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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission File Number:  001‑35808

READY CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

90‑0729143

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

 

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

(Address of Principal Executive Offices, Including Zip Code)

(212) 257-4600

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐

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

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

 

Emerging growth company  ☐

 

 

 

 

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

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

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

7.00% Convertible Senior Notes due 2023

6.50% Senior Notes due 2021

RC

RCA

RCP

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

 

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

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

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

PART I. 

FINANCIAL INFORMATION

3

Item 1. 

Financial Statements

3

Item 1A. 

Forward-Looking Statements

61

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

63

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

88

Item 4. 

Controls and Procedures

92

PART II. 

OTHER INFORMATION

92

Item 1. 

Legal Proceedings

92

Item 1A. 

Risk Factors

92

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

93

Item 3. 

Defaults Upon Senior Securities

93

Item 4. 

Mine Safety Disclosures

94

Item 5. 

Other Information

94

Item 6. 

Exhibits

94

SIGNATURES

96

EXHIBIT 31.1 CERTIFICATIONS

 

EXHIBIT 31.2 CERTIFICATIONS

 

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

 

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

 

 

 

 

2


 

Table of Contents

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

READY CAPITAL CORPORATION

unaudited CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

(In Thousands)

    

March 31, 2019

    

December 31, 2018

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,597

 

$

54,406

Restricted cash

 

 

29,979

 

 

28,921

Loans, net (including $22,595 and $22,664 held at fair value)

 

 

1,057,023

 

 

1,193,392

Loans, held for sale, at fair value

 

 

115,778

 

 

115,258

Mortgage backed securities, at fair value

 

 

91,435

 

 

91,937

Loans eligible for repurchase from Ginnie Mae

 

 

73,057

 

 

74,180

Investment in unconsolidated joint ventures

 

 

39,025

 

 

33,438

Derivative instruments

 

 

2,483

 

 

2,070

Servicing rights (including $88,218 and $93,065 held at fair value)

 

 

115,652

 

 

120,062

Receivable from third parties

 

 

718

 

 

8,888

Real estate acquired in settlement of loans, held for sale

 

 

75,517

 

 

7,787

Other assets

 

 

68,886

 

 

55,447

Assets of consolidated VIEs

 

 

1,561,864

 

 

1,251,057

Total Assets

 

$

3,279,014

 

$

3,036,843

Liabilities

 

 

 

 

 

 

Secured borrowings

 

 

848,225

 

 

834,547

Securitized debt obligations of consolidated VIEs, net

 

 

1,140,919

 

 

905,367

Convertible notes, net

 

 

110,241

 

 

109,979

Senior secured notes, net

 

 

178,979

 

 

178,870

Corporate debt, net

 

 

48,629

 

 

48,457

Guaranteed loan financing

 

 

34,047

 

 

229,678

Liabilities for loans eligible for repurchase from Ginnie Mae

 

 

73,057

 

 

74,180

Derivative instruments

 

 

3,392

 

 

3,625

Dividends payable

 

 

13,396

 

 

13,346

Accounts payable and other accrued liabilities

 

 

67,240

 

 

74,719

Total Liabilities

 

$

2,518,125

 

$

2,472,768

Stockholders’ Equity

 

 

 

 

 

 

Common stock, $0.0001 par value, 500,000,000 shares authorized, 44,395,713 and 32,105,112 shares issued and outstanding, respectively

 

 

 4

 

 

 3

Additional paid-in capital

 

 

720,680

 

 

540,478

Retained earnings

 

 

21,790

 

 

5,272

Accumulated other comprehensive loss

 

 

(1,328)

 

 

(922)

Total Ready Capital Corporation equity

 

 

741,146

 

 

544,831

Non-controlling interests

 

 

19,743

 

 

19,244

Total Stockholders’ Equity

 

$

760,889

 

$

564,075

Total Liabilities and Stockholders’ Equity

 

$

3,279,014

 

$

3,036,843

 

See Notes To Unaudited Consolidated Financial Statements

3


 

Table of Contents

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In Thousands, except share data)

    

