Ready Capital (RC) 10-Q 2021 Q3 Quarterly report

0001527590rc:AcquiredSba7LoansMemberrc:FinancingReceivablesEqualToGreaterThan60DaysPastDueMember2021-09-30

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, 2021

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, 50th 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 Preferred Stock, 6.25% Series C Cumulative Convertible, par value $0.0001 per share Preferred Stock, 6.50% Series E Cumulative Redeemable, par value $0.0001 per share 7.00% Convertible Senior Notes due 2023 6.20% Senior Notes due 2026	RC RC PRC RC PRE RCA RCB	New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange
5.75% Senior Notes due 2026	RCC	New York Stock Exchange

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 73,593,768 shares of common stock, par value $0.0001 per share, outstanding as of November 5, 2021.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 1A.	Forward-Looking Statements	65
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	67
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	98
PART II.	OTHER INFORMATION	98
Item 1.	Legal Proceedings	98
Item 1A.	Risk Factors	99
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	99
Item 3.	Default Upon Senior Securities	99
Item 4.	Mine Safety Disclosures	99
Item 5.	Other Information	99
Item 6.	Exhibits	100
SIGNATURES		102

EXHIBIT 31.1 CERTIFICATIONS

EXHIBIT 31.2 CERTIFICATIONS

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

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

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In Thousands)	September 30, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	209,769	$	138,975
Restricted cash		52,692		47,697
Loans, net (including $12,162 and $13,795 held at fair value)		2,384,497		1,550,624
Loans, held for sale, at fair value		549,917		340,288
Paycheck Protection Program loans (including $9,873 and $74,931 held at fair value)		1,784,826		74,931
Mortgage backed securities, at fair value		117,681		88,011
Loans eligible for repurchase from Ginnie Mae		149,723		250,132
Investment in unconsolidated joint ventures		125,547		79,509
Purchased future receivables, net		6,567		17,308
Derivative instruments		6,180		16,363
Servicing rights (including $107,589 and $76,840 held at fair value)		171,106		114,663
Real estate owned, held for sale		70,643		45,348
Other assets		196,827		89,503
Assets of consolidated VIEs		3,438,423		2,518,743
Total Assets	$	9,264,398	$	5,372,095
Liabilities
Secured borrowings		2,044,069		1,294,243
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		1,945,883		76,276
Securitized debt obligations of consolidated VIEs, net		2,676,265		1,905,749
Convertible notes, net		112,966		112,129
Senior secured notes, net		179,914		179,659
Corporate debt, net		333,975		150,989
Guaranteed loan financing		348,774		401,705
Contingent consideration		12,400		—
Liabilities for loans eligible for repurchase from Ginnie Mae		149,723		250,132
Derivative instruments		—		11,604
Dividends payable		33,564		19,746
Accounts payable and other accrued liabilities		189,194		135,655
Total Liabilities	$	8,026,727	$	4,537,887
Preferred stock Series C, liquidation preference $25.00 per share (refer to Note 21)		8,361		—
Commitments & contingencies (refer to Note 25)
Stockholders’ Equity
Preferred stock Series E, liquidation preference $25.00 per share (refer to Note 21)		111,378		—
Common stock, $0.0001 par value, 500,000,000 shares authorized, 72,919,824 and 54,368,999 shares issued and outstanding, respectively		7		5
Additional paid-in capital		1,115,471		849,541
Retained earnings (deficit)		(10,395)		(24,203)
Accumulated other comprehensive income (loss)		(6,276)		(9,947)
Total Ready Capital Corporation equity		1,210,185		815,396
Non-controlling interests		19,125		18,812
Total Stockholders’ Equity	$	1,229,310	$	834,208
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity	$	9,264,398	$	5,372,095

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)	2021		2020		2021		2020
Interest income	$	105,136	$	61,074	$	281,554	$	193,826
Interest expense		(50,136)		(43,823)		(156,312)		(134,162)
Net interest income before provision for loan losses	$	55,000	$	17,251	$	125,242	$	59,664
Recovery of (provision for) loan losses		(1,579)		4,231		(7,088)		(34,984)
Net interest income after recovery of (provision for) loan losses	$	53,421	$	21,482	$	118,154	$	24,680
Non-interest income
Residential mortgage banking activities		37,270		75,524		115,369		192,757
Net realized gain on financial instruments and real estate owned		23,210		7,507		49,239		22,118
Net unrealized gain (loss) on financial instruments		5,688		3,420		31,296		(43,762)
Servicing income, net of amortization and impairment of $2,798 and $7,344 for the three and nine months ended September 30, 2021, and $1,555 and $4,556 for three and nine months ended September 30, 2020, respectively		10,243		10,115		37,806		27,193
Income on purchased future receivables, net of allowance for (recovery of) doubtful accounts of ($279) and $1,260 for the three and nine months ended September 30, 2021, and $2,888 and $9,805 for three and nine months ended September 30, 2020, respectively		2,838		4,848		7,934		13,917
Income (loss) on unconsolidated joint ventures		3,548		1,996		6,100		(1,035)
Other income		5,674		4,496		5,557		40,163
Total non-interest income	$	88,471	$	107,906	$	253,301	$	251,351
Non-interest expense
Employee compensation and benefits		(24,537)		(27,612)		(71,584)		(73,836)
Allocated employee compensation and benefits from related party		(3,804)		(2,250)		(9,226)		(4,750)
Variable expenses on residential mortgage banking activities		(24,380)		(30,918)		(61,286)		(87,494)
Professional fees		(6,900)		(4,158)		(12,754)		(8,632)
Management fees – related party		(2,742)		(2,714)		(8,061)		(7,941)
Incentive fees – related party		(2,775)		(1,134)		(3,061)		(4,640)
Loan servicing expense		(8,124)		(8,231)		(21,079)		(24,122)
Transaction related expenses		(2,629)		(6)		(10,202)		(63)
Other operating expenses		(12,926)		(10,448)		(45,600)		(41,927)
Total non-interest expense	$	(88,817)	$	(87,471)	$	(242,853)	$	(253,405)
Income before provision for income taxes		53,075		41,917		128,602		22,626
Income tax provision		(6,540)		(6,554)		(22,216)		(4,116)
Net income	$	46,535	$	35,363	$	106,386	$	18,510
Less: Dividends on preferred stock		1,999		—		5,504		—
Less: Net income attributable to non-controlling interest		756		805		1,859		551
Net income attributable to Ready Capital Corporation	$	43,780	$	34,558	$	99,023	$	17,959
Earnings per common share - basic	$	0.61	$	0.63	$	1.47	$	0.32
Earnings per common share - diluted	$	0.60	$	0.63	$	1.46	$	0.31
Weighted-average shares outstanding
Basic		71,618,168		54,626,995		66,606,749		53,534,497
Diluted		71,787,228		54,704,611		66,768,918		53,612,113
Dividends declared per share of common stock	$	0.42	$	0.30	$	1.24	$	0.95

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)		2021		2020			2021		2020
Net income	$	46,535	$	35,363		$	106,386	$	18,510
Other comprehensive income (loss) - net change by component
Net change in hedging derivatives (cash flow hedges)		221		671			2,323		(2,478)
Foreign currency translation adjustment		675		(712)			1,426		(1,342)
Other comprehensive income (loss)	$	896	$	(41)		$	3,749	$	(3,820)
Comprehensive income	$	47,431	$	35,322		$	110,135	$	14,690
Less: Comprehensive income attributable to non-controlling interests		771		804			1,937		471
Comprehensive income attributable to Ready Capital Corporation	$	46,660	$	34,518		$	108,198	$	14,219

See Notes To Unaudited Consolidated Financial Statements

5

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Three Months Ended September 30, 2021
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at July 1, 2021	1,919,378	2,010,278	4,600,000	71,231,422	$	47,984	$	50,257	$	111,378	$	7	$	1,090,162	$	(23,105)	$	(7,157)	$	1,269,526	$	18,857	$	1,288,383
Dividend declared:
Common stock ($0.42 per share)	—	—	—	—		—		—		—		—		—		(31,070)		—		(31,070)		—		(31,070)
OP units	—	—	—	—		—		—		—		—		—		—		—		—		(494)		(494)
$0.390625 per Series C preferred share	—	—	—	—		—		—		—		—		—		(131)		—		(131)		—		(131)
$0.406250 per Series E preferred share	—	—	—	—		—		—		—		—		—		(1,868)		—		(1,868)		—		(1,868)
Equity issuances	—	—	—	1,660,449		—		—		—		—		25,358		—		—		25,358		—		25,358
Equity redemptions	(1,919,378)	(2,010,278)	—	—		(47,984)		(50,257)		—		—		—						(98,241)		—		(98,241)
Offering costs	—	—	—	—		—		—		—		—		(428)		—		—		(428)		(7)		(435)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(103)		—		—		(103)		(2)		(105)
Stock-based compensation	—	—	—	36,015		—		—		—		—		109		—		—		109		—		109
Share repurchases	—	—	—	(8,062)		—		—		—		—		373		—		—		373		—		373
Net income	—	—	—	—		—		—		—		—		—		45,779		—		45,779		756		46,535
Other comprehensive income	—	—	—	—		—		—		—		—		—		—		881		881		15		896
Balance at September 30, 2021	—	—	4,600,000	72,919,824	$	—	$	—	$	111,378	$	7	$	1,115,471	$	(10,395)	$	(6,276)	$	1,210,185	$	19,125	$	1,229,310

	Three Months Ended September 30, 2020
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at 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)
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 STATEMENTS OF CHANGES IN EQUITY

	Nine Months Ended September 30, 2021
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at January 1, 2021	—	—	—	54,368,999	$	—	$	—	$	—	$	5	$	849,541	$	(24,203)	$	(9,947)	$	815,396	$	18,812	$	834,208
Dividend declared:
Common stock ($1.24 per share)	—	—	—	—		—		—		—		—		—		(85,215)		—		(85,215)		—		(85,215)
OP units	—	—	—	—		—		—		—		—		—		—		—		—		(1,458)		(1,458)
$1.088125 per Series B preferred share	—	—	—	—		—		—		—		—		—		(1,162)		—		(1,162)		(1)		(1,163)
$1.17188 per Series C preferred share	—	—	—	—		—		—		—		—		—		(361)		—		(361)		—		(361)
$0.953125 per Series D preferred share	—	—	—	—		—		—		—		—		—		(1,074)		—		(1,074)		(1)		(1,075)
$0.63221 per Series E preferred share	—	—	—	—		—		—		—		—		—		(2,907)		—		(2,907)		—		(2,907)
Shares issued pursuant to merger transactions	1,919,378	2,010,278	—	16,774,337		47,984		50,257		—		2		239,535		—		—		337,778		—		337,778
Equity issuances	—	—	4,600,000	1,660,449		—		—		111,378		—		25,358		—		—		136,736		—		136,736
Equity redemptions	(1,919,378)	(2,010,278)	—	—		(47,984)		(50,257)		—		—		—		—		—		(98,241)		—		(98,241)
Offering costs	—	—	—	—		—		—		—		—		(498)		—		—		(498)		(8)		(506)
Distributions, net	—	—	—	—		—		—		—		—		—		—		—		—		(150)		(150)
Equity component of 2017 convertible note issuance	—	—	—	—		—		—		—		—		(305)		—		—		(305)		(6)		(311)
Stock-based compensation	—	—	—	161,342		—		—		—		—		2,454		—		—		2,454		—		2,454
Share repurchases	—	—	—	(45,303)		—		—		—		—		(614)		—		—		(614)		—		(614)
Net income	—	—	—	—		—		—		—		—		—		104,527		—		104,527		1,859		106,386
Other comprehensive income	—	—	—	—		—		—		—		—		—		—		3,671		3,671		78		3,749
Balance at September 30, 2021	—	—	4,600,000	72,919,824	$	—	$	—	$	111,378	$	7	$	1,115,471	$	(10,395)	$	(6,276)	$	1,210,185	$	19,125	$	1,229,310

	Nine Months Ended September 30, 2020
	Preferred Stock Shares Outstanding			Common Stock		Preferred Stock						Common Stock		Additional Paid-		Retained Earnings		Accumulated Other	Total Ready Capital		Non-controlling		Total Stockholders'
(in thousands, except share data)	Series B	Series D	Series E	Shares Outstanding		Series B		Series D		Series E		Par Value		In Capital	(Deficit)			Comprehensive Loss	Corporation Equity		Interests		Equity
Balance at January 1, 2020	—	—	—	51,127,326	$	—	$	—	$	—	$	5	$	822,837	$	8,746	$	(6,176)	$	825,412	$	19,372	$	844,784
Cumulative-effect adjustment upon adoption of ASU 2016-13, net of taxes	—	—	—	—		—		—		—		—		—		(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

See Notes To Unaudited Consolidated Financial Statements

7

READY CAPITAL CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

	Nine Months Ended September 30,
(In Thousands)	2021		2020
Cash Flows From Operating Activities:
Net income	$	106,386	$	18,510
Adjustments to reconcile net income to net cash used for operating activities:
Amortization of premiums, discounts, and debt issuance costs, net		(10,654)		25,971
Stock-based compensation		5,215		4,407
Provision for loan losses		7,088		34,984
Impairment loss on real estate owned, held for sale		1,715		3,075
Repair and denial reserve		6,051		2,452
Allowance for doubtful accounts on purchased future receivables		1,383		9,805
Purchase of loans, held for sale, at fair value		(75,666)		—
Origination of loans, held for sale, at fair value		(4,201,304)		(3,675,821)
Proceeds from disposition and principal payments of loans, held for sale, at fair value		4,298,879		3,680,537
Net (income) loss of unconsolidated joint ventures, net of distributions		(6,099)		1,202
Realized (gains) losses, net		(146,135)		(199,559)
Unrealized (gains) losses, net		(34,142)		43,334
Changes in operating assets and liabilities
Purchased future receivables, net		9,358		16,801
Derivative instruments		(62,818)		(10,226)
Assets of consolidated VIEs (excluding loans, net), accrued interest and due from servicers		10,157		2,897
Receivable from third parties		(12,789)		114
Other assets		(10,133)		6,929
Accounts payable and other accrued liabilities		32,940		34,327
Net cash used for operating activities	$	(80,568)	$	(261)
Cash Flows From Investing Activities:
Origination of loans		(2,584,002)		(448,608)
Purchase of loans		(111,810)		(121,990)
Proceeds from disposition and principal payment of loans		928,678		673,652
Origination of Paycheck Protection Program loans		(2,133,861)		(106,420)
Purchase of Paycheck Protection Program loans		(3,866)		—
Proceeds from disposition and principal payment of Paycheck Protection Program loans		468,650		216
Purchase of mortgage backed securities, at fair value		—		(14,216)
Proceeds from sale and principal payment of mortgage backed securities, at fair value		1,997,268		10,518
Purchase of real estate, held for sale		—		(329)
Proceeds from sale of real estate, held for sale		2,264		11,045
Investment in unconsolidated joint ventures		(22,644)		(16,294)
Distributions in excess of cumulative earnings from unconsolidated joint ventures		18,282		4,738
Net cash used for business acquisitions		(11,536)		—
Net cash used for investing activities	$	(1,452,577)	$	(7,688)
Cash Flows From Financing Activities:
Proceeds from secured borrowings		9,440,080		5,321,953
Repayment of secured borrowings		(10,472,037)		(5,336,010)
Proceeds from the Paycheck Protection Program Liquidity Facility borrowings		2,299,167		—
Repayment of the Paycheck Protection Program Liquidity Facility borrowings		(429,560)		—
Proceeds from issuance of securitized debt obligations of consolidated VIEs		1,239,770		495,220
Repayment of securitized debt obligations of consolidated VIEs		(462,198)		(252,276)
Proceeds from corporate debt		195,768		—
Repayment of corporate debt		(50,000)		—
Repayment of guaranteed loan financing		(63,526)		(78,784)
Repayment of deferred financing costs		(27,714)		(10,512)
Proceeds from issuance of equity, net of issuance costs		136,230		13,360
Preferred stock redemption		(98,241)		—
Common stock repurchased		—		(9,235)
Settlement of share-based awards in satisfaction of withholding tax requirements		(614)		—
Dividend payments		(78,361)		(39,951)
Tender offer of preferred shares		(11,133)		—
Distributions from non-controlling interests, net		(150)		(50)
Net cash provided by financing activities	$	1,617,481	$	103,715
Net increase in cash, cash equivalents, and restricted cash		84,336		95,766
Cash, cash equivalents, and restricted cash beginning balance		200,482		127,980
Cash, cash equivalents, and restricted cash ending balance	$	284,818	$	223,746
Supplemental disclosures:
Cash paid for interest	$	138,828	$	123,499
Cash paid (received) for income taxes	$	12,235	$	(5,878)
Non-cash investing activities
Loans transferred from loans, held for sale, at fair value to loans, net	$	—	$	509
Loans transferred from loans, net to loans, held for sale, at fair value	$	1,677	$	—
Loans transferred to real estate owned	$	1,388	$	8,832
Contingent consideration in connection with acquisitions	$	12,400	$	—
Non-cash financing activities
Dividend paid in stock	$	—	$	17,395
Share-based component of incentive fees	$	—	$	1,806
Cash, cash equivalents, and restricted cash reconciliation
Cash and cash equivalents	$	209,769	$	149,847
Restricted cash		52,692		46,204
Cash, cash equivalents, and restricted cash in assets of consolidated VIEs		22,357		27,695
Cash, cash equivalents, and restricted cash ending balance	$	284,818	$	223,746

See Notes To Unaudited Consolidated Financial Statements

8

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. 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 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, L.P. (the “Operating Partnership”) holds substantially all of our assets and conducts substantially all of our business. As of September 30, 2021 and December 31, 2020, the Company owned approximately 98.4% and 97.9% of the Operating Partnership, respectively. The Company, as sole general partner of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership, and the limited partners of the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of the Operating Partnership. Therefore, the Company consolidates the Operating Partnership.

The Company reports its results of operations through the following 4 business segments: i) Acquisitions, ii) SBC Originations, iii) Small Business Lending, and iv) Residential Mortgage Banking, with the remaining amounts recorded in Corporate- Other. The Company’s 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.

● 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 loan products 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. In addition, SBC originations include construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds.

● Small Business Lending. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap Lending, LLC (“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. We also acquire purchased future receivables and originate small balance SBA loans through our Knight Capital platform (“Knight Capital”). Knight Capital is a technology-driven platform that provides working capital to small and medium sized businesses across the U.S. In the second quarter of 2021, our Chief Executive Officer, as our Chief Operating Decision Maker (“CODM”), realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities of, and projections for, Knight Capital. We have recasted prior period amounts and segment information to conform to this presentation.

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● Residential Mortgage Banking. 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.

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

In addition, in connection with the ANH merger, the Company issued 1,919,378 shares of newly designated 8.625% Series B Cumulative Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), 779,743 shares of newly designated 6.25% Series C Cumulative Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”), and 2,010,278 shares of newly designated 7.625% Series D Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the “Series D Preferred Stock”), in exchange for all shares of ANH’s 8.625% Series A Cumulative Preferred Stock, 6.25% Series B Cumulative Convertible Preferred Stock and 7.625% Series C Cumulative Redeemable preferred stock outstanding prior to the effective time of the ANH Merger. On July 15, 2021, the Company redeemed all of the outstanding Series B and Series D Preferred Stock, in each case at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends up to, but excluding, the redemption date.

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

The acquisition of ANH increased the Company’s equity capitalization, supported continued growth of the Company’s platform and execution of the Company’s strategy, and provided the Company with improved scale, liquidity and capital alternatives, including additional borrowing capacity. Also, the stockholder base resulting from the acquisition of ANH enhanced the trading volume and liquidity for our stockholders. In addition, part of our strategy in acquiring ANH was to manage the liquidation and runoff of certain assets within the ANH portfolio and repay certain indebtedness on the ANH portfolio following the completion of the ANH Merger, and to redeploy the capital into opportunities in our core SBC strategies and other assets we expect will generate attractive risk-adjusted returns and long-term earnings accretion. Consistent with this strategy, as of September 30, 2021, the Company has liquidated approximately $2.0 billion of assets, primarily consisting of Agency RMBS, and repaid approximately $1.7 billion of indebtedness on the ANH portfolio.

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

On July 31, 2021, the Company acquired Red Stone and its affiliates (“Red Stone”), a privately owned real estate finance and investment company that provides innovative financial products and services to multifamily affordable housing, in exchange for an initial purchase price of approximately $63 million paid in cash, retention payments to key executives aggregating $7 million in cash and 128,533 shares of common stock of the Company issued to Red Stone executives under the 2012 Plan. Refer to Note 21 – Redeemable Preferred Stock and Stockholders’ Equity for more information on the 2012 Plan. Additional purchase price payments may be made over the next three years if the Red Stone business achieves certain hurdles.

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

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 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC.

Note 3. Summary of Significant Accounting Policies

Use of estimates

Preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of income and expenses during the reporting period. These estimates and assumptions are based on the best available information but actual results could be materially different.

Basis of consolidation

The accompanying consolidated financial statements of the Company include the accounts and results of operations of the Operating Partnership and other consolidated subsidiaries and variable interest entities (“VIEs”) in which we are the primary beneficiary. The consolidated financial statements are prepared in accordance with ASC 810, Consolidations. Intercompany balances and transactions have been eliminated.

Reclassifications

Certain amounts reported for the prior periods in the accompanying 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 and other financing agreements with counterparties, construction and mortgage escrows, as well as cash held for remittance on loans serviced for third parties. Restricted cash is not available for general corporate purposes but may be applied against amounts due to counterparties under existing swaps and repurchase agreement borrowings, returned to the Company when the restriction requirements no longer exist, or at the maturity of the swap or repurchase agreement.

11

Loans, net

Loans, net consists of loans, held-for-investment, net of allowance for credit 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 and are accounted for under ASC 310-10, Receivables.

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 consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the consolidated statements of income.

Allowance for credit losses. The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value (“LTV”) ratio and economic conditions. The allowance for credit losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.

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

In connection with the Company’s adoption of ASU 2016-13 on January 1, 2020, the Company implemented new processes including the utilization of loan loss forecasting models, updates to the Company’s reserve policy documentation, changes to internal reporting processes and related internal controls. The Company has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its loan portfolio. The CECL forecasting methods used by the Company include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 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.

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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 credit losses, estimates of inherent loan losses involve judgment and assumptions as to various factors, including current economic conditions. Our determination of adequacy of the allowance for credit losses is based on quarterly evaluations of the above factors. Accordingly, the provision for credit losses will vary from period to period based on management's ongoing assessment of the adequacy of the allowance for credit losses.

Non-accrual loans. A loan is placed on nonaccrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued. Non-accrual loans consist of loans for which principal or interest has been delinquent for 90 days or more and for which specific reserves are recorded, including purchased credit-deteriorated (“PCD”).

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. In addition, based on issued regulatory guidance provided by federal and state regulatory agencies, a loan modification is not considered a TDR if: (1) made in response to the COVID-19 pandemic; (2) the borrower was current on payments at the time the modification program was implemented; (3) the modification was short-term (e.g., six months).

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 consolidated statements of income when earned and deemed collectible. For loans originated by our SBC originations and SBA originations segments, changes in fair value are recurring and are reported as net unrealized gain (loss) on financial instruments in the 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 consolidated statements of income.

13

Paycheck Protection Program loans

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

The Company’s loan originations in the second round of the program are accounted for as loans, held-for-investment under ASC 310. Loan origination fees and related direct loan origination costs are capitalized into the initial recorded investment in the loan and are deferred over the loan term. The Company 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 along with expected prepayments from loan forgiveness by the federal government.

Mortgage backed securities, at fair value

The Company accounts for MBS as trading securities and 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 as well as residential Agency MBS, which are guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Purchases and sales of MBS are recorded 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 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 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, comprised of credit default swaps (“CDSs”), interest rate swaps, TBA agency securities, FX forwards and interest rate lock commitments (“IRLCs”), as part of our risk management strategy. The Company accounts for derivative instruments under ASC 815, Derivatives and Hedging. All derivatives are reported as either assets or liabilities in the 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, 2021 and December 31, 2020, the Company has offset $2.6 million and $5.0 million, respectively, of cash collateral receivable against our gross derivative liability positions. As of September 30, 2021 and December 31, 2020, the Company has not offset $10.1 million and $10.5 million, respectively, of cash collateral receivable against our derivative liability positions and is included in restricted cash in the 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 over the life of the contract. 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 consolidated statements of income.

