What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 152 added, 142 removed, 564 unchanged (34% of the section changed)

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● changes in prepayments of our assets;

● our ability to achieve the expected synergies, cost savings and other benefits from the acquisition of Broadmark Realty Capital Inc.

(“Broadmark”) , a specialty real estate finance company that specialized in originating and servicing residential and commercial construction loans;

● our ability to achieve the expected synergies, cost savings and other benefits from recent acquisitions, including the acquisitions of Broadmark Realty Capital Inc.

(“Broadmark”) , Madison One Capital, M1 CUSO and Madison One Lender Services (together, “Madison One”), and Funding Circle USA, Inc.;

● risks associated with achieving expected synergies, cost savings and other benefits from acquisitions and our increased scale;

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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”), 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.

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“Risk Factors” and Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (our “Form 10-K”).

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our interim consolidated 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.

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● Critical Accounting Estimates

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and accompanying Notes included in Part I, Item 1, “Financial Statements,” of this Form 10-Q and with Items 6, 7, 8, and 9A of our annual report on Form 10-K.

Refer to “Forward-Looking Statements” in this Form 10-Q and in our annual report on Form 10-K and “Critical Accounting Estimates” in our annual report on Form 10-K for certain other factors that may cause actual results to differ, materially, from those anticipated in the forward-looking statements included in this Form 10-Q.

Refer to “Forward-Looking Statements” in this Form 10-Q and in our Form 10-K and “Critical Accounting Estimates” in our Form 10-K for certain other factors that may cause actual results to differ, materially, from those anticipated in the forward-looking statements included in this Form 10-Q.

We are a multi-strategy real estate finance company that originates, acquires, finances, and services LMM loans, SBA loans, construction loans and, to a lesser extent, MBS collateralized primarily by LMM loans, or other real estate-related investments.

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In order to achieve this objective, we continue to grow our investment portfolio and 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.

Our Residential Mortgage Banking segment meets the criteria to be classified as held for sale and presented as a discontinued operation.

Our Residential Mortgage Banking segment meet the criteria to be classified as held for sale and presented as a discontinued operation.

For all periods presented, the operating results for these operations have been removed from continuing operations.

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● LMM Commercial Real Estate .

We originate LMM loans across the full life-cycle of an LMM property including construction, bridge, stabilized and agency loan origination channels through our wholly-owned subsidiary, ReadyCap Commercial.

We originate LMM loans across the full life-cycle of an LMM property including construction, bridge, stabilized and agency loan origination channels through our subsidiary, ReadyCap Commercial.

These originated loans are generally held-for-investment or placed into securitization structures.

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These originated loans are held for sale, and subsequently sold to Freddie Mac.

We provide construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds through Red Stone, a wholly owned subsidiary.

We provide construction and permanent financing for the preservation and construction of affordable housing, primarily utilizing tax-exempt bonds through Red Stone, a subsidiary.

In addition, we acquire LMM loans as part of our business strategy.

We hold performing LMM loans to term and seek to maximize the value of the non-performing LMM 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.

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.

● Small Business Lending .

We acquire, originate and service owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program through our wholly-owned subsidiary, ReadyCap Lending.

We acquire, originate and service owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program and government guaranteed loans focused on the USDA through our subsidiary, ReadyCap Lending.

We hold an SBA license as one of only 17 non-bank 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 Knight Capital, which is a technology-driven platform that provides working capital to small and medium sized businesses across the U.S.

We are organized and conduct our operations to qualify as a REIT under the Code.

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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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Form 10-K”).

Broadmark Acquisition.

On May 31, 2023, the Company, Broadmark Realty Capital Inc., a Maryland corporation (“Broadmark”), and RCC Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Ready Capital (“RCC Merger Sub”), completed a merger (such transaction, the “Broadmark Merger”) in which Broadmark merged with and into RCC Merger Sub, with RCC Merger Sub remaining as a wholly owned subsidiary of the Company.

For additional information on our business, refer to Part I, Item 1, “Business” in our Form 10-K.