2019

    

2018

Interest income

 

$

48,753

 

$

37,150

Interest expense

 

 

(35,775)

 

 

(22,666)

Net interest income before provision for loan losses

 

$

12,978

 

$

14,484

Provision for loan losses

 

 

(518)

 

 

(167)

Net interest income after provision for loan losses

 

$

12,460

 

$

14,317

Non-interest income

 

 

 

 

 

 

Residential mortgage banking activities

 

 

14,587

 

 

14,024

Net realized gain on financial instruments and real estate owned

 

 

7,282

 

 

12,232

Net unrealized gain (loss) on financial instruments

 

 

(6,912)

 

 

3,008

Other income

 

 

900

 

 

1,334

Servicing income, net of amortization and impairment of $1,763 and $1,350

 

 

6,752

 

 

6,410

Income on unconsolidated joint ventures

 

 

2,929

 

 

5,739

Gain on bargain purchase

 

 

30,728

 

 

 —

Total non-interest income

 

$

56,266

 

$

42,747

Non-interest expense

 

 

 

 

 

 

Employee compensation and benefits

 

 

(11,448)

 

 

(15,320)

Allocated employee compensation and benefits from related party

 

 

(853)

 

 

(1,200)

Variable expenses on residential mortgage banking activities

 

 

(9,176)

 

 

(2,290)

Professional fees

 

 

(1,829)

 

 

(2,648)

Management fees – related party

 

 

(1,997)

 

 

(2,013)

Incentive fees – related party

 

 

 —

 

 

(408)

Loan servicing expense

 

 

(3,648)

 

 

(4,093)

Merger related expenses

 

 

(5,467)

 

 

 —

Other operating expenses

 

 

(6,861)

 

 

(8,011)

Total non-interest expense

 

$

(41,279)

 

$

(35,983)

Income before provision for income taxes

 

$

27,447

 

$

21,081

Provision for income (taxes) benefit

 

 

3,003

 

 

(2,563)

Net income

 

$

30,450

 

$

18,518

Less: Net income attributable to non-controlling interest

 

 

983

 

 

664

Net income attributable to Ready Capital Corporation

 

$

29,467

 

$

17,854

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.90

 

$

0.56

Earnings per common share - diluted

 

$

0.90

 

$

0.56

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

 

Basic

 

 

32,556,875

 

 

32,036,504

Diluted

 

 

32,563,644

 

 

32,045,844

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.40

 

$

0.37

 

See Notes To Unaudited Consolidated Financial Statements

 

4


 

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In Thousands)

 

2019

 

 

2018

Net Income

$

30,450

 

$

 —

Other comprehensive income (loss) - net change by component

 

 

 

 

 

Net change in hedging derivatives (cash flow hedges)

$

(420)

 

$

 —

  Other comprehensive income (loss)

$

(420)

 

$

 —

    Comprehensive income (loss)

$

30,030

 

$

 —

       Less: Comprehensive income attributable to non-controlling interests

 

(969)

 

 

 —

Comprehensive income attributable to Ready Capital Corporation

$

29,061

 

$

 —

 

 

 

 

 

 

 

 

See Notes To Unaudited Consolidated Financial Statements

 

5


 

Table of Contents

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated Other

 

Total

 

 

 

 

 

 

 

Common Stock

 

Additional Paid-

 

Earnings

 

 

Comprehensive

 

Ready Capital

 

Non-controlling

 

Total Stockholders'

(in thousands, except share data)

    

Shares

    

Par Value

    

In Capital

    

(Deficit)

 

 

Loss

    

Corporation equity

    

Interests

    

Equity

Balance at January 1, 2018

 

31,996,440

 

$

 3

 

$

539,455

 

$

(3,385)

 

$

 —

 

$

536,073

 

$

19,394

 

$

555,467

Dividend declared on common stock ($0.37 per share)

 

 —

 

 

 —

 

 

 —

 

 

(11,910)

 

 

 —

 

 

(11,910)

 

 

 —

 

 

(11,910)

Dividend declared on OP units

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(425)

 

 