14

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

IRLC. IRLCs are agreements under which GMFS agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Unrealized gains and losses on the IRLCs, reflected as derivative assets and derivative liabilities, respectively, are measured based on the value of the underlying mortgage loan, quoted government-sponsored enterprise (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 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. Such contracts are used to convert the foreign currency risk to U.S. dollars to mitigate exposure to fluctuations in FX rates. The fair value adjustments are reported within net unrealized gain (loss) on financial instruments in the consolidated statements of income. FX forwards are classified as Level 2 in the fair value hierarchy.

CDS. 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 consolidated statements of income. CDSs are classified as Level 2 in the fair value hierarchy.

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

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

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

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

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

Servicing rights

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

Servicing rights are recognized upon sale of loans, including a securitization of loans accounted for as a sale in accordance with U.S. GAAP, if servicing is retained. For servicing rights, gains related to servicing rights retained is included in net realized gain (loss) in the 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 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.

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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 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, and cost of servicing. Residential MSRs are classified as Level 3 in the fair value hierarchy.

Real estate owned, held for sale

Real estate owned, 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 owned, 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 owned, held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged through impairment.

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

Investment in unconsolidated joint ventures

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

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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, customer relationships 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 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, Red Stone and the ANH Merger. Goodwill is not amortized, but rather, is tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill as of the date of the consolidated balance sheets, represents the excess of the consideration transferred over the fair value of net assets acquired in connection with the acquisition of Knight Capital, Red Stone and the ANH Merger.

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

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

Deferred financing costs

Costs incurred in connection with our secured borrowings 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 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 consolidated balance sheets as a direct deduction from the associated liability.

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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 and other financing agreements and repurchase agreements.

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

Borrowings under repurchase agreements. The Company accounts for borrowings under repurchase agreements 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. As of the current period ended, 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 consolidated balance sheets as an asset and cash received from the lender was recorded on our consolidated balance sheets as a liability. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense in the consolidated statements of income.

Paycheck Protection Program Liquidity Facility borrowings

The Company accounts for borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings under ASC 470, Debt. Borrowings under PPPLF are secured by PPP loans. Interest paid and accrued in connection with PPPLF is recorded as interest expense in the 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, which typically qualifies as a VIE. 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 VIE 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 consolidated statements of income.

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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 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 consolidated statements of income. The remaining settlement consideration allocated to the equity component would be recognized as a reduction of additional paid-in capital in our 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 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 consolidated statements of income.

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 consolidated balance sheets and the proceeds from the portion sold is recorded as guaranteed loan financing in the liabilities section of the 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 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 is the primary beneficiary 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.

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

Fair value option

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 consolidated balance sheets from those instruments using another accounting method.

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

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 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”), performance-based equity awards, as well as “in-the-money” conversion options associated with our outstanding convertible senior notes and convertible preferred stock. 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

U.S. GAAP establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s 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 consolidated financial statements or tax returns as well as the recoverability of amounts we record, including deferred tax assets.

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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 consolidated statements of income. As of September 30, 2021 and December 31, 2020, 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

Under revenue recognition guidance, specifically ASC 606, 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.

Most of the Company’s revenue streams, such as 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, follow specific revenue recognition criteria and therefore the guidance referenced above does not have a material impact on our consolidated financial statements. In addition, revisions to existing accounting rules regarding the determination of whether a company is acting as a principal or agent in an arrangement and accounting for sales of nonfinancial assets where the seller has continuing involvement, did not materially impact the Company. A further description of the revenue recognition criteria is outlined below.

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 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 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 consolidated statements of income as a component of interest income.

Residential mortgage banking activities

Residential mortgage banking activities reflects revenue within our residential mortgage banking business directly related to loan origination and sale activity. This primarily consists of the realized gains on sales of residential loans held for sale and loan origination fee income, Residential mortgage banking activities also consists of unrealized gains and losses associated with the changes in fair value of the loans held for sale, the fair value of retained MSR additions, and the realized and unrealized gains and losses from derivative instruments.

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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 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 derivative instruments.

Loan origination fee income represents revenue earned from originating mortgage loans held for sale and are reflected in residential mortgage banking activities, when loans are sold.

Variable expenses on residential mortgage banking activities. Loan expenses include indirect costs related to loan origination activities, such as correspondent fees, and are expensed as incurred and are included within variable expenses on residential mortgage banking activities on the Company’s 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. Recent accounting pronouncements

Financial Accounting Standards Board (“FASB”) Standards

Standard	Summary of guidance	Effects on financial statements
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020	Provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from LIBOR, and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. The guidance generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination.	The Company has loan, security, and debt agreements that incorporate LIBOR as a reference interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have on our business or on the overall financial markets.
	In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition.  Guidance is optional and may be elected over time, through December 31, 2022 using a prospective application on all eligible contract modifications.	The Company has not adopted any of the optional expedients or exceptions through September 30, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions.
ASU 2020-06, Debt – Debt with Conversion and other Options and Derivatives and Hedging-Contracts in Entity’s Own Equity (Topic 470-20) Issued August 2020	Addresses the complexities in accounting for certain financial instruments with a debt and equity component. The number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted “Earnings per share” under ASC 260.	The Company is currently assessing the impact this guidance will have on our consolidated financial statements.
	Effective for fiscal years beginning after December 15, 2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition.

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Note 5. Business Combinations

On March 19, 2021, the Company completed a merger agreement with ANH, a specialty finance company that focuses primarily on residential mortgage-backed securities and loans that are either rated “investment grade” or are guaranteed by federally sponsored enterprises. See Note 1 for more information about the ANH Merger. 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 table below summarizes the fair value of assets acquired and liabilities assumed from the merger.

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

In the table above, the gross contractual unpaid principal amount for acquired loans held for sale, at fair value was $98.3 million, all of which is expected to be collected.

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.

(In thousands, except per share data)
Fair value of net assets acquired	$	410,526
ANH shares outstanding at March 19, 2021		99,374
Exchange ratio	x	0.1688
Shares issued		16,774
Market price as of March 19, 2021	$	14.28
Consideration transferred based on value of common shares issued	$	239,537
Cash paid per share	$	0.61
Cash paid based on outstanding ANH shares	$	60,626
Preferred Stock, Series B Issued		1,919,378
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series B issued	$	47,984
Preferred Stock, Series C Issued		779,743
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series C issued	$	19,494
Preferred Stock, Series D Issued		2,010,278
Market price as of March 19, 2021	$	25.00
Consideration transferred based on value of Preferred Stock, Series D shares issued	$	50,257
Total consideration transferred	$	417,898
Goodwill	$	7,372

On July 31, 2021, the Company acquired Red Stone, a privately owned real estate finance and investment company that provides innovative financial products and services to multifamily affordable housing, in exchange for an initial purchase price of approximately $63 million paid in cash, retention payments to key executives aggregating $7 million in cash and 128,533 shares of common stock of the Company issued to Red Stone executives under the 2012 Plan. Refer to Note 21 – Redeemable Preferred Stock and Stockholders’ Equity for more information on the 2012 Plan. Additional purchase price payments may be made over the next three years if the Red Stone business achieves certain hurdles.

24

The table below summarizes the fair value of assets acquired and liabilities assumed from the acquisition.

(In Thousands)	July 31, 2021
Assets
Cash and cash equivalents	$	1,553
Restricted cash		6,994
Investment in unconsolidated joint ventures		35,577
Servicing rights		15,800
Other assets:
Intangible Assets		9,300
Other		1,330
Total assets acquired	$	70,554
Liabilities
Accounts payable and other accrued liabilities		7,965
Total liabilities assumed	$	7,965
Net assets acquired	$	62,589

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.

(In thousands, except per share data)
Fair value of net assets acquired	$	62,589
Cash paid		63,000
Contingent consideration		12,400
Total consideration transferred	$	75,400
Goodwill	$	12,811

In a business combination, the initial allocation of the purchase price is considered preliminary and therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of the acquisition date. Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received. As of September 30, 2021, the goodwill recorded in connection with the ANH Merger and Red Stone acquisition have been allocated to the SBC Originations segment.

The following pro-forma income and earnings (unaudited) of the combined company are presented as if the ANH merger had occurred on January 1, 2021 and January 1, 2020.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Selected Financial Data
Interest income	$	105,136	$	73,726	$	293,303	$	262,663
Interest expense		(50,136)		(49,930)		(159,840)		(173,702)
Recovery of (provision for) loan losses		(1,579)		4,231		(7,088)		(35,602)
Non-interest income		88,471		126,065		256,026		296,498
Non-interest expense		(88,864)		(90,306)		(248,529)		(490,943)
Income (loss) before provision for income taxes		53,028		63,786		133,872		(141,086)
Income tax benefit (expense)		(6,540)		(6,554)		(22,216)		(4,117)
Net income (loss)	$	46,488	$	57,232	$	111,656	$	(145,203)

Non-recurring pro-forma transaction costs directly attributable to the ANH merger were $7.6 million for the nine months ended September 30, 2021, and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the merger. Such costs for the three months ended September 30, 2021 were not material.

Due to the relative size of the Red Stone business acquisition, pro forma financial information is considered not material.

25

Note 6. Loans and allowance for credit 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 the time of purchase

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

● Loans, held-for-sale, at fair value – originated or acquired loans with the intention to sell in the near term

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

● Paycheck Protection Program loans, held-for-investment – SBA loans originated in round 2 of the PPP program

Loan portfolio

The following table summarizes the classification, UPB, and carrying value of loans held by the Company including loans of consolidated VIEs.

	September 30, 2021				December 31, 2020
(In Thousands)	Carrying Value		UPB		Carrying Value		UPB
Loans
Originated Transitional loans	$	1,333,370	$	1,341,427	$	530,671	$	535,963
Originated SBA 7(a) loans		330,884		338,190		310,537		314,938
Acquired SBA 7(a) loans		162,457		168,845		201,066		210,115
Originated SBC loans		245,283		238,667		173,190		167,470
Acquired loans		336,793		344,092		351,381		352,546
Originated SBC loans, at fair value		12,162		12,491		13,795		14,088
Originated Residential Agency loans		3,173		3,173		3,208		3,208
Total Loans, before allowance for loan losses	$	2,424,122	$	2,446,885	$	1,583,848	$	1,598,328
Allowance for loan losses	$	(39,625)	$	—	$	(33,224)	$	—
Total Loans, net	$	2,384,497	$	2,446,885	$	1,550,624	$	1,598,328
Loans in consolidated VIEs
Originated SBC loans	$	811,653	$	808,330	$	889,566	$	885,235
Originated Transitional loans		1,857,638		1,875,209		788,403		792,432
Acquired loans		641,150		640,178		697,567		701,133
Originated SBA 7(a) loans		60,316		63,788		68,625		72,451
Acquired SBA 7(a) loans		34,640		42,401		42,154		52,456
Total Loans, in consolidated VIEs, before allowance for loan losses	$	3,405,397	$	3,429,906	$	2,486,315	$	2,503,707
Allowance for loan losses on loans in consolidated VIEs	$	(9,622)	$	—	$	(13,508)	$	—
Total Loans, net, in consolidated VIEs	$	3,395,775	$	3,429,906	$	2,472,807	$	2,503,707
Loans, held for sale, at fair value
Originated Residential Agency loans	$	281,946	$	275,632	$	260,447	$	249,852
Originated Freddie Mac loans		13,495		13,268		51,248		50,408
Originated SBC loans		41,353		40,978		17,850		17,850
Originated SBA 7(a) loans		40,254		36,403		10,232		9,436
Acquired loans		172,869		167,950		511		499
Total Loans, held for sale, at fair value	$	549,917	$	534,231	$	340,288	$	328,045
Total Loans, net and Loans, held for sale, at fair value	$	6,330,189	$	6,411,022	$	4,363,719	$	4,430,080
Paycheck Protection Program loans
Paycheck Protection Program loans, held-for-investment	$	1,774,953	$	1,857,853	$	—	$	—
Paycheck Protection Program loans, held at fair value		9,873		9,873		74,931		74,931
Total Paycheck Protection Program loans	$	1,784,826	$	1,867,726	$	74,931	$	74,931
Total Loan portfolio	$	8,115,015	$	8,278,748	$	4,438,650	$	4,505,011

26

Loan vintage and credit quality indicators

The Company monitors the credit quality of its loan portfolio based on primary credit quality indicators, such as delinquency rates. Loans that are 30 days or more past due, provide an indication of a borrower’s capacity and willingness to meet its financial obligations. In the tables below, Total Loans, net includes Loans, net in consolidated VIEs as well as a specific allowance for loan losses of $23.1 million as of September 30, 2021 and $17.2 million as of December 31, 2020.

The tables below summarize the classification, UPB and carrying value of loans by year of origination.

			Carrying Value by Year of Origination
(In Thousands)	UPB		2021		2020		2019		2018		2017		Pre 2017		Total
September 30, 2021
Loans
Originated Transitional loans	$	3,216,636	$	2,020,604	$	421,281	$	510,721	$	215,507	$	—	$	12,724	$	3,180,837
Originated SBC loans		1,046,997		121,181		47,745		426,068		190,009		104,190		162,997		1,052,190
Acquired loans		984,270		9,390		75,753		68,616		46,899		27,247		747,425		975,330
Originated SBA 7(a) loans		401,978		52,992		46,291		93,135		114,611		56,885		24,404		388,318
Acquired SBA 7(a) loans		211,246		40		76		13,870		14,013		269		166,121		194,389
Originated SBC loans, at fair value		12,491		—		—		—		—		1,550		10,612		12,162
Originated Residential Agency loans		3,173		1,199		705		642		434		—		193		3,173
Total Loans, before general allowance for loan losses	$	5,876,791	$	2,205,406	$	591,851	$	1,113,052	$	581,473	$	190,141	$	1,124,476	$	5,806,399
General allowance for loan losses															$	(26,127)
Total Loans, net															$	5,780,272
			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
December 31, 2020
Loans
Originated Transitional loans	$	1,328,395	$	385,183	$	583,593	$	306,971	$	23,783	$	18,480	$	1,064	$	1,319,074
Originated SBC loans		1,052,705		66,715		486,033		237,313		110,354		43,696		112,444		1,056,555
Acquired loans		1,053,679		21,414		40,572		42,167		38,649		19,533		883,774		1,046,109
Originated SBA 7(a) loans		387,389		47,939		98,568		133,812		68,375		22,056		4,041		374,791
Acquired SBA 7(a) loans		262,571		139		19,658		14,636		283		19		204,703		239,438
Originated SBC loans, at fair value		14,088		—		—		—		1,598		6,442		5,755		13,795
Originated Residential Agency loans		3,208		1,571		645		705		—		88		199		3,208
Total Loans, before general allowance for loan losses	$	4,102,035	$	522,961	$	1,229,069	$	735,604	$	243,042	$	110,314	$	1,211,980	$	4,052,970
General allowance for loan losses															$	(29,539)
Total Loans, net															$	4,023,431

The tables below present delinquency information on loans, net by year of origination.

			Carrying Value by Year of Origination
(In Thousands)	UPB		2021		2020		2019		2018		2017		Pre 2017		Total
September 30, 2021
Loans
Current and less than 30 days past due	$	5,721,014	$	2,205,376	$	583,638	$	1,110,132	$	528,054	$	185,226	$	1,059,956	$	5,672,382
30 - 59 days past due		25,734		—		—		—		6,627		150		18,704		25,481
60+ days past due		130,043		30		8,213		2,920		46,792		4,765		45,816		108,536
Total Loans, before general allowance for loan losses	$	5,876,791	$	2,205,406	$	591,851	$	1,113,052	$	581,473	$	190,141	$	1,124,476	$	5,806,399
General allowance for loan losses															$	(26,127)
Total Loans, net															$	5,780,272
			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
December 31, 2020
Loans
Current and less than 30 days past due	$	3,904,294	$	516,474	$	1,221,227	$	707,068	$	203,331	$	100,003	$	1,125,100	$	3,873,203
30 - 59 days past due		38,836		5,812		5,191		15,097		401		2		11,933		38,436
60+ days past due		158,905		675		2,651		13,439		39,310		10,309		74,947		141,331
Total Loans, before general allowance for loan losses	$	4,102,035	$	522,961	$	1,229,069	$	735,604	$	243,042	$	110,314	$	1,211,980	$	4,052,970
General allowance for loan losses															$	(29,539)
Total Loans, net															$	4,023,431

27

The tables below present delinquency information on loans, net by portfolio.

(In Thousands)	Current		30-59 days past due		60+ days past due		Total		Non-Accrual Loans		90+ days past due and Accruing
September 30, 2021
Originated Transitional loans	$	3,125,818	$	9,743	$	45,276	$	3,180,837	$	71,498	$	—
Originated SBC loans		1,025,741		2,224		24,225		1,052,190		24,477		—
Acquired loans		927,125		12,586		35,619		975,330		34,026		—
Originated SBA 7(a) loans		387,009		—		1,309		388,318		11,116		—
Acquired SBA 7(a) loans		191,825		928		1,636		194,389		4,815		—
Originated SBC loans, at fair value		12,162		—		—		12,162		—		—
Originated Residential Agency loans		2,702		—		471		3,173		2,923		—
Total Loans, before general allowance for loan losses	$	5,672,382	$	25,481	$	108,536	$	5,806,399	$	148,855	$	—
General allowance for loan losses							$	(26,127)
Total Loans, net							$	5,780,272
Percentage of loans outstanding		97.7%		0.4%		1.9%		100%		2.6%		0.0%
December 31, 2020
Originated Transitional loans	$	1,281,579	$	17,713	$	19,782	$	1,319,074	$	19,416	$	—
Originated SBC loans		1,000,878		6,591		49,086		1,056,555		37,635		—
Acquired loans		978,346		7,729		60,034		1,046,109		57,020		-
Originated SBA 7(a) loans		369,416		1,741		3,634		374,791		8,668		—
Acquired SBA 7(a) loans		228,651		4,008		6,779		239,438		9,001		—
Originated SBC loans, at fair value		13,795		—		—		13,795		—		—
Originated Residential Agency loans		538		654		2,016		3,208		2,418		—
Total Loans, before general allowance for loan losses	$	3,873,203	$	38,436	$	141,331	$	4,052,970	$	134,158	$	—
General allowance for loan losses							$	(29,539)
Total Loans, net							$	4,023,431
Percentage of loans outstanding		95.6%		0.9%		3.5%		100%		3.3%		0.0%

In addition to delinquency rates, the current estimated LTV ratio, geographic distribution of the loan collateral and collateral concentration are primary credit quality indicators that provide insight into a borrower’s capacity and willingness to meet its financial obligation. High LTV loans tend to have higher delinquency rates than loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral considers factors such as the regional economy, property price changes and specific events such as natural disasters, which will affect credit quality. The collateral concentration of the loan portfolio considers economic factors or events may have a more pronounced impact on certain sectors or property types.

28

The table below presents quantitative information on the credit quality of loans, net.

	Loan-to-Value  (1)
(In Thousands)	0.0 – 20.0%		20.1 – 40.0%		40.1 – 60.0%		60.1 – 80.0%		80.1 – 100.0%		Greater than 100.0%		Total
September 30, 2021
Loans
Originated Transitional loans	$	6,230	$	59,578	$	347,197	$	2,383,991	$	359,421	$	24,420	$	3,180,837
Originated SBC loans		23,060		85,601		565,431		372,218		—		5,880		1,052,190
Acquired loans		236,524		339,195		283,665		90,076		16,041		9,829		975,330
Originated SBA 7(a) loans		1,085		15,685		51,660		153,140		57,976		108,772		388,318
Acquired SBA 7(a) loans		6,477		30,971		73,345		42,974		25,573		15,049		194,389
Originated SBC loans, at fair value		—		7,213		—		4,949		—		—		12,162
Originated Residential Agency loans		—		301		549		953		508		862		3,173
Total Loans, before general allowance for loan losses	$	273,376	$	538,544	$	1,321,847	$	3,048,301	$	459,519	$	164,812	$	5,806,399
General allowance for loan losses													$	(26,127)
Total Loans, net													$	5,780,272
Percentage of loans outstanding		4.7%		9.3%		22.8%		52.5%		7.9%		2.8%
December 31, 2020
Loans
Originated Transitional loans	$	5,485	$	8,269	$	252,798	$	891,895	$	157,900	$	2,727	$	1,319,074
Originated SBC loans		5,372		76,899		453,381		515,023		—		5,880		1,056,555
Acquired loans		266,345		385,579		228,262		113,023		40,838		12,062		1,046,109
Originated SBA 7(a) loans		1,203		15,013		51,133		147,020		61,297		99,125		374,791
Acquired SBA 7(a) loans		7,523		39,086		89,644		54,007		28,332		20,846		239,438
Originated SBC loans, at fair value		—		7,354		—		6,441		—		—		13,795
Originated Residential Agency loans		—		—		88		1,236		1,552		332		3,208
Total Loans, before general allowance for loan losses	$	285,928	$	532,200	$	1,075,306	$	1,728,645	$	289,919	$	140,972	$	4,052,970
General allowance for loan losses													$	(29,539)
Total Loans, net													$	4,023,431
Percentage of loans outstanding		7.1%		13.0%		26.5%		42.7%		7.2%		3.5%
(1) Loan-to-value is calculated using carrying amount as a percentage of current collateral value

The table below presents the geographic concentration of loans, net, secured by real estate.

Geographic Concentration (% of Unpaid Principal Balance)	September 30, 2021		December 31, 2020
California	16.2	%	18.1	%
Texas	15.7		14.2
New York	8.4		9.8
Georgia	7.6		4.9
Florida	7.5		7.8
Illinois	5.4		5.2
Arizona	5.2		2.8
North Carolina	2.9		3.1
Washington	2.1		3.1
Colorado	1.9		2.8
Other	27.1		28.2
Total	100.0	%	100.0	%

The table below presents the collateral type concentration of loans, net.

Collateral Concentration (% of Unpaid Principal Balance)	September 30, 2021		December 31, 2020
Multi-family	44.2	%	23.8	%
Retail	12.8		17.3
SBA	10.4		17.4
Office	10.0		13.1
Mixed Use	8.9		12.9
Industrial	6.7		7.1
Lodging/Residential	2.7		3.2
Other	4.3		5.2
Total	100.0	%	100.0	%

29

The table below presents the collateral type concentration of SBA loans within loans, net.

Collateral Concentration (% of Unpaid Principal Balance)	September 30, 2021		December 31, 2020
Lodging	18.9	%	17.2	%
Offices of Physicians	11.7		12.0
Child Day Care Services	7.4		7.2
Eating Places	5.2		5.3
Gasoline Service Stations	3.9		3.4
Veterinarians	2.5		3.3
Funeral Service & Crematories	1.9		1.8
Grocery Stores	1.8		1.7
Car washes	1.5		1.4
Couriers	1.2		1.0
Other	44.0		45.7
Total	100.0	%	100.0	%

Allowance for credit losses

The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators, including probable and historical losses, collateral values, LTV ratios, and economic conditions.

The table below presents the allowance for loan losses by loan product and impairment methodology.

(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Total Allowance for loan losses
September 30, 2021
General	$	2,205	$	14,974	$	2,539	$	622	$	5,787	$	26,127
Specific		4,746		10,171		2,613		2,708		2,882		23,120
Ending balance	$	6,951	$	25,145	$	5,152	$	3,330	$	8,669	$	49,247
December 31, 2020
General	$	2,640	$	14,995	$	5,457	$	767	$	5,680	$	29,539
Specific		6,200		—		2,840		3,782		4,371		17,193
Ending balance	$	8,840	$	14,995	$	8,297	$	4,549	$	10,051	$	46,732

The tables below present a summary of the changes in the allowance for loan losses.

