21,799	$	10,874

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Income (loss) on unconsolidated joint ventures
WFLLA, LLC	$	222	$	578	$	(1,238)	$	5,437
Other unconsolidated joint ventures		1,774		469		203		622
Income (loss) on unconsolidated joint ventures	$	1,996	$	1,047	$	(1,035)	$	6,059

During the three months ended September 30, 2020 and 2019, the Company recorded $2.0 million and $1.0 million of income, respectively, which is based on our proportional ownership interest in the entities above. During the nine months ended September 30, 2020 and 2019, the Company recorded a loss of $1.0 million and $6.1 million of income, respectively. These amounts are reflected in Income on unconsolidated joint ventures within the interim unaudited statement of income.

Note 29 – Subsequent events

The Company has evaluated subsequent events through the issuance date of the financial statements and determined that no additional disclosure is necessary.

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

● 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 2019 annual report on Form 10-K, including those set forth under the captions “Risk Factors” and “Business”;

● the severity and duration of the COVID-19 pandemic;

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

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

● actions that may be taken by governmental authorities to contain the COVID-19 outbreak or treat its impact;

● applicable regulatory changes;

● risks associated with acquisitions, including the acquisition of Owens Realty Mortgage, Inc. (“ORM”) and Knight Capital LLC (“Knight Capital”);

● risks associated with achieving expected revenue synergies, cost savings and other benefits from acquisitions, including the acquisition of ORM and Knight Capital, 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 our “Manager”), and our ability to find a suitable replacement if we or our Manager were to terminate the management agreement we have entered into with our Manager;

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

● 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. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the potential impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 on our business, financial condition and results of operations due to, among other

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factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally, uncertainty regarding the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the global economy, the U.S. economy and economic activity generally.

Although we believe 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.

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

INTRODUCTION

      Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five main sections:

● Overview

● Results of Operations

● Liquidity and Capital Resources

● Off-Balance Sheet Arrangements and Contractual Obligations

● Critical Accounting Policies and Estimates

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and accompanying Notes included in Item 1, "Financial Statements," of this quarterly report on Form 10-Q and with Items 6, 7, 8, and 9A of our annual report on Form 10-K. See "Forward-Looking Statements" in this quarterly report on Form 10-Q and in our annual report on Form 10-K and "Critical Accounting Policies and Use of Estimates" in our annual report on Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this quarterly report on Form 10-Q.

OVERVIEW

Our Business

We are a multi-strategy real estate finance company that originates, acquires, 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 generally 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 originations and acquisition platforms consist of the following four operating segments:

● 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. We also acquire purchased future receivables through our Knight Capital platform.

● 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 (“ReadyCap Commercial”). These originated loans are generally held-for-investment or placed into securitization structures. Additionally, as part of this segment, we originate and service multi-family loans

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under the Federal Home Loan Mortgage Corporation’s Small Balance Loan Program (“Freddie Mac” and the “Freddie Mac program”). These originated loans are held for sale, then sold to Freddie Mac.

● SBA Originations, Acquisitions and Servicing. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap Lending, LLC (“ReadyCap Lending”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold.

● Residential Mortgage Banking. We operate our residential mortgage loan origination segment through our wholly-owned subsidiary, GMFS, LLC ("GMFS"). GMFS originates residential mortgage loans eligible to be purchased, guaranteed or insured by the Federal National Mortgage Association (“Fannie Mae”), Freddie Mac, Federal Housing Administration (“FHA”), U.S. Department of Agriculture (“USDA”) and U.S. Department of Veterans Affairs (“VA”) through retail, correspondent and broker channels. These originated loans are then sold to third parties, primarily agency lending programs.

Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. In order to achieve this objective, we intend to continue to grow our investment portfolio and we believe that the breadth of our full service real estate finance platform will allow us to adapt to market conditions and deploy capital in our asset classes and segments with the most attractive risk-adjusted returns.

We are organized and conduct our operations to qualify as a REIT under the Code. So long as we qualify as a REIT, we are generally not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to stockholders. We are organized in a traditional UpREIT format pursuant to which we serve as the general partner of and conduct substantially all of our business through Sutherland Partners, LP, or our operating partnership, which serves as our operating partnership subsidiary. We also intend to operate our business in a manner that will permit us to be excluded from registration as an investment company under the 1940 Act.

For additional information on our business, refer to Part I, Item 1, Business of our 2019 Annual Report on Form 10-K.

Factors Impacting Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on, among other things, the level of the interest income from our assets, the market value of our assets and the supply of, and demand for, SBC and SBA loans, residential loans, MBS and other assets we may acquire in the future and the financing and other costs associated with our business. Our net investment income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates, the rate at which our distressed assets are liquidated and the prepayment speed of our performing assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by conditions in the financial markets, credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose loans are held directly by us or are included in our MBS. Our operating results may also be impacted by difficult market conditions as well as inflation, energy costs, geopolitical issues, health epidemics and outbreaks of contagious diseases, such as the outbreak of COVID-19, unemployment and the availability and cost of credit. Our operating results will also be impacted by our available borrowing capacity.

Changes in Market Interest Rates

We own and expect to acquire or originate fixed rate mortgages (“FRMs”), and 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 LIBOR, plus a margin, while FRM loans bear interest that is fixed for the term of the loan. As of September 30, 2020, approximately 59% of the loans in our portfolio were ARMs, and 41% were FRMs, based on UPB. We utilize derivative financial and hedging instruments in an effort to hedge the interest rate risk associated with our ARMs.

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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.

Changes in Fair Value of Our Assets

Certain originated loans, mortgage backed securities, and servicing rights are carried at fair value and future 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 ABS. This factor is beyond our control.

Prepayment Speeds

Prepayment speeds on loans vary according to interest rates, the type of investment, conditions in the financial markets, competition, foreclosures and other factors that cannot be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans and, as a result, prepayment speeds tend to decrease. This can extend the period over which we earn interest income. When interest rates fall, prepayment speeds on loans, and therefore, ABS and servicing rights tend to increase, thereby decreasing the period over which we earn interest income or servicing fee income. Additionally, other factors such as the credit rating of the borrower, the rate of property value appreciation or depreciation, financial market conditions, foreclosures and lender competition, none of which can be predicted with any certainty, may affect prepayment speeds on loans.

Credit Spreads

Our investment portfolio may be subject to changes in credit spreads. Credit spreads measure the yield demanded on loans and securities by the market based on their credit relative to a specific benchmark and is a measure of the perceived risk of the investment. Fixed rate loans and securities are valued based on a market credit spread over the rate payable on fixed rate swaps or fixed rate U.S. Treasuries of similar maturity. Floating rate securities are typically valued based on a market credit spread over LIBOR (or another floating rate index) and are affected similarly by changes in LIBOR spreads. Excessive supply of these loans and securities or reduced demand may cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such assets. Under such conditions, the value of our portfolios would tend to decline. Conversely, if the spread used to value such assets were to decrease, or “tighten,” the value of our loans and securities would tend to increase. Such changes in the market value of these assets may affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses.

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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 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 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.

Current market conditions

The outbreak of the COVID-19 pandemic around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The impact of the outbreak has been rapidly evolving, with several countries taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. While some of these restrictions have been relaxed or phased out, many of these or similar restrictions remain in place, continue to be implemented or additional restrictions are being considered. Such actions are creating significant disruptions to global supply chains and adversely impacting several industries, including but not limited to airlines, hospitality, retail, and the broader real estate industry.

The major disruption caused by COVID-19 significantly reduced economic activity in most of the United States resulting in a significant increase in unemployment claims. COVID-19 has had a continued and prolonged adverse impact on economic and market conditions and has had a period of global economic slowdown which could have a material adverse effect on the Company’s results and financial condition.

      The full impact of COVID-19 on the real estate industry, the commercial real estate market, the small business lending market and the credit markets generally, and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to, (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of

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the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of governmental responses to the pandemic, including the PPP and other programs under the CARES Act, (v) the timing and speed of economic recovery, (vi) the availability of a treatment or vaccination for COVID-19, and (vii) the negative impact on our borrowers, real estate values and cost of capital.

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, 2019. There have been no material changes to our Critical Accounting Policies described in our annual report on Form 10-K filed with the SEC on March 12, 2020, other than a supplement to the accounting policy for our current expected credit loss reserve that was adopted by the Company in the first quarter of 2020. Refer to Note 3 and 4 of our consolidated financial statements for further description of the accounting policy for our current expected credit loss reserve and our other significant accounting policies.

RESULTS OF OPERATIONS

Key Financial Measures and Indicators

As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared per share, core earnings, and net book value per share. As further described below, core earnings is a measure that is not prepared in accordance with GAAP. We use core earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan activity and operations. See “—Non-GAAP Financial Measures” below for reconciliation to core earnings.

The following table sets forth certain information on our operating results:

	Three Months Ended September 30,			Three Months Ended September 30,			Nine Months Ended September 30,			Nine Months Ended September 30,
(in thousands, except share data)	2020			2019			2020			2019
Net Income	$	35,363		$	12,427		$	18,510		$	54,120
Earnings per common share - basic	$	0.63		$	0.27		$	0.32		$	1.29
Earnings per common share - diluted	$	0.63		$	0.27		$	0.31		$	1.29
Core Earnings	$	32,126		$	18,249		$	72,574		$	46,297
Core Earnings per common share - basic and diluted	$	0.57		$	0.40		$	1.30		$	1.10
Dividends declared per common share	$	0.30		$	0.40		$	0.95		$	1.20
Dividend yield(1)		10.7	%		10.1	%		10.7	%		10.1	%
Book value per common share	$	14.86		$	16.20		$	14.86		$	16.20
Adjusted net book value per common share(2)	$	14.84		$	16.16		$	14.84		$	16.16
(1) Based on the closing share price on September 30, 2020 and 2019, respectively.
(2) Excludes the equity component of our 2017 convertible note issuance.