(425)

Equity component of 2017 convertible note issuance

 

 —

 

 

 —

 

 

(78)

 

 

 —

 

 

 —

 

 

(78)

 

 

(3)

 

 

(81)

Contributions, net

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

107

 

 

107

Stock-based compensation

 

 —

 

 

 —

 

 

80

 

 

 —

 

 

 —

 

 

80

 

 

 —

 

 

80

Net Income

 

 —

 

 

 —

 

 

 —

 

 

17,854

 

 

 —

 

 

17,854

 

 

664

 

 

18,518

Balance at March 31, 2018

 

31,996,440

 

$

 3

 

$

539,457

 

$

2,559

 

 

 —

 

$

542,019

 

$

19,737

 

$

561,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated Other

 

Total

 

 

 

 

 

 

 

Common Stock

 

Additional Paid-

 

Earnings

 

 

Comprehensive

 

Ready Capital

 

Non-controlling

 

Total Stockholders'

(in thousands, except share data)

    

Shares

    

Par Value

    

In Capital

    

(Deficit)

 

 

Loss

    

Corporation equity

    

Interests

    

Equity

Balance at January 1, 2019

 

32,105,112

 

$

 3

 

$

540,478

 

$

5,272

 

$

(922)

 

$

544,831

 

$

19,244

 

$

564,075

Dividend declared on common stock ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(12,949)

 

 

 —

 

 

(12,949)

 

 

 —

 

 

(12,949)

Dividend declared on OP units

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(447)

 

 

(447)

Distributions, net

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20)

 

 

(20)

Shares issued pursuant to ORM merger

 

12,223,552

 

 

 1

 

 

179,320

 

 

 —

 

 

 —

 

 

179,321

 

 

 —

 

 

179,321

Equity component of 2017 convertible note issuance

 

 —

 

 

 —

 

 

(84)

 

 

 —

 

 

 —

 

 

(84)

 

 

 —

 

 

(84)

Stock-based compensation

 

52,110

 

 

 —

 

 

733

 

 

 —

 

 

 —

 

 

733

 

 

 —

 

 

733

Manager incentive fee paid in stock

 

14,939

 

 

 —

 

 

233

 

 

 —

 

 

 —

 

 

233

 

 

(3)

 

 

230

Net Income

 

 —

 

 

 —

 

 

 —

 

 

29,467

 

 

 —

 

 

29,467

 

 

983

 

 

30,450

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(406)

 

 

(406)

 

 

(14)

 

 

(420)

Balance at March 31, 2019

 

44,395,713

 

$

 4

 

$

720,680

 

$

21,790

 

 

(1,328)

 

$

741,146

 

$

19,743

 

$

760,889

 

See Notes To Unaudited Consolidated Financial Statements

 

6


 

Table of Contents

READY CAPITAL CORPORATION

Unaudited CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(In Thousands, except share information)

   

2019

  

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

30,450

 

$

18,518

 

Net income from continuing operations

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Discount accretion and premium amortization of financial instruments, net

 

 

345

 

 

(2,038)

 

Amortization of guaranteed loan financing, deferred financing costs, and intangible assets

 

 

7,630

 

 

3,492

 

Provision for loan losses

 

 

518

 

 

167

 

Charge off of real estate acquired in settlement of loans

 

 

305

 

 

19

 

Decrease in repair and denial reserve

 

 

89

 

 

110

 

Net settlement of derivative instruments

 

 

(795)

 

 

4,556

 

Origination of loans, held for sale, at fair value

 

 

(445,455)

 

 

(610,502)

 

Proceeds from disposition and principal payments of loans, held for sale, at fair value

 

 

458,503

 

 

677,401

 

Income on unconsolidated joint venture

 

 

(2,707)

 

 

1,048

 

Gain on sale of mortgages held for sale included in Residential mortgage banking activities

 

 

(10,199)

 

 

(6,279)

 

Gain (loss) on derivatives included in Residential mortgage banking activities

 

 

(364)

 

 

(1,162)

 

Creation of servicing rights, net of payoffs

 