(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
Three Months Ended September 30, 2021
Beginning balance	$	7,980	$	21,201	$	7,098	$	3,975	$	9,375	$	—	$	49,629
Provision for (recoveries of) loan losses		(1,029)		3,944		(1,217)		(210)		232		—		1,720
Charge-offs and sales		—		—		(26)		(464)		(938)		—		(1,428)
Recoveries		—		—		(703)		29		—		—		(674)
Ending balance	$	6,951	$	25,145	$	5,152	$	3,330	$	8,669	$	—	$	49,247
Three Months Ended September 30, 2020
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
Nine Months Ended September 30, 2021
Beginning balance	$	8,840	$	14,995	$	8,297	$	4,549	$	10,051	$	—	$	46,732
Provision for (recoveries of) loan losses		(389)		10,150		(2,405)		(318)		779		—		7,817
Charge-offs and sales		(1,311)		—		(26)		(940)		(2,165)		—		(4,442)
Recoveries		(189)		—		(714)		39		4		—		(860)
Ending balance	$	6,951	$	25,145	$	5,152	$	3,330	$	8,669	$	—	$	49,247
Nine Months Ended September 30, 2020
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

The tables above exclude $0.2 million of allowance for loan losses on unfunded lending commitments as of September 30, 2021. There was 0 such allowance for loan losses on unfunded lending commitments as of September 30, 2020. Refer to Note 3 – Summary of Significant Accounting Policies for more information on our accounting policies, methodologies and judgment applied to determine the allowance for loan losses and lending commitments.

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Non-accrual loans

A loan is placed on nonaccrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued.

The table below presents information about non-accrual loans.

(In Thousands)	September 30, 2021		December 31, 2020
Non-accrual loans
With an allowance	$	113,441	$	75,862
Without an allowance		35,414		58,296
Total recorded carrying value of non-accrual loans	$	148,855	$	134,158
Allowance for loan losses related to non-accrual loans	$	(23,128)	$	(17,367)
Unpaid principal balance of non-accrual loans	$	176,364	$	158,471
	September 30, 2021		September 30, 2020
Interest income on non-accrual loans for the three months ended	$	586	$	198
Interest income on non-accrual loans for the nine months ended	$	2,144	$	2,660

Troubled debt restructurings

A loan is classified as a TDR when there is a reasonable expectation that the original terms of the loan agreement will be modified by granting concessions to a borrower who is experiencing financial difficulty. Concessions typically include modifications to the interest rate, maturity date, timing of principal and interest payments and principal forgiveness. Modified loans that are classified as TDRs are individually evaluated and measured for impairment.

The table below presents details on TDR loans by type.

	September 30, 2021						December 31, 2020
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Carrying value of modified loans classified as TDRs:
On accrual status	$	286	$	8,500	$	8,786	$	307	$	6,888	$	7,195
On non-accrual status		6,670		11,753		18,423		7,020		11,044		18,064
Total carrying value of modified loans classified as TDRs	$	6,956	$	20,253	$	27,209	$	7,327	$	17,932	$	25,259
Allowance for loan losses on loans classified as TDRs	$	7	$	2,173	$	2,180	$	17	$	3,323	$	3,340

The table below presents TDR loan activity and the financial effects of these modifications by type.

	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		—		3		3		—		6		6
Pre-modification recorded balance (a)	$	—	$	322	$	322	$	—	$	713	$	713
Post-modification recorded balance (a)	$	—		321	$	321	$	—	$	730	$	730
Number of loans that remain in default as of Sept 30, 2021 (b)		—		—		—		—		4		4
Balance of loans that remain in default as of Sept 30, 2021 (b)	$	—	$	—	$	—	$	—	$	733	$	733
						-
Concession granted (a):
Term extension	$	—	$	277	$	277	$	—	$	547	$	547
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		—		—		—		—		187		187
Total	$	—	$	277	$	277	$	—	$	734	$	734
	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		1		20		21		3		16		19
Pre-modification recorded balance (a)	$	1,276	$	8,630	$	9,906	$	8,456	$	3,691	$	12,147
Post-modification recorded balance (a)	$	1,276	$	8,164	$	9,440	$	8,456	$	3,748	$	12,204
Number of loans that remain in default as of Sept 30, 2021 (b)		1		2		3		2		5		7
Balance of loans that remain in default as of Sept 30, 2021 (b)	$	1,276	$	157	$	1,433	$	8,422	$	874	$	9,296
Concession granted (a):
Term extension	$	—	$	6,912	$	6,912	$	—	$	2,371	$	2,371
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		1,276		90		1,366		8,422		327		8,749
Total	$	1,276	$	7,002	$	8,278	$	8,422	$	2,698	$	11,120
(a) Represents carrying value.
(b) Represents carrying values of the TDRs that occurred during the respective period ended that remained in default as of the current period ended. 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.

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The remaining elements of the Company’s modification programs are generally considered insignificant and do not have a material impact on financial results. For loans that the Company determines foreclosure of the collateral is probable, expected losses are measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. As of September 30, 2021 and December 31, 2020, the Company’s total carrying amount of loans in the foreclosure process was $2.4 million and $2.2 million, respectively.

PCD loans

The Company did not acquire any PCD loans in the three and nine months ended September 30, 2021 and 2020.

Note 7. Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP has a three-level hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). The Company’s valuation techniques for financial instruments use observable and unobservable inputs. Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories:

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 — One or more pricing inputs is significant to the overall valuation and unobservable. 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 financial instruments. 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.

Valuation techniques of Level 3 investments vary by instrument type, but are generally based on an income, market or cost based approach. The income approach predominantly considers discounted cash flows which is the measure of expected future cash flows in a default scenario, implied by the value of the underlying collateral, where applicable, and current performance whereas the market based approach predominantly considers pull-through rates, industry multiples and the unpaid principal balance. Fair value measurements of loans are sensitive to changes in assumptions regarding prepayments, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Fair value measurements of residential mortgage servicing rights are sensitive to changes in assumptions regarding prepayments, discount rates, and cost of servicing. Fair value measurements of derivative instruments, specifically IRLC’s, are sensitive to changes in assumptions related to origination pull-through rates, servicing fee multiples, and percentages of unpaid principal balances. Origination pull-through rates are also dependent on factors such as market interest rates, type of origination, length of lock, purpose of the loan (purchase or refinance), type of loan (fixed or variable), and the processing status of the loan. In addition, the fair value of the acquired contingent consideration was determined using a Monte Carlo simulation model which considers various potential results based on Level 3 inputs, including management’s latest estimates of future operating results. Fair value measurements of the contingent consideration liability, are sensitive to changes in assumptions related to earnings before tax (“EBT”), discount rate and risk-free rate of return.

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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 table below presents financial instruments carried at fair value on a recurring basis.

(In Thousands)	Level 1		Level 2		Level 3		Total
September 30, 2021
Assets:
Loans, held for sale, at fair value	$	—	$	549,917	$	—	$	549,917
Loans, net, at fair value		—		—		12,162		12,162
Paycheck Protection Program loans		—		—		9,873		9,873
Mortgage backed securities, at fair value		—		116,129		1,552		117,681
Derivative instruments, at fair value		—		3,820		2,360		6,180
Residential mortgage servicing rights, at fair value		—		—		107,589		107,589
Total assets	$	—	$	669,866	$	133,536	$	803,402
Liabilities:
Contingent consideration	$	—	$	—	$	12,400	$	12,400
Total liabilities	$	—	$	—	$	12,400	$	12,400
December 31, 2020
Assets:
Loans, held for sale, at fair value	$	—	$	340,288	$	—	$	340,288
Loans, net, at fair value		—		—		13,795		13,795
Paycheck Protection Program loans		—		—		74,931		74,931
Mortgage backed securities, at fair value		—		62,880		25,131		88,011
Derivative instruments, at fair value		—		—		16,363		16,363
Residential mortgage servicing rights, at fair value		—		—		76,840		76,840
Total assets	$	—	$	403,168	$	207,060	$	610,228
Liabilities:
Derivative instruments, at fair value	$	—	$	11,604	$	—	$	11,604
Total liabilities	$	—	$	11,604	$	—	$	11,604

The table below presents the valuation techniques and significant unobservable inputs used to value Level 3 financial instruments, using third party information without adjustment.

(In Thousands, except price)	Fair Value		Predominant Valuation Technique (a)		Type	Range		Weighted Average
September 30, 2021
Residential mortgage servicing rights, at fair value	$	107,589		Income Approach	Forward prepayment rate | Discount rate | Cost of servicing		(b)		(b)
Derivative instruments, at fair value	$	2,360		Market Approach	Origination pull-through rate | Servicing Fee Multiple | Percentage of unpaid principal balance		65.0 - 100% | 0.9 - 5.2% | 0.3 to 3.0%		87.1% | 4.1% | 1.3%
Contingent consideration	$	12,400		Monte Carlo Simulation Model	EBT volatility | Risk-free rate of return | EBT discount rate | Liability discount rate		25.0% | 0.4% | 17.6% | 3.3%		25.0% | 0.4% | 17.6% | 3.3%
December 31, 2020
Residential mortgage servicing rights, at fair value	$	76,840		Income Approach	Forward prepayment rate | Discount rate | Cost of servicing		(b)		(b)
Derivative instruments, at fair value	$	16,363		Market Approach	Origination pull-through rate | Servicing Fee Multiple | Percentage of unpaid principal balance		47.6 - 100% | 0.5 - 12.8% | 0.1 to 2.9%		84.1% | 3.6% | 1.1%

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

(b)Refer to Note 9 - Servicing Rights for more information on Residential mortgage servicing rights unobservable inputs.

Included within Level 3 assets of $133.5 million as of September 30, 2021 and $207.1 million as of December 30, 2020, is $23.6 million and $113.9 million of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value, respectively.

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The tables below present a summary of changes in fair value for Level 3 assets and liabilities.

(In Thousands)	MBS		Derivatives		Loans, net, at fair value		Paycheck Protection Program loans		Residential MSRs, at fair value			Contingent Consideration		Total
Three Months Ended September 30, 2021
Beginning Balance	$	1,714	$	6,130	$	13,681	$	16,431	$	100,820	$	—	$	138,776
Purchases or Originations		—		—		—		—		—		(12,400)		(12,400)
Additions due to loans sold, servicing retained		—		—		—		—		11,622		—		11,622
Sales / Principal payments		—		—		(1,380)		(6,558)		(5,000)		—		(12,938)
Realized gains, net		—		—		—		—		—		—		—
Unrealized gains (losses), net		29		(3,770)		(139)		—		147		—		(3,733)
Accreted discount, net		—		—		—		—		—		—		—
Transfer to (from) Level 3		(191)		—		—		—		—		—		(191)
Ending Balance	$	1,552	$	2,360	$	12,162	$	9,873	$	107,589	$	(12,400)	$	121,136
Unrealized gains (losses), net on assets/liabilities	$	124	$	2,360	$	(329)	$	—	$	(36,406)	$	—	$	(34,251)
Nine Months Ended September 30, 2021
Beginning Balance	$	25,131	$	16,363	$	13,795	$	74,931	$	76,840	$	—	$	207,060
Purchases or Originations		—		—		—		3,866		—		(12,400)		(8,534)
Additions due to loans sold, servicing retained		—		—		—		—		35,595		—		35,595
Sales / Principal payments		(92)		—		(1,592)		(68,924)		(15,650)		—		(86,258)
Realized gains, net		—		—		(5)		—		—		—		(5)
Unrealized gains (losses), net		1,223		(14,003)		(36)		—		10,804		—		(2,012)
Accreted discount, net		60		—		—		—		—		—		60
Transfer to (from) Level 3		(24,770)		—		—		—		—		—		(24,770)
Ending Balance	$	1,552	$	2,360	$	12,162	$	9,873	$	107,589	$	(12,400)	$	121,136
Unrealized gains (losses), net on assets/liabilities	$	124	$	2,360	$	(329)	$	—	$	(36,406)	$	—	$	(34,251)
Three Months Ended September 30, 2020
Beginning Balance	$	411	$	19,037	$	124,298	$	—	$	73,645	$	—	$	217,391
Originations		12,640		—		1,198		—		11,343		—		25,181
Sales / Principal payments		(11)		—		(5,911)		—		(5,916)		—		(11,838)
Realized gains, net		—		—		375		—		—		—		375
Unrealized gains (losses), net		(114)		1,812		5		—		(4,688)		—		(2,985)
Transfer to (from) Level 3		(276)		—		—		—		—		—		(276)
Ending Balance	$	12,650	$	20,849	$	119,965	$	—	$	74,384	$	—	$	227,848
Unrealized gains (losses), net on assets/liabilities	$	(82)	$	20,849	$	(333)	$	—	$	(43,123)	$	—	$	(22,689)
Nine Months Ended September 30, 2020
Beginning Balance	$	460	$	2,814	$	20,212	$	—	$	91,174	$	—	$	114,660
Originations		12,640		—		106,728		—		—		—		119,368
Additions due to loans sold, servicing retained		—		—		—		—		31,821		—		31,821
Sales / Principal payments		(13)		—		(6,207)		—		(15,443)		—		(21,663)
Realized gains, net		—		—		375		—		—		—		375
Unrealized gains (losses), net		(154)		18,035		(1,143)		—		(33,168)		—		(16,430)
Transfer to (from) Level 3		(283)		—		—		—		—		—		(283)
Ending Balance	$	12,650	$	20,849	$	119,965	$	—	$	74,384	$	—	$	227,848
Unrealized gains (losses), net on assets/liabilities	$	(82)	$	20,849	$	(333)	$	—	$	(43,123)	$	—	$	(22,689)

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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Financial instruments not carried at fair value

The table below presents the carrying value and estimated fair value of financial instruments that are not carried at fair value and are classified as Level 3.

	September 30, 2021				December 31, 2020
(In Thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Loans, net	$	5,768,110	$	5,705,504	$	4,009,636	$	4,103,200
Paycheck Protection Program loans		1,774,953		1,857,853		—		—
Purchased future receivables, net		6,567		6,567		17,308		17,308
Servicing rights		63,517		69,869		37,823		47,567
Total assets	$	7,613,147	$	7,639,793	$	4,064,767	$	4,168,075
Liabilities:
Secured borrowings	$	2,044,069	$	2,044,069	$	1,294,243	$	1,294,243
Paycheck Protection Program Liquidity Facility borrowings		1,945,883		1,945,883		76,276		76,276
Securitized debt obligations of consolidated VIEs, net		2,676,265		2,230,143		1,905,749		1,907,541
Senior secured note, net		179,914		180,740		179,659		188,114
Guaranteed loan financing		348,774		370,602		401,705		426,348
Convertible notes, net		112,966		93,350		112,129		68,186
Corporate debt, net		333,975		346,445		150,989		151,209
Total liabilities	$	7,641,846	$	7,211,232	$	4,120,750	$	4,111,917

Other assets of $38.0 million as of September 30, 2021, and $23.8 million as of December 31, 2020, are not carried at fair value and include due from servicers and accrued interest, which are presented in Note 19 – Other Assets and Other Liabilities. Receivables from third parties of $51.6 million as of September 30, 2021, and $1.2 million as of December 31, 2020, are not carried at fair value but generally approximate fair value and are classified as Level 3. Accounts payable and other accrued liabilities of $25.3 million as of September 30, 2021, and $23.8 million as of December 31, 2020, are not carried at fair value and include payables to related parties and accrued interest payable which are included in Note 19. For these instruments, carrying value generally approximates fair value and are classified as Level 3.

Note 8. Mortgage backed securities

The table below presents information about the mortgage backed securities portfolio, which is classified as trading securities and carried at fair value.

		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, 2021
Freddie Mac Loans	12/2037	3.9	%	$	114,234	$	49,088	$	54,638	$	5,550	$	—
Commercial Loans	11/2050	4.5			72,806		39,037		34,581		772		(5,228)
Residential	01/2041	3.6			31,748		24,793		28,462		3,708		(39)
Total Mortgage backed securities, at fair value	01/2044	4.1	%	$	218,788	$	112,918	$	117,681	$	10,030	$	(5,267)
December 31, 2020
Freddie Mac Loans	01/2037	3.7	%	$	139,408	$	52,320	$	53,509	$	1,880	$	(691)
Commercial Loans	11/2050	4.5			73,074		39,224		34,411		226		(5,039)
Tax Liens	09/2026	6.0			92		92		91		—		(1)
Total Mortgage backed securities, at fair value	10/2041	4.1	%	$	212,574	$	91,636	$	88,011	$	2,106	$	(5,731)

(a) Weighted based on current principal balance

The table below presents information about the maturity of the mortgage backed securities portfolio.

		Weighted Average		Principal		Amortized
(In Thousands)	Interest Rate(a)			Balance		Cost		Fair Value
September 30, 2021
After five years through ten years		—	%	$	—	$	—	$	—
After ten years		4.1			218,788		112,918		117,681
Total Mortgage backed securities, at fair value		4.1	%	$	218,788	$	112,918	$	117,681
December 31, 2020
After five years through ten years		6.0	%	$	92	$	92	$	91
After ten years		2.8			212,482		91,544		87,920
Total Mortgage backed securities, at fair value		4.1	%	$	212,574	$	91,636	$	88,011

(a) Weighted based on current principal balance

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Note 9. Servicing rights

The Company performs servicing activities for third parties, which primarily include collecting principal, interest and other payments from borrowers, remitting the corresponding payments to investors and monitoring delinquencies. The Company’s servicing fees are specified by pooling and servicing agreements.

The table below presents information about servicing rights.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
SBA servicing rights, at amortized cost
Beginning net carrying amount	$	19,721	$	17,318	$	18,764	$	17,660
Additions due to loans sold, servicing retained		2,778		993		6,478		2,328
Acquisitions		—		—		—		—
Amortization		(986)		(909)		(3,075)		(2,642)
Impairment (recovery)		(308)		138		(962)		194
Ending net carrying amount	$	21,205	$	17,540	$	21,205	$	17,540
Freddie Mac multi-family servicing rights, at amortized cost
Beginning net carrying amount	$	24,724	$	16,798	$	19,059	$	13,135
Additions due to loans sold, servicing retained		3,292		2,107		10,760		7,094
Acquisitions		15,800		—		15,800		—
Amortization		(1,504)		(784)		(3,307)		(2,108)
Ending net carrying amount	$	42,312	$	18,121	$	42,312	$	18,121
Total servicing rights, at amortized cost	$	63,517	$	35,661	$	63,517	$	35,661
Residential mortgage servicing rights, at fair value
Beginning net carrying amount	$	100,820	$	73,645	$	76,840	$	91,174
Additions due to loans sold, servicing retained		11,622		11,343		35,595		31,821
Loan pay-offs		(5,000)		(5,916)		(15,650)		(15,443)
Unrealized gains (losses)		147		(4,688)		10,804		(33,168)
Ending fair value amount	$	107,589	$	74,384	$	107,589	$	74,384
Total servicing rights	$	171,106	$	110,045	$	171,106	$	110,045

Servicing rights – SBA and Freddie Mac. The Company’s SBA and Freddie Mac multi-family servicing rights are carried at amortized cost and evaluated quarterly for impairment. 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 table below presents additional information about SBA and Freddie Mac multi-family servicing rights.

	As of September 30, 2021				As of December 31, 2020
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Carrying Value		Amount		Carrying Value
SBA	$	813,089	$	21,205	$	643,135	$	18,764
Freddie Mac multi-family		4,043,989		42,312		1,501,998		19,059
Total	$	4,857,078	$	63,517	$	2,145,133	$	37,823

The table below presents significant assumptions used in the estimated valuation of SBA and Freddie Mac multi-family servicing rights carried at amortized cost.

		September 30, 2021						December 31, 2020
		Range of input values				Weighted Average		Range of input values				Weighted Average
SBA servicing rights
	Forward prepayment rate	7.1	-	21.1	%	8.3	%	6.7	-	20.8	%	8.5	%
	Forward default rate	0.0	-	10.6	%	9.1	%	0.0	-	10.5	%	8.2	%
	Discount rate	9.2	-	21.0	%	9.8	%	4.5	-	4.5	%	4.5	%
	Servicing expense	0.4	-	0.4	%	0.4	%	0.4	-	0.4	%	0.4	%
Freddie Mac multi-family servicing rights
	Forward prepayment rate	0.0	-	5.1	%	2.4	%	0.1	-	5.1	%	2.4	%
	Forward default rate	0.0	-	0.4	%	0.3	%	0.0	-	0.4	%	0.3	%
	Discount rate	6.0	-	6.0	%	6.0	%	6.0	-	6.0	%	6.0	%
	Servicing expense	0.1	-	0.3	%	0.2	%	0.2	-	0.3	%	0.2	%

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

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The table below presents the possible impact of 10% and 20% adverse changes to key assumptions on SBA and Freddie Mac multi-family servicing rights.

(In Thousands)	September 30, 2021		December 31, 2020
SBA servicing rights
Forward prepayment rate
Impact of 10% adverse change	$	(649)	$	(729)
Impact of 20% adverse change	$	(1,266)	$	(1,420)
Default rate
Impact of 10% adverse change	$	(157)	$	(150)
Impact of 20% adverse change	$	(312)	$	(298)
Discount rate
Impact of 10% adverse change	$	(720)	$	(395)
Impact of 20% adverse change	$	(1,394)	$	(777)
Servicing expense
Impact of 10% adverse change	$	(1,338)	$	(1,250)
Impact of 20% adverse change	$	(2,676)	$	(2,501)
Freddie Mac multi-family servicing rights
Forward prepayment rate
Impact of 10% adverse change	$	(202)	$	(163)
Impact of 20% adverse change	$	(401)	$	(324)
Default rate
Impact of 10% adverse change	$	(8)	$	(6)
Impact of 20% adverse change	$	(16)	$	(13)
Discount rate
Impact of 10% adverse change	$	(1,336)	$	(678)
Impact of 20% adverse change	$	(2,609)	$	(1,324)
Servicing expense
Impact of 10% adverse change	$	(2,679)	$	(1,947)
Impact of 20% adverse change	$	(5,359)	$	(3,894)

The table below presents estimated future amortization expense for SBA and Freddie Mac multi-family servicing rights.

(In Thousands)	September 30, 2021
2021	$	4,114
2022		9,292
2023		8,241
2024		7,333
2025		6,567
Thereafter		27,970
Total	$	63,517

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 table below presents additional information about residential mortgage servicing rights carried at fair value.

	September 30, 2021				December 31, 2020
(In Thousands)	Unpaid Principal Amount		Fair Value		Unpaid Principal Amount		Fair Value
Fannie Mae	$	3,975,954	$	37,474	$	3,700,450	$	27,632
Ginnie Mae		2,858,078		31,264		2,757,124		25,899
Freddie Mac		3,892,128		38,851		3,071,312		23,309
Total	$	10,726,160	$	107,589	$	9,528,886	$	76,840

The table below presents significant assumptions used in the valuation of residential mortgage servicing rights carried at fair value.

		September 30, 2021						December 31, 2020
		Range of input values				Weighted Average		Range of input values				Weighted Average
Residential mortgage servicing rights
	Forward prepayment rate	10.1	-	29.4	%	10.8	%	12.6	-	31.4	%	14.3	%
	Discount rate	9.0	-	11.2	%	9.5	%	9.1	-	11.7	%	9.8	%
	Cost of servicing	$70	-	$85		$74		$70	-	$85		$74

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

37

The table below presents the possible impact of 10% and 20% adverse changes to key assumptions on the fair value of residential mortgage servicing rights.

(In Thousands)	September 30, 2021		December 31, 2020
Residential mortgage servicing rights
Prepayment rate
Impact of 10% adverse change	$	(5,253)	$	(5,049)
Impact of 20% adverse change	$	(10,140)	$	(9,701)
Discount rate
Impact of 10% adverse change	$	(3,911)	$	(2,601)
Impact of 20% adverse change	$	(7,552)	$	(5,028)
Cost of servicing
Impact of 10% adverse change	$	(1,954)	$	(1,469)
Impact of 20% adverse change	$	(3,908)	$	(2,938)

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

Residential mortgage banking activities, reflects revenue within our residential mortgage banking business directly related to loan origination and sale activity. This primarily consists of the realized gains on sales of residential loans held for sale and loan origination fee income. Residential mortgage banking activities also consists of unrealized gains and 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 table below presents the components of residential mortgage banking activities and associated variable expenses.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Realized and unrealized gain (loss) of residential mortgage loans held for sale, at fair value	$	26,346	$	61,131	$	86,926	$	143,747
Creation of new mortgage servicing rights, net of payoffs		6,623		5,427		19,947		16,378
Loan origination fee income on residential mortgage loans		4,720		6,021		16,143		15,529
Unrealized gain (loss) on IRLCs and other derivatives		(419)		2,945		(7,647)		17,103
Residential mortgage banking activities	$	37,270	$	75,524	$	115,369	$	192,757
Variable expenses on residential mortgage banking activities	$	(24,380)	$	(30,918)	$	(61,286)	$	(87,494)

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Note 11. Secured borrowings

The table below presents certain characteristics of secured borrowings.

								Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size		Pledged Assets Carrying Value		September 30, 2021		December 31, 2020
JPMorgan	Acquired loans, SBA loans	August 2022	1M L + 2.5% to 2.875%	$	200,000	$	61,371	$	46,307	$	36,604
Keybank	Freddie Mac loans	February 2022	SOFR + 1.41%		100,000		13,495		13,268		50,408
East West Bank	SBA loans	October 2022	Prime - 0.821% to + 0.00%		75,000		66,441		50,201		40,542
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50% to 3.00%		231,600		51,781		40,250		36,840
Comerica Bank	Residential loans	June 2022	1M L + 1.75%		100,000		95,254		89,793		78,312
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000		118,217		116,628		123,951
Origin Bank	Residential loans	September 2022	Variable Pricing		60,000		32,985		31,840		27,450
Associated Bank	Residential loans	November 2021	1M L + 1.50%		60,000		32,012		30,631		15,556
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000		76,325		49,400		34,400
Credit Suisse	Purchased future receivables	October 2023	1M L + 4.50%		50,000		6,567		1,000		—
Bank of the Sierra	Real estate	August 2050	3.25% to 3.45%		22,770		32,428		22,281		22,611
Western Alliance	Residential loans	July 2022	3.75% to 4.75%		50,000		350		335		—
Total borrowings under credit facilities and other financing agreements				$	1,149,370	$	587,226	$	491,934	$	466,674
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 2.00% to 3.00%	$	500,000	$	142,163	$	110,773	$	210,735
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00% to 2.40%		350,000		308,636		225,974		190,567
JPMorgan	Transitional loans	November 2022	1M L + 2.00% to 2.75%		700,000		858,005		636,171		247,616
Performance Trust	Acquired loans	March 2024	1M T + 2.00%		174,000		98,071		84,419		—
Credit Suisse	Fixed rate, Transitional, Acquired loans	May 2022	1M L + 2.00% to 2.35%		500,000		252,998		184,892		—
Credit Suisse	Residential loans	December 2021	L + 3.00%		100,000		74,994		60,390		—
JPMorgan	MBS	October 2021	1.15% to 1.63%		33,338		57,770		33,338		65,407
Deutsche Bank	MBS	October 2021	2.38%		12,956		19,777		12,956		16,354
Citibank	MBS	October 2021	2.33%		48,094		83,231		48,094		58,076
RBC	MBS	October 2021	1.31% to 1.96%		62,458		93,061		62,458		38,814
CSFB	MBS	October 2021	2.40% to 2.95%		58,786		108,138		58,786		—
Various	MBS	October 2021	Variable Pricing		33,884		53,148		33,884		—
Total borrowings under repurchase agreements				$	2,573,516	$	2,149,992	$	1,552,135	$	827,569
Total secured borrowings				$	3,722,886	$	2,737,218	$	2,044,069	$	1,294,243

In the table above:

● The current facility size for borrowings under credit facilities due to Credit Suisse is €200.0 million, but has been converted into USD for purposes of this disclosure.

● The weighted average interest rate of borrowings under credit facilities was 2.8% and 2.8% as of September 30, 2021 and December 31, 2020, respectively.

● The weighted average interest rate of borrowings under repurchase agreements was 2.0% and 3.3% as of September 30, 2021 and December 31, 2020, respectively.

● The agreements governing secured borrowings require maintenance of certain financial and debt covenants. The Company received a waiver from certain financing counterparties to exclude the Paycheck Protection Program Liquidity Fund from certain covenant calculations as of September 30, 2021 and therefore was in compliance with all debt and financial covenants as of the current period ended. The Company was in compliance with all debt and financial covenants as of December 31, 2020.

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The table below presents the carrying value of collateral pledged with respect to secured borrowings outstanding.

	​ Pledged Assets Carrying Value
(In Thousands)	September 30, 2021		December 31, 2020
Collateral pledged - borrowings under credit facilities and other financing agreements
Loans, held for sale, at fair value	$	294,940	$	313,844
Loans, net		176,966		159,482
Loans, held at fair value		—		73,799
Mortgage servicing rights		76,325		50,941
Purchased future receivables		6,567		—
Real estate owned, held for sale		32,428		32,948
Total	$	587,226	$	631,014
Collateral pledged - borrowings under repurchase agreements
Loans, net	$	1,533,817	$	815,603
Mortgage backed securities		99,452		72,179
Trade receivable		26,909		—
Retained interest in assets of consolidated VIEs		288,764		226,773
Loans, held for sale, at fair value		198,075		17,850
Loans, held at fair value		1,550		3,071
Real estate acquired in settlement of loans		1,425		829
Total	$	2,149,992	$	1,136,305
Total collateral pledged on secured borrowings	$	2,737,218	$	1,767,319

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 L.P., 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.

On October 20, 2021, the Company redeemed all of the outstanding Senior Secured Notes in connection with the issuance of ReadyCap Holdings, LLC's 4.50% Senior Secured Notes due 2026. Refer to Note 28 - Subsequent Events for additional information.

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 (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 the Company's common stock. As of September 30, 2021, the conversion rate was 1.6146 shares of common stock per $25 principal amount of the Convertible Notes, which equals a conversion price of approximately $15.48 per share of the Company’s common stock. Upon conversion, holders will receive, at the Company's discretion, cash, shares of the Company's common stock, or a combination thereof.

The Company may redeem all or any portion of the Convertible Notes on or after August 15, 2021, if the last reported sale price of the Company’s common stock has been at least 120% of the conversion price in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price payable in cash equal to 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.

40

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, 2021, the Company was in compliance with all covenants with respect to the Convertible Notes.

Corporate debt, net

The 2021 Notes

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

On March 26, 2021, the Company redeemed all of the outstanding 2021 Notes, at a redemption price equal to 100% of the principal amount of the 2021 Notes plus accrued and unpaid interest, for cash.

The 6.20% 2026 Notes

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

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

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

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

41

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

The 5.75% 2026 Notes

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

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

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

As of September 30, 2021, the Company was in compliance with all covenants with respect to the Corporate debt.

Junior subordinated notes

On March 19, 2021, the Company completed the ANH Merger which included the Company assuming the outstanding junior subordinated notes (“Junior subordinated notes”) issued to ANH. On March 15, 2005 ANH issued $37.38 million of junior subordinated notes to a newly formed statutory trust, Anworth Capital Trust I, organized by ANH under Delaware law. The trust issued $36.25 million in trust preferred securities, of which $15 million were for I-A notes and $21.25 million for I-B notes, to unrelated third party investors. Both the junior subordinated notes and the trust preferred securities require quarterly payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. Both the junior subordinated notes and the trust preferred securities will mature in 2035 and are currently redeemable, at our option, in whole or in part, without penalty. ANH used the net proceeds of this issuance to invest in Agency MBS. In accordance with ASC 810-10, Anworth Capital Trust I does not meet the requirements for consolidation.

The Debt ATM Agreement

On May 20, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which the Company may offer and sell, from time to time, up to $100.0 million of the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) (the “Debt ATM Program”). The Agent is not required to sell any specific number of the notes, but the Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between the Agent and the Company. During the three months ended September 30, 2021, the Company did not sell any amount of the 6.20% 2026 Notes or the 5.75% 2026 Notes through the Debt ATM Program.

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The table below presents information about our senior secured notes, convertible notes, and corporate debt.

(in thousands, except rates)	Coupon Rate		Maturity Date	September 30, 2021
Senior secured notes principal amount(1)	7.50	%	2/15/2022	$	180,000
Unamortized premium - Senior secured notes					294
Unamortized deferred financing costs - Senior secured notes					(380)
Total Senior secured notes, net				$	179,914
Convertible notes principal amount (2)	7.00	%	8/15/2023		115,000
Unamortized discount - Convertible notes (3)					(748)
Unamortized deferred financing costs - Convertible notes					(1,286)
Total Convertible notes, net				$	112,966
Corporate debt principal amount(4)	6.20	%	7/30/2026		104,250
Corporate debt principal amount(5)	5.75	%	2/15/2026		201,250
Unamortized discount - corporate debt					(4,531)
Unamortized deferred financing costs - corporate debt					(3,244)
Junior subordinated notes principal amount(6)	3M + 3.10	%	3/30/2035		15,000
Junior subordinated notes principal amount(7)	3M + 3.10	%	4/30/2035		21,250
Total corporate debt, net				$	333,975
Total carrying amount of debt				$	626,855
Total carrying amount of conversion option of equity components recorded in equity				$	748
(1) Interest on the senior secured notes is payable semiannually on each February 15 and August 15.
(2) Interest on the convertible notes is payable quarterly on February 15, May 15, August 15, and November 15 of each year.
(3) Represents the discount created by separating the conversion option from the debt host instrument.
(4) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year.
(5) Interest on the corporate debt is payable January 30, April 30, July 30, and October 30 of each year, beginning on April 30, 2021.
(6) Interest on the Junior subordinated notes I-A payable March 30, June 30, September 30, and December 30 of each year.
(7) Interest on the Junior subordinated notes I-B payable January 30, April 30, July 30, and October 30 of each year.

The table below presents the contractual maturities for our senior secured notes, convertible notes, and corporate debt.

(In Thousands)	September 30, 2021
2021	$	—
2022		180,000
2023		115,000
2024		—
2025		—
Thereafter		341,750
Total contractual amounts	$	636,750
Unamortized deferred financing costs, discounts, and premiums, net		(9,895)
Total carrying amount of debt	$	626,855

Note 13. Guaranteed loan financing

Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment in the consolidated balance sheets and the portion sold is recorded as guaranteed loan financing in the liabilities section of the 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 consolidated statements of income. Guaranteed loan financings are secured by loans of $349.8 million and $403.0 million as of September 30, 2021 and December 31, 2020, respectively.

The table below presents guaranteed loan financing and the related interest rates and maturity dates.

	Weighted Average		Range of		Range of
(In Thousands)	Interest Rate		Interest Rates		Maturities (Years)	Ending Balance
September 30, 2021	3.78	%	0.99-6.50	%	2021-2044	$	348,774
December 31, 2020	3.76	%	0.99-6.50	%	2021-2044	$	401,705

The table below presents the contractual maturities of our guaranteed loan financing.

(In Thousands)	September 30, 2021
2021	$	6
2022		883
2023		1,182
2024		2,036
2025		2,924
Thereafter		341,743
Total	$	348,774

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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 vehicles, most notably trusts. We primarily securitize our acquired and originated loans, which provides a source of funding and has enabled us to transfer a certain portion of economic risk on 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 VIE activity in which we are involved in are consolidated within our financial statements. Refer to Note 3 – Summary of Significant Accounting Policies 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 typically consolidate, as we are the primary beneficiary.

As a result of the consolidation, the securitization is viewed as a loan financing to enable the creation of the senior security and ultimately, sale 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, with the exception of an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.

The securitization trust receives principal and interest on the underlying loans and distributes those payments to the certificate holders. The assets and other instruments held by the securitization trust are restricted in that they can only be used to fulfill the obligations of the securitization trust. The risks associated with the Company’s involvement with the VIE is limited to the risks and rights as a certificate holder of the securities retained by the Company.

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

	September 30, 2021						December 31, 2020
	Current				Weighted		Current				Weighted
	Principal		Carrying		Average		Principal		Carrying		Average
(In Thousands)	Balance		value		Interest Rate		Balance		value		Interest Rate
Waterfall Victoria Mortgage Trust 2011-SBC2	$	—	$	—	—	%	$	4,055	$	4,055	5.5	%
ReadyCap Lending Small Business Trust 2019-2		85,082		83,924	2.6			103,030		101,468	3.1
Sutherland Commercial Mortgage Trust 2017-SBC6		19,524		19,224	3.9			27,035		26,555	3.6
Sutherland Commercial Mortgage Trust 2018-SBC7		—		—	—			79,302		78,168	4.7
Sutherland Commercial Mortgage Trust 2019-SBC8		153,755		151,470	2.9			178,911		176,307	2.9
Sutherland Commercial Mortgage Trust 2020-SBC9		106,553		104,465	4.1			131,729		129,014	3.8
Sutherland Commercial Mortgage Trust 2021-SBC10		169,007		166,566	1.6			—		—	—
ReadyCap Commercial Mortgage Trust 2014-1		8,300		8,283	5.7			10,880		10,858	5.8
ReadyCap Commercial Mortgage Trust 2015-2		22,530		20,680	5.2			45,075		35,183	4.8
ReadyCap Commercial Mortgage Trust 2016-3		19,376		18,490	5.0			26,371		25,286	4.7
ReadyCap Commercial Mortgage Trust 2018-4		88,496		85,734	4.1			94,273		91,098	4.0
ReadyCap Commercial Mortgage Trust 2019-5		177,177		169,507	4.3			229,232		220,605	4.2
ReadyCap Commercial Mortgage Trust 2019-6		320,674		314,884	3.2			359,266		348,773	3.2
Ready Capital Mortgage Financing 2018-FL2		—		—	—			48,979		48,975	2.4
Ready Capital Mortgage Financing 2019-FL3		138,231		137,988	1.7			229,440		227,950	2.0
Ready Capital Mortgage Financing 2020-FL4		324,208		320,401	3.0			324,219		318,385	3.1
Ready Capital Mortgage Financing 2021-FL5		510,955		505,184	1.5			—		—	—
Ready Capital Mortgage Financing 2021-FL6		543,223		535,590	1.3			—		—	—
Total	$	2,687,091	$	2,642,390	2.4	%	$	1,891,797	$	1,842,680	3.3	%

The table above excludes non-company sponsored securitized debt obligations of $33.9 million and $63.1 million that are consolidated in the consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

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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 and 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 as we do not have the power to direct the activities that most significantly impact their economic performance therefore, we only account for our specific interest in them.

Assets and liabilities of consolidated VIEs

The table below presents securitized assets and liabilities of consolidated VIEs.

(In Thousands)	September 30, 2021		December 31, 2020
Assets:
Cash and cash equivalents	$	4	$	20
Restricted cash		22,353		13,790
Loans, net		3,395,775		2,472,807
Real estate owned, held for sale		2,778		4,456
Other assets		17,513		27,670
Total assets	$	3,438,423	$	2,518,743
Liabilities:
Securitized debt obligations of consolidated VIEs, net		2,676,265		1,905,749
Total liabilities	$	2,676,265	$	1,905,749

Assets of unconsolidated VIEs

The table below reflects our variable interests in identified VIEs, of which we are not the primary beneficiary.

	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Mortgage backed securities, at fair value(2)	$	83,398	$	80,690	$	83,398	$	80,690
Investment in unconsolidated joint ventures		22,635		28,290		22,635		28,290
Total assets in unconsolidated VIEs	$	106,033	$	108,980	$	106,033	$	108,980
(1) Maximum exposure to loss is limited to the greater of the fair value or carrying value of the assets as of the consolidated balance sheet date.
(2) Retained interest in Freddie Mac and other third party sponsored securitizations.

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Note 15. Interest income and interest expense

Interest income and expense are recorded in the consolidated statements of income and classified based on the nature of the underlying asset or liability. The table below presents the components of interest income and expense.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Interest income
Loans
Originated transitional loans	$	41,287	$	21,366	$	98,874	$	65,953
Originated SBC loans		12,041		12,784		36,794		42,712
Acquired loans		14,710		13,611		41,892		42,938
Acquired SBA 7(a) loans		4,665		4,014		14,129		14,165
Originated SBA 7(a) loans		5,394		4,413		14,248		15,153
Originated SBC loans, at fair value		268		639		746		1,470
Originated residential agency loans		27		40		106		89
Total loans (1)	$	78,392	$	56,867	$	206,789	$	182,480
Held for sale, at fair value, loans
Originated residential agency loans	$	3,221	$	2,178	$	8,503	$	5,376
Originated Freddie loans		653		221		1,985		911
Acquired loans		372		39		376		166
Total loans, held for sale, at fair value (1)	$	4,246	$	2,438	$	10,864	$	6,453
Paycheck Protection Program loans
Paycheck Protection Program loans	$	18,716	$	—		51,380	$	—
Paycheck Protection Program loans, at fair value		(36)		302		547		496
Total Paycheck Protection Program loans	$	18,680	$	302	$	51,927	$	496
Mortgage backed securities, at fair value	$	3,818	$	1,467	$	11,974	$	4,397
Total interest income	$	105,136	$	61,074	$	281,554	$	193,826
Interest expense
Secured borrowings	$	(14,048)	$	(9,898)	$	(49,687)	$	(36,196)
Paycheck Protection Program Liquidity Facility borrowings		(2,258)		(51)		(4,137)		(51)
Securitized debt obligations of consolidated VIEs		(19,490)		(21,351)		(60,004)		(58,196)
Guaranteed loan financing		(3,472)		(4,110)		(10,595)		(14,506)
Senior secured note		(3,465)		(3,466)		(10,380)		(10,407)
Convertible note		(2,188)		(2,188)		(6,564)		(6,564)
Corporate debt		(5,215)		(2,759)		(14,945)		(8,242)
Total interest expense	$	(50,136)	$	(43,823)	$	(156,312)	$	(134,162)
Net interest income before provision for loan losses	$	55,000	$	17,251	$	125,242	$	59,664
(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 where the Company has not elected hedge accounting, fair value adjustments are made and recorded in earnings. The fair value adjustments for interest rate swaps and CDS, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported as a net realized gain on financial instruments in the consolidated statements of income. The fair value adjustments for IRLCs, along with the related interest income, interest expense and gains (losses) on termination of such instruments, are reported in residential mortgage banking activities in the consolidated statements of income.

As described in Note 3, for qualifying cash flow hedges, the change in the fair value of derivatives is recorded in OCI and recognized in the consolidated statements of income. Derivative movements impacting earnings are recognized on a consistent basis with the classification of the hedged item, primarily interest expense. The ineffective portions of the cash flow hedges are immediately recognized in earnings.

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The table below presents average notional derivative amounts, as this is the most relevant measure of volume, and derivative assets and liability by type.

		As of September 30, 2021						As of December 31, 2020
		Notional		Derivative		Derivative		Notional		Derivative		Derivative
(In Thousands)	Primary Underlying Risk	Amount		Asset		Liability		Amount		Asset		Liability
Interest rate lock commitments	Interest rate risk	$	443,211	$	2,360	$	—	$	614,358	$	16,363	$	—
Interest Rate Swaps - not designated as hedges	Interest rate risk		447,548		981		—		160,801		—		(952)
Interest Rate Swaps - designated as hedges	Interest rate risk		—		—		—		132,325		—		(5,701)
TBA Agency Securities	Interest rate risk		472,500		2,352		—		565,000		—		(4,004)
Credit Default Swaps	Credit risk		—		—		—		15,000		—		(174)
FX forwards	Foreign exchange rate risk		27,862		487		—		3,866		—		(773)
Total		$	1,391,121	$	6,180	$	—	$	1,491,350	$	16,363	$	(11,604)

The table below presents gains and losses on derivatives.

	Net Realized		Net Unrealized		Net Realized		Net Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
	Three Months Ended September 30, 2021				Nine Months Ended September 30, 2021
Credit default swaps	$	(286)	$	301	$	(286)	$	322
Interest rate swaps		(1,419)		4,126		(7,198)		12,596
TBA Agency Securities		—		3,351		—		6,356
Interest rate lock commitments		—		(3,769)		—		(14,003)
FX forwards		634		17		276		1,260
Total	$	(1,071)	$	4,026	$	(7,208)	$	6,531
	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
Credit default swaps	$	—	$	(2)	$	—	$	59
Interest rate swaps		(1,189)		1,310		(2,185)		(9,194)
Residential mortgage banking activities interest rate swaps		—		957		—		(1,148)
Interest rate lock commitments		—		1,988		—		18,251
FX forwards		(593)		(98)		(302)		(196)
Total	$	(1,782)	$	4,155	$	(2,487)	$	7,772

In the table above:

● Gains (losses) on credit default swaps, interest rate swaps and FX forwards are recorded in net unrealized gain (loss) on financial instruments or net realized gain (loss) on financial instruments in the consolidated statements of income.

● For qualifying hedges of interest rate risk on interest rate swaps, the effective portion relating to the unrealized gain (loss) on derivatives are recorded in accumulated other comprehensive income (loss).

● Gains (losses) on residential mortgage banking activities interest rate swaps and interest rate lock commitments are recorded in residential mortgage banking activities in the consolidated statements of income.

The table below summarizes the gains and losses on derivatives which have qualified for hedge accounting.

(In Thousands)	Derivatives - effective portion reclassified from AOCI to income		Hedge ineffectiveness recorded directly in income		Total income statement impact		Derivatives- effective portion recorded in OCI		Total change in OCI for period
Interest rate hedges- forecasted transactions:
Three Months Ended September 30, 2021	$	(264)	$	—	$	(264)	$	(43)	$	221
Three Months Ended September 30, 2020	$	(371)	$	—	$	(371)	$	300	$	671
Nine Months Ended September 30, 2021	$	(874)	$	—	$	(874)	$	1,449	$	2,323
Nine Months Ended September 30, 2020	$	(1,104)	$	(1,694)	$	(2,798)	$	(5,276)	$	(2,478)

In the table above:

● Forecasted transactions on interest rates consists of benchmark interest rate hedges of LIBOR-indexed floating-rate liabilities.

● 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.

● Amounts recorded in OCI for the period represents after tax amounts.

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Note 17. Real estate owned, held for sale

The table below presents details on our real estate owned, held for sale portfolio.

(In Thousands)	September 30, 2021		December 31, 2020
Acquired ORM Portfolio:
Retail	$	18,401	$	18,700
Mixed Use		14,023		14,248
Land		6,318		7,256
Lodging/Residential		3,230		3,230
Total Acquired ORM REO	$	41,972	$	43,434
Other REO held for sale:
Single Family	$	25,400	$	—
Retail		3,129		660
Office		—		829
SBA		142		425
Total Other REO	$	28,671	$	1,914
Total real estate owned, held for sale	$	70,643	$	45,348

In the table above,

● Other REO excludes $2.8 million as of September 30, 2021 and $4.5 million as of December 30, 2020 of real estate owned, held for sale within consolidated VIEs.

● Acquired ORM REO relates to assets acquired through a merger in March 2019 with Owens Realty Mortgage, Inc. (“ORM”).

Note 18. Agreements and transactions with related parties

Management Agreement

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

Management fee. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee calculated and payable quarterly in arrears equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement) up to $500 million and 1.00% per annum of stockholders’ equity in excess of $500 million. Concurrently with entering into the Merger Agreement, we, our operating partnership and our Manager entered into an Amendment which provides that, contingent upon the closing of the Merger, the Manager’s base management fee will be reduced by the Temporary Fee Reduction. Other than the Temporary Fee Reduction set forth in the Amendment, the terms of the Management Agreement remain the same. Refer to Note 1 – Organization for a more detailed description of the Management Agreement terms.

The table below presents the management fee payable to our Manager.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Management fee - total	$	2.7 million	$	2.7 million	$	8.1 million	$	7.9 million
Management fee - amount unpaid	$	2.7 million	$	2.7 million	$	2.7 million	$	2.7 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) distributable earnings (which is referred to as core earnings in the partnership agreement or the operating partnership) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that distributable earnings over the prior twelve calendar quarters is greater than 0. For purposes of determining the incentive distribution payable to our Manager, distributable earnings is defined under the partnership agreement of the operating partnership in a manner that is similar to the definition of Distributable Earnings described below under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d)  depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other

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non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of distributable earnings described under "Non-GAAP Financial Measures".

The table below presents the incentive fee payable to our Manager.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Incentive fee distribution - total	$	2.8 million	$	1.1 million	$	3.1 million	$	4.6 million
Incentive fee distribution - amount unpaid	$	2.8 million	$	1.1 million	$	2.8 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 our Manager), based upon (1) unsatisfactory performance by our Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term. Additionally, upon such a termination by the Company without cause (or upon termination by the Manager due to the Company’s material breach), the management agreement provides that the Company will pay the Manager a termination fee equal to 3 times the average annual base management fee earned by our Manager during the prior 24 month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, except upon an internalization. Additionally, if the management agreement is terminated under circumstances in which the Company is obligated to make a termination payment to the Manager, the operating partnership shall repurchase, concurrently with such termination, the Class A special unit for an amount equal to 3 times the average annual amount of the incentive distribution paid or payable in respect of the Class A special unit during the 24 month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination.