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The following table sets forth certain information on our investment portfolio activity (based on fully committed amounts):

	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Loan originations
SBC loan originations	$	122,487	$	465,374	$	750,164	$	1,176,942
SBA loan originations		82,912		48,244		149,283		146,021
Residential agency mortgage loan originations		1,184,237		656,791		3,066,711		1,519,377
Total loan originations	$	1,389,636	$	1,170,409	$	3,966,158	$	2,842,340
Total loan acquisitions	$	20,989	$	77,900	$	72,483	$	568,784
Total loan investment activity	$	1,410,625	$	1,248,309	$	4,038,641	$	3,411,124

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 September 30, 2020 and per share information for the three months ended September 30, 2020, 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 2019 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 September 30, 2020. 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 2019 Annual report on Form 10-K.

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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:

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Acquired Portfolio

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

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Residential Mortgage Banking

The following table includes certain portfolio metrics related to our residential mortgage banking segment:

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Changes in Financial Condition

The following table compares our consolidated balance sheets as of September 30, 2020 and June 30, 2020 (amounts in thousands):

	September 30,		June 30,		$ Change		% Change
(In Thousands)	2020		2020		Q3'20 vs. Q2'20		Q3'20 vs. Q2'20
Assets
Cash and cash equivalents	$	149,847	$	257,017	$	(107,170)	(41.7)	%
Restricted cash		46,204		91,539		(45,335)	(49.5)
Loans, net (including $119,965 and $124,298 held at fair value)		1,393,139		1,432,807		(39,668)	(2.8)
Loans, held for sale, at fair value		348,719		297,669		51,050	17.1
Mortgage backed securities, at fair value		90,427		75,411		15,016	19.9
Loans eligible for repurchase from Ginnie Mae		237,542		186,197		51,345	27.6
Investment in unconsolidated joint ventures		69,204		53,939		15,265	28.3
Purchased future receivables, net		16,659		27,190		(10,531)	(38.7)
Derivative instruments		20,849		19,037		1,812	9.5
Servicing rights (including $74,384 and $73,645 held at fair value)		110,045		107,761		2,284	2.1
Real estate, held for sale		45,063		47,009		(1,946)	(4.1)
Other assets		98,614		103,701		(5,087)	(4.9)
Assets of consolidated VIEs		2,691,198		2,761,655		(70,457)	(2.6)
Total Assets	$	5,317,510	$	5,460,932	$	(143,422)	(2.6)	%
Liabilities
Secured borrowings	$	1,176,621	$	1,253,895	$	(77,274)	(6.2)	%
Securitized debt obligations of consolidated VIEs, net		2,059,114		2,140,009		(80,895)	(3.8)
Convertible notes, net		111,855		111,581		274	0.2
Senior secured notes, net		179,572		179,481		91	0.1
Corporate debt, net		150,658		150,387		271	0.2
Guaranteed loan financing		421,183		436,532		(15,349)	(3.5)
Liabilities for loans eligible for repurchase from Ginnie Mae		237,542		186,197		51,345	27.6
Derivative instruments		7,774		9,106		(1,332)	(14.6)
Dividends payable		16,934		14,524		2,410	16.6
Accounts payable and other accrued liabilities		132,087		166,174		(34,087)	(20.5)
Total Liabilities	$	4,493,340	$	4,647,886	$	(154,546)	(3.3)	%
Stockholders’ Equity
Common stock	$	5	$	5	$	—	0.0	%
Additional paid-in capital		846,960		854,222		(7,262)	(0.9)
Retained earnings (deficit)		(31,779)		(49,755)		17,976	(36.1)
Accumulated other comprehensive (loss)		(9,916)		(9,876)		(40)	0.4
Total Ready Capital Corporation equity		805,270		794,596		10,674	1.3	%
Non-controlling interests		18,900		18,450		450	2.4
Total Stockholders’ Equity	$	824,170	$	813,046	$	11,124	1.4	%
Total Liabilities and Stockholders’ Equity	$	5,317,510	$	5,460,932	$	(143,422)	(2.6)	%

Comparison of balances at September 30, 2020 to June 30, 2020

Assets

Cash and cash equivalents decreased $107.2 million, primarily due to a share repurchase of $9.3 million, net reductions of secured borrowings of $77.3 million, purchase of loans, held-for-investment of $67.8 million, and investments in unconsolidated joint ventures of $14.6 million.  

Assets of consolidated VIEs decreased by $70.5 million due to paydowns on securitized loans.

Liabilities

Secured borrowings associated with our repurchase agreements and credit facilities decreased by $77.3 million due to loan sales and paydowns.

Securitized debt obligations of consolidated VIEs, net decreased by $80.9 million, as a result of paydowns of securitized loans.

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Accounts payable and other accrued liabilities decreased by $34.1 million, primarily due to payment of servicing payables related to PPP loan originations in the third quarter of 2020.

Equity

Total equity attributable to our company increased by $11.1 million, primarily the result of net income, attributable to net interest income, servicing income, gains on loan sales, and recovery of loan reserves.

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 September 30, 2020:

(in thousands)	Acquisitions		SBC Originations		SBA Originations, Acquisitions and Servicing		Residential Mortgage Banking		Total
Assets
Loans, net (1)(2)	$	949,728	$	2,366,167	$	743,114	$	5,235	$	4,064,244
Loans, held for sale, at fair value		510		20,486		39,764		287,959		348,719
Mortgage backed securities, at fair value		22,842		67,585		—		—		90,427
Servicing rights		—		18,121		17,540		74,384		110,045
Investment in unconsolidated joint ventures		69,204		—		—		—		69,204
Purchased future receivables, net		16,659		—		—		—		16,659
Real estate, held for sale (1)		45,063		8,422		—		—		53,485
Liabilities
Secured borrowings	$	226,545	$	482,665	$	159,467	$	307,944	$	1,176,621
Securitized debt obligations of consolidated VIEs		552,998		1,399,224		106,892		—		2,059,114
Guaranteed loan financing		—		—		421,183		—		421,183
Senior secured notes, net		42,609		129,919		7,045		—		179,572
Corporate debt, net		75,189		75,469		—		—		150,658
Convertible notes, net		55,125		51,132		5,598		—		111,855
(1) Includes 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 the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):

	Three Months Ended September 30,				$ Change		Nine Months Ended September 30,				$ Change
	2020		2019		2020 vs. 2019		2020		2019		2020 vs. 2019
Interest income
Loan acquisitions	$	14,532	$	18,880	$	(4,348)	$	45,993	$	47,761	$	(1,768)
SBC originations		35,287		32,354		2,933		112,052		91,182		20,870
SBA originations, acquisitions and servicing		9,037		7,235		1,802		30,316		23,468		6,848
Residential mortgage banking		2,218		1,254		964		5,465		3,099		2,366
Total interest income	$	61,074	$	59,723	$	1,351	$	193,826	$	165,510	$	28,316
Interest expense
Loan acquisitions	$	(11,011)	$	(11,076)	$	65	$	(32,871)	$	(29,383)	$	(3,488)
SBC originations		(23,342)		(23,835)		493		(72,476)		(65,903)		(6,573)
SBA originations, acquisitions and servicing		(6,414)		(2,739)		(3,675)		(21,766)		(11,529)		(10,237)
Residential mortgage banking		(2,157)		(1,740)		(417)		(5,778)		(4,104)		(1,674)
Corporate - other		(899)		-		(899)		(1,271)		-		(1,271)
Total interest expense	$	(43,823)	$	(39,390)	$	(4,433)	$	(134,162)	$	(110,919)	$	(23,243)
Net interest income before provision for loan losses	$	17,251	$	20,333	$	(3,082)	$	59,664	$	54,591	$	5,073
Loan acquisitions	$	4,824	$	(94)	$	4,918	$	(2,865)	$	(771)	$	(2,094)
SBC originations		117		(33)		150		(23,890)		(342)		(23,548)
SBA originations, acquisitions and servicing		(710)		(566)		(144)		(7,729)		(1,446)		(6,283)
Residential mortgage banking		-		—		-		(500)		—		(500)
Provision for loan losses	$	4,231	$	(693)		4,924		(34,984)		(2,559)		(32,425)
Net interest income after provision for loan losses	$	21,482	$	19,640	$	1,842	$	24,680	$	52,032	$	(27,352)
Non-interest income
Loan acquisitions	$	8,643	$	1,329	$	7,314	$	7,385	$	7,090	$	295
SBC originations		10,066		5,806		4,260		16,393		15,052		1,341
SBA originations, acquisitions and servicing		12,020		5,513		6,507		49,269		15,861		33,408
Residential mortgage banking		77,178		27,292		49,886		178,190		60,366		117,824
Corporate - other		(1)		44		(45)		114		30,837		(30,723)
Total non-interest income	$	107,906	$	39,984	$	67,922	$	251,351	$	129,206	$	122,145
Non-interest expense
Loan acquisitions	$	(8,554)	$	(2,602)	$	(5,952)	$	(27,926)	$	(6,277)	$	(21,649)
SBC originations		(9,339)		(6,855)		(2,484)		(28,357)		(19,022)		(9,335)
SBA originations, acquisitions and servicing		(6,344)		(6,062)		(282)		(22,837)		(17,854)		(4,983)
Residential mortgage banking		(53,820)		(28,116)		(25,704)		(148,415)		(68,842)		(79,573)
Corporate - other		(9,414)		(6,207)		(3,207)		(25,870)		(23,727)		(2,143)
Total non-interest expense	$	(87,471)	$	(49,842)	$	(37,629)	$	(253,405)	$	(135,722)	$	(117,683)
Net income (loss) before provision for income taxes
Loan acquisitions	$	8,434	$	6,437	$	1,997	$	(10,284)	$	18,420	$	(28,704)
SBC originations		12,789		7,437		5,352		3,722		20,967		(17,245)
SBA originations, acquisitions and servicing		7,589		3,381		4,208		27,253		8,500		18,753
Residential mortgage banking		23,419		(1,310)		24,729		28,962		(9,481)		38,443
Corporate - other		(10,314)		(6,163)		(4,151)		(27,027)		7,110		(34,137)
Total net income (loss) before provision for income taxes	$	41,917	$	9,782	$	32,135	$	22,626	$	45,516	$	(22,890)