On June 5, 2024, the Company acquired Madison One Capital, M1 CUSO and Madison One Lender Services (together, “Madison One”), a leading originator and servicer of USDA and SBA guaranteed loan products, for an initial purchase price of approximately $32.9 million paid in cash (the “Madison One Acquisition”).

Approximately $3.6 million of the initial purchase price was paid as bonuses to certain key Madison One personnel in cash.

Additional purchase price payments, including cash payments and the issuance of shares of common stock of the Company, may be made over the four years following the acquisition date contingent upon the Madison One business achieving certain performance metrics.

Part of the Company’s strategy in acquiring Madison One included the value of the anticipated synergies arising from the acquisition and the value of the acquired assembled workforce, neither of which qualify for recognition as an intangible asset.

Refer to Notes 1 and 5, included in Part I, Item 1, “Financial Statements,” of this Form 10-Q, for more information about the Madison One Acquisition and the assets acquired and liabilities assumed as a result of the Madison One Acquisition.

On May 31, 2023, the Company, Broadmark Realty Capital Inc., a Maryland corporation (“Broadmark”), and RCC Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the operating partnership (“RCC Merger Sub”), completed a merger (such transaction, the “Broadmark Merger”) in which Broadmark merged with and into RCC Merger Sub, with RCC Merger Sub remaining as a wholly owned subsidiary of the operating partnership.

As a result of the Broadmark Merger, the number of directors on the Company's board of directors (the “Board”) increased by three members, from nine to twelve, with the three additional directors each having served on the board of directors of Broadmark immediately prior to the effective time of the Broadmark Merger.

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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, LMM loans, SBA loans, construction loans, MBS and other assets we may acquire in the future, demand for housing, population trends, construction costs, the availability of alternative real estate financing from other lenders and the financing and other costs associated with our business.

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 and fair value of our assets and the supply of, and demand for, LMM loans, SBA loans, USDA loans, construction loans, MBS and other assets we may acquire in the future, demand for housing, population trends, construction costs, the availability of alternative real estate financing from other lenders, changes in credit spreads, and the financing and other costs associated with our business.

These factors may have an impact on our ability to originate new loans or the performance of our existing loan portfolio.

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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 our available borrowing capacity, 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.

Difficult market conditions as well as inflation, energy costs, geopolitical issues, health epidemics and outbreaks of contagious diseases, unemployment and the availability and cost of credit are factors which could also impact our operating results.

For additional information about certain risks we face, including market risk, credit risk, interest rate risk, liquidity risk, off-balance sheet risk and prepayment risk, refer to Note 23, included in Part I, Item 1, “Financial Statements,” and Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-Q, as well as Part I, Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2023.

Changes in Market Interest Rates.

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Fixed rate mortgage loans bear interest that is fixed for the term of the loan and we typically utilize derivative financial and hedging instruments in an effort to hedge the interest rate risk associated with such fixed rate mortgages.

As of March 31, 2024, 73% of fixed rate loans are match funded in securitization.

As of June 30, 2024, all fixed rate loans are match funded in securitization.

Floating rate mortgage loans generally have an adjustable interest rate equal to the sum of a fixed spread plus an index rate, such as the Secured Overnight Financing Rate (“SOFR”), which typically resets monthly.

As of March 31, 2024, approximately 82% of the loans in our portfolio were floating rate mortgages, and 18% were fixed rate mortgages, based on UPB.

With respect to our business operations, increases in interest rates may generally 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 slowdown.

Conversely, decreases in interest rates generally tend to have the opposite effect.

Non-performing loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them.

Because non-performing loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates.

Changes in Fair Value of Our Assets .

Certain originated loans, MBS, and servicing rights are carried at fair value, while 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 in the period such changes occur.

The expectation of changes in real estate prices is a key determinant for the value of loans and ABS.

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 and servicing fee income.

When interest rates fall, prepayment speeds increase on loans, 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 SOFR (or another floating rate index) and are affected similarly by changes in SOFR 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.

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.

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 inherent 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.

As of June 30, 2024, approximately 82% of the loans in our portfolio were floating rate mortgages, and 18% were fixed rate mortgages, based on UPB.