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

Expense reimbursement. In addition to the management fees and incentive distribution described above, the Company is also 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 consolidated statements of income.

The table below presents reimbursable expenses payable to our Manager.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reimbursable expenses payable to our Manager - total	$	1.5 million	$	0.8 million	$	7.0 million	$	2.8 million
Reimbursable expenses payable to our Manager - amount unpaid	$	1.0 million	$	1.0 million	$	1.0 million	$	1.0 million

Other. During September 2021, the Company acquired $6.3 million of interest in unconsolidated joint ventures from a fund which is managed by an affiliate of our Manager.

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Note 19. Other assets and other liabilities

The table below presents the composition of other assets and other liabilities.

(In Thousands)	September 30, 2021		December 31, 2020
Other assets:
Deferred tax asset	$	18,396	$	18,396
Deferred loan exit fees		22,006		13,940
Accrued interest		25,194		12,656
Goodwill		31,389		11,206
Due from servicers		12,784		11,171
Right-of-use lease asset		2,685		3,172
Intangible assets		15,255		6,986
Deferred financing costs		3,071		2,612
PPP fee receivable		494		18
Other assets		65,553		9,346
Other assets	$	196,827	$	89,503
Accounts payable and other accrued liabilities:
Deferred tax liability	$	16,839	$	16,839
Accrued salaries, wages and commissions		48,193		35,724
Accrued interest payable		19,712		19,695
Servicing principal and interest payable		14,067		7,318
Repair and denial reserve		15,608		9,557
Payable to related parties		5,578		4,088
Accrued professional fees		4,067		1,365
Lease payable		3,607		3,670
Deferred LSP revenue		425		10,700
Accrued PPP related costs		24,456		498
Other liabilities		36,642		26,201
Total accounts payable and other accrued liabilities	$	189,194	$	135,655

As of September 30, 2021, other assets includes $46.6 million of trade settlement receivables from sales of non-agency bonds in relation to ANH.

Intangible assets

The table below presents information on our intangible assets.

z
(In Thousands)	September 30, 2021		December 31, 2020		Estimated Useful Life
Customer Relationships - Red Stone	$	6,740	$	—	19 years
Internally developed software - Knight Capital		2,586		3,061	6 years
Trade name – Red Stone		2,500		—	Indefinite life
SBA license		1,000		1,000	Indefinite life
Broker network - Knight Capital		689		889	4.5 years
Favorable lease		672		768	12 years
Trade name - Knight Capital		599		709	6 years
Trade name - GMFS		469		559	15 years
Total intangible assets	$	15,255	$	6,986

The amortization expense related to our intangible assets was $0.4 million for the three months ended September 30, 2021 and $0.3 million for the three months ended September 30, 2020. The amortization expense related to our intangible assets for both the nine months ended September 30, 2021 and 2020 was $1.0 million. Such amounts are recorded as other operating expenses in the consolidated statements of income.

The table below presents accumulated amortization for finite-lived intangible assets.

(In Thousands)	September 30, 2021
Internally developed software - Knight Capital	$	1,214
Favorable lease		808
Trade name - GMFS		754
Broker network - Knight Capital		511
Trade name - Knight Capital		281
Customer Relationships – Red Stone		60
Total accumulated amortization	$	3,628

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The table below presents amortization expense related to finite-lived intangible assets for the subsequent five years.

(In Thousands)	September 30, 2021
2021	$	413
2022		1,626
2023		1,599
2024		1,390
2025		1,144
Thereafter		5,583
Total	$	11,755

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 consolidated balance sheets and the provision for loan indemnification losses is included in variable expenses on residential mortgage banking activities, in the Company's 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. As of September 30, 2021 and December 31, 2020, the loan indemnification reserve was $4.3 million and $4.1 million, respectively.

Due to 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. As of September 30, 2021 and December 31, 2020, the reasonably possible loss above the recorded loan indemnification reserve was not material.

Note 20. Other income and operating expenses

Paycheck Protection Program

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

The Company has participated in the PPP as both direct lender and service provider. Under the CARES Act, we originated $109.5 million of PPP loans and were a Lender Service Provider (“LSP”) for $2.5 billion of PPP loans. For our originations as direct lender, we elected the fair value option and thus, classified the loans as held at fair value on our consolidated balance sheets. Fees totaling $5.2 million were recognized in the period of origination. For loans processed under the LSP, we were obligated to perform certain services including: 1) assistance and services to the third-party in the underwriting, marketing, processing and funding of loans, 2) processing forgiveness of the loans with the SBA and 3) servicing and management of subsequently resulting PPP loan portfolios. Such loans are not carried on our consolidated balance sheet and fees totaling $43.3 million were recognized as services were performed. Unrecognized fees as of September 30, 2021 were $0.4 million. Expenses related to PPP loans under the CARES Act are recognized in the period in which they are incurred.

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The table below presents details about the Company’s assets and liabilities related to its PPP activities.

(In Thousands)	September 30, 2021
Assets
Paycheck Protection Program loans	$	1,774,953
Paycheck Protection Program loans, at fair value		9,873
PPP fee receivable		493
Accrued interest receivable		9,666
Total PPP related assets	$	1,794,985
Liabilities
Paycheck Protection Program Liquidity Facility borrowings	$	1,945,883
Interest payable		2,567
Deferred LSP revenue		425
Accrued PPP related costs		24,457
Payable to third parties		1,438
Repair and denial reserve		8,890
Total PPP related liabilities	$	1,983,660

In the table above,

● Originations of PPP loans under the Economic Aid Act were $2.2 billion. These loans are classified as held-for-investment and are accounted for under ASC 310-10, Receivables.

● Total net fees of $104.0 million are deferred over the expected life of the loans and will be recognized as interest income.

● As of September 30, 2021, PPPLF borrowings exceed PPP loans on the balance sheet due to net fees of $82.9 million. In addition, PPP loans are forgiven before the related PPPLF borrowings are repaid. These proceeds are unrestricted and held in cash and cash equivalents on the consolidated balance sheet.

The table below presents details about the Company’s income and expenses related to its pre-tax PPP activities.

		Three Months Ended September 30,				Nine Months Ended September 30,			Financial statement account
(In Thousands)		2021		2020		2021		2020
Income
LSP origination fees	$	—	$	1,652	$	—	$	27,768	Other income
PPP processing fees		—		7		—		5,162	Other income
LSP fee income		417		1,700		10,275		2,553	Servicing income
Interest income		18,680		302		51,927		496	Interest income
Total PPP related income	$	19,097	$	3,661	$	62,202	$	35,979
Expense
Direct operating expenses	$	(25)	$	125	$	8,193	$	5,650	Other operating expenses
Repair and denial reserve		196		111		5,585		2,430	Other income
Interest expense		1,196		687		13,818		2,089	Interest expense
Total PPP related expenses (direct)	$	1,367	$	923	$	27,596	$	10,169
Net PPP related income	$	17,730	$	2,738	$	34,606	$	25,810

Other income and expenses

The table below presents details the composition of other income and operating expenses.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Other income:
Origination income	$	2,794	$	3,144	$	6,297	$	39,256
Change in repair and denial reserve		45		316		(6,108)		(2,199)
Other		2,835		1,036		5,368		3,106
Total other income	$	5,674	$	4,496	$	5,557	$	40,163
Other operating expenses:
Origination costs	$	4,041	$	2,717	$	20,069	$	15,172
Technology expense		2,058		1,650		5,968		4,973
Impairment on real estate		184		—		1,462		3,075
Rent and property tax expense		1,538		1,545		4,967		3,929
Recruiting, training and travel expense		297		254		1,126		1,113
Marketing expense		1,121		400		2,306		1,331
Loan acquisition costs		115		353		449		806
Financing costs on purchased future receivables		31		63		87		1,476
Other		3,541		3,466		9,166		10,052
Total other operating expenses	$	12,926	$	10,448	$	45,600	$	41,927

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Note 21. Redeemable Preferred Stock and Stockholders’ Equity

Common stock dividends

The table below presents dividends declared by the board of directors on common stock during the last twelve months.

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

Stock incentive plan

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

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

The table below summarizes RSU and RSA activity.

	Restricted Stock Awards
(In Thousands, except share data)	Number of Shares	Grant date fair value		Weighted-average grant date fair value (per share)
Outstanding, December 31, 2020	872,079	$	13,737	$	15.75
Granted	185,586		2,379		12.82
Vested	(115,604)		(1,801)		15.58
Canceled	(1,547)		(21)		13.50
Outstanding, March 31, 2021	940,514	$	14,294	$	15.20
Granted	10,636		149		14.03
Vested	(9,723)		(126)		12.99
Outstanding, June 30, 2021	941,427	$	14,317	$	15.21
Granted	154,825		2,343		15.14
Vested	(36,015)		(526)		14.61
Canceled	(1,421)		(20)		14.26
Outstanding, September 30, 2021	1,058,816	$	16,114	$	15.22

The Company recognized $1.8 million and $5.2 million for the three and nine months ended September 30, 2021, respectively, and $1.5 million and $4.4 million for the three and nine months ended September 30, 2020, respectively, of non-cash compensation expense related to its stock-based incentive plan in our consolidated statements of income.

As of September 30, 2021 and December 31, 2020, approximately $16.1 million and $13.7 million, respectively, of non-cash compensation expense related to unvested awards had not yet been charged to net income. These costs are expected to be amortized into compensation expense ratably over the course of the remaining vesting periods.

Performance-based equity awards

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

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

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Preferred Stock

In the event of a liquidation or dissolution of the Company, any outstanding preferred stock ranks senior to the outstanding common stock with respect to payment of dividends and the distribution of assets.

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

The table below presents details on preferred equity by series.

				Preferential Cash Dividends					Carrying Value (in thousands)
Series	Shares Issued and Outstanding (in thousands)	Par Value		Liquidation Preference		Rate per Annum	Annual Dividend (per share)		September 30, 2021
C	335		0.0001		$ 25.00	6.25%		$ 1.56	$	8,361
E	4,600		0.0001		$ 25.00	6.50%		$ 1.63	$	111,378

In the table above,

● Shareholders are entitled to receive dividends, when and as authorized by the Company's Board, out of funds legally available for the payment of dividends. Dividends for Series C preferred stock are payable quarterly on the 15th day of January, April, July and October of each year or if not a business day, the next succeeding business day. Dividends for Series E preferred stock are payable quarterly on or about the last day of each January, April, July and October of each year. Any dividend payable on the preferred stock for any partial dividend period will be computed on the basis of a 360- day year consisting of twelve 30-day months. Dividends will be payable in arrears to holders of record as they appear on the Company’s records at the close of business on the last day of each of March, June, September and December, as the case may be, immediately preceding the applicable dividend payment date.

● The Company declared dividends of $0.1 million and $1.9 million of its Series C and E Cumulative preferred stock during the three months ended September 30, 2021. The dividends are payable on October 15, 2021 for Series C preferred stock and on November 1, 2021 for Series E preferred stock to the Preferred Stock Shareholders of record as of the close of business on September 30, 2021.

● The Company may, at its option, redeem the Series E Preferred Stock, in whole or in part, at any time and from time to time, for cash at a redemption price equal to 100% of the liquidation preference of $25.00 per share, plus accrued and unpaid dividends, if any, to the redemption date. Series E Preferred Stock is not redeemable prior to June 10, 2026, except under certain conditions.

Equity ATM Program

On July 9, 2021, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with JMP Securities LLC, (the “Sales Agent”), pursuant to which the Company may sell, from time to time, shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $150 million, through the Sales Agent either as agent or principal, as defined in Rule 415 under the Securities (the “Equity ATM Program”). As of September 30, 2021, the Company sold 1.7 million shares of common stock at an average price of $15.27 per share through the Equity ATM Program.

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Note 22. Earnings per Share of Common Stock

The table below 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)	2021		2020		2021		2020
Basic Earnings
Net income (loss)	$	46,535	$	35,363	$	106,386	$	18,510
Less: Income (loss) attributable to non-controlling interest		756		805		1,859		551
Less: Income attributable to participating shares		2,444		339		6,717		1,087
Basic earnings	$	43,335	$	34,219	$	97,810	$	16,872
Diluted Earnings
Net income (loss)	$	46,535	$	35,363	$	106,386	$	18,510
Less: Income (loss) attributable to non-controlling interest		756		805		1,859		551
Less: Income attributable to participating shares		2,444		339		6,717		1,087
Diluted earnings	$	43,335	$	34,219	$	97,810	$	16,872
Number of Shares
Basic — Average shares outstanding		71,618,168		54,626,995		66,606,749		53,534,497
Effect of dilutive securities — Unvested participating shares		169,061		77,616		162,169		77,616
Diluted — Average shares outstanding		71,787,228		54,704,611		66,768,918		53,612,113
Earnings Per Share Attributable to RC Common Stockholders:
Basic	$	0.61	$	0.63	$	1.47	$	0.32
Diluted	$	0.60	$	0.63	$	1.46	$	0.31

In the table above, 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.

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, 2021, the conversion spread value is currently 0, since the closing price of our common stock does not exceed the conversion rate (strike price) and is “out-of-the-money”, resulting in 0 impact on diluted EPS.

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

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Note 23. Offsetting assets and liabilities

In order to better define its contractual rights and to secure rights that will help the Company mitigate its counterparty risk, the Company may enter into an International Swaps and Derivatives Association (“ISDA”) Master Agreement with multiple derivative counterparties. An ISDA Master Agreement, published by ISDA, is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter (“OTC”), derivative contracts. The ISDA Master Agreement contains a Schedule to the Master Agreement and a Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event of a default and/or a termination event). Under an ISDA Master Agreement, the Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default, including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Company’s stockholders’ equity declines by a stated percentage or the Company fails to meet the terms of its ISDA Master Agreements, which would cause the Company to accelerate payment of any net liability owed to the counterparty. As of September 30, 2021 and December 31, 2020, the Company was in good standing on all of its ISDA Master Agreements or similar arrangements with its counterparties.

For derivatives traded under an ISDA Master Agreement, the 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 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 by 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 consolidated balance sheets to enable users of the 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, 2021 and December 31, 2020, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the consolidated balances sheets.

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The table below presents the gross fair value of derivative contracts by product type and secured borrowings, the amount of netting reflected in the consolidated balance sheets, as well as amount not offset in the consolidated balance sheets as they do not meet the enforceable credit support criteria for netting under U.S. GAAP.

							Gross amounts not offset in the Consolidated Balance Sheets(1)
(in thousands)	Gross amounts of Assets / Liabilities		Gross amounts offset		Balance in Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received / Paid		Net Amount
September 30, 2021
Assets
Interest rate lock commitments	$	2,360	$	—	$	2,360	$	—	$	—	$	2,360
FX forwards		487		—		487		—		—		487
TBA Agency Securities		2,405		53		2,352		—		—		2,352
Interest rate swaps		4,033		3,052		981		—		—		981
Total	$	9,285	$	3,105	$	6,180	$	—	$	—	$	6,180
Liabilities
Interest rate swaps	$	5,610	$	5,610	$	—	$	—	$	—	$	—
TBA Agency Securities		53		53		—		—		—		—
Secured borrowings		2,044,069		—		2,044,069		2,044,069		—		—
Paycheck Protection Program Liquidity Facility		1,945,883		—		1,945,883		1,780,445		—		165,438
Total	$	3,995,615	$	5,663	$	3,989,952	$	3,824,514	$	—	$	165,438
December 31, 2020
Assets
Interest rate lock commitments	$	16,363	$	—	$	16,363	$	—	$	—	$	16,363
Total	$	16,363	$	—	$	16,363	$	—	$	—	$	16,363
Liabilities
Interest rate swaps	$	11,670	$	5,017	$	6,653	$	—	$	6,653	$	—
TBA Agency Securities		174		—		174		—		174		—
Credit default swaps		4,004		—		4,004		—		—		4,004
FX forwards		773				773		—		—		773
Secured borrowings		1,294,243		—		1,294,243		1,294,243		—		—
Paycheck Protection Program Liquidity Facility		76,276		—		76,276		76,276		—		—
Total	$	1,387,140	$	5,017	$	1,382,123	$	1,370,519	$	6,827	$	4,777

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

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

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 and other financing agreements. In connection with these financing arrangements, the Company pledges its loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is 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.

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

Additionally, non-performing SBC loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them. Because non-performing SBC loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets.

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

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

Note 25. Commitments, contingencies and indemnifications

Litigation

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

Unfunded Loan Commitments

The table below presents unfunded loan commitments for SBC loans.

(In Thousands)	September 30, 2021		December 31, 2020
Loans, net	$	421,908	$	285,389
Loans, held for sale at fair value	$	17,358	$	7,809

Commitments to Originate Loans

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

The table below presents commitments to originate residential agency loans.

(In Thousands)	September 30, 2021		December 31, 2020
Commitments to originate residential agency loans	$	454,917	$	575,600

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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, 2021 and December 31, 2020, 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, Small Business Lending, and residential mortgage banking segments. Our TRSs are not consolidated for federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred income taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.

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

Note 27. Segment reporting

The Company reports its results of operations through the following 4 business segments: i) Acquisitions, ii) SBC Originations, iii) Small Business Lending, and iv) Residential Mortgage Banking. The Company’s organizational structure is based on a number of factors that the Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, 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.

SBC originations

Through the SBC originations segment, the Company originates SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels. Additionally, as part of this segment, we originate and service multi-family loan products under the Freddie Mac program. This segment also reflects the impact of our SBC securitization activities. In addition, SBC originations include construction and permanent financing for the preservation and construction of affordable housing primarily utilizing tax-exempt bonds.

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Small Business Lending

Through the Small Business Lending segment, the Company acquires, originates and services loans guaranteed by the SBA under the SBA Section 7(a) Program. This segment also reflects the impact of our SBA securitization activities. In the second quarter of 2021, our CODM realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities and projections for Knight Capital. We have recast all prior period amounts and segment information to conform to this presentation.

Residential mortgage banking

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 activities including interest expense relating to our senior secured and convertible notes on funds yet to be deployed, allocated employee compensation from our Manager, management and incentive fees paid to our Manager and other general corporate overhead expenses.

Results of business segments and all other. The tables below present reportable business segments, along with remaining unallocated amounts recorded within Corporate- Other.

	Three Months Ended September 30, 2021
					Small		Residential
			SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	18,954	$	55,230	$	28,739	$	2,213	$	—	$	105,136
Interest expense		(11,951)		(29,300)		(6,511)		(2,374)		—		(50,136)
Net interest income before provision for loan losses	$	7,003	$	25,930	$	22,228	$	(161)	$	—	$	55,000
Recovery of (provision for) loan losses		1,217		(2,774)		(22)		—		—		(1,579)
Net interest income after recovery of (provision for) loan losses	$	8,220	$	23,156	$	22,206	$	(161)	$	—	$	53,421
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	37,270	$	—	$	37,270
Net realized gain on financial instruments and real estate owned		4,699		4,192		14,319		—		—		23,210
Net unrealized gain on financial instruments		1,211		4,256		74		147		—		5,688
Servicing income, net		—		998		1,497		7,748		—		10,243
Income on purchased future receivables, net		—		—		2,838		—		—		2,838
Income on unconsolidated joint ventures		2,506		1,042		—		—		—		3,548
Other income		1,167		2,778		1,696		31		2		5,674
Total non-interest income	$	9,583	$	13,266	$	20,424	$	45,196	$	2	$	88,471
Non-interest expense
Employee compensation and benefits		—		(7,034)		(10,716)		(5,399)		(1,388)		(24,537)
Allocated employee compensation and benefits from related party		(383)		—		—		—		(3,421)		(3,804)
Variable expenses on residential mortgage banking activities		—		—		—		(24,380)		—		(24,380)
Professional fees		(411)		(782)		(582)		(1,534)		(3,591)		(6,900)
Management fees – related party		—		—		—		—		(2,742)		(2,742)
Incentive fees – related party		—		—		—		—		(2,775)		(2,775)
Loan servicing expense		(1,694)		(2,640)		(426)		(3,364)		—		(8,124)
Transaction related expenses		—		—		—		—		(2,629)		(2,629)
Other operating expenses		(1,108)		(3,969)		(4,139)		(1,908)		(1,802)		(12,926)
Total non-interest expense	$	(3,596)	$	(14,425)	$	(15,863)	$	(36,585)	$	(18,348)	$	(88,817)
Income (loss) before provision for income taxes	$	14,207	$	21,997	$	26,767	$	8,450	$	(18,346)	$	53,075
Total assets	$	1,249,569	$	4,546,757	$	2,462,862	$	570,236	$	434,974	$	9,264,398

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	Nine Months Ended September 30, 2021
					Small		Residential
			SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		Banking		Other		Consolidated
Interest income	$	53,919	$	141,040	$	80,304	$	6,291	$	—	$	281,554
Interest expense		(36,206)		(81,402)		(29,698)		(6,997)		(2,009)		(156,312)
Net interest income before provision for loan losses	$	17,713	$	59,638	$	50,606	$	(706)	$	(2,009)	$	125,242
Recovery of (provision for) loan losses		2,405		(9,032)		(461)		—		—		(7,088)
Net interest income after recovery of (provision for) loan losses	$	20,118	$	50,606	$	50,145	$	(706)	$	(2,009)	$	118,154
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	115,369	$	—	$	115,369
Net realized gain on financial instruments and real estate owned		465		14,992		33,782		—		—		49,239
Net unrealized gain on financial instruments		8,240		9,197		3,055		10,804		—		31,296
Servicing income, net		—		2,520		12,966		22,320		—		37,806
Income on purchased future receivables, net		—		—		7,934		—		—		7,934
Income on unconsolidated joint ventures		5,058		1,042		—		—		—		6,100
Other income (loss)		3,240		5,602		(3,454)		84		85		5,557
Total non-interest income	$	17,003	$	33,353	$	54,283	$	148,577	$	85	$	253,301
Non-interest expense
Employee compensation and benefits	$	—	$	(13,580)	$	(26,097)	$	(29,114)	$	(2,793)	$	(71,584)
Allocated employee compensation and benefits from related party		(926)		—		—		—		(8,300)		(9,226)
Variable expenses on residential mortgage banking activities		—		—		—		(61,286)		—		(61,286)
Professional fees		(1,306)		(1,725)		(1,930)		(1,929)		(5,864)		(12,754)
Management fees – related party		—		—		—		—		(8,061)		(8,061)
Incentive fees – related party		—		—		—		—		(3,061)		(3,061)
Loan servicing expense		(4,829)		(7,968)		(468)		(7,814)		—		(21,079)
Transaction related expenses		—		—		—		—		(10,202)		(10,202)
Other operating expenses		(4,958)		(11,718)		(19,209)		(6,325)		(3,390)		(45,600)
Total non-interest expense	$	(12,019)	$	(34,991)	$	(47,704)	$	(106,468)	$	(41,671)	$	(242,853)
Income (loss) before provision for income taxes	$	25,102	$	48,968	$	56,724	$	41,403	$	(43,595)	$	128,602
Total assets	$	1,249,569	$	4,546,757	$	2,462,862	$	570,236	$	434,974	$	9,264,398

	Three Months Ended September 30, 2020
					Small		Residential
			SBC		Business		Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		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
Recovery of (provision for) loan losses		2,906		2,029		(704)		—		—		4,231
Net interest income after recovery of (provision for) loan losses	$	6,427	$	13,974	$	1,919	$	61	$	(899)	$	21,482
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	75,524	$	—	$	75,524
Net realized gain (loss) on financial instruments and real estate owned		(2,244)		5,309		4,442		—		—		7,507
Net unrealized gain (loss) on financial instruments		2,295		3,459		2,353		(4,687)		—		3,420
Servicing income, net		—		610		3,194		6,311		—		10,115
Income on purchased future receivables, net		—		—		4,848		—		—		4,848
Income on unconsolidated joint ventures		1,996		—		—		—		—		1,996
Other income (loss)		951		688		2,828		30		(1)		4,496
Total non-interest income (loss)	$	2,998	$	10,066	$	17,665	$	77,178	$	(1)	$	107,906
Non-interest expense
Employee compensation and benefits	$	—	$	(4,046)	$	(7,570)	$	(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		(254)		(449)		(530)		(960)		(1,965)		(4,158)
Management fees – related party		—		—		—		—		(2,714)		(2,714)
Incentive fees – related party		—		—		—		—		(1,134)		(1,134)
Loan servicing (expense) income		(1,528)		(2,394)		(106)		(4,206)		3		(8,231)
Transaction related expenses		—		—		—		—		(6)		(6)
Other operating expenses		(585)		(2,450)		(4,100)		(2,618)		(695)		(10,448)
Total non-interest expense	$	(2,592)	$	(9,339)	$	(12,306)	$	(53,820)	$	(9,414)	$	(87,471)
Income (loss) before provision for income taxes	$	6,833	$	14,701	$	7,278	$	23,419	$	(10,314)	$	41,917
Total assets	$	1,096,804	$	2,515,234	$	841,373	$	640,112	$	223,987	$	5,317,510

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	Nine Months Ended September 30, 2020
			SBC		Small Business		Residential Mortgage		Corporate-
(In Thousands)	Acquisitions		Originations		Lending		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		(4,776)		(21,978)		(7,730)		(500)		—		(34,984)
Net interest income after provision for loan losses	$	8,346	$	17,598	$	820	$	(813)	$	(1,271)	$	24,680
Non-interest income
Residential mortgage banking activities	$	—	$	—	$	—	$	192,757	$	—	$	192,757
Net realized gain (loss) on financial instruments and real estate owned		(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, net		—		1,541		7,187		18,465		—		27,193
Income on purchased future receivables, net		—		—		13,917		—		—		13,917
Income (loss) on unconsolidated joint ventures		(1,035)		—		—		—		—		(1,035)
Other income		2,354		3,410		34,149		136		114		40,163
Total non-interest income (loss)	$	(10,207)	$	16,393	$	66,861	$	178,190	$	114	$	251,351
Non-interest expense
Employee compensation and benefits	$	—	$	(11,445)	$	(20,436)	$	(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		(504)		(891)		(1,192)		(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)
Transaction related expenses		—		—		—		—		(63)		(63)
Other operating expenses		(4,670)		(10,336)		(18,411)		(6,376)		(2,134)		(41,927)
Total non-interest expense	$	(10,036)	$	(28,357)	$	(40,727)	$	(148,415)	$	(25,870)	$	(253,405)
Income (loss) before provision for income taxes	$	(11,897)	$	5,634	$	26,954	$	28,962	$	(27,027)	$	22,626
Total assets	$	1,096,804	$	2,515,234	$	841,373	$	640,112	$	223,987	$	5,317,510

Note 28. Subsequent events

On October 20, 2021, the Company closed a private placement of $350.0 million in aggregate principal amount of ReadyCap Holdings, LLC’s 4.5% Senior Secured Notes due 2026. The Company used the net proceeds to redeem all of the outstanding 7.5% Senior Secured Notes due 2022 and for general corporate purposes.