 

(2,281)

 

 

(4,408)

 

Gain on bargain purchase

 

 

(30,728)

 

 

 —

 

Net realized gains on financial instruments and real estate owned

 

 

(7,282)

 

 

(12,232)

 

Net unrealized gains on financial instruments

 

 

6,912

 

 

(3,008)

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

 

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

 

 

2,406

 

 

(8,261)

 

Receivable from third parties

 

 

8,170

 

 

(4,308)

 

Other assets

 

 

(7,814)

 

 

5,122

 

Accounts payable and other accrued liabilities

 

 

(6,647)

 

 

(10,013)

 

Net cash provided by operating activities

 

 

1,056

 

 

48,222

 

Cash Flow From Investing Activities:

 

 

 

 

 

 

 

Origination of loans

 

 

(245,367)

 

 

(118,945)

 

Purchase of loans

 

 

(128,991)

 

 

(142,000)

 

Purchase of mortgage backed securities, at fair value

 

 

 —

 

 

(10,419)

 

Purchase of real estate

 

 

 —

 

 

(191)

 

Proceeds on unconsolidated joint venture in excess of earnings recognized

 

 

5,739

 

 

4,092

 

Payment of liability under participation agreements, net of proceeds received

 

 

 —

 

 

(81)

 

Proceeds from disposition and principal payment of loans

 

 

183,800

 

 

116,836

 

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

 

 

3,277

 

 

3,662

 

Proceeds from sale of real estate

 

 

285

 

 

614

 

Cash acquired in connection with the ORM merger

 

 

10,822

 

 

 —

 

Net cash (used in) provided by investing activities

 

 

(170,435)

 

 

(146,432)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from secured borrowings

 

 

951,342

 

 

938,671

 

Proceeds from issuance of securitized debt obligations of consolidated VIEs

 

 

355,846

 

 

148,497

 

Proceeds from senior secured note offering

 

 

 —

 

 

41,328

 

Payment of contingent consideration

 

 

(1,207)

 

 

 —

 

Payment of secured borrowings

 

 

(949,703)

 

 

(912,948)

 

Payment of securitized debt obligations of consolidated VIEs

 

 

(118,893)

 

 

(65,111)

 

Payment of guaranteed loan financing

 

 

(20,526)

 

 

(17,360)

 

Payment of promissory note

 

 

(674)

 

 

 —

 

Payment of deferred financing costs

 

 

(7,538)

 

 

(4,443)

 

Contributions, net

 

 

(20)

 

 

107

 

Dividend payments

 

 

(13,346)

 

 

(12,289)

 

Net cash (used in) provided by financing activities

 

 

195,281

 

 

116,452

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

25,902

 

 

18,242

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

94,970

 

 

90,954

 

Cash, cash equivalents, and restricted cash at end of period

 

$

120,872

 

$

109,196

 

 

 

 

 

 

 

 

 

Supplemental disclosure of operating cash flow

 

 

 

 

 

 

 

Cash paid for interest

 

$

34,471

 

$

23,135

 

Cash paid (received) for income taxes

 

$

(3,125)

 

$

796

 

Stock-based compensation

 

$

733

 

$

151

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

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

 

$

 —

 

$

333

 

Deconsolidation of assets in securitization trusts

 

$

177,815

 

$

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

Common stock issued in connection with ORM Merger

 

 

12,223,552

 

 

 

 

Deconsolidation of borrowings in securitization trusts

 

$

177,815

 

$

 —

 

Incentive shares issued to investment manager pursuant to management agreement

 

$

233

 

$

 —

 

 

 

 

 

 

 

 

 

Cash and restricted cash reconciliation

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,597

 

$

86,773

 

Restricted cash

 

 

29,979

 

 

13,964

 

Cash, cash equivalents, and restricted cash in Assets of consolidated VIEs

 

 

43,296

 

 

8,459

 

Cash, cash equivalents, and restricted cash at end of period

 

$

120,872

 

$

109,196

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

7


 

Table of Contents

READY CAPITAL CORPORATION

NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1 – Organization

 

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

 

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

 

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

 

Sutherland Partners, LP (the “Operating Partnership”) holds substantially all of our assets and conducts substantially all of our business. As of  March 31, 2019 and December 31, 2018, the Company owned approximately 97.6% and 96.5%, of the operating partnership units (“OP units”) of the Operating Partnership, respectively. The Company, as sole general partner of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership, and the limited partners of the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of the Operating Partnership. Therefore, the Company consolidates the Operating Partnership.