Current market conditions.

The first quarter was generally characterized by persisting macroeconomic concerns including uncertainty about the commercial real estate sector, inflation, interest rates, and geopolitical tensions.

The second quarter was generally characterized by persisting macroeconomic concerns including uncertainty about the commercial real estate sector, inflation, interest rates, and geopolitical tensions.

Although the full impact of these changes remains uncertain and difficult to predict, concerns and uncertainties about the economic outlook may adversely impact our financial condition, results of operations and cash flows.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in thousands, except share data)

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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.

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 pipeline at any one time and there can be no assurance the assets currently in our pipeline will be acquired or originated by us in the future.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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(in thousands)

March 31, 2024

June 30, 2024

December 31, 2023

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Loans, net (including $0 and $9,348 held at fair value)

Loans, held for sale (net of valuation allowance of $146,180 and $0)

Loans, held for sale (including $89,380 and $81,599 held at fair value and net of valuation allowance of $217,719 and $0)

Mortgage-backed securities

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Real estate owned, held for sale

Assets of consolidated VIEs

Assets of consolidated VIEs (net of valuation allowance of $9,448 and $0)

Assets held for sale

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Total Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity

As of March 31, 2024, total assets in our consolidated balance sheet were $12.0 billion, a decrease of $398 million from December 31, 2023, primarily reflecting a decrease in Loans, net and Assets of consolidated VIEs, partially offset by an increase in Loans, held for sale.

Loans, net decreased $620 million, primarily due to loans transferred to Loans, held for sale.

As of June 30, 2024, total assets in our consolidated balance sheet were $11.8 billion, a decrease of $667 million from December 31, 2023, primarily reflecting a decrease in Assets of consolidated VIEs and Loans, net, partially offset by an increase in Loans, held for sale.

Assets of consolidated VIEs decreased $647 million, due to paydowns on securitized loans.

Loans, net decreased $575 million, primarily due to loans transferred to Loans, held for sale.

Loans, held for sale increased $451 million, primarily due to loans transferred from Loans, net.

As of March 31, 2024, total liabilities in our consolidated balance sheet were $9.5 billion, a decrease of $259 million from December 31, 2023, primarily reflecting a decrease in Securitized debt obligations of consolidated VIEs, net, partially offset by an increase in Secured borrowings.

As of June 30, 2024, total liabilities in our consolidated balance sheet were $9.4 billion, a decrease of $420 million from December 31, 2023, primarily reflecting a decrease in Securitized debt obligations of consolidated VIEs, net, partially offset by an increase in Secured borrowings.

Securitized debt obligations of consolidated VIEs, net decreased $661 million due to paydowns on securitized loans.

Secured borrowings increased $210 million due to increased borrowings on originations of loans, partially offset by payments.

As of March 31, 2024, total stockholders’ equity was $2.5 billion, a decrease of $139 million from December 31, 2023, primarily due to common stock repurchased through the Company’s share repurchase program.

As of June 30, 2024, total stockholders’ equity was $2.4 billion, a decrease of $247 million from December 31, 2023, primarily due to common stock repurchased through the Company’s share repurchase program.

Selected Balance Sheet Information by Business Segment.

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Small Business Lending

March 31, 2024

June 30, 2024

Loans, held for sale

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● Real estate owned, held for sale includes assets of consolidated VIEs.

Income Statement Analysis and Metrics

Three Months Ended March 31,

Statement of Operations Analysis and Metrics

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Small business lending

Total recovery of loan losses

Net interest income after recovery of loan losses

Total recovery of (provision for) loan losses

Net interest income after recovery of (provision for) loan losses

Non-interest income (loss)

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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.

Realized and unrealized gains (losses) on financial instruments are recorded in the consolidated statements of operations 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Net realized gain (loss) - all other

Net realized gain (loss) on financial instruments

Net realized gain on financial instruments

Unrealized gain (loss) on financial instruments

Unrealized loss on loans - Freddie Mac and CMBS

Unrealized gain on loans - SBA

Unrealized gain (loss) on derivatives

Unrealized gain (loss) on loans - SBA

Unrealized loss on derivatives

Unrealized gain on MBS

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Q2 2024 versus Q2 2023.