Results of Operations – Supplemental Information

Realized and unrealized gains (losses) on financial instruments are recorded in the 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 realized and unrealized gains (losses) on financial instruments:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Realized gains (losses) on financial instruments
Realized gains on loans - Freddie Mac	$	1,518	$	1,954	$	5,517	$	3,817
Creation of mortgage servicing rights - Freddie Mac		2,107		1,798		7,094		3,745
Realized gains on loans - SBA		3,448		2,098		7,937		8,148
Creation of mortgage servicing rights - SBA		993		600		2,328		2,481
Realized gain (loss) on derivatives, at fair value		(1,996)		132		(2,700)		1,048
Realized gain (loss) on mortgage backed securities, at fair value		471		1,112		2,060		2,349
Net realized gains (losses) - all other		966		(317)		(118)		(674)
Net realized gain on financial instruments	$	7,507	$	7,377	$	22,118	$	20,914
Unrealized gains (losses) on financial instruments
Unrealized gain (loss) on loans - Freddie Mac	$	(40)	$	(64)	$	(18)	$	234
Unrealized gain (loss) on loans - SBA		2,353		772		1,302		267
Unrealized gain (loss) on residential mortgage servicing rights, at fair value		(4,688)		(7,582)		(33,168)		(21,050)
Unrealized gain (loss) on derivatives, at fair value		648		(701)		(4,415)		(2,827)
Unrealized gain (loss) on mortgage backed securities, at fair value		3,708		(245)		(8,314)		1,466
Net unrealized gains (losses) - all other		1,439		(61)		851		111
Net unrealized gain (loss) on financial instruments	$	3,420	$	(7,881)	$	(43,762)	$	(21,799)

Acquisition Segment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2020		2019		$ Change		2020		2019		$ Change
Interest income	$	14,532	$	18,880	$	(4,348)	$	45,993	$	47,761	$	(1,768)
Interest expense		(11,011)		(11,076)		65		(32,871)		(29,383)		(3,488)
Net interest income before provision for loan losses	$	3,521	$	7,804	$	(4,283)	$	13,122	$	18,378	$	(5,256)
Provision for loan losses		4,824		(94)		4,918		(2,865)		(771)		(2,094)
Net interest income after provision for loan losses	$	8,345	$	7,710	$	635	$	10,257	$	17,607	$	(7,350)
Non-interest income		8,643		1,329		7,314		7,385		7,090		295
Non-interest expense		(8,554)		(2,602)		(5,952)		(27,926)		(6,277)		(21,649)
Total non-interest income (expense)	$	89	$	(1,273)	$	1,362	$	(20,541)	$	813	$	(21,354)
Net income (loss) before provision for income taxes	$	8,434	$	6,437	$	1,997	$	(10,284)	$	18,420	$	(28,704)

Interest income

Interest income of $14.5 million for the quarter ended September 30, 2020 in our acquisitions segment represented a decrease of $4.3 million from the prior year quarter, primarily driven by a decrease in loan acquisition activity and loan payoffs. As of September 30, 2020, the carrying value of the acquired loan portfolio was $995.4 million, compared to $1.1 billion as of September 30, 2019.

Interest income of $46.0 million in the nine months ended September 30, 2020 in our acquisitions segment represented a decrease of $1.8 million from the prior period, primarily driven by a decrease in loan acquisition activity in 2020 and loan payoffs.  

Interest expense

Interest expense of $11.0 million for the quarter ended September 30, 2020 in our acquisitions segment was relatively unchanged from the prior year quarter.

Interest expense of $32.9 million in the nine months ended September 30, 2020 in our acquisitions segment represented an increase of $3.5 million from the prior year period, primarily reflecting an increase in borrowing activities under our shorter-term secured borrowings and securitized debt obligations.

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Provision for (Recoveries of) loan losses

Recoveries of loan losses of $4.8 million for the quarter ended September 30, 2020 in our acquisitions segment represented an increase of $4.9 million from the prior year quarter. The increase in the recovery for loan losses during the quarter ended September 30, 2020 was primarily the result of the stabilized assumptions and lower weighted average maturity of the portfolio since the first and second quarters of 2020.

Provision for loan losses of $2.9 million for the nine months ended September 30, 2020 in our acquisitions segment represented an increase of $2.1 million from the prior year period. The increase in the provision for loan losses during the nine months ended September 30, 2020 was primarily the result of the implementation of the CECL impairment standard, which resulted in an increase in loan loss reserves across all product types upon implementation in 2020 as well as the adverse change in the economic outlook due to the COVID-19 pandemic.

Non-interest income (loss)

Non-interest income of $8.6 million for the quarter ended September 30, 2020 in our acquisitions segment represented an increase of $7.3 million from the prior year quarter, primarily driven by a $3.8 million increase in income on purchased future receivables at Knight Capital.

Non-interest income of $7.4 million for the nine months ended September 30, 2020 in our acquisitions segment was relatively unchanged from the prior year period.

Non-interest expense

Non-interest expense of $8.6 million for the quarter ended September 30, 2020 in our acquisitions segment represented an increase of $6.0 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in employee compensation and benefits of $3.2 million and an increase in general operating expenses of $1.7 million, due to operating expenses incurred at Knight Capital.

Non-interest expense of $27.9 million for the nine months ended September 30, 2020 in our acquisitions segment represented an increase of $21.6 million from the prior year period ended September 30, 2019, primarily reflecting an increase in employee compensation and benefits of $8.6 million at Knight Capital, REO impairment of $3.0 million, an increase in general operating expenses of $5.5 million and an increase in loan servicing expense of $1.0 million.

SBC Originations Segment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2020		2019		$ Change		2020		2019		$ Change
Interest income	$	35,287	$	32,354	$	2,933	$	112,052	$	91,182	$	20,870
Interest expense		(23,342)		(23,835)		493		(72,476)		(65,903)		(6,573)
Net interest income before provision for loan losses	$	11,945	$	8,519	$	3,426	$	39,576	$	25,279	$	14,297
Recoveries of (provision for) loan losses		117		(33)		150		(23,890)		(342)		(23,548)
Net interest income after provision for loan losses	$	12,062	$	8,486	$	3,576	$	15,686	$	24,937	$	(9,251)
Non-interest income (loss)		10,066		5,806		4,260		16,393		15,052		1,341
Non-interest expense		(9,339)		(6,855)		(2,484)		(28,357)		(19,022)		(9,335)
Total non-interest income (expense)	$	727	$	(1,049)	$	1,776	$	(11,964)	$	(3,970)	$	(7,994)
Net income (loss) before provision for income taxes	$	12,789	$	7,437	$	5,352	$	3,722	$	20,967	$	(17,245)

Interest income

Interest income of $35.3 million for the quarter ended September 30, 2020 in our SBC originations segment represented an increase of $2.9 million from the prior year quarter primarily reflecting an increase in SBC loan originations, resulting in higher average loan balances. Originated SBC loans contributed $13.4 million in interest income during the quarter ended September 30, 2020, representing a $2.6 million increase from the quarter ended September 30, 2019. Originated transitional loans contributed $21.4 million in interest income during the quarter ended September 30, 2020, representing a $1.2 million increase from the quarter ended September 30, 2019.

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Interest income of $112.1 million for the nine months ended September 30, 2020 in our SBC originations segment represented an increase of $20.9 million from the prior year period primarily reflecting an increase in SBC loan originations, resulting in higher average loan balances. Originated SBC loans contributed $44.2 million in interest income during the nine months ended September 30, 2020, representing an $8.4 million increase from the nine months ended September 30, 2019. Originated transitional loans contributed $66.0 million in interest income during the nine months ended September 30, 2020, representing a $14.6 million increase from the nine months ended September 30, 2019.

Interest expense

Interest expense of $23.3 million in our SBC originations segment was relatively unchanged from the prior year quarter ended September 30, 2019.

Interest expense of $72.5 million in our SBC originations segment represented an increase of $6.6 million from the prior year period ended September 30, 2019, primarily reflecting an increase in borrowing activities under our shorter-term secured borrowings and securitized debt obligations.

Provision for (Recoveries of) loan losses

Recoveries of loan losses of $0.1 million in our SBC originations segment was relatively unchanged from the prior year quarter ended September 30, 2019.

Provision for loan losses of $23.9 million for the nine months ended September 30, 2020 in our SBC originations segment represented an increase of $23.5 million from the prior year period. The increase in the provision for loan losses during the nine months ended September 30, 2020 was primarily the result of the implementation of the CECL impairment standard and the adverse change in the economic outlook due to the COVID-19 pandemic.

Non-interest income

Non-interest income of $10.1 million for the quarter ended September 30, 2020 in our SBC originations segment represented an increase of $4.3 million from the prior quarter ended September 30, 2019 primarily reflecting an increase in the fair value of owned Freddie Mac bonds in the quarter.

Non-interest income of $16.4 million for the nine months ended September 30, 2020 in our SBC originations segment represented an increase of $1.3 million from the prior year period ended September 30, 2019 reflecting an increase in realized gains on sales of Freddie Mac loans (including creation of servicing rights) of $5.0 million.

Non-interest expense

Non-interest expense of $9.3 million for the quarter ended September 30, 2020 in our SBC originations segment represented an increase of $2.5 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in employee compensation expense of $2.6 million, and an increase in servicing expense of $0.8 million.

Non-interest expense of $28.4 million for the nine months ended September 30, 2020 in our SBC originations segment represented an increase of $9.3 million from the prior year period ended September 30, 2019, primarily reflecting an increase in general operating expenses of $2.1 million, an increase in employee compensation expense of $6.0 million, and an increase in servicing expense of $1.5 million.