 

The Company is a multi-strategy real estate finance company that originates, acquires, finances and services small to medium balance commercial (“SBC”) loans, Small Business Administration (“SBA”) loans, residential mortgage loans, and to a lesser extent, mortgage backed securities (“MBS”) collateralized primarily by SBC loans, or other real estate-related investments.

 

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

 

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

 

·

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

 

·

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

 

·

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

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

 

·

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

 

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

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

 

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

 

 

Note 2 – Basis of Presentation

 

The unaudited interim consolidated financial statements presented herein are as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018.  These unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”)—as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the U.S. Securities and Exchange Commission.

 

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

 

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

 

Note 3 – Summary of Significant Accounting Policies

 

Use of Estimates

 

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

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contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Basis of Consolidation

 

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

 

Reclassifications

 

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

 

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

 

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

 

Cash and Cash Equivalents

 

The Company has accounted for cash and cash equivalents in accordance with ASC 305, Cash and Cash Equivalents. The Company defines cash and cash equivalents as cash, demand deposits, and short-term, highly liquid investments with original maturities of 90 days or less when purchased. Cash and cash equivalents are exposed to concentrations of credit risk. We deposit our cash with institutions that we believe to have highly valuable and defensible business franchises, strong financial fundamentals, and predictable and stable operating environments.

 

As of December 31, 2018, the Company had $0.6 million in money market mutual funds, and substantially all of the Company’s cash and cash equivalents not held in money market funds were comprised of cash balances with banks that are in excess of the Federal Deposit Insurance Corporation insurance limits. As of March 31, 2019 this balance was zero.

 

Restricted Cash

 

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

 

Loans, net

 

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

 

Loans, held-for-investment

 

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

 

Acquired loans are recorded at cost at the time they are acquired. 

 

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

 

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

 

Purchased Credit Impaired (PCI) Loans

 

The estimated cash flow expected for each loan is estimated at the time the loan is acquired. The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the initial investment is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using the interest method of accretion. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-accretable difference and is not accreted over time.

 

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

 

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

 

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

 

Non-PCI Loans

 

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

 

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

 

Loans, held at fair value

 

Loans, held at fair value represent certain loans originated by ReadyCap for which the Company has elected the fair value option. Interest is recognized as interest income on the unaudited interim consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on the unaudited interim consolidated statements of income.

 

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Allowance for loan losses

 

The allowance for loan losses is intended to provide for credit losses inherent in the loans, held-for-investment portfolio and is reviewed quarterly for adequacy considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value ratio and economic conditions. The allowance for loan losses is increased through provisions for loan losses charged to earnings and reduced by charge-offs, net of recoveries.

 

We determine the allowance for loan losses by measuring credit impairment on (1) an individual basis for non-accrual status loans, and (2) on a collective basis for all other loans with similar risk characteristics. The allowance for loan losses on an individual basis is assessed when a loan is on non-accrual and the recoverability of the loan is less than its carrying value. The Company considers the loans to be collateral dependent and relies on the current fair value of the collateral as the basis for determining impairment. Loans that are not assessed individually for impairment are assessed on a collective basis. For the acquired loans we perform a historical analysis on both cumulative defaults and severity upon default for all loans that were current as of November 4, 2013 when the Company was formed or acquired thereafter. We calculated the cumulative default and loss severity on the acquired loans with delinquency statuses of 90+ days and applied those factors to the current acquired loan population. For the originated loans, our historical data shows a minimal number of defaults, therefore we used an analysis performed on the latest ReadyCap securitization to determine the likelihood of default and to determine loss severity we stressed collateral value to the current principal balance based on the total valuation decline of SBC properties from the peak valuation in 2007 through their post-crisis low in 2010.