Interest income of $200.8 million represented an increase of $2.7 million, primarily due to increased loan balances and increases in interest rates.

Interest income of $202.0 million represented a decrease of $10.2 million, primarily due to decreased loan balances, partially offset by increases in interest rates.

Interest expense of $158.3 million represented a decrease of $2.2 million, driven by decreased debt balances, partially offset by increases in interest rates.

Recovery of loan losses of $14.4 million represented an increase of $31.8 million, primarily due to loans transferred to Loans, held for sale.

Non-interest loss of $85.4 million represented an increase of $110.2 million, primarily due to the valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Non-interest expense of $31.3 million represented an increase of $6.8 million, due to an increase in charge-offs of real estate acquired in settlement of loans, partially offset by a decrease in employee compensation and benefits.

YTD 2024 versus YTD 2023.

Interest income of $402.8 million represented a decrease of $7.5 million, primarily due to decreased loan balances, partially offset by increases in interest rates.

Interest expense of $317.2 million represented an increase of $7.2 million, driven by increases in interest rates.

Recovery of loan losses of $45.2 million represented an increase of $54.5 million, primarily due to loans transferred to Loans, held for sale.

Non-interest loss of $122.9 million represented an increase of $132.5 million, primarily due to the valuation allowance related to the transfer of Loans, net to Loans, held for

Non-interest expense of $43.4 million represented an increase of $21.2 million, due to an increase in charge-offs of real estate acquired in settlement of loans.

Non-interest loss of $208.3 million represented an increase of $242.7 million, primarily due to the valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Non-interest expense of $74.7 million represented an increase of $28.1 million, due to increases in charge-offs of real estate acquired in settlement of loans and loan servicing expenses.

Small Business Lending Segment Results.

Q2 2024 versus Q2 2023.

Interest income of $31.6 million represented an increase of $13.7 million, primarily due to increases in interest rates.

Interest expense of $24.9 million represented an increase of $15.5 million, driven by increases in interest rates.

Provision for loan losses of $4.2 million represented an increase of $2.8 million, due to changes in the forecasted macroeconomic inputs for reserve modeling and an increase in specific loan reserves.

Non-interest income of $20.3 million represented a decrease of $1.4 million, primarily due to a decrease in servicing income and employee tax credit consulting income, partially offset by net realized and unrealized gains on financial instruments.

Non-interest expense of $18.1 million represented an increase of $1.0 million, due to an increase in professional fees and other operating expenses related to employee tax credit consulting income, partially offset by a decrease in employee compensation and benefits.

Interest income of $32.1 million represented an increase of $13.3 million, primarily due to increases in interest rates and increased loan balances.

Interest expense of $24.8 million represented an increase of $15.1 million, driven by increases in interest rates and increased debt balances.

Recovery of loan losses of $4.5 million represented an increase of $6.5 million, due to changes in the forecasted macroeconomic inputs for reserve modeling and a decrease in specific loan reserves.

Non-interest income of $19.9 million represented a decrease of $1.3 million, primarily due to a decrease in employee tax credit consulting income and servicing income, partially offset by net realized gains on financial instruments.

Non-interest expense of $17.3 million represented a decrease of $1.9 million, due to decreases in employee compensation and benefits.

YTD 2024 versus YTD 2023.

Interest income of $63.7 million represented an increase of $27.0 million, primarily due to increases in interest rates and increased loan balances.

Interest expense of $49.7 million represented an increase of $30.7 million, driven by increases in interest rates and increased debt balances.

Recovery of loan losses of $0.2 million represented an increase of $3.7 million, due to changes in the forecasted macroeconomic inputs for reserve modeling and a decrease in specific loan reserves.

Non-interest income of $40.2 million represented a decrease of $2.7 million, primarily due to a decrease in employee tax credit consulting income and servicing income, partially offset by net realized gains on

financial instruments.