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SBA Originations, Acquisitions and Servicing Segment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2020		2019		$ Change		2020		2019		$ Change
Interest income	$	9,037	$	7,235	$	1,802	$	30,316	$	23,468	$	6,848
Interest expense		(6,414)		(2,739)		(3,675)		(21,766)		(11,529)		(10,237)
Net interest income before provision for loan losses	$	2,623	$	4,496	$	(1,873)	$	8,550	$	11,939	$	(3,389)
Provision for loan losses		(710)		(566)		(144)		(7,729)		(1,446)		(6,283)
Net interest income after provision for loan losses	$	1,913	$	3,930	$	(2,017)	$	821	$	10,493	$	(9,672)
Non-interest income		12,020		5,513		6,507		49,269		15,861		33,408
Non-interest expense		(6,344)		(6,062)		(282)		(22,837)		(17,854)		(4,983)
Total non-interest income (expense)	$	5,676	$	(549)	$	6,225	$	26,432	$	(1,993)	$	28,425
Net income (loss) before provision for income taxes	$	7,589	$	3,381	$	4,208	$	27,253	$	8,500	$	18,753

Interest income

Interest income of $9.0 million for the quarter ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $1.8 million from the prior year quarter ended September 30, 2019, due to an increase in loan origination activities during 2019 resulting in higher average loan balances in 2020.

Interest income of $30.3 million for the nine months ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $6.8 million from the prior year period ended September 30, 2019, due to an increase in loan origination activities during 2019 resulting in higher average loan balances in 2020.

Interest expense

Interest expense of $6.4 million for the quarter ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $3.7 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in borrowing activities under secured short-term borrowings due to the need to finance a greater number of loan originations.

Interest expense of $21.8 million for the nine months ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $10.2 million from the prior year period ended September 30, 2019, primarily reflecting an increase in borrowing activities under secured short-term borrowings due to the need to finance a greater number of loan originations.

Provision for loan losses

Provision for loan losses of $0.7 million for the quarter ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment was relatively unchanged from the prior year quarter ended September 30, 2019.

Provision for loan losses of $7.7 million for the nine months ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $6.3 million from the prior year period ended September 30, 2019, primarily the result of the implementation of the CECL impairment standard and the adverse change in the economic outlook due to the COVID-19 pandemic in 2020.

Non-interest income

Non-interest income of $12.0 million for the quarter ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $6.5 million from the prior year quarter ended September 30, 2019, primarily reflecting income from origination and servicing of PPP loans.

Non-interest income of $49.3 million for the nine months ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $33.4 million from the prior year period ended September 30, 2019, primarily reflecting income from origination and servicing of PPP loans.

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Non-interest expense

Non-interest expense of $6.3 million for the quarter ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment was relatively unchanged from the prior year quarter ended September 30, 2019.

Non-interest expense of $22.8 million for the nine months ended September 30, 2020 in our SBA originations, acquisitions, and servicing segment represented an increase of $5.0 million from the prior year period ended September 30, 2019, primarily reflecting an increase in other operating expenses of $5.0 million and an increase in servicing expense of $0.4 million, primarily due from origination and servicing of PPP loans.

Residential Mortgage Banking Segment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2020		2019		$ Change		2020		2019		$ Change
Interest income	$	2,218	$	1,254	$	964	$	5,465	$	3,099	$	2,366
Interest expense		(2,157)		(1,740)		(417)		(5,778)		(4,104)		(1,674)
Net interest income before provision for loan losses	$	61	$	(486)	$	547	$	(313)	$	(1,005)	$	692
Provision for loan losses		—		—		-		(500)		—		(500)
Net interest income after provision for loan losses	$	61	$	(486)	$	547	$	(813)	$	(1,005)	$	192
Non-interest income		77,178		27,292		49,886		178,190		60,366		117,824
Non-interest expense		(53,820)		(28,116)		(25,704)		(148,415)		(68,842)		(79,573)
Total non-interest income (expense)	$	23,358	$	(824)	$	24,182	$	29,775	$	(8,476)	$	38,251
Net income (loss) before provision for income taxes	$	23,419	$	(1,310)	$	24,729	$	28,962	$	(9,481)	$	38,443

Interest income

Interest income of $2.2 million in our residential mortgage banking segment for the quarter ended September 30, 2020 represented an increase of $1.0 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in overall loan originations, resulting in an increase in balance sheet carrying values of loans during the quarter ended September 30, 2020.

Interest income of $5.5 million in our residential mortgage banking segment for the nine months ended September 30, 2020 represented an increase of $2.4 million from the prior year period ended September 30, 2019, primarily reflecting an increase in overall loan originations, resulting in an increase in balance sheet carrying values of loans during the nine months ended September 30, 2020.

Interest expense

Interest expense of $2.2 million in our residential mortgage banking segment for the quarter ended September 30, 2020 represented an increase of $0.4 million from the prior year quarter ended September 30, 2019, primarily reflecting borrowing costs on a greater number of originated loans.

Interest expense of $5.8 million in our residential mortgage banking segment for the nine months ended September 30, 2020 represented an increase of $1.7 million from the prior year period ended September 30, 2019, primarily reflecting borrowing costs on a greater number of originated loans.

Provision for loan losses

Provision for loan losses of $0.5 million for the nine months ended September 30, 2020 in our residential mortgage banking segment represented an increase of $0.5 million from the prior year period ended September 30, 2019, primarily the result of financial hardships experienced by certain borrowers as a result of COVID-19.

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Non-interest income  

Non-interest income of $77.2 million in our residential mortgage banking segment for the quarter ended September 30, 2020 represented an increase of $49.9 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in revenue on residential mortgage banking activities of $46.5 million as a result of an increase in loan originations in the current year and by a decrease in unrealized losses on residential MSRs of $4.7 million during the quarter ended September 30, 2020 compared to $7.6 million of unrealized losses during the quarter ended September 30, 2019.

Non-interest income of $178.2 million in our residential mortgage banking segment for the nine months ended September 30, 2020 represented an increase of $117.8 million from the prior year period ended September 30, 2019, primarily reflecting an increase in revenue on residential mortgage banking activities of $128.1 million as a result of an increase in loan originations in the current year. This was offset by unrealized losses on residential MSRs of $33.3 million during the nine months ended September 30, 2020 compared to $21.1 million of unrealized losses during the nine months ended September 30, 2019.

Non-interest expense

Non-interest expense of $53.8 million in our residential mortgage banking segment for the quarter ended September 30, 2020 represented an increase of $25.7 million from the prior year quarter ended September 30, 2019, primarily reflecting an increase in variable expenses on residential mortgage banking activities of $13.6 million, an increase in employee compensation of $8.2 million, and an increase in loan servicing expense of $2.5 million.

Non-interest expense of $148.4 million in our residential mortgage banking segment for the nine months ended September 30, 2020 represented an increase of $79.6 million from the prior year period ended September 30, 2019, primarily reflecting increases in variable expenses on residential mortgage banking activities of $47.5 million, employee compensation of $22.6 million and loan servicing expense of $8.2 million.

Corporate- Other

Non-interest income

Non-interest income of $30.8 million in our Corporate – Other segment for the nine months ended September 30, 2019 represented a bargain purchase gain associated with the ORM merger.  There were no significant changes for the three months ended September 30, 2020 compared to the prior year quarter.

Non-interest expense

Non-interest expense of $9.4 million for the quarter ended September 30, 2020 increased $3.2 million from the prior year quarter ended September 30, 2019, primarily due to an increase in professional fees of $1.3 million and incentive fees due to our Manager of $1.1 million.

Non-interest expense of $25.9 million for the nine months ended September 30, 2020 increased $2.1 million from the prior year period ended September 30, 2019, primarily due to an increase in incentive fees and management fees due to our Manager of $5.6 million and an increase in professional fees of $2.1 million, partially offset by due to an increase in merger related expense of $6.0 million.

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.

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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 for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2020		2019		Change		2020		2019		Change
Net Income	$	35,363	$	12,427	$	22,936	$	18,510	$	54,120	$	(35,610)
Reconciling items:
Unrealized (gain) loss on mortgage servicing rights		4,688		7,582		(2,894)		33,169		21,049		12,120
Impact of the adoption of ASU 2016-13 on accrual loans		(7,248)		—		(7,248)		23,114		—		23,114
Non-recurring REO impairment		(114)		—		(114)		2,961		—		2,961
Merger transaction costs and other non-recurring expenses		998		51		947		3,220		6,914		(3,694)
Bargain purchase gain		—		—		—		—		(30,728)		30,728
Unrealized (gain) loss on mortgage-backed securities		—		85		(85)		185		205		(20)
Unrealized loss on de-designated cash flow hedges		—		—		—		2,118		—		2,118
Total reconciling items	$	(1,676)	$	7,718	$	(9,394)	$	64,767	$	(2,560)	$	67,327
Income tax adjustments		(1,561)		(1,896)		335		(10,703)		(5,263)		(5,440)
Core earnings	$	32,126	$	18,249	$	13,877	$	72,574	$	46,297	$	26,277
Less: Core earnings attributable to non-controlling interests		(731)		(474)		(257)		(2,160)		(1,352)		(808)
Less: Income attributable to participating shares		(339)		(79)		(260)		(1,087)		(240)		(847)
Core earnings attributable to common stockholders	$	31,056	$	17,696	$	13,360	$	69,814	$	44,705	$	25,109
Core Earnings per common share - basic and diluted	$	0.57	$	0.40	$	0.17	$	1.30	$	1.10	$	0.20

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Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Consolidated net income increased by $22.9 million, from $12.4 million during the three months ended September 30, 2019 to $35.4 million during the three months ended September 30, 2020. Core earnings increased by $13.9 million, from $18.2 million during the three months ended September 30, 2019 to $32.1 million during the three months ended September 30, 2020.

The increase in consolidated net income and core earnings was primarily the result of an increase in residential mortgage banking activities net of variable costs of $32.9 million.  

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Consolidated net income decreased by $35.6 million, from $54.1 million during the nine months ended September 30, 2019 to $18.5 million during the nine months ended September 30, 2020. Core earnings increased by $26.3 million, from $46.3 million during the nine months ended September 30, 2019 to $72.6 million during the nine months ended September 30, 2020.