On November 3, 2021, the Company entered into a merger agreement to acquire a series of privately held, real estate structured finance opportunities funds, with a focus on construction lending, managed by MREC Management, LLC. Under the terms of the merger agreement, the Company will acquire all of the outstanding equity interests in Mosaic Real Estate Credit, LLC (“MREC Onshore”), Mosaic Real Estate Credit TE, LLC (“MREC TE”) and MREC International Incentive Split, LP (“MREC IIS”) in exchange for shares of a newly designated Ready Capital Class B common stock (“Class B Common Stock”), plus non-transferable contingent equity rights (“CERs”) that, depending on the performance of the Mosaic asset portfolio over a three-year period following the closing, may entitle investors in the Mosaic Funds (as defined below) to receive additional shares of Ready Capital common stock.  MREC IIS is an intermediate holding company through which investors in Mosaic Real Estate Credit Offshore, LP (“MREC Offshore” and together with MREC Onshore and MREC TE, the “Mosaic Funds”) invest in the Mosaic platform. The shares of Class B Common Stock will have dividend, distribution and other rights identical to those of the existing shares of common stock of Ready Capital, except that the newly issued Class B Common Stock will not be listed on the New York Stock Exchange. The shares of Class B Common Stock will automatically convert (on a share-for-share basis) into shares of the existing class of common stock listed on the New York Stock Exchange on the first business day following the 365th day following the closing.

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The number of shares of Class B Common Stock to be received by investors in the Mosaic Funds will be based on an exchange ratio determined by dividing the adjusted book value of the Mosaic Funds as of September 30, 2021, by the Ready Capital adjusted book value per share as of that date. The adjusted book values of Ready Capital and the Mosaic Funds will be modified in certain respects, including to give pro-forma effect to any dividends or other distributions. A $98.9 million reduction will be applied to the book value of the Mosaic Funds to derive their aggregate adjusted book value. Under a pro forma exchange ratio, as of June 30, 2021, investors in the Mosaic Funds would receive approximately 30.3 million shares of Class B Common Stock. Based on the Company’s closing stock price on November 3, 2021, the implied value of the Ready Capital shares expected to be issued in connection with the closing is approximately $471 million and the maximum possible payment under the CERs would be an additional approximately $89 million of Ready Capital common stock (or 90% of the upfront $98.9 million reduction). Additionally, holders of CERs will have the right to receive dividends (“CER Dividends”), which will accrue based on the actual Ready Capital common dividends per share paid to shareholders from the closing of the transaction to the end of the three year term and will be paid to CER Holders to the extent the CER is realized at the end of the three-year term. The CER Dividend will also be delivered in the form of Ready Capital shares.

The transaction is expected to close during the first quarter of 2022, subject to the respective approvals by the stockholders of Ready Capital and the holders of interests in the Mosaic Funds and other customary closing conditions. The merger of each of the Mosaic Merger Entities with a subsidiary of Ready Capital is subject to the approval of investors of each of the Mosaic Funds, each Mosaic Fund voting to approve the merger separately and independently of the other Mosaic Funds, provided, however, under the merger agreement, Ready Capital's obligation to acquire MREC TE and MREC IIS is conditioned upon the investors of MREC Onshore approving its merger.

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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 other comparable terminology, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

● our investment objectives and business strategy;

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

● our expected leverage;

● our expected investments;

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

● our ability to achieve the expected revenue synergies, cost savings and other benefits from the acquisition of Anworth Mortgage Asset Corporation (“Anworth”) and Red Stone and its affiliates (“Red Stone”);

● our ability to compete in the marketplace;

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

● market, industry and economic trends;

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

● mortgage loan modification programs and future legislative actions;

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

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

● projected capital and operating expenditures;

● availability of qualified personnel;

● prepayment rates; and

● projected default rates.

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

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

● applicable regulatory changes;

● risks associated with acquisitions, including the acquisition of Anworth and Red Stone;

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

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

● general volatility of the capital markets;

● changes in our investment objectives and business strategy;

● the availability, terms and deployment of capital;

● the availability of suitable investment opportunities;

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

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

● the severity and duration of the novel coronavirus (“COVID-19”) pandemic, including the emergence and severity of COVID-19 variants;

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

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

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

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

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

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

● limitations on our business as a result of our qualification as a REIT; and

● the degree and nature of our competition, including competition for SBC loans, MBS, residential mortgage loans and other real estate-related investments that satisfy our investment objectives and strategies.

Upon the occurrence of these or other factors, our business, financial condition, liquidity and consolidated results of operations may vary materially from those expressed in, or implied by, any such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we 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. We are not obligated, and do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A. “Risk Factors” of the Company’s annual report on Form 10-K.

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

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.

● 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 loan products 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. In addition, SBC originations include construction and permanent financing for the preservation and construction of affordable housing primarily utilizing tax-exempt bonds.

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● Small Business Lending. We acquire, originate and service owner-occupied loans guaranteed by the SBA under its Section 7(a) loan program (the “SBA Section 7(a) Program”) through our wholly-owned subsidiary, ReadyCap Lending, LLC (“ReadyCap Lending” or “RCL”). We hold an SBA license as one of only 14 non-bank Small Business Lending Companies (“SBLCs”) and have been granted preferred lender status by the SBA. These originated loans are either held-for-investment, placed into securitization structures, or sold. We also acquire purchased future receivables through our Knight Capital platform (“Knight Capital”). Knight Capital, which we acquired in 2019, is a technology-driven platform that provides working capital to small and medium sized businesses across the U.S. In the second quarter of 2021, our Chief Executive Officer as our Chief Operating Decision Maker (“CODM”),  realigned our business segments to include Knight Capital in the Small Business Lending segment from the Acquisitions segment to be more closely aligned with the activities of, and projections for, Knight Capital. We have recast all prior period amounts and segment information to conform to this presentation.

● 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, L.P., 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” in the Company’s Annual Report on Form 10-K.

Acquisitions

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

In addition, we issued 1,919,378 shares of newly designated 8.625% Series B Cumulative Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock"), 779,743 shares of newly designated 6.25% Series C Cumulative Convertible Preferred Stock, par value $0.0001 per share (the "Series C Preferred Stock") and 2,010,278 shares of newly designated 7.625% Series D Cumulative Redeemable Preferred Stock, par value $0.0001 per share (the "Series D Preferred Stock"), in exchange for all shares of ANH’s 8.625% Series A Cumulative Preferred Stock, 6.25% Series B Cumulative Convertible Preferred Stock and 7.625% Series C Cumulative Redeemable preferred stock outstanding prior to the effective time of the ANH Merger. On July 15, 2021, the Company redeemed all of the outstanding Series B and Series D Preferred Stock, in each case at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends up to, but excluding, the redemption date.

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Upon the closing of the transaction and after giving effect to the issuance of shares of common stock as consideration in the merger, our historical stockholders owned approximately 77% of our outstanding common stock, while historical ANH stockholders owned approximately 23% of our outstanding common stock.

The acquisition of ANH increased our equity capitalization, supported continued growth of our platform and execution of our strategy, and provided us with improved scale, liquidity and capital alternatives, including additional borrowing capacity. Also, the stockholder base resulting from the acquisition of ANH enhanced the trading volume and liquidity for our stockholders. In addition, part of our strategy in acquiring ANH was to manage the liquidation and runoff of certain assets within the ANH portfolio and repay certain indebtedness on the ANH portfolio following the completion of the ANH Merger, and to redeploy the capital into opportunities in our core SBC strategies and other assets we expect will generate attractive risk-adjusted returns and long-term earnings accretion. Consistent with this strategy, as of September 30, 2021, we have liquidated approximately $2.0 billion of assets within the ANH portfolio, primarily consisting of Agency RMBS, and repaid approximately $1.7 billion of indebtedness on the portfolio.

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

Red Stone. On July 31, 2021, the Company acquired Red Stone and its affiliates (“Red Stone”), a privately owned real estate finance and investment company that provides innovative financial products and services to multifamily affordable housing, in exchange for an initial purchase price of approximately $63 million paid in cash, retention payments to key executives aggregating $7 million in cash and 128,533 shares of common stock of the Company issued to Red Stone executives under the 2012 Plan. Additional purchase price payments may be made over the next three years if the Red Stone business achieves certain hurdles.

Factors Impacting Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on the level of 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 adjustable rate mortgages (“ARMs”), with maturities ranging from five to 30 years. Our loans typically have amortization periods of 15 to 30 years or balloon payments due in five to ten years. ARM loans generally have a fixed interest rate for a period of five, seven or ten years and then an adjustable interest rate equal to the sum of an index rate, such as the LIBOR, plus a margin, while FRM loans bear interest that is fixed for the term of the loan. As of September 30, 2021, approximately 68% of the loans in our portfolio were ARMs, and 32% 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. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for loan financing.

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. The Company estimates the projected weighted-average life of our investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages and/or the speed at which we are able to liquidate an asset. If the timeline to resolve non-performing assets extends, this could have a negative impact on our results of operations, as carrying costs may therefore be higher than initially anticipated. This situation may also cause the fair market value of our investment to decline if real estate values decline over the extended period. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Credit Risk. 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 COVID-19 pandemic around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. Although more normalized activities have resumed, the full impact of COVID-19 on 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 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 pandemic, including the emergence and severity of COVID-19 variants (ii) the effectiveness of the United States public health response, including the administration and effectiveness of COVID-19 vaccines throughout the United States, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of governmental responses to the pandemic, and (v) the timing and speed of economic recovery.

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Results of Operations

Key Financial Measures and Indicators

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

The table below sets forth certain information on our operating results.

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands, except share data)	2021			2020			2021			2020
Net Income	$	46,535		$	35,363		$	106,386		$	18,510
Earnings per common share - basic	$	0.61		$	0.63		$	1.47		$	0.32
Earnings per common share - diluted	$	0.60		$	0.63		$	1.46		$	0.31
Distributable Earnings	$	49,365		$	32,126		$	115,501		$	72,574
Distributable Earnings per common share - basic and diluted	$	0.64		$	0.57		$	1.60		$	1.30
Dividends declared per common share	$	0.42		$	0.30		$	1.24		$	0.95
Dividend yield		11.6	%		10.7	%		17.0	%		10.7	%
Book value per common share	$	15.07		$	14.86		$	15.07		$	14.86
Adjusted net book value per common share	$	15.06		$	14.84		$	15.06		$	14.84

In the table above,

● Dividend yield is based on the respective period end closing share price.

● Adjusted net book value per common share excludes the equity component of our 2017 convertible note issuance.

The table below presents information on our investment portfolio originations and acquisitions (based on fully committed amounts).

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020
Loan originations
SBC loan originations	$	1,002,267	$	122,487	$	2,926,786	$	750,164
SBA loan originations		138,261		82,912		334,229		149,283
Residential agency mortgage loan originations		1,020,445		1,184,237		3,332,273		3,066,711
Total loan originations	$	2,160,973	$	1,389,636	$	6,593,288	$	3,966,158
Total loan acquisitions	$	167,980	$	20,989	$	167,980	$	72,483
Total loan investment activity	$	2,328,953	$	1,410,625	$	6,761,268	$	4,038,641

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.

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Return Information

The following tables present certain information related to our SBC and Small Business Lending loan portfolios as of September 30, 2021, and per share information for the three months ended September 30, 2021, which includes distributable earnings per share or return information. Distributable earnings is not a measure calculated in accordance with GAAP and is defined further within Item 7 – Non-GAAP Financial Measures in our Annual report on Form 10-K.

The following table provides a detailed breakdown of our calculation of return on equity and distributable return on equity for the three months ended September 30, 2021. Distributable return on equity is not a measure calculated in accordance with GAAP and is defined further within Item 7 – Non-GAAP Financial Measures in our Annual report on Form 10-K.

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Portfolio Metrics

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

Small Business Lending. The following table includes certain portfolio metrics related to our Small Business Lending segment:

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

Residential Mortgage Banking. The following table includes certain portfolio metrics related to our residential mortgage banking segment:

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Balance Sheet Analysis and Metrics

(In Thousands)	September 30, 2021		December 30, 2020		$ Change		% Change
Assets
Cash and cash equivalents	$	209,769	$	138,975	$	70,794	50.9	%
Restricted cash		52,692		47,697		4,995	10.5
Loans, net (including $12,162 and $13,795 held at fair value)		2,384,497		1,550,624		833,873	53.8
Loans, held for sale, at fair value		549,917		340,288		209,629	61.6
Paycheck Protection Program loans (including $9,873 and $74,931 held at fair value)		1,784,826		74,931		1,709,895	2,282.0
Mortgage backed securities, at fair value		117,681		88,011		29,670	33.7
Loans eligible for repurchase from Ginnie Mae		149,723		250,132		(100,409)	(40.1)
Investment in unconsolidated joint ventures		125,547		79,509		46,038	57.9
Purchased future receivables, net		6,567		17,308		(10,741)	(62.1)
Derivative instruments		6,180		16,363		(10,183)	(62.2)
Servicing rights (including $107,589 and $76,840 held at fair value)		171,106		114,663		56,443	49.2
Real estate owned, held for sale		70,643		45,348		25,295	55.8
Other assets		196,827		89,503		107,324	119.9
Assets of consolidated VIEs		3,438,423		2,518,743		919,680	36.5
Total Assets	$	9,264,398	$	5,372,095	$	3,892,303	72.5	%
Liabilities
Secured borrowings		2,044,069		1,294,243		749,826	57.9
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		1,945,883		76,276		1,869,607	2,451.1
Securitized debt obligations of consolidated VIEs, net		2,676,265		1,905,749		770,516	40.4
Convertible notes, net		112,966		112,129		837	0.7
Senior secured notes, net		179,914		179,659		255	0.1
Corporate debt, net		333,975		150,989		182,986	121.2
Guaranteed loan financing		348,774		401,705		(52,931)	(13.2)
Contingent Consideration		12,400		—		12,400	100.0
Liabilities for loans eligible for repurchase from Ginnie Mae		149,723		250,132		(100,409)	(40.1)
Derivative instruments		—		11,604		(11,604)	(100.0)
Dividends payable		33,564		19,746		13,818	70.0
Accounts payable and other accrued liabilities		189,194		135,655		53,539	39.5
Total Liabilities	$	8,026,727	$	4,537,887	$	3,488,840	76.9	%
Preferred stock Series C, liquidation preference $25.00 per share		8,361		—		8,361	100.0
Commitments & contingencies
Stockholders’ Equity
Preferred stock Series E liquidation preference $25.00 per share		111,378		—		111,378	100.0
Common stock, $0.0001 par value, 500,000,000 shares authorized, 72,919,824 and 54,368,999 shares issued and outstanding, respectively		7		5		2	40.0
Additional paid-in capital		1,115,471		849,541		265,930	31.3
Retained earnings (deficit)		(10,395)		(24,203)		13,808	(57.1)
Accumulated other comprehensive income (loss)		(6,276)		(9,947)		3,671	(36.9)
Total Ready Capital Corporation equity		1,210,185		815,396		394,789	48.4
Non-controlling interests		19,125		18,812		313	1.7
Total Stockholders’ Equity	$	1,229,310	$	834,208	$	395,102	47.4	%
Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity	$	9,264,398	$	5,372,095	$	3,892,303	72.5	%

As of September 30, 2021, total assets in our consolidated balance sheet were $9.3 billion, an increase of $3.9 billion from December 31, 2020, primarily reflecting an increase in Paycheck Protection Program loans, Assets of consolidated VIEs and Loans, net. Paycheck Protection Program loans increased $1.7 billion, primarily due to new originations. Assets of consolidated VIEs increased $920 million, primarily due to the transfer of loans as a result of securitizations. Loans, net increased $834 million, primarily reflecting originations, partially offset by paydowns.

As of September 30, 2021, total liabilities in our consolidated balance sheet were $8.0 billion, an increase of $3.5 billion from December 31, 2020, primarily reflecting an increase in Paycheck Protection Program Liquidity Facility borrowings, Securitized debt obligations of consolidated VIEs, net and Secured borrowings. Paycheck Protection Program Liquidity Facility borrowings increased $1.9 billion, primarily due to proceeds to support originations of PPP loans. Securitized debt obligations of consolidated VIEs, net increased $771 million, primarily due to the closing of one REMIC, SBC10 and two CLOs, RCMF 2021-FL5 and RCMF 2021-FL6. Secured borrowings increased $750 million, primarily due to increased loan originations.

As of September 30, 2021, Stockholders’ Equity increased $395 million to $1.2 billion. The increase was primarily driven by the ANH merger and the issuance of preferred shares.

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Selected Balance Sheet Information by Business Segment. The table below presents certain selected balance sheet data by each of our four business segments, with the remaining amounts reflected in Corporate –Other.

(in thousands)	Acquisitions		SBC Originations		Small Business Lending		Residential Mortgage Banking		Total
September 30, 2021
Assets
Loans, net (1)(2)	$	977,943	$	4,260,106	$	588,297	$	3,173	$	5,829,519
Loans, held for sale, at fair value		172,869		54,848		40,254		281,946		549,917
Paycheck Protection Program loans		—		—		1,784,826		—		1,784,826
Mortgage backed securities, at fair value		49,927		67,754		—		—		117,681
Servicing rights		—		42,312		21,205		107,589		171,106
Investment in unconsolidated joint ventures		89,097		36,450		—		—		125,547
Purchased future receivables, net		6,567		—		—		—		6,567
Real estate owned, held for sale (1)		69,225		4,054		142		—		73,421
Liabilities
Secured borrowings	$	441,954	$	1,190,419	$	93,069	$	318,627	$	2,044,069
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		—		—		1,945,883		—		1,945,883
Securitized debt obligations of consolidated VIEs		474,929		2,117,411		83,925		—		2,676,265
Guaranteed loan financing		—		—		348,774		—		348,774
Senior secured notes, net		42,713		130,146		7,055		—		179,914
Corporate debt, net		185,112		148,863		—		—		333,975
Convertible notes, net		55,676		51,651		5,639		—		112,966
(1) Includes assets of consolidated VIEs (2) Excludes allowance for loan losses

Income Statement Analysis and Metrics

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2021		2020		Change		2021		2020		Change
Interest income
Acquisitions	$	18,954	$	14,532	$	4,422	$	53,919	$	45,993	$	7,926
SBC originations		55,230		35,287		19,943		141,040		112,052		28,988
Small business lending		28,739		9,037		19,702		80,304		30,316		49,988
Residential mortgage banking		2,213		2,218		(5)		6,291		5,465		826
Total interest income	$	105,136	$	61,074	$	44,062	$	281,554	$	193,826	$	87,728
Interest expense
Acquisitions	$	(11,951)	$	(11,011)	$	(940)	$	(36,206)	$	(32,871)	$	(3,335)
SBC originations		(29,300)		(23,342)		(5,958)		(81,402)		(72,476)		(8,926)
Small business lending		(6,511)		(6,414)		(97)		(29,698)		(21,766)		(7,932)
Residential mortgage banking		(2,374)		(2,157)		(217)		(6,997)		(5,778)		(1,219)
Corporate - other		—		(899)		899		(2,009)		(1,271)		(738)
Total interest expense	$	(50,136)	$	(43,823)	$	(6,313)	$	(156,312)	$	(134,162)	$	(22,150)
Net interest income before provision for loan losses	$	55,000	$	17,251	$	37,749	$	125,242	$	59,664	$	65,578
Recovery of (provision for) loan losses
Acquisitions	$	1,217	$	2,906	$	(1,689)	$	2,405	$	(4,776)	$	7,181
SBC originations		(2,774)		2,029		(4,803)		(9,032)		(21,978)		12,946
Small business lending		(22)		(704)		682		(461)		(7,730)		7,269
Residential mortgage banking		—		—		—		—		(500)		500
Total recovery of (provision for) loan losses	$	(1,579)	$	4,231	$	(5,810)	$	(7,088)	$	(34,984)	$	27,896
Net interest income after recovery of (provision for) loan losses	$	53,421	$	21,482	$	31,939	$	118,154	$	24,680	$	93,474
Non-interest income
Acquisitions	$	9,583	$	2,998	$	6,585	$	17,003	$	(10,207)	$	27,210
SBC originations		13,266		10,066		3,200		33,353		16,393		16,960
Small business lending		20,424		17,665		2,759		54,283		66,861		(12,578)
Residential mortgage banking		45,196		77,178		(31,982)		148,577		178,190		(29,613)
Corporate - other		2		(1)		3		85		114		(29)
Total non-interest income	$	88,471	$	107,906	$	(19,435)	$	253,301	$	251,351	$	1,950
Non-interest expense
Acquisitions	$	(3,596)	$	(2,592)	$	(1,004)	$	(12,019)	$	(10,036)	$	(1,983)
SBC originations		(14,425)		(9,339)		(5,086)		(34,991)		(28,357)		(6,634)
Small business lending		(15,863)		(12,306)		(3,557)		(47,704)		(40,727)		(6,977)
Residential mortgage banking		(36,585)		(53,820)		17,235		(106,468)		(148,415)		41,947
Corporate - other		(18,348)		(9,414)		(8,934)		(41,671)		(25,870)		(15,801)
Total non-interest expense	$	(88,817)	$	(87,471)	$	(1,346)	$	(242,853)	$	(253,405)	$	10,552
Net income (loss) before provision for income taxes
Acquisitions	$	14,207	$	6,833	$	7,374	$	25,102	$	(11,897)	$	36,999
SBC originations		21,997		14,701		7,296		48,968		5,634		43,334
Small business lending		26,767		7,278		19,489		56,724		26,954		29,770
Residential mortgage banking		8,450		23,419		(14,969)		41,403		28,962		12,441
Corporate - other		(18,346)		(10,314)		(8,032)		(43,595)		(27,027)		(16,568)
Total net income before provision for income taxes	$	53,075	$	41,917	$	11,158	$	128,602	$	22,626	$	105,976

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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.