Non-interest expense of $35.4 million was essentially unchanged from the respective prior year period.

Corporate – Other.

Q2 2024 versus Q2 2023.

Non-interest expense of $16.7 million was essentially unchanged from the respective prior year period.

Non-interest loss of $16.9 million represented a decrease of $247.1 million, primarily due to a gain on bargain purchase recognized from the Broadmark Merger.

Non-interest expense of $18.9 million represented a decrease of $8.1 million, primarily due to transaction related expenses for the Broadmark Merger.

YTD 2024 versus YTD 2023.

Non-interest loss of $16.9 million represented a decrease of $247.4 million, primarily due to a gain on bargain purchase recognized from the Broadmark Merger.

Non-interest expense of $35.6 million represented a decrease of $8.2 million, primarily due to transaction related expenses for the Broadmark Merger.

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.

We calculate distributable earnings as GAAP net income (loss) excluding the following:

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In calculating distributable earnings, we do not exclude realized gains or losses on commercial MSRs, as servicing income is a fundamental part of our business and an indicator of the ongoing performance.

Furthermore, we believe it is useful to present distributable earnings before realized losses on certain investments, such as charge-offs and losses realized on sales of real estate owned assets and LMM loans, to reflect our direct operating results.

We utilize distributable earnings before realized losses as an additional performance metric to consider when assessing our ability to declare and pay dividends.

Distributable earnings and distributable earnings before realized losses are non-U.S.

GAAP financial measures and because these non-U.S.

GAAP measures are incomplete measures of our financial performance and involve differences from net income computed in accordance with U.S.

GAAP, they should be considered along with, but not as alternatives to, our net income as measures of our financial performance.

In addition, because not all companies use identical calculations, our presentations of distributable earnings and distributable earnings before realized losses may not be comparable to other similarly-titled measures of other companies.

To qualify as a REIT, we must distribute to our stockholders each calendar year dividends equal to 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.

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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.

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

Three Months Ended March 31,

The table below presents a reconciliation of net income to distributable earnings before realized losses and distributable earnings.

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

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Reconciling items:

Unrealized loss on MSR - discontinued operations

Unrealized (gain) loss on MSR - discontinued operations

Unrealized gain on joint ventures

Decrease in CECL reserve

Increase (decrease) in CECL reserve

Increase in valuation allowance

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Merger transaction costs and other non-recurring expenses

Bargain purchase (gain) loss

Realized losses on sale of investments

Total reconciling items

Income tax adjustments

Distributable earnings before realized losses

Realized losses on sale of investments, net of tax

Distributable earnings

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Distributable earnings attributable to common stockholders

Distributable earnings before realized losses on investments, net of tax per common share - basic and diluted

Distributable earnings per common share - basic

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Q2 2024 versus Q2 2023.

Consolidated net loss of $74.2 million for the first quarter of 2024 represented a decrease of $111.1 million from the first quarter of 2023, primarily due to a valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Consolidated distributable earnings of $54.0 million for the first quarter of 2024 represented an increase of $15.8 million from the first quarter of 2024.

The increase in the distributable earnings reconciling items is primarily due to a valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Consolidated net loss of $34.2 million for the second quarter of 2024 represented a decrease of $287.6 million from the second quarter of 2023, primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Consolidated distributable earnings before realized losses of $36.9 million for the second quarter of 2024 represented a decrease of $14.4 million from the second quarter of 2023.

The increase in the distributable earnings reconciling items is primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Consolidated distributable earnings of $16.6 million for the second quarter of 2024 represented a decrease of $34.7 million from the second quarter of 2023 due to certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.

YTD 2024 versus YTD 2023.

Consolidated net loss of $108.4 million for the six months ended June 30, 2024 represented a decrease of $398.7 million from the six months ended June 30, 2023, primarily due to a gain on bargain purchase recognized from the Broadmark Merger and a valuation allowance related to the transfer of Loans, net to Loans, held for sale.

Consolidated distributable earnings before realized losses of $90.9 million for the six months ended June 30, 2024 represented an increase of $1.4 million from the six months ended June 30, 2023.