The decrease in consolidated net income was the result of a number of factors, including a $35.4 million reduction due to the adoption of CECL during the three months ended March 31, 2020. In addition, unrealized losses on MSRs of $16.4 million and $3.0 million of non-recurring REO impairment experienced in the first quarter of 2020. In addition, we experienced a bargain purchase gain of $30.7 million, offset by merger related expenses of $5.5 million, as a result of the ORM merger transaction in the first quarter of 2019. This was partially offset by the $25.8 million of revenue recognized on loans originated under the SBA’s PPP program.

Core earnings increased by $26.3 million primarily due to $25.8 million of revenue recognized on loans originated under the SBA’s PPP program and revenue growth in our residential mortgage banking segment.

COVID-19 Impact on Operating Results

The significant and wide-ranging response of international, federal, state and local public health and governmental authorities to the COVID-19 pandemic in regions across the United States and the world, including the imposition of quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, and the volatile economic, business and financial market conditions resulting therefrom, are expected to negatively impact our business, financial performance and operating results in later periods of 2020. Although we are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health efforts to contain and combat the spread of COVID-19, we will likely experience material deterioration in our financial performance and operating results, revenues, cash flow and/or profitability in one or more of the remaining periods in 2020 compared to the corresponding prior-year periods and compared to our expectations at the beginning of our 2020 fiscal year. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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 of common stock outstanding (including any restricted shares of common stock and any other shares of common stock underlying awards granted under our 2012 equity incentive plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters; provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative core 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 merger with ZAIS Financial Corp. (“ZAIS Financial merger”), whichever is less.

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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 common stock or 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 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, Corporate debt, and Convertible Notes, and net cash provided by operating activities.

We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our real estate-related assets, the tenants in the properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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Cash flow activity

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Cash flows provided by (used in) operating activities	$	(48,289)	$	(7,063)	$	(261)	$	(64,870)
Cash flows provided by (used in) investing activities	$	129,694	$	(245,446)	$	(7,688)	$	(920,245)
Cash flows provided by (used in) financing activities	$	(207,044)	$	255,607	$	103,715	$	995,283
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(125,639)	$	3,098	$	95,766	$	10,168

Three months ended September 30, 2020 compared to the three months ended September 30, 2019

Cash, cash equivalents, and restricted cash decreased by $125.6 million during the current quarter ended September 30, 2020, reflecting:

● Net cash used in operating activities of $48.3 million for the current quarter related primarily to:

- Cash outflows on originations of new loans held for sale of $1,392.9 million and gains on sales of residential mortgages held for sale of $61.1 million. These reductions in cash were partially offset by inflows relating to repayments and sales of loans, held for sale at fair value of $1,415.2 million.

● Net cash provided by investing activities of $129.7 million for the current quarter related primarily to:

- Cash inflows of $302.2 million relating to outflows repayments sales of loans, net, partially offset by purchases and originations of loans, net of $149.0 million and investment in unconsolidated joint ventures of $14.6 million.

● Net cash used in financing activities of $207.0 million for the current quarter related primarily to:

- Net repayment of secured borrowings of $77.2 million, payment of securitized debt obligations of $84.2 million, dividend payments of $14.5 million, and repurchase of the Company’s stock of $9.2 million.

Cash, cash equivalents, and restricted cash increased by $3.1 million during the previous quarter ended September 30, 2019, reflecting:

● Net cash used in operating activities of $7.1 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 $802.4 million,   offset by cash outflows on originations and purchases of new loans of $805.1 million.

● Net cash used in investing activities of $245.4 million for the current quarter related primarily to:

- Cash outflows of $418.7 million relating to originations and purchases of loans, held at fair value and held-for-investment loans, offset by cash inflows relating to repayments of loans, held at fair value and held-for-investment of $170.6 million and sales and repayments of MBS of $4.3 million.

● Net cash provided by financing activities of $255.6 million for the current quarter related primarily to:

- Net proceeds from secured borrowings of $327.0 million, proceeds from the issuance of corporate debt of $57.5 million, offset by net repayments of securitized debt of $103.7 million.

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

Cash, cash equivalents, and restricted cash increased by $95.8 million during the nine months ended September 30, 2020, reflecting:

● Net cash used in operating activities of $0.3 million for the current quarter related primarily to:

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- Cash outflows on originations of new loans held for sale of $3,675.8 million and gains on sales of residential mortgages held for sale of $143.7 million. These reductions in cash were partially offset by inflows relating to repayments and sales of loans, held for sale at fair value of $3,680.5 million.

● Net cash used in investing activities of $7.7 million for the current quarter related primarily to:

- Cash outflows of $677.0 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 $673.9 million, sales and repayments of MBS of $10.5 million, and investment in unconsolidated joint ventures of $16.3 million.

● Net cash provided by financing activities of $103.7 million for the current quarter related primarily to:

- Net proceeds from securitized debt of $242.9 million, partially offset by net repayments of secured borrowings of $11.4 million and repayments of guaranteed loan financing of $78.8 million.

Cash, cash equivalents, and restricted cash increased by $10.2 million during the previous nine months ended September 30, 2019, reflecting:

● Net cash used in operating activities of $64.9 million related primarily to:

- Cash outflows on originations and purchases of new loans, held-for-sale, at fair value of $1,889.8 million and other general changes to operating assets and liabilities of $7.8 million, partially offset by cash inflows on sales and pay-downs of loans of $1,859.5 million.

● Net cash used in investing activities of $920.2 million related primarily to:

- Cash outflows of $1,488.1 million relating to originations and purchases of loans, held-for-investment, purchases of MBS of $9.6 million, partially offset by cash inflows relating to repayments of loans, held at fair value and held-for-investment of $550.2 million and sales and repayments of MBS of $9.7 million.  

● Net cash provided by financing activities of $995.3 million related primarily to:

- Net proceeds from securitized debt obligations of $564.1 million and secured borrowings of $469.4 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
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
Q2 2019		612,383		605,173		612,383
Q3 2019		876,163		744,273		876,163
Q4 2019		809,189		842,676		876,163
Q1 2020		1,159,357		984,273		1,159,357
Q2 2020		714,162		936,760		1,057,522
Q3 2020		624,549		669,356		831,200

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

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repurchase agreements. These balances are typically paid down as we securitize our acquired and originated loan assets and issue senior bonds.

The net increase in the outstanding balances during 2019 was primarily due to the increased loan origination and acquisition activity, which resulted in a greater need to finance these assets, which was accomplished using borrowings under repurchase agreements. These balances were partially paid down during the fourth quarter of 2019 using proceeds received from our securitization activities and equity issuances.

The net decrease in the outstanding balance during 2020 was primarily due to securitization of our acquired and originated loan assets in the second quarter of 2020.

Debt facilities

We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by loans and investments. The following is a summary of our debt facilities:

									Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size			Pledged Assets Carrying Value		September 30, 2020		December 31, 2019
JPMorgan	Acquired loans, SBA loans	June 2021	1M L + 1.75 to 2.75%	$	250,000		$	44,840	$	30,742	$	88,972
Keybank	Freddie Mac loans	February 2021	1M L + 1.30%		100,000			20,486		20,242		21,513
East West Bank	SBA loans	October 2022	Prime - 0.821 to + 0.29%		50,000			40,550		33,184		13,294
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50%		234,420	(a)​		53,021		32,267		37,646
FCB	Acquired loans	June 2021	2.75%		—			—		—		1,354
Comerica Bank	Residential loans	March 2021	1M L + 1.75%		125,000			90,515		83,704		56,822
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000			123,980		118,581		52,151
Origin Bank	Residential loans	June 2021	Variable Pricing		60,000			25,093		23,471		15,343
Associated Bank	Residential loans	November 2020	1M L + 1.50%		60,000			47,918		44,489		5,823
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000			49,140		37,700		39,900
Credit Suisse	Purchased future receivables, PPP loans	June 2021	1M L + 4.50%		150,000			—		—		34,900
Rabobank	Real estate	January 2021	4.22%		14,500			—		—		12,485
Federal Reserve Bank of Minneapolis	PPP loans	April 2022	0.35%		105,222			105,089		105,005		—
Bank of the Sierra	Real estate	August 2050	3.25%		22,750			37,562		22,687		—
Total borrowings under credit facilities (b)				$	1,371,892		$	638,194	$	552,072	$	380,203
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 1.875 to 2.125%	$	500,000		$	114,196	$	103,307	$	124,718
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00 to 2.40%		350,000			232,524		161,100		141,356
JPMorgan	Transitional loans	December 2020	1M L + 2.25 to 4.00%		400,000			265,599		175,764		250,466
JPMorgan	MBS	March 2021	1.54 to 4.75%		70,875			115,128		70,875		93,715
Deutsche Bank	MBS	January 2021	3.54%		16,354			20,189		16,354		44,730
Citibank	MBS	November 2020	3.25 to 3.76%		58,422			114,749		58,422		56,189
Bank of America	MBS	Matured	1.31 to 1.61%		—			—		—		38,954
RBC	MBS	February 2021	3.05 to 4.43%		38,727			61,595		38,727		59,061
Total borrowings under repurchase agreements (c)				$	1,434,378		$	923,980	$	624,549	$	809,189
Total secured borrowings				$	2,806,270		$	1,562,174	$	1,176,621	$	1,189,392

(a) The current facility size is €200.0 million, but has been converted into USD for purposes of this disclosure.

(b) The weighted average interest rate of borrowings under credit facilities was 2.8% and 4.0% as of September 30, 2020 and December 31, 2019, respectively.

(c) The weighted average interest rate of borrowings under repurchase agreements was 3.3% and 4.2% as of September 30, 2020 and December 31, 2019, respectively.