 

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

 

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

 

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

 

Non-accrual loans

 

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

 

Troubled Debt Restructurings

 

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

 

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

 

Impaired loans

 

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

 

Loans, held for sale, at fair value

 

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

 

Mortgage backed securities, at fair value

 

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

 

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

 

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

 

Loans eligible for repurchase from Ginnie Mae 

 

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

 

Derivative instruments, at fair value

 

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

 

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

 

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

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Interest Rate Swap Agreements

 

An interest rate swap is an agreement between two counterparties to exchange periodic interest payments where one party to the contract makes a fixed-rate payment in exchange for a floating-rate payment from the other party. The dollar amount each party pays is an agreed-upon periodic interest rate multiplied by some pre-determined dollar principal (notional amount). No principal (notional amount) is exchanged between the two parties at trade initiation date. Only interest payments are exchanged. Interest rate swaps are classified as Level 2 in the fair value hierarchy. The fair value adjustments are reported within net unrealized gain (loss) on financial instruments, while the related interest income or interest expense, are reported within net realized gain (loss) on financial instruments in the unaudited interim consolidated statements of income.

 

Interest Rate Lock Commitments (“IRLCs”)

 

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

 

CDS

 

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

 

Hedge Accounting

 

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

 

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

 

For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income/(loss) ("OCI"), and is reclassified out of OCI and into the Consolidated Statements of Income when the hedged cash flows affect earnings. These amounts are recognized consistent with the classification of the hedged item, primarily interest expense (for hedges of interest rate risk). The ineffective portions of the cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income / (loss) ("AOCI") is recognized in earnings when the cash flows that were hedged affect earnings, so long as the forecasted transaction remains probable of occurring. For hedge relationships that are discontinued because a forecasted transaction is probable of not occurring according to the original hedge forecast (including an additional two month window), any related derivative values recorded in AOCI are immediately recognized in earnings. Hedge accounting is generally terminated at the debt issuance date because we are no longer exposed to cash flow variability subsequent to issuance. Accumulated amounts recorded in AOCI at that date are then released to earnings

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in future periods to reflect the difference in 1) the fixed rates economically locked in at the inception of the hedge and 2) the actual fixed rates established in the debt instrument at issuance. Because of the effects of the time value of money, the actual interest expense reported in earnings will not equal the effective yield locked in at hedge inception multiplied by the par value. Similarly, this hedging strategy does not actually fix the interest payments associated with the forecasted debt issuance.

 

Servicing rights

 

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

 

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

 

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

 

Servicing rights – SBA and Freddie Mac

 

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

 

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

 

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

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Servicing rights - Residential (carried at fair value)

 

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

 

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

 

Real estate acquired in settlement of loans, held for sale

 

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

 

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

 

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

 

Intangible assets

 

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

 

Investment in unconsolidated joint venture

 

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

 

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

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

 

Deferred financing costs

 

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

 

Due from Servicers

 

The loan servicing activities of the Company’s SBC Loan Acquisitions and SBC Originations reportable segments are performed primarily by third-party servicers. SBA loans originated by and held at RCL are internally serviced. Residential mortgage loans originated by and held at GMFS are both serviced by third-party servicers and internally serviced. The Company’s servicers hold substantially all of the cash owned by the Company related to loan servicing activities. These amounts include principal and interest payments made by borrowers, net of advances and servicing fees. Cash is generally received within thirty days of recording the receivable.

 

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

 

Secured borrowings

 

Secured borrowings include borrowings under credit facilities, borrowings under repurchase agreements, and promissory notes.

 

Borrowings under credit facilities

 

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

 

Borrowing under repurchase agreements

 

Borrowings under repurchase agreements are accounted for under ASC 860, Transfers and Servicing. Investment securities financed under repurchase agreements are treated as collateralized borrowings, unless they meet sale treatment or are deemed to be linked transactions. Through March 31, 2019, none of our repurchase agreements have been accounted for as components of linked transactions. All securities financed through a repurchase agreement have remained on our unaudited interim consolidated balance sheets as an asset and cash received from the lender was recorded on our unaudited interim consolidated balance sheets as a liability. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense on the unaudited interim consolidated statements of income.