The table below presents the components of realized and unrealized gains (losses) on financial instruments.

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2021		2020		$ Change		2021		2020		$ Change
Realized gains (losses) on financial instruments
Realized gains on loans - Freddie Mac	$	1,626	$	1,518		108	$	6,823	$	5,517	$	1,306
Creation of mortgage servicing rights - Freddie Mac		3,292		2,107		1,185		10,760		7,094		3,666
Realized gains on loans - SBA		11,559		3,448		8,111		27,275		7,937		19,338
Creation of mortgage servicing rights - SBA		2,778		993		1,785		6,478		2,328		4,150
Realized gain (loss) on derivatives, at fair value		(1,072)		(1,996)		924		(7,209)		(2,700)		(4,509)
Realized gain on mortgage backed securities, at fair value		5,730		471		5,259		7,502		2,060		5,442
Net realized gains (losses) - all other		(703)		966		(1,669)		(2,390)		(118)		(2,272)
Net realized gain on financial instruments	$	23,210	$	7,507		15,703	$	49,239	$	22,118	$	27,121
Unrealized gains (losses) on financial instruments
Unrealized gain (loss) on loans - Freddie Mac	$	339	$	(40)		379	$	(178)	$	(18)	$	(160)
Unrealized gain (loss) on loans - SBA		74		2,353		(2,279)		3,055		1,302		1,753
Unrealized gain (loss) on residential mortgage servicing rights, at fair value		146		(4,688)		4,834		10,803		(33,168)		43,971
Unrealized gain (loss) on derivatives, at fair value		4,444		648		3,796		12,003		(4,415)		16,418
Unrealized gain (loss) on mortgage backed securities, at fair value		2,818		3,708		(890)		8,387		(8,314)		16,701
Net unrealized gains (losses) - all other		(2,133)		1,439		(3,572)		(2,774)		851		(3,625)
Net unrealized gain (loss) on financial instruments	$	5,688	$	3,420		2,268	$	31,296	$	(43,762)	$	75,058

Acquisition Segment Results.

Q3 2021 versus Q3 2020. Interest income of $19.0 million represented an increase of $4.4 million, due to income from loan payoffs. Interest expense of $12.0 million represented an increase of $0.9 million, primarily due to additional corporate debt. The recovery of loan losses of $1.2 million represented a decrease of $1.7 million, due to loan payoffs and stabilizing macroeconomic assumptions. Non-interest income of $9.6 million represented an increase of $6.6 million, primarily due to net realized gains on financial instruments, partially offset by a decrease in unrealized gains on financial instruments. Non-interest expense of $3.6 million represented an increase of $1.0 million, primarily due to an increase in expenses related to real estate acquired in the ANH merger.

YTD 2021 versus YTD 2020. Interest income of $53.9 million represented an increase of $7.9 million, due to interest income on assets acquired in the ANH merger, partially offset by decreases in interest income due to the reduced size of the existing acquired loan portfolio. Interest expense of $36.2 million represented an increase of $3.3 million, primarily due to additional corporate debt. The recovery of loan losses of $2.4 million represented an increase $7.2 million, due to payoffs of the loan portfolio and stabilizing macroeconomic assumptions. Non-interest income of $17.0 million represented an increase of $27.2 million, due to net unrealized and realized gains on financial instruments and gains from unconsolidated subsidiaries. Non-interest expense of $12.0 million represented an increase of $2.0 million, primarily due to an increase in compensation and operating expenses.

SBC Originations Segment Results.

Q3 2021 versus Q3 2020. Interest income of $55.2 million represented an increase of $19.9 million, due to increased loan balances. Interest expense of $29.3 million represented an increase of $6.0 million, due to an increase in borrowings on increased loan balances. The provision for loan losses of $2.8 million represented an increase of $4.8 million, due to increased loan balances. Non-interest income of $13.3 million represented an increase of $3.2 million, primarily due to increased gains on loan sales and origination income. Non-interest expense of $14.4 million represented an increase of $5.1 million, primarily due to an increase in compensation expenses.

YTD 2021 versus YTD 2020. Interest income of $141.0 million represented an increase of $29.0 million, due to increased loan balances. Interest expense of $81.4 million represented an increase of $8.9 million, due to an increase in borrowings on increased loan balances. The provision for loan losses of $9.0 million represented a decrease of $12.9 million, due to stabilizing macroeconomic assumptions. Non-interest income of $33.4 million represented an increase of $17.0 million, primarily due to realized and unrealized gains on financial instruments. Non-interest expense of $35.0 million represented an increase of $6.6 million, primarily due to an increase in compensation expenses, loan servicing expenses and other operating expenses.

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Small Business Lending Segment Results.

Q3 2021 versus Q3 2020. Interest income of $28.7 million represented an increase of $19.7 million, due to increased loan balances, including PPP loans. Interest expense of $6.5 million was essentially unchanged from the same prior year period. The provision for loan losses decreased $0.7 million, due to higher CECL reserves taken in the third quarter of 2020, driven by the outlook towards COVID-19’s impact on small businesses. Non-interest income of $20.4 million represented an increase of $2.8 million, primarily due to realized gains on financial instruments held for sale, partially offset by income on purchased future receivables. Non-interest expense of $15.9 million represented an increase of $3.6 million, primarily due to an increase in compensation expenses.

YTD 2021 versus YTD 2020. Interest income of $80.3 million represented an increase of $50.0 million, due to increased loan balances, including PPP loans. Interest expense of $29.7 million represented an increase of $7.9 million, due to an increase in costs associated with borrowings to support PPP loan activities. The provision for loan losses of $0.5 million represented a decrease of $7.3 million, due to higher CECL reserves taken during 2020, driven by the outlook towards COVID-19’s impact on small businesses. Non-interest income of $54.3 million represented a decrease of $12.6 million, primarily due to fee income recognized on Round 1 PPP loans in the prior year. Non-interest expense of $47.7 million represented an increase of $7.0 million, primarily due to an increase in compensation and operating expenses.

Residential Mortgage Banking Segment Results.

Q3 2021 versus Q3 2020. Non-interest income of $45.2 million represented a decrease of $32.0 million, due to lower volumes and margins. Non-interest expense of $36.6 million represented a decrease of $17.2 million, primarily due to a decrease in compensation expenses and variable expenses on residential mortgage banking activities due to lower production.

YTD 2021 versus YTD 2020. Interest income of $6.3 million represented an increase of $0.8 million, due to an increase in loan balances. Interest expense of $7.0 million represented an increase of $1.2 million, due to an increase in loan balances. The provision for loan losses decreased $0.5 million, due to stabilizing macroeconomic assumptions. Non-interest income of $148.6 million represented a decrease of $29.6 million, primarily due to lower volumes and margins. Non-interest expense of $106.5 million represented a decrease of $41.9 million, primarily due to a decrease in compensation expenses and variable expenses on residential mortgage banking activities due to lower production.

Corporate – Other.

Q3 2021 versus Q3 2020. Interest expense decreased by $0.9 million due to a decrease in unallocated corporate debt. Non-interest expense of $18.3 million increased by $8.9 million which was driven by an increase in merger expenses related to ANH, management fees, incentive fees and compensation expenses.

YTD 2021 versus YTD 2020. Interest expense of $2.0 million represented an increase of $0.7 million, due to an increase in unallocated corporate debt. Non-interest expense of $41.7 million represented an increase of $15.8 million, primarily due to an increase in merger expenses related to ANH and Red Stone and compensation expenses.

Non-GAAP financial measures

We believe that providing investors with distributable earnings, formerly referred to as core earnings, gives investors greater transparency into the information used by management in our financial and operational decision-making, including the determination of dividends. Distributable earnings is a non-U.S. GAAP financial measure and because distributable earnings is an incomplete measure of our financial performance and involves differences from net income computed in accordance with U.S. GAAP, it should be considered along with, but not as an alternative to, our net income as a measure of our financial performance. In addition, because not all companies use identical calculations, our presentation of distributable earnings may not be comparable to other similarly-titled measures of other companies.

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We calculate distributable 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) any unrealized current non-cash provision for credit losses on accrual loans

v) any unrealized gains or losses on de-designated cash flow hedges

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

In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains and losses on MBS acquired by us in the secondary market, but is not adjusted to exclude unrealized gains and losses on MBS retained by us as part of our loan origination businesses, where we transfer originated loans into an MBS securitization and retain an interest in the securitization. In calculating distributable earnings, we do not adjust net income (in accordance with GAAP) to take into account unrealized gains and losses on MBS retained by us as part of our loan origination businesses because we consider the unrealized gains and losses that are generated in the loan origination and securitization process to be a fundamental part of this business and an indicator of the ongoing performance and credit quality of our historical loan originations. In calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude realized gains and losses on certain MBS securities due to a variety of reasons which may include collateral type, duration, and size. In 2016, we liquidated the majority of our MBS portfolio excluded from distributable earnings to fund our recurring operating segments.  

In addition, in calculating distributable earnings, net income (in accordance with GAAP) is adjusted to exclude unrealized gains or losses on residential MSRs, held at fair value. We treat our commercial MSRs and residential MSRs as two separate classes based on the nature of the underlying mortgages and our treatment of these assets as two separate pools for risk management purposes. Servicing rights relating to our small business commercial business are accounted for under ASC 860, Transfer and Servicing, while our residential MSRs are accounted for under the fair value option under ASC 825, Financial Instruments. In calculating distributable earnings, we do not exclude realized gains or losses on either commercial MSRs or residential MSRs, held at fair value, as servicing income is a fundamental part of our business and as an indicator of the ongoing performance.

To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. There are certain items, including net income generated from the creation of MSRs, that are included in distributable earnings but are not included in the calculation of the current year’s taxable income. These differences may result in certain items that are recognized in the current period’s calculation of distributable earnings not being included in taxable income, and thus not subject to the REIT dividend distribution requirement, until future years.

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The table below presents a reconciliation of net income to distributable earnings.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2021		2020		Change		2021		2020		Change
Net Income	$	46,535	$	35,363	$	11,172	$	106,386	$	18,510	$	87,876
Reconciling items:
Unrealized (gain) loss on mortgage servicing rights		(147)		4,688		(4,835)		(10,804)		33,169		(43,973)
Impact of ASU 2016-13 on accrual loans		(1,329)		(7,248)		5,919		2,677		23,114		(20,437)
Non-recurring REO impairment		(10)		(114)		104		500		2,961		(2,461)
Merger transaction costs and other non-recurring expenses		5,485		998		4,487		15,719		3,220		12,499
Unrealized loss on mortgage-backed securities		—		—		—		—		185		(185)
Unrealized loss on de-designated cash flow hedges		—		—		—		—		2,118		(2,118)
Total reconciling items	$	3,999	$	(1,676)	$	5,675	$	8,092	$	64,767	$	(56,675)
Income tax adjustments		(1,169)		(1,561)		392		1,023		(10,703)		11,726
Distributable earnings	$	49,365	$	32,126	$	17,239	$	115,501	$	72,574	$	42,927
Less: Distributable earnings attributable to non-controlling interests		802		731		71		1,960		2,160		(200)
Less: Income attributable to participating shares		2,444		339		2,105		6,717		1,087		5,630
Distributable earnings attributable to common stockholders	$	46,119	$	31,056	$	15,063	$	106,824	$	69,327	$	37,497
Distributable Earnings per common share - basic and diluted	$	0.64	$	0.57	$	0.07	$	1.60	$	1.30	$	0.30

Q3 2021 versus Q3 2020. Consolidated net income of $46.5 million for the third quarter of 2021 represented an increase of $11.2 million from the third quarter of 2020, primarily due to an increase in interest income from commercial and small business loans,  partially offset by a decrease in non-interest income on residential mortgage banking activities. Consolidated distributable earnings of $49.4 million for the third quarter of 2021 represented an increase of $17.2 million from the third quarter of 2020. The increase in the distributable earnings reconciling items is primarily due to an increase in CECL reserves and merger transaction costs and other non-recurring expenses, partially offset by a decrease in unrealized losses on MSRs in our residential mortgage banking segment.

YTD 2021 versus YTD 2020. Consolidated net income of $106.4 million for the nine months ended September 30, 2021 represented an increase of $87.9 million from the nine months ended September 30, 2020, primarily due to increased loan balances, including PPP loans, and a reduction in CECL reserves. Consolidated distributable earnings of $115.5 million for the nine months ended September 30, 2021 represented an increase of $42.9 million from the nine months ended September 30, 2020. The decrease in the distributable earnings reconciling items is primarily due to a decrease in unrealized gains on MSRs and a reduction in CECL reserves, partially offset by an increase in merger transaction costs and other non-recurring expenses.

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 have adversely impacted our business, financial performance and operating results throughout 2021. The full magnitude and duration of the COVID-19 pandemic and the extent to which it impacts our financial condition, results of operations and cash flows will depend on future developments, which continue to be uncertain, including new information that may emerge concerning the severity of COVID-19 variants, the administration and effectiveness of vaccines, the impact of COVID-19 on economic activity and on our borrowers' businesses and their ability to meet their financial obligations to us. We will continue to monitor for any material or adverse effects on our business resulting from the COVID-19 pandemic. 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 the Company’s Annual Report on Form 10-K.

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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) distributable earnings (as described below) of our operating partnership, on a rolling four-quarter basis and before the incentive distribution for the current quarter, and (y) the product of (1) the weighted average of the issue price per share of common stock or operating partnership unit (“OP unit”) (without double counting) in all of our offerings multiplied by the weighted average number of shares of common stock outstanding (including any restricted shares of common stock and any other shares of common stock underlying awards granted under our 2012 equity incentive plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters; provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative distributable earnings is greater than zero for the most recently completed 12 calendar quarters.

For purposes of calculating the incentive distribution, the shares of common stock and OP units issued as of the closing of the ZAIS Financial merger in connection with the merger agreement were deemed to be issued at the per share price equal to (i) the sum of (A) the weighted average of the issue price per share of Sutherland common stock or Sutherland OP units (without double counting) issued prior to the closing of the ZAIS Financial merger multiplied by the number of shares of Sutherland common stock outstanding and Sutherland OP units (without double counting) issued prior to the closing of the merger plus (B) the amount by which the net book value of our Company as of the closing of the merger (after giving effect to the closing of the merger agreement) exceeded the amount of the net book value of Sutherland immediately preceding the closing of the merger, divided by (ii) all of the shares of our common stock and OP units issued and outstanding as of the closing of the merger (including the date of the closing of the mergers).

The incentive distribution shall be calculated within 30 days after the end of each quarter and such calculation shall promptly be delivered to our Company. We are obligated to pay the incentive distribution 50% in cash and 50% in either common stock or OP units, as determined in our discretion, within five business days after delivery to our Company of the written statement from the holder of the Class A special unit setting forth the computation of the incentive distribution for such quarter. Subject to certain exceptions, our Manager may not sell or otherwise dispose of any portion of the incentive distribution issued to it in common stock or OP units until after the three year anniversary of the date that such shares of common stock or OP units were issued to our Manager. The price of shares of our common stock for purposes of determining the number of shares payable as part of the incentive distribution is the closing price of such shares on the last trading day prior to the approval by our board of the incentive distribution.

For purposes of determining the incentive distribution payable to our Manager, distributable earnings is defined under the partnership agreement of our operating partnership in a manner that is similar to the definition of distributable earnings described above under "Non-GAAP Financial Measures" but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d) depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of distributable earnings described above under "Non-GAAP Financial Measures".

Liquidity and Capital Resources

Liquidity is a measure of our ability to turn non-cash assets into cash and to meet potential cash requirements. We use significant cash to purchase SBC loans and other target assets, originate new SBC loans, pay dividends, repay principal and interest on our borrowings, fund our operations and meet other general business needs. Our primary sources of liquidity will include our existing cash balances, borrowings, including securitizations, re-securitizations, repurchase agreements, warehouse facilities, bank credit facilities and other financing agreements (including term loans and revolving facilities), the net proceeds of offerings of equity and debt securities, including our Senior Secured Notes, corporate debt, and Convertible Notes, and net cash provided by operating activities.

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

Cash flow

Nine Months Ended September 30, 2021. Cash and cash equivalents as of September 30, 2021, increased by $84.3 million to $284.8 million from December 31, 2020, primarily due to net cash provided from financing activities, partially offset by net cash used for investing and operating activities. The net cash provided from financing activities primarily reflected net proceeds from PPPLF borrowings, secured borrowings and issuances of securitized debt. The net cash used for investing activities primarily reflected loan originations and purchases, including PPP loans, partially offset by proceeds from mortgage backed securities. The net cash used for operating activities primarily reflected gains on loans and mortgage servicing rights.

Nine Months Ended September 30, 2020. Cash and cash equivalents as of September 30, 2020, increased by $95.8 million to $223.7 million from December 31, 2019, primarily due to net cash provided from financing activities, partially offset by net cash used for investing and operating activities. The net cash provided from financing activities primarily reflected net proceeds from issuances of securitized debt obligations of consolidated VIEs. The net cash used for investing activities primarily reflected loan originations and purchases, partially offset by paydowns. The net cash used for operating activities primarily reflected net realized gains on sales of residential mortgages held for sale, partially offset by provision for loan losses and net proceeds of loans, held for sale, at fair value.

Collateralized borrowings under repurchase agreements

The table below 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 2018		610,251		526,757		610,251
Q4 2018		635,233		622,742		635,233
Q1 2019		597,963		604,107		635,233
Q2 2019		612,383		605,173		612,383
Q3 2019		876,163		744,273		876,163
Q4 2019		809,189		842,676		876,163
Q1 2020		1,159,357		984,273		1,159,357
Q2 2020		714,162		936,760		1,057,522
Q3 2020		624,549		669,356		831,200
Q4 2020		827,569		726,059		827,569
Q1 2021		1,320,644		1,785,656		2,481,436
Q2 2021		1,223,527		1,145,354		1,223,527
Q3 2021		1,552,135		1,497,324		1,552,135

The net increase in the outstanding balances during the third quarter of 2021 was primarily due to increased borrowings to fund SBC originations and acquisitions volumes.

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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 table below is a summary of our debt facilities.

								Carrying Value at
Lender	Asset Class	Current Maturity	Pricing	Facility Size		Pledged Assets Carrying Value		September 30,  2021		December 31, 2020
JPMorgan	Acquired loans, SBA loans	August 2022	1M L + 2.5% to 2.875%	$	200,000	$	61,371	$	46,307	$	36,604
Keybank	Freddie Mac loans	February 2022	SOFR + 1.41%		100,000		13,495		13,268		50,408
East West Bank	SBA loans	October 2022	Prime - 0.821% to + 0.00%		75,000		66,441		50,201		40,542
Credit Suisse	Acquired loans (non USD)	December 2021	Euribor + 2.50% to 3.00%		231,600		51,781		40,250		36,840
Comerica Bank	Residential loans	June 2022	1M L + 1.75%		100,000		95,254		89,793		78,312
TBK Bank	Residential loans	October 2021	Variable Pricing		150,000		118,217		116,628		123,951
Origin Bank	Residential loans	September 2022	Variable Pricing		60,000		32,985		31,840		27,450
Associated Bank	Residential loans	November 2021	1M L + 1.50%		60,000		32,012		30,631		15,556
East West Bank	Residential MSRs	September 2023	1M L + 2.50%		50,000		76,325		49,400		34,400
Credit Suisse	Purchased future receivables	October 2023	1M L + 4.50%		50,000		6,567		1,000		—
Bank of the Sierra	Real estate	August 2050	3.25% to 3.45%		22,770		32,428		22,281		22,611
Western Alliance	Residential loans	July 2022	3.75% to 4.75%		50,000		350		335		—
Total borrowings under credit facilities and other financing agreements				$	1,149,370	$	587,226	$	491,934	$	466,674
Citibank	Fixed rate, Transitional, Acquired loans	October 2021	1M L + 2.00% to 3.00%	$	500,000	$	142,163	$	110,773	$	210,735
Deutsche Bank	Fixed rate, Transitional loans	November 2021	3M L + 2.00% to 2.40%		350,000		308,636		225,974		190,567
JPMorgan	Transitional loans	November 2022	1M L + 2.00% to 2.75%		700,000		858,005		636,171		247,616
Performance Trust	Acquired loans	March 2024	1M T + 2.00%		174,000		98,071		84,419		—
Credit Suisse	Fixed rate, Transitional, Acquired loans	May 2022	1M L + 2.00% to 2.35%		500,000		252,998		184,892		—
Credit Suisse	Residential loans	December 2021	L + 3.00%		100,000		74,994		60,390		—
JPMorgan	MBS	October 2021	1.15% to 1.63%		33,338		57,770		33,338		65,407
Deutsche Bank	MBS	October 2021	2.38%		12,956		19,777		12,956		16,354
Citibank	MBS	October 2021	2.33%		48,094		83,231		48,094		58,076
RBC	MBS	October 2021	1.31% to 1.96%		62,458		93,061		62,458		38,814
CSFB	MBS	October 2021	2.40% to 2.95%		58,786		108,138		58,786		—
Various	MBS	October 2021	Variable Pricing		33,884		53,148		33,884		—
Total borrowings under repurchase agreements				$	2,573,516	$	2,149,992	$	1,552,135	$	827,569
Total secured borrowings				$	3,722,886	$	2,737,218	$	2,044,069	$	1,294,243

In the table above:

● The current facility size for borrowings under credit facilities due to Credit Suisse is €200.0 million, but has been converted into USD for purposes of this disclosure.

● The weighted average interest rate of borrowings under credit facilities was 2.8% and 2.8% as of September 30, 2021 and December 31, 2020, respectively.

● The weighted average interest rate of borrowings under repurchase agreements was 2.0% and 3.3% as of September 30, 2021 and December 31, 2020, respectively.

● The agreements governing secured borrowings require maintenance of certain financial and debt covenants. The Company received a waiver from certain financing counterparties to exclude the Paycheck Protection Program Liquidity Fund from certain covenant calculations as of September 30, 2021 and therefore was in compliance with all debt and financial covenants as of the current period ended. The Company was in compliance with all debt and financial covenants as of December 31, 2020.

Financing facilities

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 February 2020, pursuant to which ReadyCap Commercial, Sutherland Asset I, Ready Capital Sub REIT and Sutherland Warehouse Trust II may be advanced an aggregate principal amount of up to $350 million on originated mortgage loans (the “DB Loan Repurchase Facility”). As of September 30, 2021, we had $226.0 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. ReadyCap Commercial’s, Sutherland Asset I’s, Ready Capital Sub REIT’s and Sutherland Warehouse Trust II’s obligations are fully guaranteed by us.

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The eligible assets for the DB Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties subject to certain eligibility criteria, such as property type, geographical location, LTV ratios, debt yield and debt service coverage ratios. The principal amount paid by the bank for each mortgage loan is based on a percentage of the lesser of the mortgaged property value or the principal balance of such mortgage loan. ReadyCap Commercial, Sutherland Asset I, Ready Capital Sub REIT and Sutherland Warehouse Trust II paid the bank an up-front fee and are also required to pay the bank availability fees, and a minimum utilization fee for the DB Loan Repurchase Facility, as well as certain other administrative costs and expenses. The DB Loan Repurchase Facility also includes financial maintenance covenants applicable to Sutherland Partners L.P., which include (i) an adjusted tangible net worth that does not decline by more than 25% in any calendar quarter, 35% in any calendar year or 50% from the highest adjusted tangible net worth set forth in recent audited financial statements, (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; provided however, that no less than two-thirds of the liquidity maintained by the Guarantor to satisfy the covenant shall be cash liquidity, (iii) a debt-to-assets ratio no greater than 80% and (iv) a tangible net worth at least equal to the sum of (a) the product of 1/15 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”) and Sutherland Warehouse Trust, LLC (“Sutherland Warehouse Trust”) entered into a master repurchase agreement in December 2015, pursuant to which ReadyCap Warehouse Financing and Sutherland Warehouse Trust, may sell, and later repurchase, mortgage loans in an aggregate principal amount of up to $400 million. As of October 2019, Ready Capital Mortgage Depositor II, LLC (“Ready Capital Mortgage Depositor II”) was added to the agreement. Our subsidiaries renewed their master repurchase agreement with JPMorgan in November 2020 (the “JPM Loan Repurchase Facility”). In January 2021 the facility was amended for an upsize to $650 million from an effective date of January 14, 2021, through but excluding April 30, 2021, and thereafter downsized to $400 million. In June 2021, the facility was amended for an upsize to $600 million. In September 2021, the facility was amended for an upsize to $700 million. As of September 30, 2021, we had $636.2 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 November 2022, and up to 25% of the then current unpaid obligations of ReadyCap Warehouse Financing, Sutherland Warehouse Trust and Ready Capital Mortgage Depositor II, LLC Trust are 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) 65% of total stockholders’ equity as of the most recent renewal date of the facility plus (b) 65% of the net proceeds of any equity issuance after the most recent renewal date (ii) maximum leverage of 3:1, excluding non-recourse indebtedness and (iii) liquidity equal to at least the lesser of (a) 5% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) $15.0 million.