Consolidated distributable earnings of $70.6 million for the six months ended June 30, 2024 represented a decrease of $18.8 million from the six months ended June 30, 2023 due to certain charge-offs and losses realized on sales of real estate owned assets and LMM loans.

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) IFCE (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 2013 Equity Incentive Plan, our 2023 Equity Incentive Plan and the Broadmark Equity 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;

than zero, equal to the difference between (i) the product of (A) 15% and (B) the difference between (x) IFCE (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 2013 Equity Incentive Plan, our 2023 Equity Incentive Plan and the Broadmark Equity 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 IFCE is greater than zero for the most recently completed 12 calendar quarters.

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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.

partnership excluding non-cash equity compensation expense, the expenses incurred in connection with the operating partnership's formation or continuation, the incentive distribution, real estate depreciation and amortization (to the extent that the Company forecloses on any properties underlying its assets) and any unrealized gains, losses, or other non-cash items recorded in the period, regardless of whether such items are included in other comprehensive income or loss, or in net income.

For purposes of determining the incentive distribution payable to the Manager, incentive fee core earnings (“IFCE”) is defined under the partnership agreement of the operating partnership as GAAP net income (loss) of the operating partnership excluding non-cash equity compensation expense, the expenses incurred in connection with the operating partnership's formation or continuation, the incentive distribution, real estate depreciation and amortization (to the extent that the Company forecloses on any properties underlying its assets) and any unrealized gains, losses, or other non-cash items recorded in the period, regardless of whether such items are included in other comprehensive income or loss, or in net income.

The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the independent directors.

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Because the severity, magnitude and duration of these economic events remain uncertain, rapidly changing and difficult to predict, the impact on our operations and liquidity also remains uncertain and difficult to predict.

Three Months Ended March 31, 2024.

Cash and cash equivalents as of March 31, 2024, decreased by $27.0 million to $235.5 million from December 31, 2023, primarily due to cash used for financing activities, partially offset by cash provided by investing and operating activities.

The net cash used for financing activities primarily reflected repayments of securitized debt obligations of consolidated VIEs.

Six Months Ended June 30, 2024.

Cash and cash equivalents as of June 30, 2024, increased by $16.5 million to $279.0 million from December 31, 2023, primarily due to cash provided by investing and operating activities, partially offset by cash used for financing activities.

The net cash provided by investing activities primarily reflected proceeds on disposition and principal payments of loans, partially offset by net cash used for loan originations.

The net cash provided by operating activities reflected a valuation allowance related to the transfer of Loans, net to Loans, held for sale, partially offset by an increase in operating assets.

Three Months Ended March 31, 2023.

Cash and cash equivalents as of March 31, 2023, decreased by $84.1 million to $189.5 million from December 31, 2022, primarily due to cash used for financing and operating activities, partially offset by cash provided by investing activities.

The net cash used for financing activities primarily reflected net payments on secured borrowings, partially offset by net proceeds from issuances of securitized debt.

The net cash used for operating activities primarily reflected a decrease in operating liabilities and increase in operating assets, partially offset by net proceeds on disposition and principal payments of loans, held for sale.

The net cash provided by investing activities primarily reflected proceeds from disposition and principal payments of loans and proceeds from the sale of real estate held for sale, partially offset by net cash used for loan originations.

The net cash used for financing activities primarily reflected repayments of securitized debt obligations of consolidated VIEs.

Six Months Ended June 30, 2023.

Cash and cash equivalents as of June 30, 2023, increased by $80.1 million to $353.7 million from December 31, 2022, primarily due to cash provided by investing and operating activities, partially offset by

cash used for financing activities.

The net cash provided by operating activities primarily reflected net income and decreases in loans, held for sale, at fair value, provision for loan losses, and amortization of loan discounts, premiums, and deferred issuance costs, net, as well as decreases in derivative instruments, partially offset by a bargain purchase gain, realized gains on financial instruments, net, increases in other current assets and decreases in other current liabilities.