 

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Securitized debt obligations of consolidated VIEs, net

 

Since 2011, we have engaged in several securitization transactions, which the Company accounts for under ASC 810. Securitization involves transferring assets to an SPE, or securitization trust, to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt instruments. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The consolidation of the SPE includes the issuance of senior securities to third parties, which are shown as securitized debt obligations of consolidated VIEs on the consolidated balance sheets.

 

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

 

Convertible note, net

 

ASC 470, Debt, requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. ASC 470-20 requires that the initial proceeds from the sale of these notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. We measured the estimated fair value of the debt component of our convertible notes as of the issuance date based on our nonconvertible debt borrowing rate. The equity components of the convertible senior notes have been reflected within additional paid-in capital in our unaudited interim consolidated balance sheet, and the resulting debt discount is amortized over the period during which the convertible notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense.

 

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

 

Senior secured notes, net

 

The Company accounts for secured debt offerings under ASC 470, Debt. Pursuant to the adoption of ASU 2015-03, the Company’s senior secured notes are presented net of debt issuance costs. These senior secured notes are collateralized by loans, MBS, and retained interests of consolidated VIE’s. Interest paid and accrued in connection with senior secured notes is recorded as interest expense on the unaudited interim consolidated statements of income.

 

Corporate debt, net

 

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

 

Guaranteed loan financing

 

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

 

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Repair and denial reserve

 

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

 

Variable Interest Entities

 

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

 

In determining whether we are the primary beneficiary of a VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE, such as our role establishing the VIE and our ongoing rights and responsibilities, the design of the VIE, our economic interests, servicing fees and servicing responsibilities, and other factors.

 

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

 

Non-controlling Interests

 

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

 

Fair Value Option

 

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

 

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

 

We have elected the fair value option for loans held-for-sale originated by GMFS that the Company intends to sell in the near term. We have elected the fair value option for certain residential mortgage servicing rights acquired as part of the merger transaction.

 

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Earnings per Share

 

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

 

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

 

Income Taxes

 

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

 

We provide for exposure in connection with uncertain tax positions, which requires significant judgment by management including determination, based on the weight of the tax law and available evidence, that it is more-likely-than-not that a tax result will be realized. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense on our unaudited interim consolidated statements of income. As of March 31, 2019 and December 31, 2018, we accrued no taxes, interest or penalties related to uncertain tax positions. In addition, we do not anticipate a change in this position in the next 12 months.

 

Revenue Recognition

 

On January 1, 2018, new accounting rules regarding revenue recognition became effective for public companies with a calendar fiscal year.  Under the new accounting rules regarding revenue, revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized through the following five-step process:

 

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

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

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

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

 

Since the updated guidance does not apply to revenue associated with financial instruments, including interest income, realized or unrealized gains on financial instruments, loan servicing fees, loan origination fees, among other revenue streams, the adoption of this standard did not have a material impact on our unaudited interim consolidated financial statements. The revenue recognition guidance also included revisions to existing accounting rules regarding the determination of whether a company is acting as a principal or agent in an arrangement and accounting for sales of nonfinancial assets where the seller has continuing involvement.  These additional revisions also did not materially impact the Company.

 

Interest Income

 

Interest income on non-PCI loans, held-for-investment, loans, held at fair value, loans, held for sale, at fair value, and MBS, at fair value is accrued based on the outstanding principal amount and contractual terms of the instrument. Discounts

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or premiums associated with the loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on contractual cash flows through the maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to the accrual status of the asset. If the asset has been delinquent for the previous 90 days, the asset status will turn to non-accrual, and recognition of interest income will be suspended until the asset resumes contractual payments for three consecutive months. For PCI loans, the excess of the cash flows expected to be collected on these loans, measured as of the acquisition date, over the initial investment is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using the interest method of accretion.