Performance Trust repurchase agreement. Our subsidiaries, ReadyCap Commercial, LLC and Sutherland Asset I, LLC entered a master repurchase agreement in March 2021, pursuant to which ReadyCap Commercial, LLC and Sutherland Asset I, LLC may be advanced an aggregate principal amount of up to $113 million on performing and non-performing acquired legacy small balance commercial loans (the “Performance Trust Loan Repurchase Facility”). In June 2021 the facility was amended for an upsize to $123 million. In July 2021 the facility was amended for an upsize to $143 million. In August 2021 the facility was amended for an upsize to $169 million. In September 2021 the facility was amended for an upsize to $174 million. As of September 30, 2021, we had $84.4 million outstanding under the Performance Trust Loan Repurchase Facility. The Performance Trust Loan Repurchase Facility is committed until March 2024, and up to 25% of the then current unpaid obligations of ReadyCap Commercial, LLC and Sutherland Asset I, LLC are guaranteed by us.

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Citibank loan repurchase agreement. Our subsidiaries, Waterfall Commercial Depositor, LLC, Sutherland Asset I, LLC, ReadyCap Commercial, LLC and Ready Capital Subsidiary REIT I, LLC renewed a master repurchase agreement in October 2020 with Citibank, N.A., pursuant to where these subsidiaries may sell, and later repurchase, a trust certificate (the “Trust Certificate”), representing interests in mortgage loans in an aggregate principal amount of up to $500 million. As of September 30, 2021, we had $110.8 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, Ready Capital Sub REIT and ReadyCap Commercial, LLC are 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, ReadyCap Commercial, LLC and Ready Capital Sub REIT 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(excluding non-recourse liabilities in connection with any securitization transaction) of which no more than 20% could be Marketable Securities; and (iii) the ratio of our operating partnership’s total indebtedness (excluding non-recourse liabilities in connection with any securitization transaction) to our net asset value not exceeding 4:1 at any time.

Credit Suisse repurchase agreement. Our subsidiaries, ReadyCap Warehouse Financing II, LLC and Sutherland Asset I-CS, LLC entered a master repurchase agreement in May 2021, pursuant to which Ready Cap Warehouse Financing II, LLC and Sutherland Asset I-CS, LLC may be advanced an aggregate principal amount of up to $500 million on newly originated and acquired commercial products (excluding SBA and Freddie Small Balance Loans) (the “Credit Suisse Loan Repurchase Facility”). As of September 30, 2021, we had $184.9 million outstanding under the Credit Suisse Loan Repurchase Facility. The Credit Suisse Loan Repurchase Facility is committed until May 2022, and obligations of ReadyCap Warehouse Financing II, LLC and Sutherland Asset I-CS, LLC are guaranteed by us.

Securities repurchase agreements. As of September 30, 2021, we had $249.5 million of secured borrowings related to ABS and pledged Trust Certificates with various counterparties.

General statements regarding loan and securities repurchase facilities. As of September 30, 2021, we had $1.7 billion in carrying value of loans pledged against our borrowings under the loan repurchase facilities and $415.1 million in carrying value fair value of ABS 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.

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Our borrowings under repurchase agreements are renewable at the discretion of our lenders and, as such, our ability to roll-over such borrowings is not guaranteed. The terms of the repurchase transaction borrowings under our repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association, as to repayment, margin requirements and the segregation of all assets we have initially sold under the repurchase transaction. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction, and cross default and setoff provisions.

JPMorgan credit facility. We amended our credit facility with JPMorgan in June 2021 providing for a total borrowing capacity of up to $200 million. As of September 30, 2021, we had $46.3 million outstanding under this credit facility. Under this facility, RCL and Sutherland 2016-1 JPM Grantor Trust pledge loans guaranteed by the SBA under the SBA Section 7(a) Loan Program, SBA 504 loans and other loans. 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 most recent renewal date of the facility plus (b) 50% of the net proceeds of any equity issuance after the most recent renewal date (ii) maximum leverage of 3:1, excluding non-recourse indebtedness 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) the aggregate amount of indebtedness outstanding under the agreement. The amended terms have an interest rate based on loan type ranging from one month LIBOR (reset daily), plus a spread.

As of September 30, 2021, we had a leverage ratio of 2.2x 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.

East West Bank credit facility. RCL renewed a senior secured revolving credit facility with East West Bank in October 2020, which provides financing of up to $50.0 million. In May 2021 the facility was amended for an upsize to $75 million. The agreement extends for two years, with an additional one-year extension at the Company’s request and pays interest equal to the Prime Rate minus 0.821% on SBA 7(a) guaranteed loans and the Prime Rate plus 0.000% on non-guaranteed loans.

Other credit facilities. GMFS funds its origination platform through warehouse lines of credit with six counterparties with total borrowings outstanding of $318.6 million as of September 30, 2021. GMFS utilizes committed warehouse lines of credit agreements ranging from $50 million to $150 million, with expiration dates between October 2021 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. In addition, in connection with the acquisition of ANH, we assumed approximately $2.0 billion of secured borrowings, of which approximately $1.7 billion has been repaid as of September 30, 2021.  

PPP borrowing facilities

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

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In January 2021, PPP was reopened to provide funding to new borrowers and certain existing borrowers. We have elected to participate again in PPP in 2021 as both a direct lender and a service provider. We use the following two facilities in order to participate in funding PPP loans.

PPP Participant Bank financing agreements. In late January 2021 RCL entered into two agreements with a certain PPP participant bank, as follows:

1) Master PPP Loan Participation Purchase Agreement: ReadyCap Lending (“RCL”) sells to such PPP participant bank 100% undivided, beneficial ownership interests in certain PPP originated loans with RCL retaining the record legal title to each participated PPP Loan. RCL continues to service such loans. The purchase price equals 99.825% for the first one-billion dollars of PPP Loans originated and 99.55% for all subsequent PPP Loans originated by RCL; and provided that if a participation limit increase is in effect, the purchase price for any participation effected under such participation limit increase shall be 98.75%. The purchase commitment fee paid to such PPP participant bank is $2 million.

2) Letter Agreement Repurchase Option: RCL shall have the option to repurchase any participation that has been purchased by such PPP participant bank at a purchase price equal to the outstanding loan amount of the related PPP Loan as of the repurchase date plus any accrued interest. RCL may only exercise the repurchase option with respect to a participation during the seven Business Day period commencing on the business day immediately following the purchase date with respect to such participation. RCL established a bank account at the PPP participant bank, and is to maintain a balance of at least $10 million.

The termination date of the agreement shall mean the date as of which all of the PPP loans related to a participation sold have been paid in full and all collections with respect thereto have been paid, or when we no longer hold legal title to any PPP loan related to a participation sold. As such, this financing agreement was fully repaid in June 2021 and therefore, has been terminated.

Paycheck Protection Program Facility borrowings. RCL utilizes the ability to receive advances from the Federal Reserve through the Paycheck Protection Program Facility (“PPPLF”). Loans are participated with a PPP participant bank in accordance with the financing agreement described above, repurchased from such PPP participant bank, and then pledged using PPPLF. The program charges an interest rate of 0.35%. As of September 30, 2021, we had approximately $1.9 billion outstanding under this credit facility.

Public debt offerings

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

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

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Corporate debt

The 2021 Notes

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

On March 25, 2021, we redeemed all of the outstanding 2021 Notes, at a redemption price equal to 100% of the principal amount of the 2021 Notes plus accrued and unpaid interest, for cash.

The 6.20% 2026 Notes

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

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

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

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

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

The 5.75% 2026 Notes

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

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

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Prior to February 15, 2023, the 5.75% 2026 Notes will not be redeemable by us. On or after February 15, 2023, we may redeem for cash all or any portion of the 5.75% 2026 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 5.75% 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If we undergo a change of control repurchase event, holders may require us to purchase the 5.75% 2026 Notes, in whole or in part, for cash at a repurchase price equal to 101% of the aggregate principal amount of the 5.75% 2026 Notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase, as described in greater detail in the base indenture, as supplemented by the fifth supplemental indenture dated as of February 10, 2021.

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

Junior subordinated notes. On March 19, 2021, we completed the ANH Merger which included the Company taking on the outstanding junior subordinated notes (“Junior subordinated notes”) issued of ANH. On March 15, 2005 ANH issued $37.38 million of junior subordinated notes to a newly formed statutory trust, Anworth Capital Trust I, organized by ANH under Delaware law. The trust issued $36.25 million in trust preferred securities, of which $15 million were for I-A notes and $21,250,000 for I-B notes, to unrelated third party investors. Both the junior subordinated notes and the trust preferred securities require quarterly payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. Both the junior subordinated notes and the trust preferred securities will mature in 2035 and are currently redeemable, at our option, in whole or in part, without penalty. ANH used the net proceeds of this issuance to invest in Agency MBS. In accordance with ASC 810-10, Anworth Capital Trust I does not meet the requirements for consolidation.

The Debt ATM Agreement

On May 20, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), pursuant to which we may offer and sell, from time to time, up to $100.0 million of the 6.20% 2026 Notes and the 5.75% 2026 Notes. Sales of the 6.20% 2026 Notes and the 5.75% 2026 Notes pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) (the “Debt ATM Program”). The Agent is not required to sell any specific number of the notes, but the Agent will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between the Agent and us. During the three months ended September 30, 2021, we did not sell any amount of the 6.20% 2026 Notes or the 5.75% 2026 Notes through the Debt ATM Program.

Other long term financing

ReadyCap Holdings 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, issue price and the date from which interest will accrue) 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 L.P., Sutherland Asset I, LLC, and ReadyCap Commercial. The funds were used to fund new SBC and SBA loan originations and new SBC loan acquisitions.

The Senior Secured Notes bear interest at 7.50% per annum payable semiannually on each February 15 and August 15. 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.

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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 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 Holdings’ ability to create or incur any lien on the capital stock of its wholly-owned subsidiary, ReadyCap Lending and (b) ReadyCap Holdings’ ability to permit ReadyCap Lending to create or incur any lien on its assets to secure indebtedness of its affiliates other than its subsidiaries or any securitization entity; and (v) limit ReadyCap Holdings’ 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.

On October 20, 2021, the Company redeemed  all of the outstanding 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 table below presents information on the securitization structures and related issued tranches of notes to investors.

Deal Name	Collateral Asset Class	Issuance	Active / Collapsed	Bonds Issued (in $ millions)
Trusts (Firm sponsored)
Waterfall Victoria Mortgage Trust 2011-1 (SBC1)	SBC Acquired loans	February 2011	Collapsed	$	40.5
Waterfall Victoria Mortgage Trust 2011-3 (SBC3)	SBC Acquired loans	October 2011	Collapsed		143.4
Sutherland Commercial Mortgage Trust 2015-4 (SBC4)	SBC Acquired loans	August 2015	Collapsed		125.4
Sutherland Commercial Mortgage Trust 2018 (SBC7)	SBC Acquired loans	November 2018	Collapsed		217.0
ReadyCap Lending Small Business Trust 2015-1 (RCLT 2015-1)	Acquired SBA 7(a) loans	June 2015	Collapsed		189.5
ReadyCap Lending Small Business Loan Trust 2019-2 (RCLT 2019-2)	Originated SBA 7(a) loans, Acquired SBA 7(a) loans	December 2019	Active		131.0
Real Estate Mortgage Investment Conduits (REMICs)
ReadyCap Commercial Mortgage Trust 2014-1 (RCMT 2014-1)	SBC Originated conventional	September 2014	Active	$	181.7
ReadyCap Commercial Mortgage Trust 2015-2 (RCMT 2015-2)	SBC Originated conventional	November 2015	Active		218.8
ReadyCap Commercial Mortgage Trust 2016-3 (RCMT 2016-3)	SBC Originated conventional	November 2016	Active		162.1
ReadyCap Commercial Mortgage Trust 2018-4 (RCMT 2018-4)	SBC Originated conventional	March 2018	Active		165.0
Ready Capital Mortgage Trust 2019-5 (RCMT 2019-5)	SBC Originated conventional	January 2019	Active		355.8
Ready Capital Mortgage Trust 2019-6 (RCMT 2019-6)	SBC Originated conventional	November 2019	Active		430.7
Waterfall Victoria Mortgage Trust 2011-2 (SBC2)	SBC Acquired loans	March 2011	Collapsed		97.6
Sutherland Commercial Mortgage Trust 2018 (SBC6)	SBC Acquired loans	August 2017	Active		154.9
Sutherland Commercial Mortgage Trust 2019 (SBC8)	SBC Acquired loans	June 2019	Active		306.5
Sutherland Commercial Mortgage Trust 2020 (SBC9)	SBC Acquired loans	June 2020	Active		203.6
Sutherland Commercial Mortgage Trust 2021 (SBC10)	SBC Acquired loans	May 2021	Active		232.6
Collateralized Loan Obligations (CLOs)
Ready Capital Mortgage Financing 2017– FL1	SBC Originated transitional	August 2017	Collapsed	$	198.8
Ready Capital Mortgage Financing 2018 – FL2	SBC Originated transitional	June 2018	Collapsed		217.1
Ready Capital Mortgage Financing 2019 – FL3	SBC Originated transitional	April 2019	Active		320.2
Ready Capital Mortgage Financing 2020 – FL4	SBC Originated transitional	June 2020	Active		405.3
Ready Capital Mortgage Financing 2021 – FL5	SBC Originated transitional	March 2021	Active		628.9
Ready Capital Mortgage Financing 2021 – FL6	SBC Originated transitional	August 2021	Active		652.5
Trusts (Non-firm sponsored)
Freddie Mac Small Balance Mortgage Trust 2016-SB11	Originated agency multi-family	January 2016	Active	$	110.0
Freddie Mac Small Balance Mortgage Trust 2016-SB18	Originated agency multi-family	July 2016	Active		118.0
Freddie Mac Small Balance Mortgage Trust 2017-SB33	Originated agency multi-family	June 2017	Active		197.9
Freddie Mac Small Balance Mortgage Trust 2018-SB45	Originated agency multi-family	January 2018	Active		362.0
Freddie Mac Small Balance Mortgage Trust 2018-SB52	Originated agency multi-family	September 2018	Active		505.0
Freddie Mac Small Balance Mortgage Trust 2018-SB56	Originated agency multi-family	December 2018	Active		507.3
Key Commercial Mortgage Trust 2020-S3(1)	SBC Originated conventional	September 2020	Active		263.2
(1) Contributed portion of assets into trust

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, 2021. See Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations" in the Company's annual report on Form 10-K for further details. 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 our accounting policies and use of estimates included in “Notes to Consolidated Financial Statements, Note 3 – Summary of Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in the Company’s annual report on Form 10-K.

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Allowance for credit losses

The allowance for credit losses consists of the allowance for losses on loans and lending commitments accounted for at amortized cost. Such loans and lending commitments are reviewed quarterly considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value (“LTV”) ratio and economic conditions. The allowance for credit losses increases through provisions charged to earnings and reduced by charge-offs, net of recoveries.

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

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

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

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

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

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

Valuation of financial assets and liabilities carried at fair value

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

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

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

Servicing rights impairment

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

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

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

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

Inflation. Virtually all of our assets and liabilities are and will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with U.S. GAAP and our activities and balance sheet shall be measured with reference to historical cost and/or fair market value without considering inflation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we enter into transactions in various financial instruments that expose us to various types of risk, both on and off-balance sheet, which are associated with such financial instruments and markets for which we invest. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off-balance sheet risk and prepayment risk. Many of these risks have been augmented due to the continuing economic disruptions caused by the COVID-19 pandemic which remain uncertain and difficult to predict. We continue to monitor the impact of the pandemic and the effect of these risks in our operations.

Market risk. 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.

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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 borrower’s 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, 2021, approximately 0.1% 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 rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for SBC financing.

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The table below projects the impact on our interest income and expense for the twelve month period following September 30, 2021, assuming an immediate increase or decrease of 25, 50, 75, and 100 basis points in LIBOR.

		12-month pretax net interest income sensitivity profiles
		Instantaneous change in rates
(in thousands)		25 basis point increase		50 basis point increase		75 basis point increase		100 basis point increase		25 basis point decrease		50 basis point decrease		75 basis point decrease		100 basis point decrease
Assets:
Loans held for investment	$	8,245	$	16,478	$	24,712	$	32,945	$	(922)	$	(1,714)	$	(2,483)	$	(3,251)
Interest rate swap hedges		1,119		2,238		3,357		4,475		(1,119)		(2,238)		(3,357)		(4,475)
Mortgage backed securities		213		426		640		853		(156)		(219)		(278)		(337)
Total	$	9,577	$	19,142	$	28,709	$	38,273	$	(2,197)	$	(4,171)	$	(6,118)	$	(8,063)
Liabilities:
Recourse debt	$	(4,328)	$	(8,655)	$	(13,067)	$	(17,498)	$	1,342	$	1,421	$	1,452	$	1,452
Non-recourse debt		(4,063)		(8,137)		(11,529)		(15,603)		1,921		1,933		1,945		1,956
Total	$	(8,391)	$	(16,792)	$	(24,596)	$	(33,101)	$	3,263	$	3,354	$	3,397	$	3,408
Total Net Impact to Net Interest Income (Expense)	$	1,186	$	2,350	$	4,113	$	5,172	$	1,066	$	(817)	$	(2,721)	$	(4,655)

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 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.

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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, credit facilities, and other financing agreements. In connection with these financing arrangements, we pledge our mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e. 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.

The table below presents exposure to repurchase agreements and credit facilities counterparties as of September 30, 2021.

(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	$ 2,044,069	$ 2,737,218	$ 693,149	7.5	%
(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 table below 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 as of September 30, 2021.

(in thousands)	Counterparty Rating (1)	Amount of Risk (2)	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity
Credit Suisse AG	A+ / A1	$ 142,167	5	11.6%
Deutsche Bank AG	BBB+/A2	$ 89,483	2	7.3%
JPMorgan Chase Bank, N.A.	A+ / Aa2	$ 246,266	14	20.0%
Citibank, N.A.	A+ / Aa3	$ 66,527	1	5.4%
(1) The counterparty ratings presented are the long-term issuer credit rating for JP Morgan, Credit Suisse and Deutsche Bank the long-term bank deposits rating for Citibank, as rated September 30, 2021 by S&P and Moody’s, respectively.
(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities.

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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 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, 2021. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business.

On February 24, 2021, Sheila Baker and Merle W. Bundick purported shareholders of Anworth, filed lawsuits in the California Superior Court, styled Baker v. McAdams, et al., No. 21STCV07569 (the “Baker Action”) and Bundick v. McAdams, et al., No. 21STCV07571 (the “Bundick Action”). On March 2, 2021, Benjamin Gigli, a purported shareholder of Anworth, also filed a lawsuit in California Superior Court, styled Gigli v. McAdams, et al., No. 21STCV08413 (the “Gigli Action,” and together with the Baker Action and the Bundick Action, the “California State Court Actions”). The California State Court Actions were filed against the Anworth Board. The complaints in the California State Court Actions assert that the Anworth Board breached their fiduciary duties by failing to properly consider acquisition proposals that were purportedly superior to the Merger, agreeing to purportedly unreasonable deal protections in connection with the

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Merger, and authorizing the issuance of the Form 424B3 filed on February 9, 2021, which allegedly contained materially misleading information. The California State Court Actions seek, among other things, rescissory damages and an award of attorneys’ and experts’ fees. On May 26, 2021, the California State Court Actions were consolidated and restyled In re Anworth Mortgage Asset Corporation Stockholder Litigation, Lead Case No. 21STCV07569.  A consolidated amended complaint was filed by Sheila Baker, Merle W. Bundick, and Benjamin Gigli (together, the “Plaintiffs”) on June 14, 2021, and the Anworth Board filed a Demurrer seeking to dismiss the consolidated amended complaint on August 13, 2021.  Plaintiffs opposed the Anworth Board’s Demurrer on September 13, 2021, and the Anworth Board filed their reply brief on October 4, 2021.  A hearing on the Anworth Board’s Demurrer was scheduled for October 27, 2021.

Ready Capital intends to vigorously defend against the California State Court Actions.

Item 1A. Risk Factors

See the Company's Annual Report on Form 10-K for the year ended December 31, 2020. 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.

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

Shares Repurchase Program

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 million on August 4, 2020, bringing the total authorized and available under the program to $25 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.

The table below provides information with respect to common purchases by the Company during the quarter.

Period	Total Number of Shares		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program
July	—		—	—		14,508,964
August	—		—	—		14,508,964
September	8,062		15.21	8,062	(1)​	14,386,341
Totals / Averages	8,062	$	15.21	8,062	$	14,386,341
(1) Certain of our employees surrendered common stock owned by them to satisfy their tax and other compensation related withholdings associated with the vesting of restricted stock units. The price paid per share is based on the price of our common stock as of the date of the withholding.

Item 3. Default Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit number		Exhibit description
2.1	*	Agreement and Plan of Merger, by and among Ready Capital Corporation, ReadyCap Merger Sub LLC and Owens Realty Mortgage, Inc., dated as of November 7, 2018 (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed November 9, 2018)
2.2	*	Agreement and Plan of Merger, dated as of December 6, 2020, by and among Ready Capital Corporation, RC Merger Subsidiary, LLC and Anworth Mortgage Asset Corporation (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed December 8, 2020)
3.1	*	Articles of Amendment and Restatement of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)
3.2	*	Articles Supplementary of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)
3.3	*	Articles of Amendment and Restatement of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed November 4, 2016)
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)
3.6	*	Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.7 to the Registrant's Registration Statement on Form 8-A filed on March 19, 2021).
3.7	*	Articles Supplementary to the Articles of Amendment of Ready Capital Corporation designating the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 10, 2021).
4.1	*	Specimen Common Stock Certificate of 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 on February 13, 2017)
4.3	*	First Supplemental Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC, ReadyCap Commercial, LLC, each as guarantors and U.S. Bank National Association, as trustee and as collateral agent, including the form of 7.5% Senior Secured Notes due 2022 and the related guarantees (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on February 13, 2017)
4.4	*	Indenture, dated as of August 9, 2017, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on August 9, 2017)
4.5	*	First Supplemental Indenture, dated as of August 9, 2017, by and between Sutherland Asset Management Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on August 9, 2017)

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4.6	*	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 on March 13, 2019)
4.7	*	Amendment No. 1, dated as of February 26, 2019, to the First Supplemental Indenture, dated as of August 9, 2017, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.8 of the Registrant's Current Report on Form 10-K filed March on 13, 2019)
4.8	*	Fourth Supplemental Indenture, dated as of July 22, 2019, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on July 22, 2019)
4.9	*	Fifth Supplemental Indenture, dated as of February 10, 2021, by and between Ready Capital Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed February on 10, 2021)
4.10	*	Specimen Preferred Stock Certificate representing the shares of 6.25% Series C Cumulative Convertible Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.13 of the Registrant's Registration Statement on Form 8-A filed on March 19, 2021).
4.1	1*	Specimen Preferred Stock Certificate representing the shares of 6.50% Series E Cumulative Redeemable Preferred Stock, $0.0001 par value per share (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on June 10, 2021).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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 Scheme Document
101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF		Inline XBRL Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Linkbase Document
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded with the Inline XBRL document)

*      Previously filed.

**    This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

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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 5, 2021	By:	/s/ Thomas E. Capasse
		Thomas E. Capasse
		Chairman of the Board and Chief Executive
		(Principal Executive Officer)
Date: November 5, 2021	By:	/s/ Andrew Ahlborn
		Andrew Ahlborn
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

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