The net cash provided by investing activities primarily reflected net proceeds from loans and REO and net proceeds provided from the Broadmark Merger partially offset by net investments in unconsolidated joint ventures, and payment of liabilities under participation agreements, net of proceeds received.

The net cash used for financing activities primarily reflected dividend payments, net payments of secured borrowings including PPPLF, and share repurchases, partially offset by net proceeds received from securitized debt obligations.

Financing Strategy and Leverage

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We also finance originated Freddie Mac SBL with secured borrowings until the loans are sold, generally within 30 days.

As of March 31, 2024, we had a total leverage ratio of 3.4x and recourse leverage ratio of 0.9x.

As of June 30, 2024, we had a total leverage ratio of 3.5x and recourse leverage ratio of 1.0x.

Our operating segments have different levels of recourse debt according to the differentiated nature of each segment.

Our LMM Commercial Real

Estate and Small Business Lending segments have recourse leverage ratios of 0.3x and 1.1x, respectively.

Our LMM Commercial Real Estate and Small Business Lending segments have recourse leverage ratios of 0.3x and 1.2x, respectively.

The remaining recourse leverage ratio is from our corporate debt offerings.

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Carrying Value

March 31, 2024

June 30, 2024

December 31, 2023

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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.

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.

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We maintain certain assets, which, from time to time, may include cash, unpledged LMM loans, LMM 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 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.

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Carrying Value

March 31, 2024

June 30, 2024

December 31, 2023

July 2024 - November 2026

November 2024 - November 2026

LMM loans - Non-USD (4)

EURIBOR + 3.00%

April 2024 - August 2024

July 2024 - June 2025

Total borrowings under repurchase agreements

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Highest Month End Balance in Quarter

The net increase in the outstanding balances during the first quarter of 2024 was primarily due to increased borrowings to fund origination volumes.

The net increase in the outstanding balances during the second quarter of 2024 was primarily due to increased borrowings to fund origination volumes.

Paycheck Protection Program Liquidity Facility borrowings.

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The program charges an interest rate of 0.35%.

As of March 31, 2024, we had approximately $28.3 million outstanding under this credit facility .

As of June 30, 2024, we had approximately $24.8 million outstanding under this credit facility .

Senior Secured Notes and Corporate Debt, Net

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Maturity Date

March 31, 2024

June 30, 2024

Senior secured notes principal amount (1)

Term loan principal amount (2)

Unamortized discount - Term loan

Unamortized deferred financing costs - Senior secured notes

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(1) Interest on the senior secured notes is payable semiannually on April 20 and October 20 of each year.

(2) Interest on the term loan is payable quarterly on January 12, April 12, July 12, and October 12 of each year.

(3) Interest on the corporate debt is payable semiannually on June 30 and December 30 of each year.

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(in thousands)

March 31, 2024

June 30, 2024

Total contractual amounts

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On October 20, 2021, ReadyCap Holdings, an indirect subsidiary of the Company, completed the offer and sale of $350.0 million of its 4.50% Senior Secured Notes due 2026 (the “Senior Secured Notes”).

The Senior Secured Notes are fully and unconditionally guaranteed by the Company, each direct parent entity of ReadyCap Holdings, and other direct or indirect subsidiaries of the Company from time to time that is a direct parent entity of Sutherland Asset III, LLC or otherwise pledges collateral to secure the Senior Secured Notes (collectively, the “Guarantors”).

ReadyCap Holdings’ and the Guarantors’ respective obligations under the Senior Secured Notes are secured by a perfected first-priority lien on certain capital stock and assets (collectively, the “SSN Collateral”) owned by certain subsidiaries of the Company.

ReadyCap Holdings’ and the SSN Guarantors’ respective obligations under the Senior Secured Notes are secured by a perfected first-priority lien on certain capital stock and assets (collectively, the “SSN Collateral”) owned by certain subsidiaries of the Company.

The Senior Secured Notes are redeemable by ReadyCap Holdings’ following a non-call period, through the payment of the outstanding principal balance of the Senior Secured Notes plus a “make-whole” or other premium that decreases the closer the Senior Secured Notes are to maturity.