 

Realized Gains (Losses)

 

Upon the sale or disposition (not including the prepayment of outstanding principal balance) of loans or securities, the excess (or deficiency) of net proceeds over the net carrying value or cost basis of such loans or securities is recognized as a realized gain/loss.

 

Origination Income and Expense

 

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

 

Residential Mortgage Banking Activities

 

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

 

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

 

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

 

Variable Expenses on Residential Mortgage Banking Activities

 

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

 

 

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Note 4 – Recently Issued Accounting Pronouncements

 

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

 

 

 

 

 

 

Standard

Summary of guidance

Effects on financial statements

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

Provides guidance on simplifying the accounting and presentation for hedging activities.

The adoption did not affect the financial statement impact of hedge accounting, as the change would simplify hedge documentation requirements and presentation associated with hedging activities.

Issued August 2017

 

 

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

The adoption of this standard did not have a material impact on our consolidated financial statements.

 

An intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should account for the
arrangement as a service contract. This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred.

 

ASU 2018-11, Leases (Topic 842): Targeted Improvements to Accounting for Leases

Provides guidance on increasing the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions.

The modified retrospective adoption of this standard resulted in the Company recording a gross up of approximately $3.3 million on our unaudited interim consolidated balance sheet upon recognition of the right-of-use assets and lease liabilities. The right-of use-assets are recorded in Other assets and the corresponding lease liabilities are recorded in Accounts payable and other accrued liabilites within the unaudited consolidated balance sheets.

Issued July 2018

 

 

 

FASB Standards issued, but not yet adopted

 

 

 

 

 

 

Standard

Summary of guidance

Effects on financial statements

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments

Requires the use of an “expected loss” credit model for estimating future credit losses of certain financial instruments instead of the “incurred loss” credit model that existing GAAP currently requires.

Required effective date: Annual reporting periods, and interim periods therein, beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018.

Issued June 2016



The “expected loss” model requires the consideration of possible credit losses over the life of an instrument compared to only estimating credit losses upon the occurrence of a discrete loss event in accordance with the current “incurred loss” methodology.



The Company is evaluating the impact ASU 2016-13 will have on our consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

Provides guidance on increasing the transparency and comparability of the disclosure requirements for fair value measurement.

Required effective date: The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Issued August 2018

 

The Company is evaluating the impact ASU 2018-13 will have on our consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 5 – Acquisition of Owens Realty Mortgage, Inc.

 

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

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

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

 

 

 

 

(In Thousands)

    

March 29, 2019

Assets

 

 

 

Cash and cash equivalents

 

$

10,822

Loans, net

 

 

130,449

Real estate acquired in settlement of loans, held for sale

 

 

67,973

Investment in unconsolidated joint ventures

 

 

8,619

Other assets

 

 

 

  Deferred tax assets

 

 

4,660

  Accrued interest

 

 

1,209

  Other

 

 

379

Total assets acquired

 

$

224,111

Liabilities

 

 

 

Secured borrowings

 

 

12,713

Other liabilities

 

 

 

Accounts payable and other accrued liabilities

 

 

1,000

 Due to Manager

 

 

228

 Deferred tax liabilities

 

 

123

Total liabilities assumed

 

$

14,064

Net assets acquired

 

$

210,047

 

 

 

 

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

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

 

 

 

 

Total Consideration Transferred (in thousands, except share and per share data)

FV of Net Assets Acquired

$

210,052

 

 

 

ORM shares outstanding at March 29, 2019

 

8,482,880

Exchange ratio

x

1.441

Shares issued

 

12,223,830

Market price as of March 29, 2019

$

14.67

Total consideration transferred based on value of shares issued

$

179,324

 

 

 

Bargain purchase gain

$

30,728

 

 

 

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

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

In a business combination, the initial allocation of the purchase price is considered preliminary and, therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of the acquisition date. Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received.

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

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

 

 

 

 

 

 

 

 

 

 

For the three months ended

(In Thousands)

 

 

March 31, 2019

 

 

March 31, 2018

Selected Financial Data