Deutsche Bank loan repurchase facility

Our subsidiaries, ReadyCap Commercial, LLC (“ReadyCap Commercial”), Sutherland Asset I, LLC (“Sutherland Asset I”), Ready Capital Subsidiary REIT I, LLC (“Ready Capital Sub-REIT”), and Sutherland Warehouse Trust II, LLC (“Sutherland Warehouse Trust II”) renewed their master repurchase agreement in January 2020, pursuant to which ReadyCap Commercial, Sutherland Asset I and Sutherland Warehouse Trust II may be advanced an aggregate principal amount of up to $350 million on originated mortgage loans (the “DB Loan Repurchase Facility”).

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As of September 30, 2020, we had $161.1 million outstanding under the DB Loan Repurchase Facility. The DB Loan Repurchase Facility is used to finance SBC loans, and the interest rate is LIBOR plus a spread, which varies depending on the type and age of the loan. The DB Loan Repurchase Facility has been extended through November 2021 and our subsidiaries have an option to extend the DB Loan Repurchase Facility for an additional year, subject to certain conditions. Up to 100% of the then-current unpaid obligations of ReadyCap Commercial, Sutherland Asset I, and Sutherland Warehouse Trust II are fully guaranteed by us.

The eligible assets for the DB Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties subject to certain eligibility criteria, such as property type, geographical location, LTV ratios, debt yield and debt service coverage ratios. The principal amount paid by the bank for each mortgage loan is based on a percentage of the lesser of the mortgaged property value or the principal balance of such mortgage loan. ReadyCap Commercial, Sutherland Asset I, 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 1/15 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”), Sutherland Warehouse Trust, LLC (“Sutherland Warehouse Trust”) entered into a master repurchase agreement in December 2015, pursuant to which ReadyCap Warehouse Financing, Sutherland Warehouse Trust and Ready Capital Mortgage Depositor II, LLC (which joined as a seller in October 2019), may sell, and later repurchase, mortgage loans in an aggregate principal amount of up to $400 million. Our subsidiaries renewed their master repurchase agreement with JPMorgan in February 2020 (the “JPM Loan Repurchase Facility”).

As of September 30, 2020, we had $175.8 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 up to 25% of the then-current unpaid obligations of ReadyCap Warehouse Financing, Sutherland Warehouse Trust and Ready Capital Mortgage Depositor II, LLC 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) $15.0 million.

Citibank loan repurchase agreement

Our subsidiaries, Waterfall Commercial Depositor, LLC, Sutherland Asset I, LLC, Ready Capital Subsidiary REIT I, LLC, and ReadyCap Commercial, LLC renewed a master repurchase agreement in August 2020 with Citibank, N.A. (the "Citi Loan Repurchase Facility" and, together with the DB Loan Repurchase Facility and the JPM Loan Repurchase Facility, the "Loan Repurchase Facilities"), pursuant to which Waterfall Commercial Depositor and Sutherland Asset I 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.

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As of September 30, 2020, we had $103.3 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 a spread, depending on asset characteristics. The Citi Loan Repurchase Facility is committed for a period of 364 days, and up to 25% of the then-current unpaid obligations of Waterfall Commercial Depositor, Sutherland Asset I, and ReadyCap Commercial, LLC 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 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 includes financial maintenance covenants, which include (i) our operating partnership’s net asset value not (A) declining more than 15% in any calendar month, (B) declining more than 25% in any calendar quarter, (C) declining more than 35% in any calendar year, or (D) declining more than 50% from our operating partnership’s highest net asset value set forth in any audited financial statement provided to the bank; (ii) our operating partnership maintaining liquidity in an amount equal to at least 1% of our outstanding indebtedness; 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 September 30, 2020, we had $184.4 million of secured borrowings related to SBC ABS and pledged Trust Certificates with four counterparties (lenders).

General statements regarding loan and securities repurchase facilities

At September 30, 2020, we had $850.1 million in fair value of Trust Certificates and loans pledged against our borrowings under the Loan Repurchase Facilities and $73.9 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.

If the estimated fair values of the assets increase due to changes in market interest rates or other market factors, lenders may release collateral back to us. Margin calls may result from a decline in the value of the investments securing the Loan Repurchase Facilities 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

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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 2020 providing for a credit facility of up to $250 million. As of September 30, 2020, we had $30.7 million outstanding under this credit facility. The credit facility is structured as a secured loan facility in which ReadyCap Commercial, 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 effective date of the facility plus (b) 50% of the net proceeds of any equity issuance after the effective 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 recourse indebtedness plus (2) amounts due under the repurchase agreement and (b) $15.0 million. The amended terms have an interest rate based on utilization ranging from one month LIBOR (reset daily), plus a spread. The term of the facility is one year, with an option to extend for an additional year.

At September 30, 2020, we had a leverage ratio of 2.0x on a recourse debt-to-equity basis.

We maintain certain assets, which, from time to time, may include cash, unpledged SBC loans, SBC ABS and short term investments (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by our counterparties, or collectively, the “Cushion”, to meet routine margin calls and protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of our investments, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. At September 30, 2020, 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 $50.0 million. The agreement extends for two years, with an additional one year extension at the Company’s request and pays interest equal to the Prime Rate minus 0.821% on SBA 7(a) guaranteed loans and the Prime Rate plus 0.029% on unguaranteed loans.

Other credit facilities

GMFS funds its origination platform through warehouse lines of credit with five counterparties with total borrowings outstanding of $307.9 million at September 30, 2020. GMFS utilizes committed warehouse lines of credit agreements ranging from $50.0 million to $150.0 million, with expiration dates between November 2020 and September 2023. The lines of credit are collateralized by the underlying mortgages, 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 September 30, 2020.

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Public offerings

Debt offerings

Convertible notes

On August 9, 2017, we closed an underwritten public sale of $115.0 million aggregate principal amount of its 7.00% convertible senior notes due 2023 (the “Convertible Notes”). The Convertible Notes will mature on August 15, 2023, unless earlier repurchased, redeemed or converted. During certain periods and subject to certain conditions, the Convertible Notes will be convertible by holders into shares of our common stock 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 our discretion, cash, shares of our common stock or a combination thereof.

We 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 us to purchase the Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest.

As of September 30, 2020, we were in compliance with all covenants with respect to the Convertible Notes.

Corporate debt

On April 27, 2018, we completed the public offer and sale of $50.0 million aggregate principal amount of its 6.50% Senior Notes due 2021(the “2021 Notes”). We issued the 2021 Notes under a base indenture, dated August 9, 2017, as supplemented by the second supplemental indenture, dated as of April 27, 2018, between us and U.S. Bank National Association, as trustee. The 2021 Notes 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 2021 Notes will mature on April 30, 2021, unless earlier redeemed or repurchased.

Prior to April 30, 2019, the 2021 Notes are not redeemable by us. We may redeem for cash all or any portion of the 2021 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 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On or after April 30, 2020, we may redeem for cash all or any portion of the 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If we undergo a change of control repurchase event, holders may require it to purchase the 2021 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 2021 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 2021 Notes are our 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 2021 Notes rank equal in right of payment to any of our existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of 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 us) preferred stock, if any, of its subsidiaries.

On July 22, 2019, we completed the public offer and sale of $57.5 million aggregate principal amount of its 6.20% Senior Notes due 2026 (the “2026 Notes” and together with the 2021 Notes, the “Corporate Debt”), which includes $7.5 million aggregate principal amount of the 2026 Notes relating to the full exercise of the underwriters’ over-allotment option. The net proceeds from the sale of the 2026 Notes are approximately $55.3 million, after deducting underwriters’ discount and estimated offering expenses. We will contribute the net proceeds to Sutherland Partners, L.P. (the “Operating Partnership”), its operating partnership subsidiary, in exchange for the issuance by the Operating Partnership of a senior unsecured note with terms that are substantially equivalent to the terms of the 2026 Notes. The Operating Partnership intends to use the net proceeds to originate or acquire our target assets and for general business purposes.

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

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

The 2026 Notes are our senior unsecured obligations and will not be guaranteed by any of its subsidiaries, except to the extent described in the Indenture upon the occurrence of certain events.  The 2026 Notes rank equal in right of payment to any of our existing and future unsecured and unsubordinated indebtedness; effectively junior in right of payment to any of 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 us) preferred stock, if any, of its subsidiaries.

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

As of September 30, 2020, we were in compliance with all covenants with respect to the corporate debt.

Equity offering

In December 2019, we completed a public offering of 6,000,000 shares of our common stock at a public offering price of $15.30 per share and an additional 900,000 shares of common stock at a public offering price of $15.30 per share pursuant to the underwriter’s full exercise of the over-allotment option in January 2020. Proceeds, net of offering costs and expenses were $ 91.8 million and $13.8 million for December 2019 and January 2020, respectively. There were no equity offerings during 2018.

U.S. federal income tax proposed regulations

The discussion under the heading “Additional U.S. Federal Income Tax Considerations” in our Prospectus dated August 31, 2018, describes certain tax legislative changes applicable to us. As described in the discussion under the heading "Additional U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Legislation – Income Accrual," we and our subsidiaries are required to recognize certain items of income for U.S. federal income tax purposes no later than we would report such items on our financial statements. Recently proposed Treasury regulations, which are not yet in effect but upon which taxpayers may rely, generally would exclude, among other items, original issue discount and market discount income from the applicability of this rule

Other long term financing

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 ReadyCap Commercial. The funds were used to fund new SBC and SBA loan originations and new SBC loan acquisitions.

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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 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 September 30, 2020, we were in compliance with all covenants with respect to the Senior Secured Notes.

Securitization transactions

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. 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.

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

Deal Name	Collateral Asset Class	Issuance	Active / Collapsed	Bonds Issued (in $ millions)
Trusts (Firm sponsored)
Waterfall Victoria Mortgage Trust 2011-1 (SBC1)	SBC Acquired loans	February 2011	Collapsed	$	40.5
Waterfall Victoria Mortgage Trust 2011-3 (SBC3)	SBC Acquired loans	October 2011	Collapsed		143.4
Sutherland Commercial Mortgage Trust 2015-4 (SBC4)	SBC Acquired loans	August 2015	Collapsed		125.4
Sutherland Commercial Mortgage Trust 2018 (SBC7)	SBC Acquired loans	November 2018	Active		217.0
ReadyCap Lending Small Business Trust 2015-1 (RCLT 2015-1)	Acquired SBA 7(a) loans	June 2015	Collapsed		189.5
ReadyCap Lending Small Business Loan Trust 2019-2 (RCLT 2019-2)	Originated SBA 7(a) loans, Acquired SBA 7(a) loans	December 2019	Active		131.0
Real Estate Mortgage Investment Conduits (REMICs)
ReadyCap Commercial Mortgage Trust 2014-1 (RCMT 2014-1)	SBC Originated conventional	September 2014	Active	$	181.7
ReadyCap Commercial Mortgage Trust 2015-2 (RCMT 2015-2)	SBC Originated conventional	November 2015	Active		218.8
ReadyCap Commercial Mortgage Trust 2016-3 (RCMT 2016-3)	SBC Originated conventional	November 2016	Active		162.1
ReadyCap Commercial Mortgage Trust 2018-4 (RCMT 2018-4)	SBC Originated conventional	March 2018	Active		165.0
Ready Capital Mortgage Trust 2019-5 (RCMT 2019-5)	SBC Originated conventional	January 2019	Active		355.8
Ready Capital Mortgage Trust 2019-6 (RCMT 2019-6)	SBC Originated conventional	November 2019	Active		430.7
Waterfall Victoria Mortgage Trust 2011-2 (SBC2)	SBC Acquired loans	March 2011	Active		97.6
Sutherland Commercial Mortgage Trust 2018 (SBC6)	SBC Acquired loans	August 2017	Active		139.4
Sutherland Commercial Mortgage Trust 2019 (SBC8)	SBC Acquired loans	June 2019	Active		306.5
Sutherland Commercial Mortgage Trust 2020 (SBC9)	SBC Acquired loans	June 2020	Active		172.4
Collateralized Loan Obligations (CLOs)
Ready Capital Mortgage Financing 2017– FL1	SBC Originated transitional	August 2017	Collapsed	$	198.8
Ready Capital Mortgage Financing 2018 – FL2	SBC Originated transitional	June 2018	Active		217.1
Ready Capital Mortgage Financing 2019 – FL3	SBC Originated transitional	April 2019	Active		320.2
Ready Capital Mortgage Financing 2020 – FL4	SBC Originated transitional	June 2020	Active		393.8
Trusts (Non-firm sponsored)
Freddie Mac Small Balance Mortgage Trust 2016-SB11	Originated agency multi-family	January 2016	Active	$	110.0
Freddie Mac Small Balance Mortgage Trust 2016-SB18	Originated agency multi-family	July 2016	Active		118.0
Freddie Mac Small Balance Mortgage Trust 2017-SB33	Originated agency multi-family	June 2017	Active		197.9
Freddie Mac Small Balance Mortgage Trust 2018-SB45	Originated agency multi-family	January 2018	Active		362.0
Freddie Mac Small Balance Mortgage Trust 2018-SB52	Originated agency multi-family	September 2018	Active		505.0
Freddie Mac Small Balance Mortgage Trust 2018-SB56	Originated agency multi-family	December 2018	Active		507.3
Key Commercial Mortgage Trust 2020-S3(1)	SBC Originated conventional	September 2020	Active		250.0
(1) Contributed portion of assets into trust

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 all firm sponsored securitizations; therefore they are consolidated in our financial statements.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Other than the items referenced above, there have been no material changes to our contractual obligations for the three and nine months ended September 30, 2020.  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.

As of the date of this quarterly report on Form 10-Q, we had no off-balance sheet arrangements, other than as disclosed.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time. The following discussion describes the critical accounting estimates that apply to our operations and require complex management judgment. This summary should be read in conjunction with a more complete discussion of our accounting policies and use of estimates included in “Notes to Consolidated Financial Statements, Note 3 – Summary of Significant

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Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in our 2019 annual report on Form 10-K.

Loan impairment and 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 (“LTV”) 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.

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost. The allowance for loan losses required under ASU 2016-13 is deducted from the respective loans’ amortized cost basis on our unaudited consolidated balance sheets. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

In connection with the Company’s adoption of ASU 2016-13 on January 1, 2020, the Company implemented new processes including the utilization of loan loss forecasting models, updates to the Company’s reserve policy documentation, changes to internal reporting processes and related internal controls. The Company has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2019 and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. The Company might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.

The Company estimates the CECL expected credit losses for its loan portfolio at the individual loan level. Significant inputs to the Company’s forecasting methods include (i) key loan-specific inputs such as LTV, vintage year, loan-term, underlying property type, occupancy, geographic location, and others, and (ii) a macro-economic forecast. These estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.

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

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.

Significant judgment is required when evaluating loans for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 6 – Loans and Allowance for Loan Losses” included in Item 8, “Financial Statements and Supplementary Data,” in this quarterly report on Form 10-Q for results of our loan impairment evaluation.

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Valuation of financial assets and liabilities carried at fair value

We measure our MBS, derivative assets and liabilities, residential mortgage servicing rights, and any assets or liabilities where we have elected the fair value option at fair value, including certain loans we have originated that are expected to be sold to third parties or securitized in the near term.

We have established valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that valuation approaches are consistently applied, and the assumptions and inputs are reasonable. We also have established processes to provide that the valuation methodologies, techniques and approaches for investments that are categorized within Level 3 of the ASC 820 Fair Value Measurement fair value hierarchy (the “fair value hierarchy”) are fair, consistent and verifiable. Our processes provide a framework that ensures the oversight of our fair value methodologies, techniques, validation procedures, and results.

When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Refer to “Notes to Consolidated Financial Statements, Note 7 – Fair Value Measurements” included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K for a more complete discussion of our critical accounting estimates as they pertain to fair value measurements.

Servicing rights impairment

Servicing rights, at amortized cost, are initially recorded at fair value and subsequently carried at amortized cost. We have elected the fair value option on our residential mortgage servicing rights, which are not subject to impairment.  

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

Significant judgment is required when evaluating servicing rights for impairment; therefore, actual results over time could be materially different. Refer to “Notes to Consolidated Financial Statements, Note 9 – Servicing Rights” included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K for a more complete discussion of our critical accounting estimates as they pertain to servicing rights impairment.

Refer to “Notes to Consolidated Financial Statements, Note 4– Recently Issued Accounting Pronouncements” included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K for a discussion of recent accounting developments and the expected impact to the Company.

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

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risk, off-balance sheet risk and prepayment risk. Many of these risks have been magnified due to the continuing economic disruptions caused by the COVID-19 pandemic; however, while we continue to monitor the pandemic its impact on such risks remains uncertain and difficult to predict.

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.

The COVID-19 pandemic has adversely impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in property renovations currently planned or underway. These negative conditions may persist into the future and impair borrower’s ability to pay principal and interest due under our loan agreements. We maintain robust asset management relationships with our borrowers and have leveraged these relationships to address the potential impact of the COVID-19 pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality and retail assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans. Accordingly, we have discussed with our borrowers potential near-term defensive loan modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic, and which would typically be coupled with an additional equity commitment and/or guaranty from sponsors. As of September  30, 2020, approximately 1.8% of the loans in our commercial real estate portfolio are in forbearance plans. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments.

Interest rate risk

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

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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 September 30, 2020, assuming an immediate increase or decrease of 25, 50, 75 and 100 basis points in interest rates:

		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	$	4,249	$	8,498	$	12,748	$	16,997	$	(951)	$	(1,815)	$	(2,644)	$	(3,453)
Interest rate swap hedges		689		1,379		2,068		2,757		(689)		(1,379)		(2,068)		(2,757)
Total	$	4,938	$	9,877	$	14,816	$	19,754	$	(1,640)	$	(3,194)	$	(4,712)	$	(6,210)
Liabilities
Recourse debt	$	(2,067)	$	(4,134)	$	(6,201)	$	(8,269)	$	1,350	$	1,433	$	1,516	$	1,599
Non-recourse debt		(2,057)		(4,113)		(6,170)		(8,227)		1,376		1,759		2,143		2,526
Total	$	(4,124)	$	(8,247)	$	(12,371)	$	(16,496)	$	2,726	$	3,192	$	3,659	$	4,125
Total Net Impact to Net Interest Income (Expense)	$	814	$	1,630	$	2,445	$	3,258	$	1,086	$	(2)	$	(1,053)	$	(2,085)

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 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

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agreements. This could have a negative impact on our results of operations. In some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Real estate risk

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 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.

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The following table summarizes the Company’s exposure to its repurchase agreements and credit facilities counterparties at September 30, 2020:

(in thousands)	Borrowings under repurchase agreements and credit facilities (1)	Assets pledged on borrowings under repurchase agreements and credit facilities	Net Exposure	Exposure as a Percentage of Total Assets
Total Counterparty Exposure	$ 1,176,621	$ 1,562,174	$ 385,553	7.3	%
(1) The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and credit facilities, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets

The following table presents information with respect to any counterparty for repurchase agreements for which our Company had greater than 5% of stockholders’ equity at risk in the aggregate at September 30, 2020:

(in thousands)	Counterparty Rating (1)	Amount of Risk (2)	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity
JPMorgan Chase Bank, N.A.	A+ / Aa2	$ 134,088	6	16.3	%
Citibank, N.A.	A+ / Aa3	$ 67,216	2	8.2	%
Deutsche Bank AG	BBB+ / A3	$ 75,259	17	9.1	%
(1) The counterparty rating presented is the long-term issuer credit rating as rated at September 30, 2020 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.

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

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appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of September 30, 2020. 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 and nine months ended September 30, 2020 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, 2019. 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.

The current outbreak of COVID-19 has caused severe disruptions in the U.S. and global economy and to our business, and may continue to have an adverse impact on our performance, financial condition and results of operations.

The outbreak of COVID-19 in many countries continues to adversely impact global economic activity and has contributed to significant volatility in financial markets. On March 11, 2020, the World Health Organization publicly characterized COVID-19 as a pandemic. On March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The global impact of the outbreak has been rapidly evolving, and as cases of the virus increased around the world, governments and organizations have implemented a variety of actions to mobilize efforts to mitigate the ongoing and expected impact. Many governments have reacted by instituting quarantines, restrictions on travel, school closures, bans on public events and on public gatherings, “shelter in place” or “stay at home” rules, restrictions on types of business that may continue to operate, and/or restrictions on types of construction projects that may continue. Although, in certain cases, exceptions may be available for certain essential operations and businesses, and in other cases certain of these restrictions have been relaxed or phased out, many of these or similar restrictions remain in place, continue to be implemented or additional restrictions are being considered. There is no assurance that any exceptions or easing of restrictions will enable us to avoid adverse effects to our results of operations and business. Further, such actions have created, and expect to continue to create, disruption in real estate financing transactions and the commercial real estate market and adversely impact a number of industries, including many small businesses throughout the United States. The outbreak has triggered a period of economic slowdown and experts are uncertain as to how long these conditions may last.

In the United States, there have been a number of federal, state and local government initiatives applicable to a significant number of mortgage loans, to manage the spread of the virus and its impact on the economy, financial markets and continuity of businesses of all sizes and industries. On March 27, 2020, the U.S. Congress approved, and President Trump signed into law, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides approximately $2 trillion in financial assistance to individuals and businesses resulting from the outbreak of COVID-19. The CARES Act, among other things, provides certain measures to support individuals and businesses in

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maintaining solvency through monetary relief, including in the form of financing and loan forgiveness and/or forbearance.  Although this action by the federal government, together with other actions taken at the federal, regional and local levels, are intended to support these economies, there is no guarantee that such measures will provide sufficient relief to avoid continued adverse effects on the economy and potentially a recession. Similar actions have been taken by governments around the globe but as is the case in the United States there is no assurance that such measures will prevent further economic disruptions, which may be significant, around the world.

We believe that both our and our Manager’s ability to operate, our level of business activity and the profitability of our business, as well as the values of, and the cash flows from, the assets we own have been, and will continue to be, impacted by the effects of COVID-19 and could in the future be impacted by another pandemic or other major public health issues. While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events.  

The effects of COVID-19 have adversely impacted the value of our assets, our business, financial condition and results of operations and cash flows, and both our and our Manager’s ability to operate successfully. Some of the factors that impacted us to date and may continue to affect us include the following:

● to the extent the value of commercial real estate declines, which would also likely negatively impact the value of the loans we own, we could become subject to additional margin calls under our repurchase agreements;

● our ability to continue to satisfy any additional margin calls from our lenders and to the extent we are unable to satisfy any such margin calls, any acceleration of our indebtedness, increase in the interest rate on advanced funds, termination of our ability to borrow funds from them, or foreclosure by our lenders on our assets;

● difficulty accessing debt and equity capital on attractive terms, or at all;

● a severe disruption and instability in the financial markets or deteriorations in credit and financing conditions may jeopardize the solvency and financial wherewithal of counterparties with whom we do business, including our borrowers and could affect our or our counterparties’ ability to make regular payments of principal and interest (whether due to an inability to make such payments, an unwillingness to make such payments, or a waiver of the requirement to make such payments on a timely basis or at all) and our ability to recover the full value of our loan, thus reducing our earnings and liquidity;

● unavailability of information, resulting in restricted access to key inputs used to derive certain estimates and assumptions made in connection with evaluating our loans for impairments and establishing allowances for loan losses;

● our ability to remain in compliance with the financial covenants under our borrowings, including in the event of impairments in the value of the loans we own;

● disruptions to the efficient function of our operations because of, among other factors, any inability to access short-term or long-term financing for the loans we make;

● our need to sell assets, including at a loss;

● to the extent we elect or are forced to reduce our loan origination activities, such as the curtailment in the origination of purchased future receivables during the second quarter of 2020;

● inability of other third-party vendors we rely on to conduct our business to operate effectively and continue to support our business and operations, including vendors that provide IT services, legal and accounting services, or other operational support services;

● effects of legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues, which could result in additional regulation or restrictions affecting the conduct of our business; and

● our ability to ensure operational continuity in the event our business continuity plan is not effective or ineffectually implemented or deployed during a disruption.

The rapid development and fluidity of the circumstances resulting from this pandemic precludes any prediction as to the ultimate adverse impact of COVID-19. There are no comparable recent events which provide guidance as to the effect of the spread of COVID-19 and a pandemic on our business. Nevertheless, COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows. Moreover, many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

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Holders of our common stock may not receive distributions or may receive them on a delayed basis and distributions may not be declared or paid or distributions may decrease over time. Distributions may be paid in shares of common stock, cash or a combination of shares of common stock and cash. Changes in the amount and timing of distributions we pay or in the tax characterization of distributions we pay may adversely affect the market price of our common stock or may result in holders of our common stock being taxed on distributions at a higher rate than initially expected.

Our distributions are driven by a variety of factors, including our minimum distribution requirements under the REIT tax laws and our REIT taxable income (including certain items of non-cash income) as calculated pursuant to the Code. We are generally required to distribute to our stockholders at least 90% of our REIT taxable income, although our reported financial results for GAAP purposes may differ materially from our REIT taxable income.

In the year ended December 31, 2019, we paid $63.3 million of cash distributions on our common stock, representing cumulative distributions of $1.60 per share. On March 11, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.40 per share of common stock. On March 20, 2020, the Company announced that the dividend would be paid in a combination of cash and common stock on April 30, 2020 to common stockholders of record as of the close of business of March 31, 2020, which resulted in the issuance of approximately 2.8 million shares of common stock on April 30, 2020. On June 15, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.25 per share of common stock to common stockholders of record as of the close of business on June 30, 2020. On September 15, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock to common stockholders of record as of the close of business on September 30, 2020.

We continue to prudently evaluate our liquidity and review the ability and advisability of paying distributions in the future in light of our financial condition and the applicable minimum distribution requirements under applicable REIT tax laws and regulations. Our ability to continue to pay quarterly distributions in 2020 may be adversely affected by a number of factors, including the risk factors described in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2019. Further, we continue to monitor our cash balances and cash flows and may consider paying future distributions in shares of common stock, cash, or a combination of shares of common stock and cash. Any decision regarding the composition of such distributions will be made following an analysis and review of our liquidity, including our cash balances and cash flows, at the time of payment of the distribution. For example, we may determine to distribute shares of common stock in lieu of cash, or in combination with cash, in respect of our distribution obligations, which, among other things, could result in dilution to existing stockholders.

To the extent we determine that future distributions would represent a return of capital to investors or would not be required under applicable REIT tax laws and regulations, rather than the distribution of income, we may determine to discontinue distribution payments until such time that distributions would again represent a distribution of income or be required under applicable REIT tax laws and regulations. Any reduction or elimination of our payment of distributions would not only reduce the amount of distributions you would receive as a holder of our common stock, but could also have the effect of reducing the market price of our common stock and our ability to raise capital in future securities offerings.

In addition, the rate at which holders of our common stock are taxed on distributions we pay and the characterization of our distribution — be it ordinary income, capital gains, or a return of capital — could have an impact on the market price of our common stock. After we announce the expected characterization of distributions we have paid, the actual characterization (and, therefore, the rate at which holders of our common stock are taxed on the distributions they have received) could vary from our expectations, including due to errors, changes made in the course of preparing our corporate tax returns, or changes made in response to an audit by the Internal Revenue Service, or the IRS, with the result that holders of our common stock could incur greater income tax liabilities than expected.

We may pay taxable distributions in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such distributions, placing downward pressure on the market price of our common stock.

We may satisfy the REIT 90% distribution test with taxable distributions of our common stock. The IRS has issued Revenue Procedure 2017-45 authorizing elective cash/stock distributions to be made by "publicly offered REITs." Pursuant to Revenue Procedure 2017-45, the IRS will treat the distribution of stock pursuant to an elective cash/stock distribution as a distribution of property under Section 301 of the Code (i.e., a distribution), as long as at least 20% of the total distribution is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied. In

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addition, the IRS issued Revenue Procedure 2020-19, which temporarily reduces (through the end of 2020) the minimum amount of the distribution that must be available in cash to 10%.

If we make a taxable distribution payable in cash and common stock, taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells the common stock that it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in common stock. If we make a taxable distribution payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our common stock.

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

Shares Repurchase Program

The table below provides information with respect to common stock purchases by the Company through September 30, 2020:

Period	Total Number of Shares		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program(1)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program(1)
July 1 – July 31, 2020	-	$	-	-	$	25,000,000
August 1 – August 31, 2020	712,421		9.73	712,421		18,068,144
September 1 – September 30, 2020	220,012		10.36	220,012		15,788,819
Totals / Averages	932,433	$	9.96	932,433	$	15,788,819

(1) On March 6, 2018, the Company's Board of Directors approved a share repurchase program authorizing, but not obligating, the repurchase of up to $20.0 million of its common stock, which was increased by an additional $5.0 million on August 4, 2020, bringing the total authorized and available under the program to $25.0 million. The Company expects to acquire shares through open market or privately negotiated transactions. The timing and amount of repurchase transactions will be determined by the Company’s management based on its evaluation of market conditions, share price, legal requirements and other factors.  

Item 3. Defaults Upon Senior Securities

None.

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)

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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)
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 of the Registrant's Current Report on Form 10-K filed March 13, 2019)

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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 of the Registrant's Current Report on Form 10-K filed 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 of the Registrant's Current Report on Form 10-K filed March 13, 2019)
4.10	*	Fourth Supplemental Indenture, dated as of July 22, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed July 22, 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		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonmy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		The cover page from this quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (and contained in Exhibit 101).

*     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.

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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: November 6, 2020	By:	/s/ Thomas E. Capasse
	Thomas E. Capasse
	Chairman of the Board and Chief Executive
	(Principal Executive Officer)

Date: November 6, 2020	By:	/s/ Andrew Ahlborn
	Andrew Ahlborn
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

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