ReadyCap Holdings is required to offer to repurchase the Senior Secured Notes at 101% of the principal balance of the Senior Secured Notes in the event of a change in control and a downgrade of the rating on the Senior Secured Notes in connection therewith, as set forth more fully in the note purchase agreement.

The Senior Secured Notes were issued pursuant to a note purchase agreement, which contains certain customary negative covenants and requirements relating to the collateral and our company, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and limitations on transactions with affiliates.

The Senior Secured Notes were issued pursuant to a note purchase agreement, which contains certain customary negative covenants and requirements relating to the collateral and our company, ReadyCap Holdings, and the SSN Guarantors, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and limitations on transactions with affiliates.

Ready Term Holdings, LLC (“Ready Term Holdings”) term loan due 2029.

On April 12, 2024, Ready Term Holdings, an indirect subsidiary of the Company, entered into a credit agreement which provides for a delayed draw term loan to the Company in an aggregate principal amount not to exceed $115.25 million (the “Term Loan”).

The Term Loan is fully and unconditionally guaranteed by the Company and other direct or indirect subsidiaries of the Company from time to time that pledge collateral to secure the Term Loan (collectively, the “Term Loan Guarantors”).

Ready Term Holdings’ and the Term Loan Guarantors’ respective obligations under the Term Loan are secured by a perfected first-priority lien on certain capital stock and assets (collectively, the “Term Loan Collateral”) owned by certain subsidiaries of the Company.

The Term Loan matures on April 12, 2029, and may be drawn at any time on or prior to January 12, 2025, subject to the satisfaction of customary conditions.

The Company borrowed $75.0 million in connection with the initial closing of the Term Loan.

The Term Loan bears interest on the outstanding principal amount thereof at a rate equal to (a) SOFR plus 5.50% per annum or (b) base rate plus 4.50% per annum;

provided that if at any time the Term Loan is rated below investment grade, the interest rate shall increase to (x) SOFR plus 6.50% per annum or (y) base rate plus 5.50% per annum until the rating is no longer below investment grade.

In connection with the entry into the credit agreement, the Company also agreed to pay certain upfront fees on the initial borrowing date.

The Company will also pay, with respect to any unused portion of the Term Loan, a commitment fee of 1.00% per annum.

The Term Loan was issued pursuant to a credit agreement, which contains certain customary representations and warranties and affirmative and negative covenants and requirements relating to the collateral and our Company, Ready Term Holdings, and the Term Loan Guarantors, including maintenance of a minimum asset coverage ratio.

Corporate debt.

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The supplemental indentures governing the notes often contain customary negative covenants and financial covenants relating to maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and limitations on transactions with affiliates.

In addition, in connection with the Broadmark Merger, RCC Merger Sub, a wholly owned subsidiary of the Company, assumed Broadmark’s obligations on certain senior unsecured notes.

In addition, in connection with the Broadmark Merger, RCC Merger Sub, a wholly owned subsidiary of the operating partnership, assumed Broadmark’s obligations on certain senior unsecured notes.

The note purchase agreement governing these notes contains financial covenants that require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as other customary affirmative and negative covenants.

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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 (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.

No such sales through the Debt ATM Program were made during the three months ended March 31, 2024 or March 31, 2023.

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.

No such sales through the Debt ATM Program were made during the three or six months ended June 30, 2024 or June 30, 2023.

Securitization transactions

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These securitizations allow us to match fund the LMM 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.

The assets pledged as collateral for these

securitizations were contributed from our portfolio of assets.

By contributing these LMM and SBA assets to the various securitizations, these transactions created capacity for us to fund other investments.

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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 months ended March 31, 2024.

Other than the items referenced above, there have been no material changes to our contractual obligations for the three months ended June 30, 2024.

Refer to Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations," in the Company's Form 10-K for further details.

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We believe that all of the decisions and assessments upon which our consolidated 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.

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 Form 10-K.

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Refer to “Notes to Consolidated Financial Statements, Note 8 – 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 Form 10-K for a discussion of recent accounting developments and the expected impact to the Company.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis