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, 2017

Commission File Number:  001‑35808

SUTHERLAND ASSET MANAGEMENT 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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  ☒		(Do not check if a smaller reporting company)

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

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

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

The Company has 30,824,946 shares of common stock, par value $0.0001 per share, outstanding as of May 9, 2017.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
Item 1A.	Forward-Looking Statements	58
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77
Item 4.	Controls and Procedures	81
PART II.	OTHER INFORMATION	81
Item 1.	Legal Proceedings	81
Item 1A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	82
SIGNATURES
EXHIBIT 31.1 CERTIFICATIONS
EXHIBIT 31.2 CERTIFICATIONS
EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

2

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

SUTHERLAND ASSET MANAGEMENT CORPORATION

Unaudited CONSOLIDATED BALANCE SHEETS

(In Thousands)	March 31, 2017		December 31, 2016
Assets:
Cash and cash equivalents	$	40,000	$	59,566
Restricted cash		19,772		20,190
Short-term investments		239,856		319,984
Loans, held-for-investment (net of allowances for loan losses of $12,610 at March 31, 2017 and $12,721 at December 31, 2016)		926,106		929,529
Loans, held at fair value		107,691		81,592
Loans, held for sale, at fair value		152,231		181,797
Mortgage backed securities, at fair value		31,365		32,391
Loans eligible for repurchase from Ginnie Mae		117,229		137,986
Derivative instruments, at fair value		4,351		5,785
Servicing rights		20,372		22,478
Residential mortgage servicing rights, at fair value		64,625		61,376
Receivable from third parties		111,221		7,220
Other assets		60,938		54,277
Assets of consolidated VIEs		631,765		691,096
Total Assets	$	2,527,522	$	2,605,267
Liabilities:
Borrowings under credit facilities		266,323		326,610
Promissory note payable		7,046		7,378
Securitized debt obligations of consolidated VIEs		434,055		492,942
Borrowings under repurchase agreements		632,951		600,852
Senior secured note		73,390		—
Guaranteed loan financing		361,916		390,555
Contingent consideration		8,841		14,487
Liabilities for loans eligible for repurchase from Ginnie Mae		117,229		137,986
Derivative instruments, at fair value		619		643
Dividends payable		12,162		11,505
Accounts payable and other accrued liabilities		63,130		70,207
Total Liabilities	$	1,977,662	$	2,053,165
Stockholders’ Equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized, 30,549,084 and 30,549,084 shares issued and outstanding, respectively		3		3
Additional paid-in capital		513,658		513,295
Retained deficit		(2,648)		(201)
Total Sutherland Asset Management Corporation equity		511,013		513,097
Non-controlling interests		38,847		39,005
Total Stockholders’ Equity	$	549,860	$	552,102
Total Liabilities and Stockholders’ Equity	$	2,527,522	$	2,605,267

See Notes To Unaudited Consolidated Financial Statements

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SUTHERLAND ASSET MANAGEMENT CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended March 31,
(In Thousands, except share data)	2017		2016
Interest income
Loans, held-for-investment	$	30,101	$	32,332
Loans, held at fair value		1,626		3,362
Loans, held for sale, at fair value		1,434		—
Mortgage backed securities, at fair value		723		2,173
Total interest income		33,884		37,867
Interest expense
Securitized debt obligations of consolidated VIEs		(5,122)		(4,541)
Borrowings under repurchase agreements		(4,221)		(3,859)
Guaranteed loan financing		(3,264)		(3,949)
Borrowings under credit facilities		(2,976)		(1,952)
Senior secured note		(790)		—
Promissory note payable		(68)		—
Total interest expense		(16,441)		(14,301)
Net interest income before provision for loan losses		17,443		23,566
Provision for loan losses		(1,232)		(2,184)
Net interest income after provision for loan losses		16,211		21,382
Other income (expense)
Other income		2,702		2,308
Servicing income, net of amortization and impairment of $2,765 and $1,212 respectively		4,442		1,413
Employee compensation and benefits		(13,464)		(5,070)
Allocated employee compensation and benefits from related party		(1,012)		(900)
Professional fees		(2,159)		(1,776)
Management fees – related party		(1,977)		(1,838)
Loan servicing expense		(1,513)		(876)
Other operating expenses		(12,508)		(3,863)
Total other income (expense)		(25,489)		(10,602)
Net realized gain on financial instruments		20,261		191
Net unrealized loss on financial instruments		(392)		(336)
Income from continued operations before income tax provisions		10,591		10,635
Provision for income taxes		(1,034)		(1,171)
Net income from continuing operations		9,557		9,464
Discontinued operations
Loss from discontinued operations (including loss on disposal of $267 in in the three months ended March 31, 2016)		—		(576)
Income tax benefit		—		225
Loss from discontinued operations		—		(351)
Net income		9,557		9,113
Less: Net income attributable to non-controlling interest		701		737
Net income attributable to Sutherland Asset Management Corporation	$	8,856	$	8,376
Basic and diluted earnings (loss) per share:
Continuing operations	$	0.29	$	0.34
Discontinued operations	$	—	$	(0.01)
Basic and diluted weighted-average shares outstanding		30,549,806		25,764,953
Dividends declared per share of common stock	$	0.37	$	—

See Notes To Unaudited Consolidated Financial Statements

4

SUTHERLAND ASSET MANAGEMENT CORPORATION

Unaudited CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

									Retained		Total Sutherland
	Common Stock			Preferred Stock			Additional Paid-		Earnings		Asset Management		Non-controlling		Total Stockholders'
(in thousands, except share data)	Shares	Par Value		Shares	Par Value		In Capital		(Deficit)		Corporation equity		Interests		Equity
Balance at January 1, 2016	25,739,847	$	2	125	$	125	$	447,093	$	(5,899)	$	441,321	$	38,892	$	480,213
Incentive shares issued	27,199		—	—		—		482		—		482		—		482
Net Income	—		—	—		—		—		8,376		8,376		737		9,113
Balance at March 31, 2016	25,767,045	$	2	125	$	125	$	447,575	$	2,477	$	450,179	$	39,629	$	489,808

									Retained		Total Sutherland
	Common Stock			Preferred Stock			Additional Paid-		Earnings		Asset Management		Non-controlling		Total Stockholders'
(in thousands, except share data)	Shares	Par Value		Shares	Par Value		In Capital		(Deficit)		Corporation equity		Interests		Equity
Balance at January 1, 2017	30,549,084	$	3	—	$	—	$	513,295	$	(201)	$	513,097	$	39,005	$	552,102
Dividend declared on common stock ($0.37 per share)	—		—	—		—		—		(11,303)		(11,303)		—		(11,303)
Dividend declared on OP units	—		—	—		—		—		—		—		(859)		(859)
Stock-based compensation	—		—	—		—		363		—		363		—		363
Net Income	—		—	—		—		—		8,856		8,856		701		9,557
Balance at March 31, 2017	30,549,084	$	3	—	$	—	$	513,658	$	(2,648)	$	511,013	$	38,847	$	549,860

See Notes To Unaudited Consolidated Financial Statements

5

SUTHERLAND ASSET MANAGEMENT CORPORATION

Unaudited CONSOLIDATED STATEMENT OF CASH FLOWS

	Three Months Ended March 31,
(In Thousands)	2017		2016
Cash Flows From Operating Activities:
Net income	$	9,557	$	9,113
Less: Net loss from discontinued operations		—		(351)
Net income from continuing operations		9,557		9,464
Adjustments to reconcile net income to net cash provided
(used in) operating activities:
Discount accretion and premium amortization of financial instruments, net		(2,476)		(7,739)
Amortization of guaranteed loan financing, deferred financing costs, and intangible assets		4,948		5,266
Provision for loan losses		1,232		2,184
Charge off of real estate acquired in settlement of loans		103		567
Decrease in repair and denial reserve		(263)		(1,462)
Purchase of short-term investments and trading securities		(639,481)		(249,957)
Proceeds from sale of short-term investments and trading securities		719,948		249,996
Net settlement of derivative instruments		(225)		(567)
Purchase of loans, held for sale, at fair value		(5,909)		—
Origination of loans, held for sale, at fair value		(530,662)		—
Proceeds from disposition and principal payments of loans, held for sale, at fair value		584,159		—
Net realized gains on financial instruments		(20,261)		(191)
Net unrealized losses on financial instruments		392		336
Net changes in operating assets and liabilities
Assets of consolidated VIEs, accrued interest and due from servicers		24,675		607
Receivable from third parties		(104,001)		186
Other assets		(5,832)		(7,738)
Accounts payable and other accrued liabilities		(11,742)		(3,170)
Net cash provided by (used in) operating activities		24,162		(2,218)
Net cash provided by (used in) operating activities of discontinued operations		—		(1,149)
Cash Flow From Investing Activities:
Origination of loans, held at fair value		(27,499)		(109,052)
Purchase of loans, held-for-investment		(5,577)		—
Origination of loans, held-for-investment		(71,272)		(118,555)
Purchase of mortgage backed securities, at fair value		—		(8,544)
Payment of liability under participation agreements		(487)		(454)
Proceeds from disposition and principal payment of loans, held at fair value		2,057		91,719
Proceeds from disposition and principal payment of loans, held-for-investment		115,648		179,161
Proceeds from sale and principal payment of mortgage backed securities, at fair value		1,224		103,957
Proceeds from sale of real estate		577		2,460
Decrease/(Increase) in restricted cash		628		(1,838)
Net cash provided by (used in) investing activities		15,299		138,854
Cash Flows From Financing Activities:
Proceeds from borrowings under credit facilities		589,485		4,789
Proceeds from borrowings under repurchase agreements		1,144,461		957,090
Proceeds from senior secured note offering		75,000		—
Payment of borrowings under credit facilities		(649,772)		(18,694)
Payments of securitized debt obligations of consolidated VIEs		(59,722)		(27,284)
Payment of borrowings under repurchase agreements		(1,112,362)		(986,614)
Payment of guaranteed loan financing		(31,903)		(32,519)
Payment of promissory note payable		(332)		—
Payment of deferred financing costs		(2,377)		(528)
Dividend payments on common stock		(11,505)		(13,366)
Net cash provided by (used in) financing activities		(59,027)		(117,126)
Net increase (decrease) in cash and cash equivalents		(19,566)		18,361
Cash and cash equivalents at beginning of period		59,566		41,569
Cash and cash equivalents at end of period	$	40,000	$	59,930
Supplemental disclosure of operating cash flow
Cash paid for interest	$	14,632	$	13,569
Cash paid for taxes	$	480	$	1,820
Supplemental disclosure of non-cash investing activities
Loans transferred from Loans, held for sale, at fair value to Loans, held-for-investment	$	331	$	—
Loans transferred from Loans, held-for-investment to Loans, held for sale, at fair value	$	3,021	$	—
Supplemental disclosure of non-cash financing activities
Incentive shares issued	$	—	$	482
Stock based compensation	$	363	$	—

See Notes to Unaudited Consolidated Financial Statements

6

SUTHERLAND ASSET MANAGEMENT CORPORATION

NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Organization

Sutherland Asset Management Corporation (the “Company” or “Sutherland” and together with its subsidiaries “we,” “us” and “our”) is a Maryland corporation. On October 31, 2016, we completed our path to becoming a publicly traded company through our merger with and into a subsidiary of ZAIS Financial, with ZAIS Financial legally surviving the merger and changing its name to Sutherland Asset Management Corporation. On November 1, 2016, we began trading on the New York Stock Exchange (“NYSE”) under ticker symbol “SLD”. See further discussion in Note 5, Business Combinations.

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, 2017 and December 31, 2016, the Company owned approximately 92.9% of the operating partnership units (“OP units”) of the Operating Partnership. The Company, as sole general partner of the Operating Partnership, has responsibility and discretion in the management and control of the Operating Partnership, and the limited partners of the Operating Partnership, in such capacity, have no authority to transact business for, or participate in the management activities of the Operating Partnership. Therefore, the Company consolidates the Operating Partnership.

The Company, together with its consolidated subsidiaries and variable interest entities (“VIEs”), is a specialty-finance company which acquires, originates, manages, services and finances small 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 operates in four reportable segments: Loan Acquisitions, SBC Conventional Originations, SBA Originations, Acquisitions and Servicing, and Residential Mortgage Banking.

The Loan Acquisitions segment represents the Company’s investments in SBC loans, real estate acquired in settlement of loans (“REO”), MBS and equity securities traded on public exchanges. Management seeks to maximize the value of the SBC loans acquired by the Company through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their properties. Where this is not possible, such as in the case of many non-performing loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

The SBC Conventional Originations segment is operated through a wholly-owned subsidiary, ReadyCap Commercial, LLC (“RCC”), a wholly-owned subsidiary of ReadyCap Holdings, LLC (collectively, “ReadyCap”). RCC originates SBC loans through multiple loan origination channels. These loans may be financed though borrowings under credit facilities, borrowings under repurchase agreements and securitization transactions.

The SBA Originations, Acquisitions, and Servicing segment is operated through ReadyCap Lending, LLC (“Lending” or “RCL”), a wholly-owned subsidiary of ReadyCap Holdings, LLC. RCL acquires, originates and services loans guaranteed by the SBA under the SBA loan program. RCL holds a SBA license as a Small Business Lending Company and has been granted preferred lender status by the SBA.

The Residential Mortgage Banking segment is operated through GMFS, LLC (“GMFS”), a mortgage banking platform and a wholly-owned subsidiary we acquired as part of the ZAIS Financial merger. GMFS originates, sells and services residential mortgage loans. GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development (“HUD”) / Federal Housing Administration (“FHA”)

7

Mortgagee, U.S. Department of Agriculture (“USDA”) approved originator and U.S. Department of Veterans Affairs (“VA”) Lender. GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, USDA and VA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The Company qualifies as a 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.

In the fourth quarter of 2015, the Company determined Silverthread Falls, LLC (“Silverthread”), a brokerage subsidiary, was classified as held-for-sale due to management’s intent to sell the business, and the Company has included Silverthread in discontinued operations. The trade date of the Silverthread sale was February 28, 2016 and the closing occurred in May of 2016.

Note 2 – Basis of Presentation

The unaudited consolidated financial statements presented herein are as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016.  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.

Per ASC 805-40-45-1, we were designated as the accounting acquirer (accounting survivor) because of our larger pre-merger size relative to ZAIS Financial, the relative voting interests of our stockholders after consummation of the merger, and our senior management and board continuing on after the consummation of the merger. As the accounting acquirer, our historical financial statements (and not those of ZAIS Financial) are the historical financial statements following the consummation of the merger and are included in this quarterly report on Form 10-Q and the related consolidated financial statements and footnotes.

Historical stockholders’ equity of the Company prior to the reverse acquisition has been retrospectively adjusted (a recapitalization) for the equivalent number of shares received by the Company after giving effect to any difference in par value of ZAIS Financial’s and the Company’s stock with any such difference recognized in equity. Retained earnings of the Company have been carried forward after the acquisition. Operations prior to the merger are those of the Company. Under the terms of the merger agreement: (1) stockholders of ZAIS Financial and unitholders in the ZAIS operating partnership retained their existing shares and partnership units following the merger, (2) each outstanding share of Sutherland common stock was converted into 0.8356 of ZAIS Financial common stock and (3) each outstanding partnership unit of Sutherland operating partnership was converted into 0.8356 units of limited partnership interests in the operating partnership.

The accompanying unaudited 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 interim unaudited consolidated financial statements and related notes should be read in conjunction with the Company's 2016 annual report on Form 10-K.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of 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 periods or the entire year.

Note 3 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

8

Basis of Consolidation

The accompanying consolidated financial statements of the Company include the accounts and results of operations of the Operating Partnership and other consolidated subsidiaries and VIEs in which we are the primary beneficiary. The 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 consolidated financial statements, as described in Note 26, have been reclassified in order to conform to the current period’s presentation. The historical results of Silverthread been reflected in the accompanying consolidated statements of income for the three months ended March 31, 2016 as discontinued operations and financial information related to discontinued operations has been excluded from the notes to these consolidated financial statements for all periods presented.

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 March 31, 2017 and December 31, 2016, the Company had $0.6 million and $0.6 million, respectively, 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.

Restricted Cash

Restricted cash represents cash held by the Company as collateral against its derivatives, borrowings under repurchase agreements, and borrowings under credit facilities with counterparties, as well as cash held for remittance on loans serviced for third parties and collateral related to the ReadyCap Commercial Freddie Mac program. 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 collateral requirements are exceeded or at the maturity of the swap or repurchase agreement. Restricted cash is returned to the Company when our collateral requirements are exceeded or at the maturity or termination of the derivative, borrowings under repurchase agreements and borrowings under credit facilities.

Short term investments

The Company accounts for short-term investments as trading securities under ASC 320, Investments-Debt and Equity Securities. Short-term investments consist of U.S. Treasury Bills with original maturities of less than a year but greater than three months. The Company holds short-term investments at fair value. Interest received and accrued as well as the accretion of purchase discount in connection with short-term investments is recorded as interest income on the consolidated statements of income. Changes in the fair value of short-term investments are recorded as net unrealized gain (loss) on the consolidated statements of income.

Loans, held for sale, at fair value

Loans, held for sale, at fair value are loans originated by ReadyCap and GMFS that are expected to be sold to third parties in the near term. Interest is recognized as interest income on the consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on the consolidated statements of income.

9

The Company transfers loans held for sale, at fair value to loans, held-for-investment when the Company no longer intends to sell the loans.

Loans, held at fair value

Loans, held at fair value are loans originated by ReadyCap. The Company has elected the fair value option because of the intent to transfer to securitizations in the near term. Interest is recognized as interest income on the consolidated statements of income when earned and deemed collectible. Changes in fair value are recurring and are reported as net unrealized gain (loss) on the consolidated statements of income.

The Company transfers loans held at fair value to loans, held-for-investment on the date of securitization.

Loans, held-for-investment

Loans, held-for-investment are loans acquired from third parties, loans originated by ReadyCap that we do not intend to securitize or 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 and any related allowance for loan losses is not carried over at the acquisition date. These acquired loans are segmented into two groups at time of purchase. 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 “Credit Impaired 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 securitize are accounted for under ASC 310-10, Receivables- Overall, (“ASC 310-10”) and are referred to as “Non-credit Impaired Loans”.

Non-credit Impaired 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-credit impaired 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.

Credit Impaired Loans

The estimated cash flows expected for each loan is estimated at the time the loan is acquired. The excess of the cash flows expected to be collected on credit impaired 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 credit impaired loans on a quarterly basis. If the Company determines that discounted expected cash flows have decreased, the credit impaired loans would be considered further impaired, which would result in a provision for loan loss and a corresponding increase in valuation allowance included in the allowance for loan losses.

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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 significant increase in expected cash flows.

The estimate of the amount and timing of cash flows for our credit impaired 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.

The determination of whether an allowance for loan loss is necessary if 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.

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.

For non-credit impaired loans, 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 since they have similar risk characteristics. The allowance of 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 performed 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 does not show any defaults, therefore we used a Moody’s 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-crises low in 2010.

For credit impaired loans, the allowance for loan losses is described in the credit impaired loan discussion above.

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-credit impaired loans when principal or interest has been delinquent for 90 days or when it is determined that full collection of contractual cash flows is not probable. Additionally, credit impaired 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. Income on credit impaired loans is recognized as described above under—Loans, held-for-investment—Credit Impaired 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

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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, sales and transfers to loans at fair value, we may remove loans held-for-investment from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.

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

Impaired loans

The Company considers a loan to be impaired when the Company does not expect to collect all the contractual interest and principal payments as scheduled in the loan agreements.

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 consolidated balance sheets.

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

Loans eligible for repurchase from Ginnie Mae

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

Derivative instruments, at fair value

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we utilize derivative financial instruments, currently comprised of credit default swaps, interest rate swaps, and interest rate lock commitments 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 consolidated balance sheets at the estimated fair value with the changes in the fair value recorded in earnings.

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, 2017 and December 31, 2016, the cash collateral receivable held for derivative instruments is $1.3 million and $1.7 million, respectively, and is included in restricted cash on the consolidated balance sheets.

Interest Rate Swap Agreements

An interest rate swap is an agreement between two counterparties to exchange periodic interest payments where one party to the contract makes a fixed-rate payment in exchange for a floating-rate payment from the other party. The dollar amount each party pays is an agreed-upon periodic interest rate multiplied by some pre-determined dollar principal

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(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, along with the related interest income or interest expense, are reported as net gain/loss on financial instruments.

Interest Rate Lock Commitments (“IRLCs”)

IRLCs are agreements under which the Company 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 (“GSE”, such as Fannie Mae, Freddie Mac, or Ginnie Mae) or MBS prices, estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expense and broker fees. The unrealized gains or losses are reported on the consolidated statements of income as net unrealized gain/(loss) on financial instruments. IRLCs are classified as Level 3 in the fair value hierarchy.

Credit Default Swaps (“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. They are similar to buying or selling insurance contracts on a borrower’s debt, without being regulated by insurance regulators. The fair value adjustments, along with the related interest income or interest expense, are reported as gain/(loss) on financial instruments. CDS are classified as Level 2 in the fair value hierarchy.

Servicing rights and Residential mortgage servicing rights, at fair value

Servicing rights 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.

Mortgage servicing rights are recognized upon sale or securitization of mortgage loans if servicing is retained. Creation of mortgage servicing rights retained upon sale of a loan is included in net realized gain on the 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 SBA 7A commercial mortgage loans 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

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 is tested 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 of the intangibles is determined using discounted cash flow modeling techniques, which require management to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted loan prepayment rates, delinquency rates and anticipated maturity defaults. If the carrying value of the servicing rights exceeds the net present value of servicing cash flows, the servicing rights are considered impaired and an impairment loss is recognized in earnings for the amount by which carrying value exceeds the net present value of servicing cash flows.

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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 expected cash flows, prepayment speeds, 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.

Residential mortgage servicing rights, 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. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs.

As permitted by U.S. GAAP, the Company has elected to account for its acquired portfolio of mortgage servicing rights 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 speeds, discount rates, default rates, cost to service, contractual servicing fees, escrow earnings and ancillary income. MSRs are classified as Level 3 in the fair value hierarchy.

Intangible assets

Intangible assets are accounted for under ASC 350, Intangibles-Goodwill and Other. As of March 31, 2017 and December 31, 2016, the Company’s identifiable intangible assets include SBA license for our Lending operations as well as a trade name, customer relationships, a favorable lease, and other licenses, 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 a quarterly basis. Intangible assets are included within other assets on the consolidated balance sheets.

Deferred financing costs

Costs incurred in connection with our borrowings under credit facilities are accounted for under ASC 340, Other Assets and Deferred Costs. Deferred costs are capitalized and amortized using the effective interest method over the respective financing term with such amortization reflected on our consolidated statements of income as a component of interest expense. 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. Unamortized deferred financing costs related to securitizations are presented on the consolidated balance sheets as a direct deduction from the associated liability, or securitized debt obligations.

Due from Servicers

The loan-servicing activities of the Company’s SBC Loan Acquisitions and SBC Conventional Originations reportable segments are performed primarily by third-party servicers. SBA loans originated by and held at ReadyCap Lending are internally serviced. Residential mortgage loans originated by and held at GMFS are internally serviced. As of

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March 31, 2017 and December 31, 2016, 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. As of March 31, 2017 and December 31, 2016, the due from servicers balance in the amount of $33.3 million and $54.7 million, respectively, represent funds received by loan servicers from loan activities that have not yet been paid to the Company. As of March 31, 2017 and December 31, 2016, $29.5 million and $27.7 million of these balances are included within the assets of consolidated VIEs on the consolidated balance sheets, respectively.

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.

Borrowings under credit facilities

The Company accounts for borrowings under credit facilities under ASC 470, Debt. The Company partially finances its loans, held-for-investment, and loans, held for sale, at fair value 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 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 consolidated statements of income.

Promissory note payable

The Company accounts for promissory notes payable under ASC 470, Debt. Pursuant to the adoption of ASU 2015‑03, the Company’s promissory note payable is presented net of debt issuance costs. The Company partially finances its loans, held-for-investment through promissory notes with various counterparties. These notes are collateralized by loans, held-for-investment and have maturity dates within five years from the consolidated balance sheet date. Interest paid and accrued in connection with promissory notes is recorded as interest expense on the consolidated statements of income.

Senior secured note

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

Securitized debt obligations of consolidated VIEs

Since 2011, we have engaged in eight securitization transactions, which the Company accounts for under ASC 810. The Company is required to consolidate, as a VIE, the special purpose entity (“SPE”)/trust that was created to facilitate the transaction and to which the underlying loans in connection with the securitization were transferred. 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. These costs are amortized using the effective interest method. Amortization of debt issuance costs is amortized using the effective interest method and is included in interest expense from securitized debt obligations on the consolidated financial statements.

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, 2017, none of our repurchase agreements have been accounted

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for as components of linked transactions. All securities financed through a repurchase agreement have remained on our consolidated balance sheets as an asset and cash received from the lender was recorded on our consolidated balance sheets as a liability. Interest paid and accrued in connection with our repurchase agreements is recorded as interest expense on the 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 consolidated balance sheets and the portion sold is recorded as guaranteed loan financing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded as interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying consolidated statements of income.

Contingent consideration

Contingent consideration represent future payments of cash or equity interests to the former owners of GMFS, which was acquired on October 31, 2016. The contingent consideration was initially recorded on the date of acquisition at fair value in the consolidated balance sheet and is subsequently remeasured each reporting period at fair value with the change in the fair value recorded in earnings in the accompanying consolidated statements of income.

Repair and denial reserve

The repair and denial reserve represents the potential liability to the SBA in the event that we are required to make whole the SBA 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 defined as entities in which equity investors (i) do not control the entity, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (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. For VIEs that do not have substantial ongoing activities, the power to direct the activities that most significantly impact the VIE’s economic performance may be determined by an entity’s involvement with the design of the VIE.

The Company is required to re-evaluate whether to consolidate a VIE each reporting period, based upon the facts and circumstances pertaining to the VIE during such period. The Company consolidates a VIE when it is determined to be the primary beneficiary of such VIE.

The Company uses special purpose entities to securitize financial assets. 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. Since 2011, we have engaged in eight securitization transactions. As discussed in Note 22, we have concluded that the Company was the primary beneficiary in each of these securitization trusts and the securitization trusts are VIEs that are consolidated.

Non-controlling Interests

Non-controlling interest presented on the consolidated balance sheets and the consolidated statements of income represent direct investment in the Operating Partnership by Sutherland OP Holdings I, Ltd. Sutherland OP Holdings II, Ltd., and third parties.

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Fair Value Option

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

We have elected the fair value option for loans held-for-sale originated by ReadyCap as well as loans originated by ReadyCap that the Company intends to securitize. The fair value elections for loans, held 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 certain residential mortgage servicing rights acquired as part of the merger transaction.

Earnings per Share

We present both basic and diluted earnings per share (“EPS”) amounts in our consolidated financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our share-based compensation, consisting of unvested restricted stock units (“RSUs”). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period. The Company’s earnings per share has been updated retroactively as a result of the reverse merger.

All of the Company’s unvested RSUs 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 consolidated financial statements or tax returns. We assess the recoverability of deferred tax assets through evaluation of carryback availability, projected taxable income and other factors as applicable. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns as well as the recoverability of amounts we record, including deferred tax assets.

We provide for exposure in connection with uncertain tax positions, which requires significant judgment by management including determination, based on the weight of the tax law and available evidence, that it is more-likely-than-not that a tax result will be realized. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense on our consolidated statements of income. As of March 31, 2017 and December 31, 2016, 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

Revenue is accounted for under ASC 605, Revenue Recognition, which provides among other things that revenue be recognized when there is persuasive evidence an arrangement exists, delivery and services have been rendered, price is fixed and determinable and collectability is reasonably assured.

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Interest Income

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

Realized Gains (Losses)

Upon the sale or disposition (not including the prepayment of outstanding principal balance) of loans or securities, the excess (or deficiency) of net proceeds over the net carrying value or cost basis of such loans or securities is recognized as a realized gain/loss. Outstanding interest balances for payments in full are reported in interest income on loans, held-for-investment.

Origination Income and Expense

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

Note 4 – Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014‑09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard clarifies the required factors that an entity must consider when recognizing revenue and also requires additional disclosures. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016‑20, is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is evaluating the impact this ASU will have on our consolidated financial statements. Although we have not completed our assessment, we do not anticipate that the adoption of ASU 2014-09 will have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The adoption of this standard did not have an impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718)– Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”),  which seeks to simplify the accounting for employee share-based payment transactions, including the accounting for associated income taxes and forfeitures. The ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The adoption of this standard did not have an impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 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. The “expected loss” model requires the consideration of possible credit losses over the

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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. ASU 2016-13 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. The Company is evaluating the impact ASU 2016-13 will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on the disclosure and classification of certain items within the statement of cash flows, including beneficial interests obtained in a securitization of financial assets, debt prepayment or extinguishment costs, and distributions received from equity-method investees. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and is required to be applied retrospectively to all periods presented beginning in the year of adoption. Early adoption is permitted. The Company is evaluating the impact ASU 2016-15 will have on the Company’s statement of cash flows.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory (“ASC 2016-16”), which requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current GAAP requires. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. The Company is evaluating the impact ASU 2016-16 will have on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810) – Interests Held through Related Parties That Are under Common Control (“ASU 2016-17”). ASU 2016-17 requires, when assessing which party is the primary beneficiary in a VIE, that the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those interests as if they were that of the decision maker itself, as current GAAP requires. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. The adoption of this standard did not have an impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The ASU should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the potential effects of adoption of ASU 2016-18 on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”), which amends the definition of a business to exclude acquisitions of groups of assets where substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.  This ASU results in most real estate acquisitions no longer being considered business combinations and instead being accounted for as asset acquisitions.  The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017 and is applied prospectively.  Early application is permitted. The Company is evaluating the impact ASU 2017-01 will have on the Company's consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the De-recognition of Nonfinancial Assets (Topic 610-20) (“ASU 2017-05”). ASU 2017-05 requires that all entities account for the de‑recognition of a business in accordance with ASC 810, including instances in which the business is considered in substance real estate.  The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017.  Early application is permitted. The Company is evaluating the impact ASU 2017-05 will have on the Company's consolidated financial statements.

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Note 5 – Business Combinations

On October 31, 2016, Sutherland merged with and into a subsidiary of ZAIS Financial Corp. (“ZAIS”), with ZAIS legally surviving the merger and changing its name to Sutherland Asset Management Corporation (the “Combined Company”). Per the terms of the Agreement and Plan of Merger (“Merger Agreement”), dated as of April 6, 2016, as amended as of May 9, 2016 and August 4, 2016, (i) Sutherland merged with and into ZAIS Merger Sub, LLC, with ZAIS Merger Sub, LLC surviving the merger transaction and continuing as a wholly-owned subsidiary of ZAIS and (ii) Sutherland Partners, L.P. merged with and into ZAIS Financial Partners, L.P., with ZAIS Financial Partners, L.P. legally surviving the merger transaction, continuing as a wholly-owned subsidiary of ZAIS, and changing its name to Sutherland Partners, L.P. ZAIS was re-named Sutherland Asset Management Corporation as part of the merger transaction (as a whole, the “Merger Transaction” or “merger”).

Prior to and as a condition to the merger, ZAIS Financial disposed of its seasoned re-performing mortgage loan portfolio, such that upon the completion of the merger, ZAIS Financial’s assets largely consisted of its GMFS origination subsidiary, cash, conduit loans and residential mortgage backed securities (“RMBS”). Additionally, prior to the closing, ZAIS Financial completed a tender offer, purchasing 4,185,478 shares of common stock from existing ZAIS Financial stockholders at a purchase price of $15.37 per share. In connection with the merger, 25,870,420 shares of common stock were issued to our pre-merger common stockholders, and 2,288,663 units in the operating partnership subsidiary (“OP units”) were issued to our pre-merger OP unit holders. Our pre-merger stockholders held approximately 86% of our stockholders’ equity as a result of the merger, with continuing ZAIS Financial stockholders holding approximately 14% of our stockholders’ equity, on a fully diluted basis.

Under the terms of the Merger Agreement, in connection with the Merger Transaction, each outstanding share of the Company and each outstanding unit of Sutherland Partners, L.P. was converted into the right to receive 0.8356 (the “Exchange Ratio”) shares of common stock in ZAIS or units in ZAIS Financial Partners, L.P., respectively. The Exchange Ratio was determined by dividing the Company’s adjusted book value per share on July 31, 2016 (the “Determination Date”) by the ZAIS adjusted book on the Determination Date.

Additionally, the Merger Agreement provided for a cash tender offer to existing ZAIS shareholders for cash proceeds up to $64.3 million. The tender offer was completed at a price of $15.37 equal to 95% of ZAIS’s adjusted book value per share, as further adjusted by ZFC’s pro-rata share of (i) an $8.0 million payment to ZAIS REIT Management, LLC relating to the termination of ZFC’s existing advisory agreement, and (ii) approximately $4.0 million related to intangible assets. The tender offer resulted in the tender of 4,185,478 shares of ZAIS common stock.

The primary purpose of the merger was to increase the Combined Company’s scale, with a stockholders’ equity base in excess of $550 million, which is expected to enhance operational efficiencies, substantially increase the liquidity in the combined company common stock and meaningfully reduce operating costs. Sutherland management believes that stockholders of the combined company will benefit from lower base management fees and that the incentive distribution fee structure will further align stakeholder interests.

The following pro-forma income and earnings of the Combined Company are presented for the three months ended March 31, 2016:

		For the three months ended
(In Thousands)		March 31, 2016
Selected Financial Data
Interest income	$	40,490
Interest expense		(16,791)
Provision for loan losses		(2,184)
Other income (expense)		(10,410)
Realized gain (loss)		(501)
Unrealized gain (loss)		(10,459)
Net income from continuing operations before income taxes	$	145

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Note 6 – Fair Value Measurements

The Company adopted the provisions of ASC 820 Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of March 31, 2017:

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash held in money market funds	$	632	$	—	$	—	$	632
Short term investments		239,856		—		—		239,856
Loans, held for sale, at fair value		—		114,906		37,325		152,231
Loans, held at fair value		—		—		107,691		107,691
Mortgage backed securities, at fair value		—		—		31,365		31,365
Derivative instruments, at fair value		—		2,973		1,378		4,351
Residential mortgage servicing rights, at fair value		—		—		64,625		64,625
Total assets	$	240,488	$	117,879	$	242,384	$	600,751
Liabilities:
Derivative instruments, at fair value	$	—	$	619	$	—	$	619
Contingent consideration		—		—		8,841		8,841
Total liabilities	$	—	$	619	$	8,841	$	9,460

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The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2016:

(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash held in money market funds	$	632	$	—	$	—	$	632
Short term investments		319,984		—		—		319,984
Loans, held for sale, at fair value		—		164,485		17,312		181,797
Loans, held at fair value		—		—		81,592		81,592
Mortgage backed securities, at fair value		—		—		32,391		32,391
Derivative instruments, at fair value		—		3,095		2,690		5,785
Residential mortgage servicing rights, at fair value		—		—		61,376		61,376
Total assets	$	320,616	$	167,580	$	195,361	$	683,557
Liabilities:
Derivative instruments, at fair value	$	—	$	643	$	—	$	643
Contingent consideration		—		—		14,487		14,487
Total liabilities	$	—	$	643	$	14,487	$	15,130

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

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	81,592	$	155,134
Realized gains, net		27		1,953
Unrealized gains (losses), net		630		(76)
Originations		27,499		109,052
Sales		(2,017)		(86,571)
Principal payments		(40)		(5,148)
Ending Balance	$	107,691	$	174,344

As of March 31, 2017 and December 31, 2016, the unrealized gains on loans, held at fair value were $3.1 million and $2.5 million, respectively.

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

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	17,312	$	—
Realized gains, net		476		—
Unrealized gains, net		526		—
Originations		69,665		—
Creation of mortgage servicing rights included in realized gains, net		441		—
Sales		(54,116)		—
Transfer from loans, held-for-investment, net		3,021		—
Ending Balance	$	37,325	$	—

As of March 31, 2017 and December 31, 2016, the unrealized gains on loans, held for sale, at fair value were $3.8 million and 2.9 million, respectively.

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

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	32,391	$	213,504
Accreted discount (amortized premium), net		54		64
Realized gains (losses), net		189		(3,051)
Unrealized gains (losses), net		(45)		2,001
Purchases		—		8,544
Sales / Principal Payments		(1,224)		(103,957)
Ending Balance	$	31,365	$	117,105

As of March 31, 2017 and December 31, 2016, the unrealized losses on MBS at fair value were $0.3 million and $0.3 million, respectively.

The following table presents a summary of changes in the fair value of residential mortgage servicing rights, at fair value classified as Level 3:

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	61,376	$	—
Additions due to loans sold, servicing retained		5,052		—
Loan pay-offs		(1,250)		—
Unrealized gains (losses)		(553)		—
Ending Balance	$	64,625	$	—

As of March 31, 2017 and December 31, 2016, the unrealized gains on residential mortgage servicing rights, at fair value were $6.4 million and $6.9 million, respectively. 

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

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	2,690	$	—
Unrealized losses		(1,312)		—
Ending Balance	$	1,378	$	—

As of March 31, 2017 and December 31, 2016, the unrealized losses on derivative instruments, at fair value were $2.1 million and $0.8 million, respectively. 

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

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning Balance	$	14,487	$	—
Adjustment for legal settlement		(5,744)		—
Amortization		98		—
Ending Balance	$	8,841	$	—

As of March 31, 2017 and December 31, 2016, there was no unrealized gain (loss) on contingent consideration.

The Company’s policy is to recognize transfers in and transfers out as of the beginning of the period of the event or the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments. There were no transfers to or from Level 3 for the consolidated balance sheet periods presented except for the transfers identified above.

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Valuation Process for Fair Value Measurements

The Company establishes valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that valuation approaches are consistently applied and the assumptions and inputs are reasonable. The Company has also established processes to provide that the valuation methodologies, techniques and approaches for investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent and verifiable. The Company’s processes provide a framework that ensures the oversight of the Company’s fair value methodologies, techniques, validation procedures, and results.

The Company designates a valuation committee (the “Committee”) to oversee the entire valuation process of the Company’s Level 3 investments. The Committee is comprised of various personnel who are responsible for developing the Company’s written valuation policies, processes and procedures, conducting periodic reviews of the valuation policies, and performing validation procedures on the overall fairness and consistent application of the valuation policies and processes and that the assumptions and inputs used in valuation are reasonable.

The validation procedures overseen by the Committee are also intended to provide that the values received from external third-party pricing sources are consistent with the Company’s Valuation Policy and are carried at fair value. To the extent that there are no exchange pricing, vendor marks or broker quotes readily available, the Company may use an internal valuation model or other valuation methodology that may be based on unobservable market inputs to fair value the investment.

The values provided by a third-party pricing service are calculated based on key inputs provided by the Company including collateral values, unpaid principal balances, cash flow velocity, contractual status and anticipated disposition timelines. In addition, the Company performs an internal valuation used to assess and review the reasonableness and validity of the fair values provided by a third party. The Company also performs analytical procedures, which include automated checks consisting of prior-period variance analysis, comparisons of actual prices to internally calculate expected prices based on observable market changes, analysis of changes in pricing ranges, and relative value and yield comparisons using the Company’s proprietary valuation models.

Upon completion of the review process described above, the Company may provide additional quantitative and qualitative data to the third-party pricing service to consider in valuing certain financial assets and liabilities, as applicable. Such data may include deal specific information not included in the data tape provided to the third party, outliers when compared to the unpaid principal balance and collateral value and knowledge of any impending liquidation of an investment. If deemed necessary by the third party and management, the investments are re-valued by the third party to account for the updated information.

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 using third party information without adjustment:

			Predominant				Weighted
			Valuation				Average Price
(In Thousands, except price)	Fair Value		Technique	Type	Price Range		(a)
Loans, held at fair value	$	107,691	SingleExternal Source	Third Party Mark	$	100.00 – 104.00	$	103.00
Loans, held for sale, at fair value		37,325	SingleExternal Source	Third Party Mark		101.00 – 107.00		101.84
Mortgage backed securities, at fair value (b)		28,871	Broker Quotes	Third Party Mark		14.88 – 104.00		68.62
Mortgage backed securities, at fair value		2,494	Transaction Price	Transaction Price		90.00 – 100.39		98.45
Residential mortgage servicing rights, at fair value		64,625	Single external source	Discounted cash flow		N/A		N/A
Contingent consideration		8,841	Single external source	Option pricing model		N/A		N/A

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

(b)Price ranges and weighted averages exclude interest-only strips with a fair value of $1.4 million as of March 31, 2017.

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The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of December 31, 2016 using third-party information without adjustment:

			Predominant				Weighted
			Valuation				Average Price
(In Thousands, except price)	Fair Value		Technique	Type	Price Range		(a)
Loans, held at fair value	$	81,592	Single External Source	Third Party Mark	$	98.47 – 105.00	$	103.16
Loans, held for sale, at fair value		17,312	Single External Source	Third Party Mark		100.04 – 102.97		100.87
Mortgage backed securities, at fair value (b)		29,883	Broker Quotes	Third Party Mark		17.91 – 101.00		68.90
Mortgage backed securities, at fair value		2,508	Transaction Price	Transaction Price		99.00 – 99.00		99.00
Residential mortgage servicing rights, at fair value		61,376	Single external source	Discounted cash flow		N/A		N/A
Contingent consideration		14,487	Single external source	Option pricing model		N/A		N/A

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

(b)Price ranges and weighted averages exclude interest-only strips with a fair value of $1.5 million as of December 31, 2016.

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. Generally, an increase in the probability of default and loss severity in the event of default would result in a lower fair value measurement. A decrease in these assumptions would have the opposite effect. Conversely, an assumption that the home prices will increase would result in a higher fair value measurement. A decrease in the assumption for home prices would have the opposite effect.

Financial instruments not carried at fair value

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the consolidated balance sheets and are classified as Level 3:

	March 31, 2017				December 31, 2016
(In Thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Loans, held-for-investment	$	1,547,529	$	1,610,647	$	1,585,088	$	1,639,982
Servicing rights		20,372		21,748		22,478		23,470
Other assets(a)		155,667		155,667		73,726		73,726
Total assets	$	1,723,568	$	1,788,062	$	1,681,292	$	1,737,178
Liabilities:
Borrowings under credit facilities	$	266,323	$	266,323	$	326,610	$	326,610
Promissory note payable		7,046		7,046		7,378		7,378
Securitized debt obligations of consolidated VIEs		434,055		444,013		492,942		483,381
Senior secured note		73,390		73,390		—		—
Guaranteed loan financing		361,916		380,828		390,555		409,751
Borrowings under repurchase agreements		632,951		632,951		600,852		600,852
Accounts payable and other accrued liabilities(b)		3,689		3,955		5,497		5,827
Total liabilities	$	1,779,370	$	1,808,506	$	1,823,834	$	1,833,799

(a) Other assets not carried at fair value and are classified as Level 3 include Due from servicers, Accrued interest, Deferred financing costs and Receivable from third parties, which are included in Note 20.

(b) Accounts payable and other accrued liabilities not carried at fair value and are classified as Level 3 include Payable to related parties and liabilities under participation agreements which are included in Note 20.

The table above does not include real estate acquired in settlement of loans for which the Company has recorded a valuation allowance of $6.8 million and $6.9 million at March 31, 2017 and December 31, 2016, respectively. These assets have been marked to third-party broker price opinions less an estimate of costs to sell.

Note 7 – Loans

The Company is a real estate finance company that acquires, originates, manages, services, and finances SBC, SBA, and residential mortgage loans. During the three months ended March 31, 2017, the Company originated $629.4 million

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in unpaid principal balance and acquired $11.5 million in unpaid principal balance. During the three months ended March 31, 2016, the Company originated $227.6 million in unpaid principal balance and did not acquire any loans during that period.

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

	Unpaid Principal Balance				Carrying Value
Loans (In Thousands)	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Held-for-investment	$	1,661,531	$	1,708,543	$	1,547,529	$	1,585,088
Held for sale, at fair value		148,417		178,907		152,231		181,797
Held at fair value		104,558		79,089		107,691		81,592
Total loans	$	1,914,506	$	1,966,539	$	1,807,451	$	1,848,477

Loan characteristics

The following table displays the geographic concentration of the Company’s loans, held-for-investment secured by real estate recorded on our consolidated balance sheets.

Geographic Concentration (Unpaid Principal Balance)	March 31, 2017		December 31, 2016
Texas	13.3	%	14.0	%
California	12.5	%	12.8	%
Florida	9.8	%	9.6	%
New York	7.1	%	6.9	%
Arizona	5.4	%	5.4	%
Georgia	5.3	%	5.6	%
North Carolina	3.6	%	3.8	%
New Jersey	3.0	%	2.9	%
Virginia	2.7	%	3.0	%
Pennsylvania	2.6	%	2.7	%
Other	34.7	%	33.3	%
Total	100.0	%	100.0	%

The following table displays the collateral type concentration of the Company’s loans, held-for-investment on our consolidated balance sheets.

Collateral Concentration (Unpaid Principal Balance)	March 31, 2017		December 31, 2016
SBA(1)	35.2	%	36.0	%
Retail	15.1	%	14.9	%
Multi-family	14.1	%	13.3	%
Office	12.5	%	13.5	%
Industrial	7.2	%	6.8	%
Mixed Use	5.7	%	5.2	%
Lodging	3.8	%	3.7	%
Other	6.4	%	6.6	%
Total	100.0	%	100.0	%
(1) Further detail provided on SBA collateral concentration is included in table below.

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The following table displays the collateral type concentration of the Company’s SBA loans within loans, held-for-investment, on our consolidated balance sheets.

Collateral Concentration (Unpaid Principal Balance)	March 31, 2017		December 31, 2016
Offices of Physicians	16.3	%	15.8	%
Child Day Care Services	13.3	%	14.3	%
Lodging	11.5	%	11.4	%
Veterinarians	6.6	%	6.7	%
Eating Places	5.7	%	6.3	%
Grocery Stores	4.5	%	4.3	%
Auto	3.2	%	3.2	%
Accounting Auditing & Bookkeeping	2.4	%	2.4	%
Gasoline Service Stations	1.8	%	1.8	%
Funeral Service & Crematories	1.8	%	1.7	%
Other	32.9	%	32.1	%
Total	100.0	%	100.0	%

The following table displays delinquency information on loans, held-for-investment as of March 31, 2017:

	Number						30-89 Days		90+ Days
	of				Carrying		Delinquent		Delinquent
Loan Balance	Loans	Interest Rate		Maturity Date	Value (a)		(a)		(a)
Fixed-rate:
0 – 500k	387	0.00 – 24.00	%	10/15/08 – 09/01/46	$	55,793	$	2,640	$	7,326
500k – 1mm	84	4.00 – 9.90		06/01/16 – 02/01/38		60,445		1,427		1,194
1mm – 1.5mm	47	4.50 – 10.25		11/01/17 – 02/05/33		57,661		—		1,333
1.5mm – 2mm	44	4.56 – 7.52		11/01/17 – 10/01/26		78,903		—		—
2mm – 2.5mm	30	4.91 – 7.52		06/01/17 – 04/01/38		67,956		—		—
> 2.5mm	73	4.50 – 11.00		02/01/18 – 06/01/38		341,746		7,840		—
Total fixed-rate	665				$	662,504	$	11,907	$	9,853
Adjustable rate:
0 – 500k	2,266	0.00 – 9.75	%	04/27/04 – 09/21/42	$	235,115	$	12,314	$	9,065
500k – 1mm	331	2.66 – 8.63		10/28/14 – 07/17/42		209,186		3,504		5,456
1mm – 1.5mm	127	3.50 – 8.20		04/08/19 – 07/31/42		141,609		5,899		4,895
1.5mm – 2mm	42	2.62 – 6.50		04/12/17 – 11/30/37		62,546		1,347		3,354
2mm – 2.5mm	5	5.75 – 6.50		03/16/27 – 07/29/37		11,254		—		—
> 2.5mm	45	2.29 – 8.63		10/20/09 – 08/06/42		227,487		—		7,773
Total adjustable rate	2,816				$	887,197	$	23,064	$	30,543
Total	3,481				$	1,549,701	$	34,971	$	40,396
Less: General allowance for loan losses						2,172
Total					$	1,547,529

(a)In thousands net of specific allowance for loan losses

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The following table displays delinquency information on loans, held-for-investment as of December 31, 2016:

	Number						30-89 Days		90+ Days
	of				Carrying		Delinquent		Delinquent
Loan Balance	Loans	Interest Rate		Maturity Date	Value (a)		(a)		(a)
Fixed-rate:
0 – 500k	401	0.00 – 24.00	%	10/15/08 – 09/01/46	$	56,602	$	2,383	$	8,676
500k – 1mm	88	4.00 – 9.90		03/20/10 – 02/01/38		62,246		499		2,199
1mm – 1.5mm	50	4.50 – 11.00		02/01/17 – 02/05/33		61,167		—		1,854
1.5mm – 2mm	48	4.56 – 7.52		08/01/15 – 10/01/26		85,555		—		972
2mm – 2.5mm	32	4.91 – 7.52		02/01/17 – 04/01/38		72,760		2,282		—
> 2.5mm	73	4.50 – 11.00		03/01/17 – 06/01/38		340,844		6,597		—
Total fixed-rate	692				$	679,174	$	11,761	$	13,701
Adjustable rate:
0 – 500k	2,369	0.00 – 9.75	%	04/27/04 – 09/21/42	$	245,631	$	12,525	$	8,725
500k – 1mm	345	2.66 – 8.63		10/28/14 – 03/29/42		218,479		5,079		4,792
1mm – 1.5mm	136	3.50 – 8.21		04/08/19 – 10/10/41		151,415		2,166		6,971
1.5mm – 2mm	48	2.62 – 6.25		04/12/17 – 03/01/38		70,676		1,037		2,278
2mm – 2.5mm	8	3.85 – 6.35		10/19/26 – 08/17/38		16,412		—		—
> 2.5mm	42	2.14 – 8.32		10/20/09 – 11/18/38		205,312		—		8,096
Total adjustable rate	2,948				$	907,925	$	20,807	$	30,862
Total	3,640				$	1,587,099	$	32,568	$	44,563
Less: General allowance for loan losses						2,011
Total					$	1,585,088

(a)In thousands net of specific allowance for loan losses

The Company monitors the credit quality of loans, held-for-investment on an ongoing basis. The Company considers the loan-to-value ratio of our loans to be a general indicator of credit performance. The Company monitors the loan-to-value ratio and associated risks on a monthly basis. The following table presents quantitative information on the credit quality of loans, held-for-investment as of the consolidated balance sheet dates:

	Loans, held-for-investment
Loan-to-Value (In Thousands) (a)	March 31, 2017		December 31, 2016
0.0 – 20.0%	$	64,873	$	58,931
20.1 – 40.0%		196,965		206,803
40.1 – 60.0%		531,084		532,294
60.1 – 80.0%		471,281		487,006
80.1 – 100.0%		145,475		163,500
Greater than 100.0%		140,023		138,565
Total	$	1,549,701	$	1,587,099
Less: General allowance for loan losses		2,172		2,011
Total	$	1,547,529	$	1,585,088

(a) Loan-to-value is calculated as carry amount as a percentage of current collateral value

As of March 31, 2017 and December 31, 2016, the Company’s total carrying amount of loans in the foreclosure process was $0.8 million and $2.3 million, respectively.

Loans, held-for-investment inclusive of consolidated VIEs

Loans, held-for-investment are accounted for under ASC 310-30 or ASC 310-10 depending on whether there is evidence of credit deterioration at the time of acquisition. The outstanding carry amount of the acquired loans broken down by ASC 310-30 and ASC 310-10 is as follows:

(In Thousands)	March 31, 2017		December 31, 2016
Loans, held-for-investment
Non-credit impaired loans	$	1,450,699	$	1,475,007
Credit impaired loans		96,830		110,081
Total loans, held-for-investment	$	1,547,529	$	1,585,088

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The following table details the carrying value for loans, held-for-investment at the consolidated balance sheet dates.

	March 31, 2017				December 31, 2016
	Non-credit Impaired				Non-credit Impaired
(In Thousands)	Loans		Credit Impaired Loans		Loans		Credit Impaired Loans
Unpaid principal balance	$	1,506,473	$	155,058	$	1,536,245	$	172,298
Non-accretable discount		—		(24,646)		—		(24,784)
Accretable discount		(50,450)		(24,221)		(55,563)		(26,978)
Recorded investment		1,456,023		106,191		1,480,682		120,536
Allowance for loan losses		(5,324)		(9,361)		(5,675)		(10,455)
Carrying value	$	1,450,699	$	96,830	$	1,475,007	$	110,081

In the three months ended March 31, 2017 and 2016, the Company did not acquire any credit impaired loans.

The following table details the activity of the accretable yield of loans, held-for investment.

	For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
	Non-credit Impaired				Non-credit Impaired
(In Thousands)	Loans		Credit Impaired Loans		Loans		Credit Impaired Loans
Beginning accretable yield	$	(55,563)	$	(26,978)	$	(81,886)	$	(42,031)
Purchases/Originations		326		—		—		—
Sales		419		1,195		446		1,709
Accretion		4,109		1,198		6,482		2,499
Other		259		(471)		(1)		(1,815)
Transfers		—		835		(348)		4,883
Ending accretable yield	$	(50,450)	$	(24,221)	$	(75,307)	$	(34,755)

The following table details the accrual and non-accrual state of loans, held-for-investment by carrying value.  All loans held at fair value are accrual loans.

	March 31, 2017				December 31, 2016
	Non-credit Impaired				Non-credit Impaired
(In Thousands)	Loans		Credit Impaired Loans		Loans		Credit Impaired Loans
Accrual		1,419,457		84,009		1,446,035		91,798
Non-accrual		33,414		12,821		30,983		18,283
Less: General allowance for loan losses		(2,172)		—		(2,011)		—
Total	$	1,450,699	$	96,830	$	1,475,007	$	110,081

The following table presents additional information on impaired loans, held-for-investment, or loans in which we do not expect to receive all principal and interest payments as scheduled in the loan agreements. Impaired loans include (i) non-credit impaired loans, or loans without evidence of credit deterioration at the time of purchase, that are subsequently

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placed on non-accrual status and (ii) credit impaired loans, or loans with evidence of credit deterioration since the time of purchase:

					Carrying value for		Carrying value for
	Total Carrying		Unpaid Principal		Which There Is A		Which There Is No
	value of		Balance of		Related Allowance		Related Allowance		Interest Income
(In Thousands)	Impaired Loans		Impaired Loans		for Loan Losses		for Loan Losses		Recognized
March 31, 2017
Non-credit impaired loans	$	32,202	$	42,821	$	14,745	$	17,457	$	3	(1)
Credit impaired loans		38,441		64,384		38,441		—		876	(1)
Total March 31, 2017	$	70,643	$	107,205	$	53,186	$	17,457	$	879
December 31, 2016
Non-credit impaired loans	$	32,425	$	33,185	$	14,772	$	17,653	$	103	(2)
Credit impaired loans		44,118		71,844		44,118		—		2,420	(2)
Total December 31, 2016	$	76,543	$	105,029	$	58,890	$	17,653	$	2,523
(1) For the three months ended March 31, 2017.
(2) For the three months ended March 31, 2016.

During the three months ended March 31, 2017 and the year ended December 31, 2016, the Company’s average carrying amount of impaired loans was $145,656 and $155,260, respectively.

The following table details the activity of the allowance for loan losses for loans, held-for investment:

	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
	Non-credit Impaired				Non-credit Impaired
(In Thousands)	Loans		Credit Impaired Loans		Loans		Credit Impaired Loans
Beginning balance	$	5,675	$	10,455	$	4,124	$	12,998
Provision for loan losses		567		665		702		1,482
Chargeoffs		(918)		—		(140)		(321)
Recoveries		—		(1,759)		—		(1,616)
Ending balance	$	5,324	$	9,361	$	4,686	$	12,543

For three months ended March 31, 2017, the Company had a general allowance for loan losses of $2.2 million assessed on a collective basis and is included in the allowance for loan losses above. For the three months ended March 31, 2016, there was no allowance for loan losses assessed on a collective basis. The entire provision for loan losses above represents the allowance assessed on an individual loan level.

Loans, held at fair value

Loans, held at fair value were originated by ReadyCap. We elected the fair value option, in accordance with ASC 825 due to our intent to securitize the loans in the near term.  At March 31, 2017 there were 36 loans, with an aggregate outstanding principal balance of $104.6 million and an aggregate fair value of $107.7 million. At December 31, 2016, there were 27 loans, with an aggregate outstanding principal balance of $79.1 million and an aggregate fair value of $81.6 million.

Loans, held for sale, at fair value

Loans, held for sale, at fair value were originated by either ReadyCap or GMFS. We elected the fair value option, in accordance with ASC 825 due to our intent to sell these loans in the near term. At March 31, 2017, there were 454 loans, with an aggregate outstanding principal balance of $148.4 million and an aggregate fair value of $152.3 million. At December 31, 2016, there were 714 loans, with an aggregate outstanding principal balance of $178.9 million and an aggregate fair value of $181.8 million.

Troubled Debt Restructurings

If the borrower is determined to be in financial difficulty, then the Company will determine whether a financial concession has been granted to the borrower by analyzing the value of the assets as compared to the recorded investment, modifications of the interest rate as compared to market rates, modification of the stated maturity date, modification of the

30

timing of principal and interest payments and the partial forgiveness of debt. Modified loans that are classified as TDRs are individually evaluated and measured for impairment.

The following table summarizes the recorded investment of TDRs on the consolidated balance sheet dates.

(In Thousands)	March 31, 2017		December 31, 2016
Troubled debt restructurings
SBC	$	5,978	$	7,918
SBA		9,520		11,135
Total troubled debt restructurings	$	15,498	$	19,053

As of March 31, 2017 and December 31, 2016, the total allowance for loan losses related to TDR’s was $1.3 million and $2.2 million, respectively.

The following table summarizes the TDRs that occurred during the three months ended March 31, 2017. 

	Pre-Modification		Post-Modification
(In Thousands)	Recorded Balance		Recorded Balance		Number of Loans
Troubled debt restructurings
SBC	$	2,234	$	2,034	9
SBA		522		456	4
Total troubled debt restructurings	$	2,756	$	2,490	13

The following table summarizes the TDRs that occurred during the three months ended March 31, 2016.

	Pre-Modification		Post-Modification
(In Thousands)	Recorded Balance		Recorded Balance		Number of Loans
Troubled debt restructurings
SBC	$	1,866	$	1,874	7
SBA		3,997		3,972	13
Total troubled debt restructurings	$	5,863	$	5,846	20

The following table summarizes our TDR modifications in the three months ended March 31, 2017 presented by primary modification type and includes the financial effects of these modifications.

	Term		Interest Rate		Principal
(In Thousands)	Extension		Reduction		Reduction		Foreclosure		Total
Troubled debt restructurings
SBC	$	13	$	116	$	656	$	1,249	$	2,034
SBA		390		—		—		66		456
Total troubled debt restructurings	$	403	$	116	$	656	$	1,315	$	2,490

The following table summarizes our TDR modifications in the three months ended March 31, 2016 presented by primary modification type and includes the financial effects of these modifications.

	Term		Interest Rate		Principal
(In Thousands)	Extension		Reduction		Reduction		Foreclosure		Total
Troubled debt restructurings
SBC	$	1,016	$	929	$	—	$	—	$	1,945
SBA		3,793		3		—		—		3,796
Total troubled debt restructurings	$	4,809	$	932	$	—	$	—	$	5,741

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The table below summarizes the accrual status and UPB of TDRs as of March 31, 2017.

(In Thousands)	Accrual		Non-Accrual		Total
Troubled debt restructurings
SBC	$	2,227	$	3,751	$	5,978
SBA		437		9,083		9,520
Total troubled debt restructurings	$	2,664	$	12,834	$	15,498

The table below summarizes the accrual status and UPB of TDRs as of December 31, 2016.

(In Thousands)	Accrual		Non-Accrual		Total
Troubled debt restructurings
SBC	$	5,196	$	2,722	$	7,918
SBA		359		10,776		11,135
Total troubled debt restructurings	$	5,555	$	13,498	$	19,053

The following tables summarize the March 31, 2017 carrying values of the TDRs that occurred during the three months ended March 31, 2017 and 2016 that remained in default as of March 31, 2017. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected.  For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.

	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
(In Thousands)	Number of Loans		Carrying Value		Number of Loans		Carrying Value
Troubled debt restructurings
SBC		7	$	1,917		2	$	485
SBA		1		65		3		5
Total troubled debt restructurings		8	$	1,982		5	$	490

The Company does not believe the financial impact of the presented TDRs to be material. The other elements of the Company’s modification programs do not have a significant impact on financial results given their relative size, or do not have a direct financial impact as in the case of covenant changes. 

Note 8 – Mortgage Backed Securities

The following table presents certain information about the Company’s MBS portfolio, which are classified as trading securities and carried at fair value, as of March 31, 2017.

		Weighted
	Weighted	Average								Gross		Gross
	Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)	Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
MBS
Commercial Loans	03/2034	5.7	%	$	40,023	$	29,167	$	28,871	$	1,774	$	(2,070)
Tax Liens	03/2031	6.5			2,533		2,533		2,494		2		(41)
Total		5.7	%	$	42,556	$	31,700	$	31,365	$	1,776	$	(2,111)

(a) Weighted based on current principal balance

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The following table presents certain information about the Company’s MBS portfolio, which are classified as trading securities and carried at fair value, as of December 31, 2016.

		Weighted
	Weighted	Average								Gross		Gross
	Average	Interest		Principal		Amortized				Unrealized		Unrealized
(In Thousands)	Maturity (a)	Rate (a)		Balance		Cost		Fair Value		Gains		Losses
MBS
Commercial Loans	02/2034	5.6	%	$	41,246	$	30,148	$	29,883	$	1,605	$	(1,870)
Tax Liens	03/2031	6.5			2,534		2,533		2,508		—		(25)
Total		5.7	%	$	43,780	$	32,681	$	32,391	$	1,605	$	(1,895)

(a) Weighted based on current principal balance

The following table presents certain information about the maturity of the Company’s MBS portfolio as of March 31, 2017.

	Weighted
	Average
	Interest		Principal		Amortized		Estimated
(In Thousands)	Rate (a)		Balance		Cost		Fair Value
After five years through ten years	9.1	%	$	13,030	$	12,058	$	12,410
After ten years	4.3			29,526		19,642		18,955
Total	5.7	%	$	42,556	$	31,700	$	31,365

The following table presents certain information about the maturity of the Company’s MBS portfolio as of December 31, 2016.

	Weighted
	Average
	Interest		Principal		Amortized		Estimated
(In Thousands)	Rate (a)		Balance		Cost		Fair Value
After five years through ten years	8.9	%	$	13,616	$	12,579	$	12,709
After ten years	4.2			30,164		20,102		19,682
Total	5.7	%	$	43,780	$	32,681	$	32,391

Note 9 - Servicing rights

The Company performs servicing activities for third parties, which primarily include collecting principal, interest and other payments from borrowers, remitting the corresponding payments to investors and monitoring delinquencies. The Company’s servicing fees are specified by Pooling and Servicing Agreements. The Company earned gross servicing fees of $7.2 million and $3.1 million, for the three months ended March 31, 2017 and 2016, respectively. 

The Company has servicing rights relating to its servicing of SBA and Freddie Mac loans and servicing rights relating to its servicing of residential mortgage loans within the residential mortgage banking business.

Servicing rights – SBA and Freddie Mac

The Company’s commercial loan servicing rights are carried at the lower of cost or amortized cost. The Company estimates the fair value of servicing rights carried at amortized cost using a combination of internal models and data provided by third-party valuation experts. The assumptions used in our internal valuation include the speed at which the mortgages prepay, cost of servicing, discount rate and probability of default.

The Company’s models calculate the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. We derive prepayment speeds, default assumptions and discount rate from historical experience adjusted for prevailing market conditions. Components of the estimated future cash flows include servicing fees, late fees, other ancillary fees and cost of servicing.

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The significant assumptions used in the March 31, 2017 valuation of the Company’s servicing rights carried at amortized cost include:

· Forward prepayment assumptions ranging from 2.7% to 19.2% (weighted average of 12.0%) depending on the servicing rights pool

· Forward default assumptions ranging from 0.0% to 10.7% (weighted average of 1.3%) depending on the servicing rights pool

· Discount rate of 12.0%

· Servicing expense ranging from 0.2% to 0.4% (weighted average of 0.3%) depending on the servicing rights pool.

The significant assumptions used in the December 31, 2016 valuation of the Company’s servicing rights carried at amortized cost include:

· Forward prepayment assumptions ranging from 2.1% to 19.1% (weighted average of 13.9%) depending on the servicing rights pool

· Forward default assumptions ranging from 0.0% to 10.8% (weighted average of 1.1%) depending on the servicing rights pool

· Discount rate of 12.0% 

· Servicing expenses ranging from 0.2% to 0.4% (weighted average of 0.3%) depending on the servicing rights pool

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

Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balance of loans serviced for others was $885.8 million and $750.0 million at March 31, 2017 and December 31, 2016, respectively.

The following table presents information about the Company’s commercial loan servicing rights:

	Three Months Ended March 31,
(In Thousands)	2017		2016
Beginning net carrying amount	$	22,478	$	27,250
Additions due to loans sold, servicing retained		659		—
Amortization		(1,204)		(515)
Impairment		(1,561)		(697)
Ending net carrying value	$	20,372	$	26,038

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

(In Thousands)	March 31, 2017
2017	$	3,259
2018		3,677
2019		3,022
2020		2,467
2021		1,998
Thereafter		5,949
Total	$	20,372

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The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the carrying amount of the Company’s commercial loan servicing rights.

(In Thousands)	March 31, 2017		December 31, 2016
Default rate
10% adverse change	$	(15)	$	(12)
20% adverse change		(30)		(24)
Prepayment rate
10% adverse change		(686)		(664)
20% adverse change		(1,331)		(1,290)
Discount rate
10% adverse change		(594)		(576)
20% adverse change		(1,152)		(1,119)

Residential mortgage servicing rights

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

	As of March 31, 2017				As of December 31, 2016
	Unpaid Principal				Unpaid Principal
(In Thousands)	Amount		Fair Value		Amount		Fair Value
Fannie Mae	$	2,300,315	$	25,023	$	2,211,493	$	23,924
Ginnie Mae		1,894,944		21,374		1,817,009		21,205
Freddie Mac		1,571,545		18,228		1,452,902		16,247
Total	$	5,766,804	$	64,625	$	5,481,404	$	61,376

Refer to “Note 6 - Fair Value Measurements” for activity relating to the Company’s residential mortgage servicing rights carried at fair value.

The significant assumptions used in the March 31, 2017 valuation of the Company’s residential mortgage servicing rights carried at fair include:

· Forward prepayment assumptions ranging from 7.1% to 21.4% (weighted average of 8.1%) depending on the servicing rights pool

· Discount rate assumptions ranging from 10.5% to 13.0% (weighted average of 10.9%)

· Servicing expense ranging from 0.7% to 0.8% (weighted average of 0.7%) depending on the servicing rights pool.

The significant assumptions used in the December 31, 2016 valuation of the Company’s residential mortgage servicing rights carried at fair include:

· Forward prepayment assumptions ranging from 6.9% to 11.7% (weighted average of 9.3%) depending on the servicing rights pool

· Discount rate assumptions ranging from 10.5% to 11.5% (weighted average of 10.8%)

· Servicing expense ranging from 0.4% to 1.7% (weighted average of 0.5%) depending on the servicing rights pool.

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

Residential loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balance of loans serviced for others was $5.77 billion and $5.48 billion at March 31, 2017 and December 31, 2016, respectively.

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The following table reflects the possible impact of 10% and 20% adverse changes to key assumptions on the fair value of the Company’s residential mortgage servicing rights.

(In Thousands)	March 31, 2017			December 31, 2016
Cost of service
10% adverse change	$	(1,126)	$	(1,304)
20% adverse change		(2,252)		(2,607)
Prepayment rate
10% adverse change		(2,151)		(2,038)
20% adverse change		(4,179)		(3,983)
Discount rate
10% adverse change		(2,763)		(2,299)
20% adverse change		(5,308)		(4,438)

Note 10 – Borrowings Under Credit Facilities and Promissory Note Payable

As of March 31, 2017 and December 31, 2016 the Company had credit facilities with outstanding borrowings of $266.3 million and $326.6 million, respectively. As of March 31, 2017 and December 31, 2016, the Company had outstanding borrowings under the promissory note payable of $7.0 million and $7.4 million, respectively. 

The following tables present certain characteristics of our credit facilities and promissory note payable:

				Maximum
				Facility Size
	Eligible Assets	Maturity	Pricing	(In Thousands)
JPMorgan - Commercial	Specifically Identified Assets	June 2017	LIBOR + 3.25% and LIBOR + 3.5%	$	250,000
Keybank - Commercial	Specifically Identified Assets	September 2017	LIBOR + 1.75%	$	50,000
FCB - Commercial	Specifically Identified Assets	June 2021	2.75%	$	9,164
Comerica - Residential	Specifically Identified Assets	March 2018	LIBOR + 2.125%	$	150,000
UBS - Residential	Specifically Identified Assets	November 2017	LIBOR + 2.30%	$	65,000
Associated Bank - Residential	Specifically Identified Assets	August 2017	LIBOR + 2.25%	$	40,000
Community Trust - Residential	Specifically Identified Assets	September 2017	LIBOR + 2.25%	$	25,000

	Pledged Assets Carrying Value at				Carrying Value at
	March 31,		December 31,		March 31,		December 31,
(In Thousands)	2017		2016		2017		2016
JPMorgan - Commercial	$	214,312	$	226,253	$	135,863	$	190,066
Keybank - Commercial		34,093		17,311		33,629		17,162
FCB - Commercial		8,674		9,144		7,046		7,378
Comerica - Residential		43,332		35,102		40,697		33,575
UBS - Residential		351		43,121		27,535		39,750
Associated Bank - Residential		15,313		28,575		13,999		27,869
Community Trust - Residential		15,435		18,910		14,599		18,188
Total	$	331,510	$	378,416	$	273,369	$	333,988

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The following table presents the carrying value of the Company’s collateral pledged with respect to our borrowings under credit facilities and promissory note payable outstanding with our lenders as of March 31, 2017.

			Weighted	Total
			Average	Current
(In Thousands for Total Current Principal	Number of	Weighted	Remaining	Principal		Carrying
Balance and Carrying Value)	Loans	Average Rate	Term	Balance		Value
JPMorgan - Commercial	1,541	5.7%	142	$	265,202	$	214,312
Keybank - Commercial	20	4.4%	164		33,629		34,093
FCB - Commercial	35	5.2%	45		9,211		8,674
Comerica - Residential	219	4.0%	356		41,528		43,332
UBS - Residential	2	3.4%	361		463		351
Associated Bank - Residential	79	4.2%	341		14,681		15,313
Community Trust - Residential	78	4.4%	227		15,214		15,435
Total	1,974	5.2%	176	$	379,928	$	331,510

The following tables present the carrying value of the Company’s collateral pledged with respect to our borrowings under credit facilities and promissory note payable outstanding with our lenders as of December 31, 2016.

				Weighted	Total
				Average	Current
(In Thousands for Total Current Principal	Number of	Weighted		Remaining	Principal		Carrying
Balance and Carrying Value)	Loans	Average Rate		Term	Balance		Value
JPMorgan - Commercial	1,617	5.6	%	142	$	280,071	$	226,253
Keybank - Commercial	8	4.0		178		17,162		17,311
FCB - Commercial	37	5.1		46		9,750		9,144
Comerica - Residential	173	3.8		339		35,102		35,102
UBS - Residential	232	3.7		361		43,121		43,121
Associated Bank - Residential	145	3.9		350		28,575		28,575
Community Trust - Residential	106	4.1		267		18,910		18,910
Total	2,318	5.0	%	198	$	432,691	$	378,416

The agreements governing the Company’s borrowings under credit facilities and promissory note payable require the Company to maintain certain financial and debt covenants. The Company was in compliance with all debt and financial covenants as of March 31, 2017 and December 31, 2016.

Note 11 – Offsetting Assets and Liabilities

In order to better define its contractual rights and to secure rights that will help the Company mitigate its counterparty risk, the Company may enter into an International Swaps and Derivatives Association (“ISDA”) Master Agreement with multiple derivative counterparties. An ISDA Master Agreement, published by ISDA, is a bilateral trading agreement between two parties that allow both parties to enter into over-the-counter (“OTC”), derivative contracts. The ISDA Master Agreement contains a Schedule to the Master Agreement and a Credit Support Annex, which governs the maintenance, reporting, collateral management and default process (netting provisions in the event of a default and/or a termination event). Under an ISDA Master Agreement, the Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Company’s stockholders’ equity decline by a stated percentage or the Company fails to meet the terms of its ISDA Master Agreements, which would cause the Company to accelerate payment of any net liability owed to the counterparty.  As of March 31, 2017 and December 31, 2016 and for the periods then ended, the Company was in good standing on all of its ISDA Master Agreements or similar arrangements with its counterparties.

For derivatives traded under an ISDA Master Agreement, the collateral requirements are listed under the Credit Support Annex, which is the sum of the mark to market for each derivative contract, the independent amount due to the derivative counterparty and any thresholds, if any. Collateral may be in the form of Cash or any eligible securities, as defined in the respective ISDA agreements. Cash collateral pledged to and by the Company with the counterparty, if any, is reported separately on the unaudited consolidated balance sheets as restricted cash. All margin call amounts must be made before the notification time and must exceed a minimum transfer amount threshold before a transfer is required. All margin calls must be responded to and completed by the close of business on the same day of the margin call, unless otherwise specified.

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Any margin calls after the notification time must be completed by the next business day. Typically, the Company and its counterparties are not permitted to sell, rehypothecate or use the collateral posted. To the extent amounts due to the Company from its counterparties are not fully collateralized, the Company bears exposure and the risk of loss from a defaulting counterparty. The Company attempts to mitigate counterparty risk by establishing ISDA Agreements with only high grade counterparties that have the financial health to honor their obligations and diversification, entering into agreements with multiple counterparties.

In accordance with ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, the Company is required to disclose the impact of offsetting of assets and liabilities represented in the unaudited consolidated balance sheets to enable users of the unaudited consolidated financial statements to evaluate the effect or potential effect of netting arrangements on its financial position for recognized assets and liabilities.  These recognized assets and liabilities are financial instruments and derivative instruments that are either subject to enforceable master netting arrangements or ISDA Master Agreements or meet the following right of setoff criteria: (a) the amounts owed by the Company to another party are determinable, (b) the Company has the right to set off the amounts owed with the amounts owed by the counterparty, (c) the Company intends to set off, and (d) the Company’s right of setoff is enforceable at law.  As of March 31, 2017 and December 31, 2016, the Company has elected to offset assets and liabilities associated with its OTC derivative contracts in the unaudited consolidated balances sheets. 

The following table provides disclosure regarding the effect of offsetting of the Company’s recognized assets and liabilities presented in the consolidated balance sheet as of March 31, 2017:

			Gross		Assets
			Amounts		Presented in		Gross Amounts Not Offset in the Consolidated
	Gross		Offset in the		the		Balance Sheets (1)
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral
(In Thousands)	Assets		Sheets		Sheets		Instruments		Received		Net Amount
Credit default swaps	$	203	$	—	$	203	$	—	$	—	$	203
Interest rate swaps		2,772		2		2,770		—		—		2,770
Total	$	2,975	$	2	$	2,973	$	—	$	—	$	2,973

			Gross		Liabilities
			Amounts		Presented in		Gross Amounts Not Offset in the Consolidated
	Gross		Offset in the		the		Balance Sheets (1)
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral
(In Thousands)	Liabilities		Sheets		Sheets		Instruments		Paid		Net Amount
Interest rate swaps	$	619	$	—	$	619	$	—	$	619	$	—
Borrowings under credit facilities		266,323		—		266,323		266,323		—		—
Promissory note payable		7,046		—		7,046		7,046		—		—
Borrowings under repurchase agreements		632,951		—		632,951		632,421		530		—
Total	$	906,939	$	—	$	906,939	$	905,790	$	1,149	$	—

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

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The following table provides disclosure regarding the effect of offsetting of the Company’s recognized assets and liabilities presented in the consolidated balance sheet as of December 31, 2016:

			Gross		Assets
			Amounts		Presented in		Gross Amounts Not Offset in the Consolidated
	Gross		Offset in the		the		Balance Sheets (1)
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral
(In Thousands)	Assets		Sheets		Sheets		Instruments		Received		Net Amount
Credit default swaps	$	173	$	—	$	173	$	—	$	—	$	173
Interest rate swaps		2,924		2		2,922		—		—		2,922
Total	$	3,097	$	2	$	3,095	$	—	$	—	$	3,095

					Liabilities
			Gross		Presented in		Gross Amounts Not Offset in the Consolidated
	Gross		Amounts		the		Balance Sheets  (1)
	Amounts of		Offset in the		Consolidated				Cash
	Recognized		Consolidated		Balance		Financial		Collateral
(In Thousands)	Liabilities		Balance Sheets		Sheets		Instruments		Paid		Net Amount
Interest rate swaps	$	643	$	—	$	643	$	—	$	643	$	—
Borrowings under credit facilities		326,610		—		326,610		326,610		—		—
Promissory note payable		7,378				7,378		7,378		—		—
Borrowings under repurchase agreements		600,852		—		600,852		598,992		1,860		—
Total	$	935,483	$	—	$	935,483	$	932,980	$	2,503	$	—

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

Note 12 – Derivative Instruments

The Company is exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. The Company enters into derivative instruments, which for the 2017 and 2016 were comprised of interest rate swaps and credit default swaps. Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for us making payments based on a fixed interest rate over the life of the swap contract. Credit default swaps are executed in order to mitigate the risk of deterioration in the current credit health of the commercial mortgage market. IRLCs are entered into with customers who have applied for residential mortgage loans and meet certain underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and if the loan is not hedged or committed to an investor.

The Company uses derivative instruments to manage interest rate risk and conditions in the commercial mortgage market and, as such, views them as economic hedges. The Company has not elected hedge accounting for these derivative instruments and, as a result, the fair value adjustments on such instruments are recorded in earnings. The fair value adjustments for these derivatives, along with the related interest income, interest expense and gains/(losses) on termination of such instruments, are reported as a net realized gain on financial instruments on the consolidated statements of income.

The following tables summarize the Company’s use of derivatives and their effect on the consolidated financial statements. Notional amounts included in the table are the average notional amounts on the consolidated balance sheet dates. We believe these are the most relevant measure of volume or derivative activity as they best represent the Company’s exposure to underlying instruments.

As of March 31, 2017 there was oneopen credit default swap contract and 51 open interest rate swap contracts. As of December 31, 2016 there was one open credit default swap contract and 49 open interest rate swap contracts with counterparties.

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The following table summarizes the Company’s derivatives as of March 31, 2017 and December 31, 2016.

		As of March 31, 2017						As of December 31, 2016
				Asset		Liability				Asset		Liability
		Notional		Derivatives		Derivatives		Notional		Derivatives		Derivatives
(In Thousands)	Primary Underlying Risk	Amount		Fair Value		Fair Value		Amount		Fair Value		Fair Value
Credit Default Swaps	Credit Risk	$	15,000	$	203	$	—	$	15,000	$	173	$	–
Interest Rate Swaps	Interest rate risk		141,250		2,770		(619)		135,550		2,922		(643)
Interest rate lock commitments (IRLCs)	Interest rate risk		237,000		1,378		—		212,530		2,690		—
Total		$	393,250	$	4,351	$	(619)	$	363,080	$	5,785	$	(643)

The following tables summarize the gains and losses on the Company’s derivatives for the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
			Net Change in				Net Change in
	Net Realized		Unrealized		Net Realized		Unrealized
(In Thousands)	Gain (Loss)		Gain (Loss)		Gain (Loss)		Gain (Loss)
Credit Default Swaps	$	—	$	30	$	—	$	(50)
Interest Rate Swaps		(224)		(129)		(566)		(2,226)
Interest rate lock commitments (IRLCs)		—		(1,312)		—		—
Total	$	(224)	$	(1,411)	$	(566)	$	(2,276)

Note 13 – Borrowings Under Repurchase Agreements

As of March 31, 2017 and December 31, 2016, the Company had master repurchase agreements with six counterparties and had outstanding borrowings of $633.0 million and $600.9 million with those counterparties, respectively. Our repurchase agreements bear interest at a contractually agreed-upon rate and typically have initial terms of one month at inception, but in some cases may have initial terms that are shorter or longer.

The following table presents certain characteristics of our repurchase agreements at March 31, 2017:

			Weighted		Weighted
	Repurchase		Average		Average
	Agreement		Borrowing		Remaining
(In Thousands)	Borrowings		Rate		Maturity (days)
Securities financed:
Short term investments	$	319,396	0.5	%	10
Loans, held-for-investment / Loans, held at fair value		305,551	3.6	%	189
Mortgage backed securities		8,004	3.1	%	88
Total securities financed	$	632,951	2.0	%	98

The following table presents certain characteristics of our repurchase agreements at December 31, 2016:

			Weighted		Weighted
	Repurchase		Average		Average
	Agreement		Borrowing		Remaining
(In Thousands)	Borrowings		Rate		Maturity (days)
Securities financed:
Short term investments	$	319,690	0.2	%	5
Loans, held-for-investment / Loans, held at fair value		273,050	3.6	%	144
Mortgage backed securities		8,112	2.9	%	86
Total securities financed	$	600,852	1.8	%	69

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The following table presents contractual maturity information about our borrowings under repurchase agreements at the consolidated balance sheet dates:

	March 31, 2017				December 31, 2016
			Weighted				Weighted
	Balance		Average		Balance		Average
Time Until Contractual Maturity	(In Thousands)		Interest Rate		(In Thousands)		Interest Rate
Within 30 days	$	319,396	0.5	%	$	350,054	0.4	%
Over 30 days to 60 days		15,196	2.9	%		87,942	4.0	%
Over 60 days to 90 days		127,117	3.6	%		8,112	2.9	%
Over 90 days to 120 days		10,975	2.8	%		—	—	%
Over 120 days to 360 days		160,267	3.6	%		154,744	3.6	%
Total	$	632,951	2.0	%	$	600,852	1.8	%

The following table presents the carry value or fair value of collateral positions the Company pledged with respect to the Company’s borrowings under repurchase agreements at March 31, 2017:

							Fair Value of
	Assets						Assets Pledged
	Pledged at		Amortized		Accrued		and Accrued
(In Thousands)	Fair Value		Cost		Interest		Interest
Collateral pledged:
Short term investments	$	319,474	$	319,405	$	—	$	319,474
Loans, held-for-investment / Loans, held at fair value		373,780		373,975		1,930		375,710
Mortgage backed securities		11,521		11,155		22		11,543
Retained interest in assets of consolidated VIEs		69,139		69,139		421		69,560
Total collateral pledged	$	773,914	$	773,674	$	2,373	$	776,287

The following table presents the carry value or fair value of collateral positions the Company pledged with respect to the Company’s borrowings under repurchase agreements at December 31, 2016:

							Fair Value of
	Assets						Assets Pledged
	Pledged at		Amortized		Accrued		and Accrued
(In Thousands)	Fair Value		Cost		Interest		Interest
Collateral pledged:
Short term investments	$	319,984	$	319,984	$	—	$	319,984
Loans, held-for-investment / Loans, held at fair value		332,029		329,997		1,890		333,919
Mortgage backed securities		11,815		11,676		22		11,837
Retained interest in assets of consolidated VIEs		53,749		53,749		379		54,128
Total collateral pledged	$	717,577	$	715,406	$	2,291	$	719,868

Note 14 – Senior secured note

On February 13, 2017, ReadyCap Holdings LLC, a subsidiary of the Company, issued $75.0 million in 7.50% Senior Secured Notes (“the Notes”). Payments of the amounts due on the Notes are fully and unconditionally guaranteed by the Company and its subsidiaries: Sutherland Partners LP, Sutherland Asset I, LLC, and ReadyCap Commercial, LLC. Interest on the Notes is payable semiannually on each February 15 and August 15, beginning on August 15, 2017. The Notes will mature on February 15, 2022. ReadyCap’s and the guarantors’ respective obligations under the Notes are secured by a perfected first-priority lien on the capital stock of ReadyCap and certain assets owned by the Company. As of March 31, 2017, we are in compliance with all covenants with respect to the Notes.

Note 15 – Guaranteed loan financing

Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the consolidated balance sheets and the portion sold is recorded as guaranteed loan financing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is

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recorded as interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the accompanying consolidated statements of income.

	Weighted		Range of
	Average		Interest	Range of
(In Thousands)	Interest Rate		Rates	Maturities (Years)	Ending Balance
March 31, 2017	3.03	%	1.28 – 6.57  %	2017 - 2038	$	361,916
December 31, 2016	2.79	%	3.50 – 8.75  %	2017 - 2038	$	390,555

The following table summarizes contractual maturities of total guaranteed loan financing outstanding as of March 31, 2017:

(In Thousands)	March 31, 2017
2017	$	2,262
2018		5,509
2019		4,281
2020		5,199
2021		5,820
Thereafter		338,845
Total	$	361,916

Our guaranteed loan financing is secured by loans, held-for-investment of $367.7 million and $396.9 million as of March 31, 2017 and December 31, 2016, respectively.

Note 16 – Related Party Transactions

Management Agreement

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

Base Management Fee

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

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

	For the Three Months Ended March 31,
	2017		2016
Management fee - total	$	$2.0 million	$	1.8 million
Management fee - amount unpaid	$	$2.4 million	$	2.2 million

Incentive Distribution

In addition, the Manager is entitled to an incentive distribution in an amount equal to the product of (i) 15% and (ii) the excess of (a) core earnings (as defined in the partnership agreement or our operating partnership) on a rolling four-quarter basis over (b) an amount equal to 8.00% per annum multiplied by the weighted average of the issue price per share of the common stock or OP units multiplied by the weighted average number of shares of common stock outstanding, provided that Core Earnings over the prior twelve calendar quarters (or the period since the closing of the ZAIS Financial merger, whichever is shorter) is greater than zero.  For purposes of determining the incentive distribution payable to our Manager, core earnings is defined under the partnership agreement of our operating partnership in a manner that is similar to the definition of Core Earnings described below under Item 2. “Management’s Discussion and Analysis of Financial Condition

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and Results of Operations – Non-GAAP Financial Measures” included in this quarterly report on Form 10-Q but with the following additional adjustments which (i) further exclude: (a) the incentive distribution, (b) non-cash equity compensation expense, if any, (c) unrealized gains or losses on SBC loans (not just MBS and MSRs), (d)  depreciation and amortization (to the extent we foreclose on any property), and (e) one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges after discussions between our Manager and our independent directors and after approval by a majority of the independent directors and (ii) add back any realized gains or losses on the sales of MBS and on discontinued operations which were excluded from the definition of Core Earnings described under "Non-GAAP Financial Measures".

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

	For the Three Months Ended March 31,
	2017		2016
Incentive fee distribution - total	$	—	$	—
Incentive fee distribution - amount unpaid	$	—	$	0.5 million (1)
(1) Represents stock due to the Manager as of March 31, 2016. The shares have a three-year lock up period.

The initial term of the Management Agreement extends for three years from the closing of the ZAIS Financial merger and is automatically renewed for one-year terms on each anniversary thereafter. Following the initial term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of our independent directors or the holders of a majority of the outstanding common stock (excluding shares held by employees and affiliates of the Manager), based upon (1) unsatisfactory performance by our Manager that is materially detrimental to the Company or (2) a determination that the management fee payable to the Manager is not fair, subject to the Manager’s right to prevent such a termination based on unfair fees by accepting a mutually acceptable reduction of management fees agreed to by at least two-thirds of our independent directors. The Manager must be provided with written notice of any such termination at least 180 days prior to the expiration of the then existing term and will be paid a termination fee equal to three times the sum of the average annual management fee during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

Expense Reimbursement

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

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

	For the Three Months Ended March 31,
	2017		2016
Reimbursable expenses payable to our Manager - total	$	0.9 million	$	2.3 million
Reimbursable expenses payable to our Manager - amount unpaid	$	0.7 million	$	1.8 million

Note 17 – Financial Instruments with Off-balance Sheet Risk, Credit Risk, and Certain Other Risks

In the normal course of business, the Company enters into transactions in various financial instruments that expose us to various types of risk, both on and off balance sheet. Such risks are associated with financial instruments and markets in which the Company invests.  These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off balance sheet risk and prepayment risk.

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

Credit Risk — The Company is subject to credit risk in connection with our investments in SBC loans and SBC MBS and other target assets we may acquire in the future.  The credit risk related to these investments pertains to the ability and

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

The Company is also subject to credit risk with respect to the counterparties to derivative contracts.  If a counterparty becomes bankrupt or otherwise fails to perform its obligation under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding.  In the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value.  If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security.  We may obtain only a limited recovery or may obtain no recovery in such circumstances.  In addition, the business failure of a counterparty with whom we enter a hedging transaction will most likely result in its default, which may result in the loss of potential future value and the loss of our hedge and force us to cover our commitments, if any, at the then current market price.

Counterparty credit risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.

The Company finances the acquisition of a significant portion of its loans and investments with repurchase agreements and borrowings under credit facilities. In connection with these financing arrangements, the Company pledges its loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

GMFS sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, GMFS is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that GMFS does not comply with such representations, or there are early payment defaults, GMFS may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, GMFS may be required to refund a portion of the sales proceeds to the investors.

Liquidity Risk — Liquidity risk arises in our investments and the general financing of our investing activities.  It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at a reasonable price, in addition to potential increase in collateral requirements during times of heightened market volatility.  If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss.  We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in SBC loans, MBS and other financial instruments.  Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk.  To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements.  While we may finance certain investment in security positions using traditional margin arrangements and borrowings under repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer term financing vehicles may be utilized to attempt to provide us with sources of long-term financing.

Off‑Balance Sheet Risk —The Company has undrawn commitments on outstanding loans which are disclosed in Note 18.

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Interest Rate — Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

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

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

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

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

Note 18 – Commitments, Contingencies and Indemnifications

Litigation

The Company may be subject to litigation and administrative proceedings arising in the ordinary course of its business.

The Company has entered into agreements, which provide for indemnifications against losses, costs, claims, and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to these agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on history and experience, the Company expects the risk of loss to be remote.

GMFS Settlement Agreement

As previously disclosed in the Joint Proxy Statement Prospectus used in connection with the ZAIS Financial merger transaction and in our annual report on Form 10-K for the year ended December 31, 2016, a counterparty (the “Counterparty”) whose predecessor purchased mortgage loans from GMFS, which is currently our subsidiary, asserted claims (the “Claims”) against GMFS for breach of representations and warranties arising out these mortgage loan sales.  We estimate that dating back to a period that began in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold and servicing was released by GMFS to the predecessor to the Counterparty.  As we have also previously disclosed, GMFS entered into a statute of limitations tolling agreement with the Counterparty on December 12, 2013 related to the Claims, which was further amended to extend the expiration date, most recently to May 15, 2017.

On April 25, 2017, the Company and GMFS entered into a definitive agreement (the “Settlement Agreement”) to settle all Claims with the Counterparty and provide for mutual releases.  Pursuant to the Settlement Agreement, the Company has paid a total of $6.0 million in cash and issued approximately $4.0 million in shares of the Company's common stock (275,862 shares issued)  to the Counterparty (the “Shares”), resulting in a total of $10.0 million of

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consideration paid.  The Shares were issued on May 2, 2017, in a private placement transaction. As part of the settlement, the Company has granted the Counterparty customary resale registration rights.

During the period beginning on the 24-month anniversary of the date of the Settlement Agreement (and ending 30 days thereafter), the Counterparty will have the right, but not the obligation, to require that the Company repurchase any and all the Shares that the Counterparty then owns at a price per share equal to 65% of the then last reported book value per share of the Company's common stock.

GMFS was an indirect subsidiary of ZAIS Financial when the Company completed its merger transaction with ZAIS Financial on October 31, 2016.  As disclosed in the Joint Proxy Statement Prospectus used in connection with the merger transaction and in our annual report on Form 10-K for the year ended December 31, 2016, ZAIS Financial had originally acquired GMFS on October 31, 2014 (the “GMFS 2014 acquisition”) from investment partnerships that were advised by our Manager, and from certain other entities controlled by GMFS management (together, the “2014 GMFS sellers”).  The terms of the GMFS 2014 acquisition provided for the payment of both cash consideration and the possible payment of additional contingent consideration based on the achievement by GMFS of certain financial milestones specified in the GMFS 2014 acquisition agreement.

The 2014 GMFS acquisition agreement contained representations and warranties related to GMFS, as well as indemnification obligations to cover breaches of representations and warranties, repurchase claims or demands from investors in respect of mortgage loans originated, purchased or sold by GMFS prior to the closing date of the acquisition.  The 2014 GMFS acquisition agreement also established an escrow fund to support the payment of indemnification claims and allowed for indemnification claims to be offset against the contingent consideration that would otherwise be payable to the 2014 GMFS sellers under the 2014 GMFS acquisition agreement.   

Under the terms of the indemnification provisions contained in the GMFS 2014 acquisition agreement, the 2014 GMFS sellers are liable for amounts paid in settlement of Claims made with their consent, which consent was not to be unreasonably withheld or delayed. Certain of the 2014 GMFS sellers did not consent to the settlement, and as a result, there can be no assurance that the exercise of the right to indemnification by the Company under the terms of the 2014 acquisition agreement would be successful. 

Since the resolution of the Claims and related settlement occurred subsequent to the March 31, 2017 balance sheet date, but before the issuance of the financial statements, the effects have been reflected and recognized in the consolidated financial statements as of March 31, 2017.  As a result, we recorded a legal settlement payable amount of $10.0 million, which is reflected in Other Liabilities on the consolidated balance sheet as of March 31, 2017. In accordance with the terms of the 2014 GMFS acquisition agreement, $4.0 million of the total consideration will be paid by withdrawing funds from the escrow account established by the sellers at the time of the acquisition, which has been recorded as a receivable in Other Assets on the consolidated balance sheet as of March 31, 2017. A total of $0.2 million of the loan indemnification reserve has been released as of March 31, 2017. Also in accordance with the terms of the 2014 GMFS acquisition agreement, we have applied the remaining amount of $5.8 million against the contingent consideration accrued on our balance sheet to cover the possible payment pursuant to the GMFS 2014 acquisition. As a result, we have reduced the remaining contingent consideration on our balance sheet from $14.6 million to $8.8 million as of March 31, 2017. As of March 31, 2017, the effects described above have been recorded as follows:

Description	Balance Sheet Account	Increase (Decrease) - in millions
Escrow receivable	Other assets	$	4.0
Loan indemnification reserve release	Accounts payable and other accrued liabilities	$	(0.2)
Contingent consideration reduction	Contingent consideration	$	(5.8)
Legal settlement payable	Accounts payable and other accrued liabilities	$	10.0

As a result, the settlement did not result in a charge to our earnings or otherwise adversely impact our results of operations.

Other

Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated financial statements.

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Operational Update Relating to Flooding in Louisiana

Throughout the severe flooding that occurred in southern Louisiana in mid-August 2016, GMFS, headquartered in Baton Rouge, LA, remained fully operational. In particular, GMFS continued to close and sell loans in the ordinary course of business and the production volume was at or above prior period levels. GMFS continues to reach out to customers that may have been impacted by the severe flooding. GMFS anticipates that the MSR portfolio may experience higher delinquencies and forbearance while its customers impacted by the flood recover, but does not expect the impact of the flood to have a significant impact on its operations.

Interest Rate Lock commitments (“IRLCs”)

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not economically hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform.

Unfunded Loan Commitments

As of March 31, 2017 and December 31, 2016, the Company had $6.2 million and $14.9 million of unfunded loan commitments related to loans, held at fair value, respectively. As of March 31, 2017 and December 31, 2016, the Company had $46.5 million and $29.3 million of unfunded loan commitments related to loans, for investment, respectively.

Commitments to Originate Loans

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. Upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property.

Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. As of March 31, 2017 and December 31, 2016, total commitments to originate loans were $248.7 million and $200.0 million, respectively.

Note 19 – Income Taxes

The Company is a REIT pursuant to IRC Section 856. Our qualification as a REIT depends on our ability to meet various requirements imposed by the Internal Revenue Code, which relate to our organizational structure, diversity of stock ownership and certain requirements with regard to the nature of our assets and the sources of our income. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four taxable years. As of March 31, 2017 and December 31, 2016, we are in compliance with all REIT requirements.

Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRS’ for the three months ended March 31, 2017 and 2016.

During the three months ended March 31, 2017 and 2016, we recorded an income tax provision of $1.0 million and $1.2 million, respectively, primarily related to activities of our taxable REIT subsidiaries and various state and local taxes. The decrease in the Company’s effective tax rate is related to an anticipated decline in the proportion of taxable income

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earned by our taxable REIT subsidiaries.  There were no material changes to uncertain tax positions or valuation allowances against deferred tax assets during the quarter.

Note 20 – Other Asset and Other Liabilities

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

(In Thousands)	March 31, 2017		December 31, 2016
Other assets:
Due from servicers		29,490		27,029
Intangible assets		3,543		3,636
Accrued interest		5,715		5,606
Real estate acquired in settlement of loans		4,810		3,933
Deferred financing costs		3,421		3,376
Fixed assets		1,456		1,572
Prepaid taxes		1,467		1,456
Deferred tax asset		1,371		1,371
Prepaid technology expense		743		918
Prepaid insurance expense		642		899
Other		8,280		4,481
Total other assets	$	60,938	$	54,277
Accounts payable and other accrued liabilities:
Accrued salaries, wages and commissions	$	11,574	$	17,450
Servicing principal and interest payable		10,381		10,664
Legal settlement payable		10,000		—
Repair and denial reserve		6,550		6,813
Liability under subservicing agreements		2,188		6,757
Unapplied cash		3,960		6,278
Accrued interest payable		4,376		4,680
Payable to related parties		2,407		3,762
Accrued professional fees		2,247		2,880
Loan indemnification reserve		2,658		2,780
Accrued tax liability		3,015		1,996
Liability under participation agreements		1,282		1,735
Deferred tax liability		632		632
Accounts payable on liability under participation agreements		241		982
Cash held as collateral		80		80
Other		1,539		2,718
Total accounts payable and other accrued liabilities	$	63,130	$	70,207

Real Estate Acquired in Settlement of Loans

The Company acquires real estate through the foreclosure of its loans and the occasional purchase of real estate. The Company’s real estate properties are held in the Company’s consolidated Taxable REIT Subsidiaries (“TRS”), SAMC REO 2013-01, LLC, and ReadyCap Lending, LLC, other asset specific TRSs, as well as the Company’s securitization transactions. The following tables summarize the carrying amount of the Company’s real estate holdings as of the consolidated balance sheet dates:

(In Thousands)	March 31, 2017		December 31, 2016
North Carolina		1,850		1,850
Florida		1,335		1,320
Illinois		1,261		19
Texas		108		108
Other		256		636
Total	$	4,810	$	3,933

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Loan indemnification reserve

A liability has been established for potential losses related to representations and warranties made by GMFS for loans sold with a corresponding provision recorded for loan indemnification losses. The liability is included in accounts payable and other accrued liabilities in the Company's consolidated balance sheets and the provision for loan indemnification losses is included in other expense in the Company's consolidated statements of income. In assessing the adequacy of the liability, management evaluates various factors including historical repurchases and indemnifications, historical loss experience, known delinquent and other problem loans, outstanding repurchase demand, historical rescission rates and economic trends and conditions in the industry. Actual losses incurred are reflected as a reduction of the reserve liability. At March 31, 2017 and December 31, 2016, the loan indemnification reserve was $2.7 million and $2.8 million, respectively.

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At March 31, 2017 and December 31, 2016, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

Note 21 – Other Income and Operating Expenses

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

	For the Three Months Ended March 31,
(In Thousands)	2017		2016
Other income
Origination income		2,554		420
Release of repair and denial reserve		263		1,462
Other		(115)		426
Total other income	$	2,702	$	2,308
Other operating expenses
Origination costs		7,935		943
Technology expense		911		660
Charge off of real estate acquired in settlement of loans		103		567
Rent expense		559		338
Recruiting, training and travel expenses		467		309
Acquisition costs		269		341
Depreciation		136		—
Marketing expense		379		130
Insurance expense		238		150
Other		1,511		425
Total other operating expenses	$	12,508	$	3,863

Note 22 – Use of Special Purpose Entities

Special purpose entities, or “SPEs”, are entities designed to fulfill a specific limited need of the entity that organizes it. SPEs are often used to facilitate transactions that involve securitizing financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on more favorable terms than available on such assets on an un-securitized basis. Securitization involves transferring assets to an SPE 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 or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

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Securitization transactions

Since 2011, the Company has engaged in eight securitization transactions. Under ASC 810, Consolidation, the Operating Partnership is required to consolidate, as a VIE, the SPE/trust that was created to facilitate the transactions and to which the underlying loans in connection with the securitization were transferred. See Note 3 for a discussion of our accounting policies applied to the consolidation of the VIE and transfer of the financial assets in connection with the securitization.

The loans in the securitization trust are comprised of performing and non-performing SBC loans.

On a quarterly basis, the Company completes an analysis to determine whether the VIE should be consolidated. As part of this analysis, the Company’s involvement in the creation of the VIE, including the design and purpose of the VIE and whether such involvement reflects a controlling financial interest that results in the Company being deemed the primary beneficiary of the VIE is considered. In determining whether the Company would be considered the primary beneficiary, the following factors are considered: (i) whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and (ii) whether the Company has the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE. Based on the Company’s evaluation of these factors, including the Company’s involvement in the design of the VIE, it was determined that the Company is required to consolidate the VIE’s created to facilitate the securitization transaction.

For financial statement reporting purposes, since the underlying trust is consolidated, the securitization is effectively viewed as a financing of the loans that were securitized to enable the senior security to be created and sold to a third-party investor. As such, the senior security is presented on the consolidated balance sheets as securitized debt obligations of consolidated VIEs. The third-party beneficial interest holders in the VIE have no recourse against the Company, except that the Company has an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE. As previously stated, the Company is not obligated to provide, nor has the Company provided, any financial support to these consolidated securitization vehicles.

As of March 31, 2017, the carrying value of the Company’s securitized assets was $621.4 million and $3.9 million, and is presented on the consolidated balance sheet as loans, held-for-investment and real estate acquired in settlement of loans, respectively. As of December 31, 2016, the carrying value of the Company’s securitized assets was $655.6 million and $4.1 million, and is presented on the consolidated balance sheet as loans, held-for-investment and real estate acquired in settlement of loans, respectively.

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

The activities of the trust are substantially set forth in the securitization transaction documents, primarily the loan trust agreement, the trust agreement, the indenture and the securitization servicing agreement (collectively, the “Securitization Agreements”). Neither the trust nor any other entity may sell or replace any assets of the trust except in connection with: (i) certain loan defects or breaches of certain representations and warranties which have a material adverse effect on the value of the related assets; (ii) loan defaults; (iii) certain trust events of default or (iv) an optional termination of the trust, each as specifically permitted under the Securitization Agreements.

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Securitized debt

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

	March 31, 2017						December 31, 2016
	Current				Weighted		Current				Weighted
	Principal		Carrying		Average		Principal		Carrying		Average
(In Thousands)	Balance		value		Interest Rate		Balance		value		Interest Rate
Waterfall Victoria Mortgage Trust 2011-SBC2	$	20,177	$	20,177	5.3	%	$	24,472	$	24,472	5.2	%
Sutherland Commercial Mortgage Loans 2015-SBC4		24,431		23,591	4.0			39,464		38,402	3.9
ReadyCap Commercial Mortgage Trust 2014-1		70,511		70,258	3.4			84,320		83,885	3.4
ReadyCap Commercial Mortgage Trust 2015-2		165,522		160,221	4.1			166,232		160,699	4.0
ReadyCap Commercial Mortgage Trust 2016-3		117,131		113,568	3.5			133,774		129,914	3.5
ReadyCap Lending Small Business Trust 2015-1		46,694		46,240	2.3			56,055		55,570	2.0
Total	$	444,466	$	434,055	3.7	%	$	504,317	$	492,942	3.6	%

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

VIE impact on consolidated financial statements

The following table reflects the assets and liabilities recorded on the consolidated balance sheets:

(In Thousands)	March 31, 2017		December 31, 2016
Assets:
Cash and cash equivalents	$	4	$	131
Restricted cash		598		808
Loans, held-for-investment (net of allowances for loan losses of $2,075 at March 31, 2017 and $3,409 at December 31, 2016)		621,423		655,559
Real estate acquired in settlement of loans		3,920		4,103
Accrued interest		1,987		2,835
Due from servicers		3,833		27,660
Total assets		631,765		691,096
Liabilities:
Securitized debt obligations of consolidated VIEs		434,055		492,942
Total liabilities		434,055		492,942
Equity	$	197,710	$	198,154

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The following table reflects the income and expense amounts recorded on our consolidated statements of income related to our consolidated VIEs for the periods the Company operated under operating company accounting.

	Three Months Ended March 31,
(In Thousands)	2017		2016
Interest income
Loans, held-for-investment	$	13,381	$	15,296
Total interest income		13,381		15,296
Interest expense
Securitized debt obligations		(5,122)		(4,541)
Total interest expense		(5,122)		(4,541)
Net interest income before provision for loan losses		8,259		10,755
Provision for loan losses		(1,013)		(996)
Net interest income after provision for loan losses		7,246		9,759
Other income (expense)
Other income		2		22
Loan servicing expense		(31)		(798)
Professional fees		(7)		—
Operating expenses		(754)		(405)
Total other income (expense)		(790)		(1,181)
Realized gain (loss)
Loans, held-for-investment		6		148
Real estate acquired in settlement of loans		(51)		(86)
Securitized debt obligations		(93)		(63)
Total realized gain (loss)		(138)		(1)
Net Income	$	6,318	$	8,577

Note 23 – Stockholders’ Equity

The Company’s authorized capital stock consists of 500,000,000 shares of common stock, $0.0001 par value per share and 125 shares of preferred stock, $1,000.00 par value. As of March 31, 2017 and December 31, 2016, 30,549,084 and 30,549,084 shares of common stock were issued and outstanding, respectively.

Common stock dividends

The following table presents cash dividends declared by our board of directors on our common stock from January 1, 2016 through March 31, 2017:

			Dividend per
Declaration Date	Record Date	Payment Date	Share
May 20, 2016	June 3, 2016	June 17, 2016	$	0.45	(1)
August 23, 2016	September 2, 2016	September 16, 2016	$	0.45	(1)
October 11, 2016	October 14, 2016	October 25, 2016	$	0.36	(1)
December 21, 2016	December 30, 2016	January 27, 2017	$	0.35
March 14, 2017	March 31, 2017	April 13, 2017	$	0.37
(1) Retrospectively adjusted for the equivalent number of shares after reverse acquisition

Incentive fee stock issuance

On January 8, 2016, the Company issued 27,199 shares at $17.74 per share to the Manager for the incentive distribution fee earned for the second and third quarters of 2015.  As discussed above, the Manager is entitled to an incentive distribution fee as defined in the Management Agreement. 

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Stock incentive plan

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

During the first quarter of 2017, the Company issued Restricted Stock Units (“RSUs”) to its independent directors as compensation for their service on the board of directors. RSUs are awarded at no cost to the recipient upon their grant.  Each of our four independent directors received a one-time grant of 5,000 RSUs vesting immediately on a one-for-one basis for 5,000 shares of our common stock as compensation for service to date. Each independent director also received an annual grant of 5,000 RSUs that vested or will vest on a one-for-one basis for shares of our common stock in equal quarterly installments over a one year period ending December 31, 2017. The shares of stock associated with RSUs are not issued and are unvested until the directors, officers or employees meet certain vesting conditions and earn the right to those shares. Dividend equivalent rights will be paid on unvested RSUs at the same rate and at the same time as dividends on the Company’s common stock. The Company’s current policy for issuing shares upon settlement of stock-based incentive awards is to issue new shares.

The fair value of the RSUs granted, which is determined based upon the stock price on the grant date, is recorded as compensation expense on a straight-line basis over the vesting period for the award, with an offsetting increase in stockholders’ equity.

The following table summarizes the Company’s RSU activity for the three months ended March 31, 2017:

	RSUs
(In Thousands, except share data)	Number of shares		Weighted-average grant date fair value			Weighted-average grant date fair value (per share)
Outstanding, January 1		—	$	—	$	—
Granted		40,000		580		14.50
Vested		(25,000)		(363)		14.50
Forfeited		—		—		—
Canceled		—		—		—
Outstanding, March 31, 2017		15,000	$	218	$	14.50

During the three months ended March 31, 2017, the Company recognized $0.4 million of noncash compensation expense related to its stock-based incentive plan in its consolidated statements of income.

At March 31, 2017, approximately $0.2 million of noncash compensation expense related to unvested awards had not yet been charged to net income. These costs are expected to be amortized into compensation expense ratably over the course of the remainder of 2017.

No awards were issued in connection with our private offering of shares of common stock as of December 31, 2016.

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Note 24 – Earnings per Common Share

The following table provides a reconciliation of both income from continuing operations and loss from discontinued operations, and the number of common shares used in the computation of basic income per share. This reconciliation has been retrospectively adjusted for the equivalent number of shares after the reverse acquisition.

	Three Months Ended March 31,
(In Thousands, except for share and per share amounts)	2017		2016
Basic Earnings
Continuing Operations
Income from continuing operations	$	9,557	$	9,464
Less: Income attributable to non-controlling interest		701		737
Less: Income attributable to participating shares (RSUs)		3		-
Basic - Income from continuing operations	$	8,853	$	8,727
Discontinued Operations
Loss from discontinued operations		-		(351)
Basic — Net income attributable to SLD common stockholders after allocation to participating shares (RSUs)	$	8,853	$	8,376
Diluted Earnings
Continuing Operations
Basic — Income from continuing operations	$	9,557	$	9,464
Less: Income attributable to non-controlling interest		701		737
Less: Income attributable to participating shares (RSUs)		3		-
Diluted — Income from continuing operations	$	8,853	$	8,727
Discontinued Operations
Basic — Loss from discontinued operations		-		(351)
Diluted  — Net income attributable to SLD common stockholders after allocation to participating shares (RSUs)	$	8,853	$	8,376
Number of Shares
Basic — Average shares outstanding		30,549,806		25,764,953	(1)
Effect of dilutive securities — Unvested participating shares		-		-
Diluted — Average shares outstanding		30,549,806		25,764,953
Earnings Per Share Attributable to SLD Common Stockholders:
Basic
Income from continuing operations	$	0.29	$	0.34
Loss from discontinued operations		-		(0.01)
Diluted
Income from continuing operations	$	0.29	$	0.34
Loss from discontinued operations		-		(0.01)
(1) Retroactively adjusted for the equivalent number of shares after the reverse acquisition using an exchange rate of 0.8356.

Since our capital structure only includes common shares and the unvested shares and does not include any other potential shares, basic and diluted EPS under the two-class method is the same. As of March 31, 2017, participating RSU shares of 15,000, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

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Certain investors own OP units in our operating partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the operating partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: one share of the Company's common stock, or cash equal to the fair value of a share of the Company's common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interests in the Operating Partnership is reduced and the Company's equity is increased. At March 31, 2017 and December 31, 2016, the non-controlling interest OP unit holders owned 2,349,561, OP units, respectively, or 7.1% of the OP units issued by our operating partnership.

Note 25 – Segment Reporting

The Company operates in four reportable segments: i) Loan Acquisitions, ii) SBC Conventional Originations, iii) SBA Originations, Acquisitions and Servicing, and iv) Residential Mortgage Banking.

Through the Loan Acquisitions segment, the Company acquires performing and non-performing SBC loans and intends to continue to acquire these loans as part of the Company’s business strategy.

Through the SBC Conventional Originations segment, the Company originates SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels. Additionally, as part of this segment, we originate and service multi-family loan products under the Freddie Mac program.

Through the SBA Originations, Acquisitions, and Servicing segment, the Company acquires, originates and services owner-occupied loans guaranteed by the SBA under the SBA Section 7(a) Program.

Through the Residential Mortgage Banking segment, the Company originates residential mortgage loans eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, USDA and VA through retail, correspondent and broker channels.

In accordance with ASC 280, Segment Reporting, the Company has not included discontinued operations in the segment reporting. The Company uses segment net income or loss from continuing operations as the measure of profitability of its reportable segments.

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Reportable segments for the three months ended March 31, 2017 are summarized in the below table.

			SBC		SBA Originations,		Residential
	Loan		Conventional		Acquisitions,		Mortgage
(In Thousands)	Acquisitions		Originations		and Servicing		Banking		Consolidated
Interest income
Loans, held-for-investment	$	18,567	$	1,191	$	10,143	$	200	$	30,101
Loans, held at fair value		264		1,362		—		—		1,626
Loans, held for sale, at fair value		421		183		—		830		1,434
Mortgage backed securities, at fair value		723		—		—		—		723
Total interest income	$	19,975		2,736	$	10,143	$	1,030	$	33,884
Interest expense
Securitized debt obligations of consolidated VIEs		(4,824)		—		(298)		—		(5,122)
Borrowings under repurchase agreements		(3,016)		(1,205)		—		—		(4,221)
Guaranteed loan financing		—		—		(3,264)		—		(3,264)
Borrowings under credit facilities		(1,676)		(189)		(425)		(686)		(2,976)
Senior secured note		—		(790)		—		—		(790)
Promissory note payable		(68)		—		—		—		(68)
Total interest expense	$	(9,584)	$	(2,184)	$	(3,987)	$	(686)	$	(16,441)
Net interest income before provision for loan losses	$	10,391	$	552	$	6,156	$	344	$	17,443
Provision for loan losses		(622)		(96)		(514)		—		(1,232)
Net interest income after provision for loan losses	$	9,769	$	456	$	5,642	$	344	$	16,211
Other income (expense)
Other income	$	134	$	554	$	133	$	1,881	$	2,702
Servicing income		6		(503)		797		4,142		4,442
Employee compensation and benefits		(621)		(2,026)		(2,199)		(8,618)		(13,464)
Allocated employee compensation and benefits from related party		(584)		(142)		(162)		(124)		(1,012)
Professional fees		(1,044)		(328)		(487)		(300)		(2,159)
Management fees – related party		(1,140)		(277)		(317)		(243)		(1,977)
Loan servicing expense		(900)		(247)		1,108		(1,474)		(1,513)
Other operating expenses		(1,593)		(1,804)		(885)		(8,226)		(12,508)
Total other income (expense)	$	(5,742)	$	(4,773)	$	(2,012)	$	(12,962)	$	(25,489)
Net realized gain on financial instruments		592		1,320		1,054		17,295		20,261
Net unrealized gain (loss) on financial instruments		605		1,018		211		(2,226)		(392)
Net income before income tax provisions	$	5,224	$	(1,979)	$	4,895	$	2,451	$	10,591
Provision for income taxes		103		260		(907)		(490)		(1,034)
Net income	$	5,327	$	(1,719)	$	3,988	$	1,961	$	9,557
Total Assets	$	1,459,837	$	213,937	$	543,666	$	310,082	$	2,527,522

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Reportable segments for the three months ended March 31, 2016 are summarized in the below table.

			SBC		SBA Originations,		Residential
	Loan		Conventional		Acquisitions,		Mortgage
(In Thousands)	Acquisitions		Originations		and Servicing		Banking		Consolidated
Interest income
Loans, held-for-investment	$	17,863	$	622	$	13,847	$	—	$	32,332
Loans, held at fair value		585		2,777		—		—		3,362
Loans, held for sale, at fair value		—		—		—		—		—
Mortgage backed securities, at fair value		2,173		—		—		—		2,173
Total interest income	$	20,621	$	3,399	$	13,847	$	—	$	37,867
Interest expense
Securitized debt obligations of consolidated VIEs		(4,117)		—		(424)		—		(4,541)
Borrowings under repurchase agreements		(2,269)		(1,590)		—		—		(3,859)
Guaranteed loan financing		—		—		(3,949)		—		(3,949)
Borrowings under credit facilities		(1,472)		—		(480)		—		(1,952)
Total interest expense	$	(7,858)	$	(1,590)	$	(4,853)	$	—	$	(14,301)
Net interest income before provision for loan losses	$	12,763	$	1,809	$	8,994	$	—	$	23,566
Provision for loan losses		(2,177)		—		(7)		—		(2,184)
Net interest income after provision for loan losses	$	10,586	$	1,809	$	8,987	$	—	$	21,382
Other income (expense)
Other income	$	587	$	316	$	1,405	$	—	$	2,308
Servicing income		15		120		1,278		—		1,413
Employee compensation and benefits		—		(2,284)		(2,786)		—		(5,070)
Allocated employee compensation and benefits from related party		(503)		(220)		(177)		—		(900)
Professional fees		(723)		(205)		(848)		—		(1,776)
Management fees – related party		(1,027)		(450)		(361)		—		(1,838)
Incentive fees – related party		—		—		—		—		—
Loan servicing (expense) income		(1,052)		(125)		301		—		(876)
Other operating expenses		(1,262)		(1,759)		(842)		—		(3,863)
Total other income (expense)	$	(3,965)	$	(4,607)	$	(2,030)	$	—	$	(10,602)
Net realized (loss) gain on financial instruments		(2,271)		1,457		1,005		—		191
Net unrealized gain (loss) on financial instruments		1,723		(2,059)		—		—		(336)
Net income before income tax provisions	$	6,073	$	(3,400)	$	7,962	$	—	$	10,635
Provision for income taxes		—		1,735		(2,906)		—		(1,171)
Net income from continuing operations	$	6,073	$	(1,665)	$	5,056	$	—	$	9,464
Total Assets	$	1,258,104	$	245,360	$	707,782	$	—	$	2,211,246

Note 26 – Discontinued Operations

In the fourth quarter of 2015, the Company commenced marketing the potential sale of Silverthread. Silverthread engages in real estate brokerage and advisory services. In the fourth quarter of 2015, the Company determined Silverthread should be classified as held-for-sale due to management’s intent to sell the segment, the availability and active marketing of the segment for immediate sale and the high probability of a successful sale. The Company concluded that it would not receive continuing cash flows from Silverthread and there would be no continuing involvement by the Company. Additionally, the sale of Silverthread represents a complete exit from the real estate brokerage business. The Company has concluded that the exit from the real estate brokerage business results in a strategic shift in the operations of the Company. Therefore, the Company has included Silverthread in discontinued operations.

The sale of Silverthread closed in May of 2016, with an effective economic date of March 1, 2016. We negotiated an agreement with the buyer to receive $4.0 million, $1.7 million of which was received in early March of 2017.  The

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remaining balance is expected at the end of May 2017. The net estimated receivable of $2.3 million is included in Receivable from Third Parties on the Consolidated Balance Sheet as March 31, 2017.  The operating results during the three months ended March 31, 2017 and 2016 did not have a material impact on our consolidated financial statements.

As of March 31, 2017 and December 31, 2016, there were no assets or liabilities of the discontinued segment.

The primary components of discontinued operations are detailed in the table below:

	Three Months Ended March 31,
(In Thousands)	2017		2016
Other income (expense)	$		$
Commission income		—		2,984
Property management income		—		263
Other		—		16
Total other income	$	—	$	3,263
Employee compensation and benefits		—		(1,071)
Professional fees		—		(138)
Operating expenses
Commission expense		—		(1,844)
Technology expense		—		(171)
Rent expense		—		(268)
Tax expense		—		(3)
Recruiting, training, and travel expenses		—		(46)
Marketing expense		—		(29)
Other		—		(536)
Total other operating expenses	$	—	$	(2,897)
Gain on sale		—		267
Loss before income tax benefit		—		(576)
Income tax benefit		—		225
Loss on discontinued operations presented on the statements of income	$	—	$	(351)

Note 27 – Subsequent Events

As indicated in “Note 18 – Commitments, Contingencies, and Indemnifications,” on April 25, 2017, the Company and GMFS entered into a definitive agreement to settle all claims with the counterparty and provide for mutual releases. Pursuant to the settlement agreement, the Company has agreed to pay a total of $6,000,000 in cash and to issue 275,862 of shares of the Company’s common stock to the counterparty. Since the resolution of the claims and related settlement occurred subsequent to the balance sheet date, but before the issuance of the financial statements, the effects have been reflected and recognized in the consolidated financial statements as of March 31, 2017

Item 1A. Forward-Looking Statements

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this quarterly report on Form 10-Q. The Company is not obligated, and does not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A, "Risk Factors," of the Company's annual report on Form 10-K.

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

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

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Overview

We are a real estate finance company that acquires, originates, manages, services and finances primarily small balance commercial (“SBC”) loans. SBC loans range in original principal amount of between $500,000 and $10 million and are used by small businesses to purchase real estate used in their operations or by investors seeking to acquire small multi-family, office, retail, mixed use or warehouse properties. Our acquisition and origination platforms consist of the following four operating segments:

· Loan Acquisitions.  We acquire performing and non-performing SBC loans and intend to continue to acquire these loans as part of our business strategy. We seek to maximize the value of the SBC loans acquired by us through proprietary loan modification programs.  We typically acquire non-performing loans at a discount to their unpaid principal balance (“UPB”) when we believe that resolution of the loans will provide attractive risk-adjusted returns.

· SBC Conventional Originations. We originate SBC loans secured by stabilized or transitional investor properties using multiple loan origination channels through our wholly-owned subsidiary, ReadyCap Commercial.  Additionally, as part of this segment, we originate and service multi-family loan products under the newly launched small balance loan program of the Federal Home Loan Mortgage Corporation (“Freddie Mac” and the “Freddie Mac program”).

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

· Residential Mortgage Banking. In connection with our merger with ZAIS Financial Corp. ("ZAIS Financial") on October 31, 2016, as described in greater detail below, 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.

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

We are organized and conduct our operations to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the “Code”). So long as we qualify as a REIT, we are generally not subject to U.S. federal income tax on our net taxable income to the extent that we annually distribute all of our net taxable income to stockholders. We are organized in a traditional umbrella partnership REIT (“UpREIT”) format pursuant to which we serve as the general partner of, and conduct substantially all of our business through Sutherland Partners, LP, or our operating partnership, which serves as our operating partnership subsidiary. We also intend to operate our business in a manner that will permit us to be excluded from registration as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

Factors Impacting Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on, among other things, the level of the interest income from our assets, the market value of our assets and the supply of, and demand for, SBC loans, MBS and other assets we may acquire in the future and the financing and other costs associated with our business. Our net investment income, which includes the amortization of purchase premiums and accretion of purchase

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discounts, varies primarily as a result of changes in market interest rates, the rate at which our distressed assets are liquidated and the prepayment speed of our performing assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by conditions in the financial markets, credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose SBC loans are held directly by us or are included in our MBS. Our operating results will also be impacted by our available borrowing capacity.

Changes in Market Interest Rates

We own and expect to acquire or originate floating rate mortgages, or FRMs, and adjustable rate mortgage loans (“ARMs”), with maturities ranging from five to 30 years. Our loans typically have amortization periods of 15 to 30 years or balloon payments due in five to ten years. ARM loans generally have a fixed interest rate for a period of five, seven or ten years and then an adjustable interest rate equal to the sum of an index rate, such as LIBOR, plus a margin, while FRM loans bear interest that is fixed for the term of the loan. As of March 31, 2017, approximately 55% of the loans of our portfolio were ARMs, and 45% were FRMs, based on UPB. The weighted average margin, above the floating rate, on ARMs was approximately 2.8% and the weighted average coupon on FRMs was approximately 5.9% as of March 31, 2017. We utilize derivative financial and hedging instruments in an effort to hedge the interest rate risk associated with our ARMs.

With respect to our business operations, increases in interest rates, in general, may over time cause:

· the interest expense associated with our variable-rate borrowings to increase;

· the value of fixed-rate SBC loans, MBS and other real estate-related assets to decline;

· coupons on variable-rate SBC loans and MBS to reset to higher interest rates; and

· prepayments on SBC loans and MBS to slow.

Conversely, decreases in interest rates, in general, may over time cause:

· the interest expense associated with variable-rate borrowings to decrease;

· the value of fixed-rate SBC loans, MBS and other real estate-related assets to increase;

· coupons on variable-rate SBC loans and MBS to reset to lower interest rates; and

· prepayments on SBC loans and MBS to increase.

Additionally, non-performing SBC loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically disposing of them. Because non-performing SBC loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for SBC financing.

Changes in Fair Value of Our Assets

Our originated loans are carried at fair value and future mortgage related assets may also be carried at fair value. Accordingly, changes in the fair value of our assets may impact the results of our operations for the period in which such change in value occurs. The expectation of changes in real estate prices is a major determinant of the value of SBC loans and ABS. This factor is beyond our control.

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Prepayment Speeds

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

Spreads on ABS

Since the financial crisis that began in 2007, the spread between swap rates and ABS has been volatile. Spreads on these assets initially moved wider due to the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. The spread between the yield on our assets and our funding costs is an important factor in the performance of this aspect of our business. Wider spreads imply greater income on new asset purchases but may have a negative impact on our stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply lower income on new asset purchases but may have a positive impact on our stated book value. Tighter spreads generally have a positive impact on asset prices. In this case, we may be able to reduce the amount of collateral required to secure borrowings.

SBC Loan and ABS Extension Risk

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

Credit Risk

We are subject to credit risk in connection with our investments in SBC loans and ABS and other target assets we may acquire in the future. Increases in defaults and delinquencies will adversely impact our operating results, while declines in rates of default and delinquencies will improve our operating results from this aspect of our business. Default rates are influenced by a wide variety of factors, including, property performance, property management, supply and demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the United States economy and other factors beyond our control. All loans are subject to the possibility of default. We seek to mitigate this risk by seeking to acquire assets at appropriate prices given anticipated and unanticipated losses and by deploying a value-driven approach to underwriting and diligence, consistent with our historical investment strategy, with a focus on projected cash flows and potential risks to cash flow. We further mitigate our risk of potential losses while managing and servicing our loans by performing various workout and loss mitigation strategies with delinquent borrowers. Nevertheless, unanticipated credit losses could occur which could adversely impact operating results.

Size of Investment Portfolio

The size of our investment portfolio, as measured by the aggregate principal balance of our SBC loans and ABS and the other assets we own, is also a key revenue driver. Generally, as the size of our investment portfolio grows, the amount of interest income and realized gains we receive increases. A larger investment portfolio, however, drives increased expenses, as we may incur additional interest expense to finance the purchase of our assets.

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Market Conditions

With the onset of the global financial crisis, SBC origination volume fell approximately 42.5% from the 2006 peak through 2009 and the decline was accompanied by a reduction in the principal balance of outstanding SBC loans between 2008 and 2013. Based on publicly available data from Boxwood Means as of February 28, 2017, while commercial property prices have almost recovered to their 2007 peak, SBC property prices have increased only 21.5% from the 2012 trough. We believe this trend suggests continued tight credit in SBC lending and supports our belief that credit spreads in the SBC loan asset class should for the foreseeable future remain wider compared to large balance commercial mortgage loans. Since late 2008, we have seen substantial volumes of non-performing SBC loans available for purchase from U.S. banks at significant discounts to their UPBs. We believe that banks have been motivated to sell SBC loans in order to improve their regulatory capital ratios, reduce their troubled asset ratios, a key measure monitored by regulators, investors and other stakeholders in assessing bank safety and soundness, relieve the strain on their operations caused by managing distressed loan books and to demonstrate to regulators, investors and other stakeholders that they are addressing their distressed asset issues and the drag they place on operating performance through controlled sales of these assets over time. We believe that banks will continue to be motivated to divest their non-performing SBC loan assets to address these issues over the next several years. We believe that as the economic recovery continues the volume of short-term loan extensions and restructurings will be reduced, resulting in increased opportunities for us to originate first mortgage SBC loans in the market. We believe that the supply of new capital to meet this increasing demand will continue to be constrained by the historically low activity levels in the ABS market.

Critical Accounting Policies and Use of Estimates

See the Company's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the Company's critical accounting policies and use of estimates during the three months ended March 31, 2017.

First Quarter 2017 Highlights

Operating results: 

· Achieved Net Income of $9.6 million during the three months ended March 31, 2017.

· Earnings per share of $0.29 for the three months ended March 31, 2017.

· Core Earnings of $10.9 million, or $0.33 per share, during the three months ended March 31, 2017.

· Declared dividends of $0.37 per share, during the quarter ended March 31, 2017, representing a 10.2% dividend yield, based on the the closing share price on March 31, 2017

Loan originations and acquisitions:

· Loan originations totaled $637.9 million including $148.4 million in SBC loans, $28.5 million of SBA Section 7(a) Program loans and $461.0 million of residential loans.

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

o Acquisition pipeline of $128 million in SBC loans

o Origination pipeline of:

§ $192.3 million SBC loans

§ $80.0 million of SBA Section 7(a) Program loans

§ $248.7 of commitments to originate residential agency loans

      We have a large and active pipeline of potential acquisition and origination opportunities that are in various stages of our investment process. We refer to assets as being part of our acquisition pipeline or our origination pipeline if: (i) an asset or portfolio opportunity has been presented to us and we have determined, after a preliminary analysis, that the assets fit within our investment strategy and exhibit the appropriate risk/reward characteristics and (ii) in the case of acquired loans, we have executed a non-disclosure agreement (“NDA”) or an exclusivity agreement and commenced the due

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diligence process or we have executed more definitive documentation, such as a letter of intent (“LOI”), and in the case of originated loans, we have issued a LOI, and the borrower has paid a deposit.  We operate in a competitive market for investment opportunities and competition may limit our ability to originate or acquire the potential investments in the pipeline. The consummation of any of the potential loans in the pipeline depends upon, among other things, one or more of the following: available capital and liquidity, our Manager’s allocation policy, satisfactory completion of our due diligence investigation and investment process, approval of our Manager’s Investment Committee, market conditions, our agreement with the seller on the terms and structure of such potential loan, and the execution and delivery of satisfactory transaction documentation. Historically, we have acquired less than a majority of the assets in our Manager’s pipeline at any one time and there can be no assurance the assets currently in its pipeline will be acquired or originated by our Manager in the future.

Business Outlook

Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation.  In order to achieve this objective, we will continue to grow our investment portfolio by originating new SBC, SBA, and residential mortgage loans, acquiring SBC and SBA loans from third parties and growing our SBA and residential servicing portfolio.  We intend to finance these assets in a manner that is designed to deliver attractive returns across a variety of market conditions and economic cycles.  Our ability to execute our business strategy is dependent upon many factors, including our ability to access capital and financing on favorable terms.  While there can be no assurance we will continue to have access to the equity and debt markets, we will continue to pursue these and other available market opportunities as a means to increase our liquidity and capital base.  If we were to experience a prolonged downturn in the credit markets, it could cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly.

Our business is affected by the macroeconomic conditions in the United States, including economic growth, unemployment rates, the political climate, interest rate levels and expectations. The recent economic environment has resulted in continued improvement in commercial real estate values which has generally increased payoffs and reduced credit exposure in our loan portfolios.  Interest rates have risen recently as a result of improved labor markets, personal income growth and business investment.  We believe a modest increase in interest rates is unlikely to deter most borrowers who enjoy low loan coupons and still-rising property incomes.  Recent surveys indicate that banks remain optimistic about loan demand going forward even as they may be heading into a credit tightening cycle at this stage of market expansion.  We believe that this environment should support loan origination volumes in 2017.

ZAIS Financial Merger

On October 31, 2016, we became a publicly traded company through our merger with and into a subsidiary of ZAIS Financial, with ZAIS Financial surviving the merger and changing its name to Sutherland Asset Management Corporation.  We were designated as the accounting acquirer because of our larger pre-merger size relative to ZAIS Financial, the relative voting interests of our stockholders after consummation of the merger, and our senior management and board continuing on after the consummation of the merger.  Because we were designated as the accounting acquirer, our historical financial statements (and not those of ZAIS Financial) are the historical financial statements following the consummation of the merger and are included in this quarterly report on Form 10-Q. 

Investment Activity for the Three Months Ended March 31, 2017

Loan Acquisitions. During the three months ended March 31, 2017, we acquired loans $11.5 million of SBC loans and we advanced an additional $3.4 million on existing loans. During the three months ended March 31, 2017, we received proceeds from liquidations and principal payments on loans of $67.8 million.

SBC Loan Originations. ReadyCap Commercial originated $139.2 million in loans during the three months ended March 31, 2017 and we received proceeds from liquidations and principal payments on loans of $54.1 million.

SBA Loan Originations. ReadyCap Lending originated $25.9 million in loans during the three months ended March 31, 2017 and we received proceeds from liquidations and principal payments on loans of $52.4 million.

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Residential Mortgage Loan Originations.  GMFS originated $461.0 million in loans and we received proceeds from liquidations and principal payments on loans of $527.6 million during the three months ended March 31, 2017.

Investment Activity for the Three Months Ended March 31, 2016

Loan Acquisitions. During the three months ended March 31, 2016, we did not acquire any loans. During the period, we received proceeds from liquidations and principal payments on loans of $59.4 million.

SBC Loan Originations. ReadyCap Commercial originated $218.2 million in loans during the three months ended March 31, 2016 and we received proceeds from liquidations and principal payments on loans of $156.2 million.

SBA Loan Originations. ReadyCap Lending originated $7.8 million in loans during the three months ended March 31, 2016 and we received proceeds from liquidations and principal payments on loans of $55.3 million.

Results of Operations

The following table compares our summarized results of operations for the three months ended March 31, 2017 and 2016 (amounts in thousands):

	For the Three Months Ended
	March 31,				$ Change
	2017		2016		2017 vs. 2016
Interest income
Loan acquisitions	$	19,975	$	20,621	$	(646)
SBC conventional originations		2,736		3,399		(663)
SBA originations, acquisitions and servicing		10,143		13,847		(3,704)
Residential mortgage banking		1,030		-		1,030
Total interest income		33,884		37,867		(3,983)
Interest expense
Loan acquisitions		(9,584)		(7,858)		(1,726)
SBC conventional originations		(2,184)		(1,590)		(594)
SBA originations, acquisitions and servicing		(3,987)		(4,853)		866
Residential mortgage banking		(686)		-		(686)
Total interest expense		(16,441)		(14,301)		(2,140)
Net interest income before provision for loan losses		17,443		23,566		(6,123)
Provision for loan losses		(1,232)		(2,184)		952
Net interest income after provision for loan losses		16,211		21,382		(5,171)
Other income
Loan acquisitions		140		602		(462)
SBC conventional originations		51		436		(385)
SBA originations, acquisitions and servicing		930		2,683		(1,753)
Residential mortgage banking		6,023		-		6,023
Total other income		7,144		3,721		3,423
Other expense
Loan acquisitions		(5,882)		(4,567)		(1,315)
SBC conventional originations		(4,824)		(5,043)		219
SBA originations, acquisitions and servicing		(2,942)		(4,713)		1,771
Residential mortgage banking		(18,985)		-		(18,985)
Total other expense		(32,633)		(14,323)		(18,310)
Net realized gains (losses) on financial instruments
Loan acquisitions		592		(2,271)		2,863
SBC conventional originations		1,320		1,457		(137)
SBA originations, acquisitions and servicing		1,054		1,005		49
Residential mortgage banking		17,295		-		17,295
Total net realized gains (losses) on financial instruments		20,261		191		20,070
Net unrealized gains (losses) on financial instruments
Loan acquisitions		605		1,723		(1,118)
SBC conventional originations		1,018		(2,059)		3,077
SBA originations, acquisitions and servicing		211		-		211
Residential mortgage banking		(2,226)		-		(2,226)
Total net unrealized gains (losses) on financial instruments		(392)		(336)		(56)
Net income (loss) before income tax provisions
Loan acquisitions		5,224		6,073		(849)
SBC conventional originations		(1,979)		(3,400)		1,421
SBA originations, acquisitions and servicing		4,895		7,962		(3,067)
Residential mortgage banking		2,451		-		2,451

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Total net income before income tax provisions		10,591		10,635		(44)
Provisions for income taxes		(1,034)		(1,171)		137
Net income from continuing operations		9,557		9,464		93
Loss from discontinued operations, net of tax		-		(351)		351
Net income		9,557		9,113		444
Less: Net income attributable to non-controlling interests		671		738		(67)
Net income attributable to Sutherland Asset Management Corporation	$	8,886	$	8,375	$	511

The table above summarizes the results of operations for each of our operating segments for the periods presented.  For purposes of this disclosure, amounts relating to the loan acquisitions segment include the results of operations relating to SBC loans originated by the SBC conventional originations segment and subsequently acquired by the loan acquisitions segment through internally sourced real estate mortgage investment conduit (“REMIC”) securitizations, as shown below:

	For the Three Months Ended March 31,				$ Change
	2017		2016		2017 vs. 2016
Interest income	$	9,685	$	6,390	$	3,295
Interest expense		(4,594)		(3,047)		(1,547)
Net interest income before provision for loan losses		5,091		3,343		1,748
Provision for loan losses		-		-		-
Net interest income after provision for loan losses		5,091		3,343		1,748
Other income		-		-		-
Other expenses		(223)		(145)		(78)
Net realized gains (losses)		(1)		(108)		107
Net income	$	4,867	$	3,090	$	1,777

Results for the three months ended March 31, 2017 and March 31, 2016

Consolidated Results

Interest income. For the three months ended March 31, 2017,interest income was $33.9 million, compared to interest income of $37.9 million during the three months ended March 31, 2016. The decrease in interest income for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to MBS sales during 2016, resulting in a reduction in interest income by $1.4 million, as well as a reduction in interest income on loans held-for-investment of $2.2 million. These decreases were driven by the decrease in accretion of discount on the acquired loan portfolio, a decrease in the weighted average interest rate on the originated portfolio and principal pay-downs on existing loans.

Interest Expense. For the three months ended March 31, 2017, interest expense was $16.4 million, compared to interest expense of $14.3 million during the three months ended March 31, 2016. The increase in interest expense for the three months ended March 31, 2017 as compared to the three months ended December 31, 2016 was primarily due to higher advance rates on SBC loans due to the completion of the ReadyCap Mortgage Trust 2016-3 (“RCMT 2016-3”) securitization at the end of 2016. Additional financing costs related to the securitizations and an increase in the LIBOR curve, which drives borrowing costs related to borrowings under credit facilities and borrowings under repurchase agreements, also increased interest expense.

Provision for loan losses.  For the three months ended March 31, 2017, the provision for loan losses was $1.2 million, compared to $2.2 million during the three months ended March 31, 2016. The decrease in the provision for loan losses during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily driven by our decreasing credit deteriorated loan portfolio due to liquidations and our increased focus on loan originations, rather than secondary acquisitions.

Other income. For the three months ended March 31, 2017, other income was $7.1 million, as compared to other income of $3.7 million during the three months ended March 31, 2016. The increase is due to additional servicing income of $4.1 million generated by our newly acquired residential mortgage banking business.

Other expenses. For the three months ended March 31, 2017, other expenses were $32.6 million, as compared to other expenses of $14.3 million for the three months ended March 31, 2016. The increase in other expenses during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to an increase in employee compensation and benefits expense of $8.5 million, loan servicing expenses of $0.6 million, and origination

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expenses of $7.0 million, consisting primarily of correspondent fees and closing costs, relating to our newly acquired residential mortgage banking business.

Realized gains (losses) on financial instruments. For the three months ended March 31, 2017, realized gains were $20.3 million, compared to gains of $0.2 million for the three months ended March 31, 2016. The increase in realized gains during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to realized gains on loans, held for sale increasing by $13.5 million which was driven by our newly acquired residential mortgage banking business and income generated on servicing rights of $4.5 million.

Unrealized gains (losses) on financial instruments. For the three months ended March 31, 2017, unrealized losses were $0.4 million, as compared to unrealized losses of $0.3 million for the three months ended March 31, 2016.

Loan Acquisition Segment Results

Interest income.  For the three months ended March 31, 2017,interest income was $20.0 million, in our loan acquisitions segment, compared to interest income of $20.6 million during the three months ended March 31, 2016. The decrease in interest income during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to sales of MBS during the second half of 2016, resulting in a reduction in interest income by $1.4 million. This was partially offset by additional interest income of $0.8 million generated by our acquired loan portfolio which was larger during the three months ended March 31, 2017 compared with the same period in 2016.

Interest expense. For the three months ended March 31, 2017, interest expense in our loan acquisitions segment was $9.6 million, compared to interest expense of $7.9 million during the three months ended March 31, 2016. The increase in interest expense during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to higher advance rates on SBC loans due to the completion of the RCMT 2016-3 securitization completed during 2016, resulting in higher average balances for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. Additional financing costs related to the securitization and an increase in the LIBOR curve during late 2016, which drives borrowing costs related to borrowings under credit facilities and borrowings under repurchase agreements, also increased interest expense.

Other income. For the three months ended March 31, 2017, other income was $0.1 million in our loan acquisitions segment, as compared to other income of $0.6 million for the three months ended March 31, 2016.

Other expenses. For the three months ended March 31, 2017, other expenses were $5.9 million in our loan acquisitions segment, as compared to other expenses of $4.6 million for the three months ended March 31, 2016. The increase in other expenses in our loan acquisitions segment during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to an increase in employee compensation of $0.6 million, an increase in professional fees of $0.3 million and an increase in other operating expenses of $0.3 million.

Realized gains (losses) on financial instruments. Realized gains were $0.6 million in our loan acquisition segment for the three months ended March 31, 2017 compared to realized losses of $2.3 million for the three months ended March 31, 2016. Realized gains of $0.6 million for the three months ended March 31, 2017 were primary related to sales of loans, held-for-investment. Realized losses of $2.3 million for the three months ended March 31, 2016 were primarily driven by losses on sales of MBS of $3.1 million, offset by realized gains on loans-held-for investment of $0.7 million.

Unrealized gains (losses) on financial instruments. Unrealized gains were $0.6 million in our loan acquisitions segment for the three months ended March 31, 2017 compared to unrealized gains of $1.7 million for the three months ended March 31, 2016. The decrease in unrealized gains during the three months ended March 31, 2017 as compared to the three months March 31, 2016 was the result of lower unrealized gains on MBS of $2.0 million due to sales of MBS during 2016, reducing the size of the MBS portfolio. This was partially offset by $0.5 million of mark-to-market gains on loans, held for sale, at fair value for the three months ended March 31, 2017.

SBC Conventional Originations Segment Results

Interest income.  Interest income was $2.7 million in our SBC conventional originations segment during the three months ended March 31, 2017 as compared to interest income of $3.4 million for the three months ended March 31, 2016.

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The decrease in interest income during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to lower originations of SBC loans and lower average balances.

Interest Expense. Interest expense was $2.2 million in our SBC conventional originations segment during the three months ended March 31, 2017 as compared to interest expense of $1.6 million during the three months ended March 31, 2016. The decrease in interest expense during the three months ended March 31, 2017 as compared to the three months ended March 31, 2017 was driven by a decrease in borrowing activities under credit facilities due to the need to finance fewer loan originations during the three months ended March 31, 2017.

Other income. For the three months ended March 31, 2017, other income was $0.1 million, as compared to other income of $0.4 million for the three months ended March 31, 2016.

Other expenses. For the three months ended March 31, 2017, other expenses were $4.8 million in our SBC conventional originations segment, as compared to other expenses of $5.0 million for the three months ended March 31, 2016.

Realized gains (losses) on financial instruments.  Realized gains were $1.3 million in our SBC conventional originations segment for the three months ended March 31, 2017 compared to realized gains of $1.5 million for the three months ended March 31, 2016. Realized gains of $1.3 million for the three months ended March 31, 2017 were primarily driven by sales of loans, held-for-sale, resulting in gains of $0.9 million and income generated on mortgage servicing rights of $0.4 million. Realized gains of $1.5 million for the three months ended March 31, 2016 were primarily driven by sales of loans, held-for-sale resulting in realized gains of $2.0 million, partially offset by losses of $0.5 million on derivatives.

Unrealized gains (losses) on financial instruments.  Unrealized gains were $1.0 million in our SBC conventional originations segment for the three months ended March 31, 2017 compared to unrealized losses of $2.1 million for the three months ended March 31, 2016. The change was primarily due to the changes in fair value of loans, held at fair value resulting in $0.6 million of additional gains during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. Changes in the fair value of derivatives resulted in $2.1 million of fewer losses in the three months March 31, 2017 as compared to March 31, 2016.

SBA Originations, Acquisitions and Servicing Segment Results

Interest income.  Interest income was $10.1 million during the three months ended March 31, 2017 in our SBA originations, acquisitions, and servicing segment, as compared to interest income of $13.8 million during the three months ended March 31, 2016. The decrease in interest income during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to portfolio pay-downs of existing loans resulting in a reduction of interest income.

Interest Expense. For the three months ended March 31, 2017, interest expense was $4.0 million in our SBA originations, acquisitions, and servicing segment, compared to interest expense of $4.9 million during the three months ended March 31, 2016. The decrease in interest expense during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to a reduction in borrowings needed to finance assets, which resulted in a reduction in interest expense.

Other income. For the three months ended March 31, 2017, other income was $0.9 million in our SBA originations, acquisitions, and servicing segment, as compared to other income of $2.7 million for the three months ended March 31, 2016.The decrease in other income during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to the release of the repair and denial reserve of $1.3 million during the three months ended March 31, 2016. The release of reserve was driven by a decrease in defaults in the SBA portfolio and decrease in the severity of repair claims on our 7(a) loans by the SBA. The remaining decrease was the result of a decrease in servicing fee income due to a reduction in the asset base.

Other expenses. For the three months ended March 31, 2017, other expenses were $2.9 million in our SBA originations, acquisitions, and servicing segment, as compared to other expense of $4.7 million for the three months ended March 31, 2016. The decrease in other expenses during the three months ended March 31, 2017 as compared to the three months ended March 31, 2017 was primarily due to lower servicing expenses and a reduction in other operating expenses.

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Residential Mortgage Banking Segment Results

We acquired the GMFS business as part of the ZAIS Financial merger on October 31, 2016 and, therefore, the following results reflect only the three months ended March 31, 2017. See “Note 5 – Business Combinations” in Item 1. “Financial Statements” included in this quarterly report on Form 10-Q for the pro forma results of the combined company for the three months ended March 31, 2016.

Interest income. Interest income was $1.0 million in our residential mortgage banking segment during the three months ended March 31, 2017, which was earned on residential mortgage loans, held for sale.

Interest Expense. Interest expense was $0.7 million during the three months ended March 31, 2017, which reflects financing costs on borrowings under credit facilities used to originate new loans.

Other income.  Other income in our residential mortgage banking segment was $6.0 million for the three months ended March 31, 2017. Other income was comprised of servicing income of $4.1 million and origination fee income of $1.9 million.

Other expense. Other expense in our residential mortgage banking segment was $19.0 million for the three months ended March 31, 2017. Other expense was comprised of employee compensation and benefits expense of $8.6 million, loan servicing expenses of $1.5 million, and origination expenses of $7.0 million, consisting primarily of correspondent fees and closing costs.

Realized gains (losses) on financial instruments.  Realized gains in our residential mortgage banking segment were $17.3 million for the three months ended March 31, 2017, due to gains of $13.5 million generated on sales of residential mortgage loans, held-for-sale, as well as income generated on new mortgage servicing rights of $3.8 million.

Unrealized gains (losses) on financial instruments. Net unrealized losses were $2.2 million for the three months ended March 31, 2017, which were comprised primarily of $1.6 million in unrealized losses on derivative instruments and $0.6 million in unrealized losses on our residential mortgage servicing rights, carried at fair value due to changes in interest rates during the three months ended March 31, 2017.

Non-GAAP Financial Measures

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

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

i) any unrealized gains or losses on MBS

ii) any realized gains or losses on sales of MBS

iii) any unrealized gains or losses on MSRs

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

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The following table presents our summarized consolidated results of operations and reconciliation to Core Earnings for the three months ended March 31, 2017 and 2016:

(in millions)	Three Months Ended March 31, 2017		Three Months Ended March 31, 2016		Change 2017 vs 2016
Net Income	$	9.6	$	9.1	$	0.5
Reconciling items:
Unrealized (gain) loss on MBS		-		(2.0)		2.0
Realized (gain) loss on MBS		-		3.1		(3.1)
Unrealized (gain) loss on MSRs		1.1		-		1.1
Merger transaction costs		0.1		-		0.1
Restricted Stock Unit (RSU) grant to Independent Directors(1)		0.3		-		0.3
Loss on discontinued operations		-		0.6		(0.6)
Total reconciling items	$	1.5	$	1.7	$	(0.2)
Income tax adjustments		(0.2)		(0.3)		0.1
Core earnings	$	10.9	$	10.5	$	0.4
(1) Represents RSU grant for services rendered to date.

Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

Consolidated Net Income increased by $0.5 million, from $9.1 million during the three months ended March 31, 2016 to $9.6 million during the three months ended March 31, 2017. Core Earnings increased by $0.4 million, from $10.5 million during the three months ended March 31, 2016 to $10.9 million during the three months ended March 31, 2017.

The increase in Consolidated Net Income of $0.5 million was primarily due to $2.0 million of net income generated by our newly acquired residential mortgage banking business. During the three months ended March 31, 2017, the residential mortgage banking business contributed $0.3 million of net interest income to our Company. Also contributing to the net income generated by the residential mortgage banking business were realized gains on sales of originated loans, offset by loan servicing fee expenses and correspondent fee expenses. This increase in Consolidated Net Income was partially offset by a reduction in net interest income generated on our acquired loan portfolio as we have shifted our focus from acquired loans to loan originations during 2016.

The increase in Core Earnings of $0.4 million during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to the increase in Consolidated Net Income, as described above.

Incentive Distribution Payable to Our Manager

As disclosed in the Joint Proxy Statement Prospectus used in connection with the ZAIS Financial merger transaction, under the partnership agreement of our operating partnership, our Manager, the holder of the Class A special unit in our operating partnership, is entitled to receive an incentive distribution, distributed quarterly in arrears in an amount not less than zero equal to the difference between (i) the product of (A) 15% and (B) the difference between (x) core earnings (as described below) of our operating partnership, on a rolling four-quarter basis and before the incentive distribution for the current quarter, and (y) the product of (1) the weighted average of the issue price per share of common stock or operating partnership unit (“OP unit”) (without double counting) in all of our offerings multiplied by the weighted average number of shares of common stock outstanding (including any restricted shares of common stock and any other shares of common stock underlying awards granted under our 2012 equity incentive plan) and OP units (without double counting) in such quarter and (2) 8%, and (ii) the sum of any incentive distribution paid to our Manager with respect to the first three quarters of such previous four quarters; provided, however, that no incentive distribution is payable with respect to any calendar quarter unless cumulative core earnings is greater than zero for the most recently completed 12 calendar quarters, or the number of completed calendar quarters since the closing date of the ZAIS Financial merger, whichever is less. 

For purposes of calculating the incentive distribution prior to the completion of a 12-month period following the closing of the ZAIS Financial merger, core earnings will be calculated on an annualized basis. In addition, for purposes of calculating the incentive distribution, the shares of common stock and OP units issued as of the closing of the ZAIS Financial merger in connection with the merger agreement shall be deemed to be issued at the per share price equal to

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(i) the sum of (A) the weighted average of the issue price per share of Sutherland common stock or Sutherland OP units (without double counting) issued prior to the closing of the ZAIS Financial merger multiplied by the number of shares of Sutherland common stock outstanding and Sutherland OP units (without double counting) issued prior to the closing of the merger plus (B) the amount by which the net book value of our Company as of the closing of the merger (after giving effect to the closing of the merger agreement) exceeds the amount of the net book value of Sutherland immediately preceding the closing of the merger, divided by (ii) all of the shares of our common stock and OP units issued and outstanding as of the closing of the merger (including the date of the closing of the mergers).

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

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

Liquidity and Capital Resources

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

Our Manager’s extensive experience in loan acquisition, origination, servicing and securitization strategies has enabled us to complete 10 securitizations of SBC loan assets since January 2011 allowing us to match fund the SBC loans pledged as collateral to secure these securitizations on a long-term, non-recourse basis. As part of these transactions, we created eight separate entities and issued to third-party investors, tranches of investment-grade debt through newly-formed wholly-owned subsidiaries. Three of these securitizations, including Waterfall Victoria Mortgage Trust 2011-1 (“SBC-1”), Waterfall Victoria Mortgage Trust 2011-3 (“SBC-3”), and Sutherland Commercial Mortgage Trust 2015-4 (“SBC-4”) are trusts collateralized by non-performing and re-performing SBC loans and a fourth securitization (SBC-2) is a REMIC structure collateralized by performing SBC loans. We have completed three securitizations of newly originated loans, each a REMIC structure, including ReadyCap Commercial Mortgage Trust 2014-1 (“RCMT 2014-1”), ReadyCap Commercial Mortgage Trust 2015-2 (“RCMT 2015-2”), and ReadyCap Commercial Mortgage Trust 2016-3 (“RCMT 2016-3”), which are collateralized by newly originated SBC loans.  In addition we also completed the securitization of ReadyCap Lending Small Business Trust 2015-1 (“RCLSBL 2015-1”) collateralized by SBA Section 7(a) Program loans and the securitizations of Freddie Mac Small Balance Mortgage Trust 2016-SB11 (“FRESB 2016-SB11”) and Freddie Mac Small Balance Mortgage Trust 2016-SB18 (“FRESB 2016-SB18”), that are collateralized by multi-family Freddie Mac loans. The assets pledged as collateral for these securitization structures were contributed from our portfolio of assets. By contributing these SBC and SBA assets to the various securitization structures, these transactions created capacity for us to fund other investments.

The securitization structures issued investors tranches of notes of approximately $40.5 million, $97.6 million, $143.4 million, $181.7 million, $218.8 million, $162.1 million, $189.5 million, $125.4 million, $110.0 million, and

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$118.0 million for SBC-1, SBC-2, SBC-3, RCMT 2014-1, RCMT 2015-2, RCMT 2016-3, RCLSBL 2015-1, SBC-4, FRESB 2016-SB11, and FRESB 2016-SB18, respectively. We used the proceeds from the sale of the tranches issued to purchase SBC loans.  We are the primary beneficiary of SBC-1, SBC-2, SBC-3, RCMT 2014-1, RCMT 2015-2, RCMT 2016-3, RCLSBL 2015-1, and SBC-4, therefore they are consolidated in our financial statements.

Our strategy is to continue to finance our assets through the securitization market and to access other forms of borrowings.

Deutsche Bank Loan Repurchase Facility

Our subsidiaries, ReadyCap Commercial, Sutherland Asset I, and Sutherland Warehouse Trust II renewed their master repurchase agreement on February 14, 2017, pursuant to which ReadyCap Commercial, Sutherland Asset I, Sutherland Warehouse Trust II may be advanced an aggregate principal amount of up to $275 million on originated mortgage loans (the “DB Loan Repurchase Facility”). As of March 31, 2017, we had $90.4 million outstanding under the DB Loan Repurchase Facility. The DB Loan Repurchase Facility is used to finance SBC loans, and the interest rate is LIBOR plus a spread, which varies depending on the type and age of the loan. The DB Loan Repurchase Facility has been extended through February 2018 and our subsidiaries have an option to extend the DB Loan Repurchase Facility for an additional year, subject to certain conditions.  ReadyCap Commercial’s, Sutherland Asset I’s, and Sutherland Warehouse Trust II obligations are fully guaranteed by us.

The eligible assets for the DB Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties subject to certain eligibility criteria, such as property type, geographical location, LTV ratios, debt yield and debt service coverage ratios. The principal amount paid by the bank for each mortgage loan is based on a percentage of the lesser of the mortgaged property value or the principal balance of such mortgage loan. ReadyCap Commercial, Sutherland Asset I, and Sutherland Warehouse Trust II paid the bank an up-front fee and are also required to pay the bank availability fees, and a minimum utilization fee for the DB Loan Repurchase Facility, as well as certain other administrative costs and expenses. The DB Loan Repurchase Facility also includes financial maintenance covenants, which include (i) an adjusted tangible net worth that does not decline by more than 25% in a quarter, 35% in a year or 50% from the highest adjusted tangible net worth, (ii) a minimum liquidity amount of the greater of (a) $5 million and (b) 3% of the sum of any outstanding recourse indebtedness plus the aggregate repurchase price of the mortgage loans on the Repurchase Agreement, (iii) a debt-to-assets ratio no greater than 80% and (iv) a tangible net worth at least equal to the sum of (a) the product of 1/9 and the amount of all non-recourse indebtedness (excluding the aggregate repurchase price) and other securitization indebtedness and (b) the product of 1/3 and the sum of the aggregate repurchase price and all recourse indebtedness.

JPMorgan Loan Repurchase Facility

Our subsidiaries, ReadyCap Warehouse Financing and Sutherland Warehouse Trust entered into master repurchase agreement in December 2015, pursuant to which ReadyCap Warehouse Financing LLC and Sutherland Warehouse Trust, may sell, and later repurchase, mortgage loans in an aggregate principal amount of up to $100 million. As of March 31, 2017, we had $69.9 million outstanding under the JPM Loan Repurchase Facility. The JPM Loan Repurchase Facility is used to finance commercial transitional loans, conventional commercial loans and commercial mezzanine loans and securities and the interest rate is LIBOR plus a spread, which is determined by the lender on an asset-by-asset basis. The JPM Loan Repurchase Facility is committed for a period of two years, and ReadyCap Warehouse Financing’s and Sutherland Warehouse Trust’s obligations are fully guaranteed by us.

The eligible assets for the JPM Loan Repurchase Facility are loans secured by first and junior mortgage liens on commercial properties and subject to approval by JPM as the Buyer. The principal amount paid by the bank for each mortgage loan is based on the principal balance of such mortgage loan. ReadyCap Warehouse Financing and Sutherland Warehouse Trust paid the bank a structuring fee and are also required to pay the bank unused fees for the JPM Loan Repurchase Facility, as well as certain other administrative costs and expenses. The JPM Loan Repurchase Facility also includes financial maintenance covenants, which include (i) total stockholders’ equity must not be permitted to be less than the sum of (a) 60% of total stockholders equity as of the closing date of the facility plus (b) 50% of the net proceeds of any equity issuance after the closing date (ii) maximum leverage of 2:1, provided that as of the closing date of the facility the guarantor shall be required to maintain a leverage ratio of less than 2.5:1, of which 0.5 of the 2.5 comprising the indebtedness in the leverage ratio for such date shall be comprised of short-term US Treasury securities and

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(iii) liquidity equal to at least the lesser of (a) 4% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) $25,000,000.

Citibank Loan Repurchase Agreement

Our subsidiaries, Waterfall Commercial Depositor and Sutherland Asset I renewed a master repurchase agreement in June 2016 with Citibank, N.A. (the "Citi Loan Repurchase Facility" and, together with the DB Loan Repurchase Facility and the JPM Loan Repurchase Facility, the "Loan Repurchase Facilities"), pursuant to which Waterfall Commercial Depositor and Sutherland Asset I may sell, and later repurchase, a trust certificate, or the Trust Certificate, representing interests in mortgage loans in an aggregate principal amount of up to $200 million, $125 million of which is committed. As of March 31, 2017, we had $102.2 million outstanding under the Citi Loan Repurchase Facility. The Citi Loan Repurchase Facility is used to finance SBC loans, and the interest rate is LIBOR plus 3.00%. The Citi Loan Repurchase Facility is committed for a period of 364 days, and Waterfall Commercial Depositor and Sutherland Asset I’s obligations are fully guaranteed by us.

The eligible assets for the Citi Loan Repurchase Facility are loans secured by a first mortgage lien on commercial properties which, amongst other things, generally have an UPB less than $10 million. The principal amount paid by the bank for the Trust Certificate is based on a percentage of the lesser of the market value or the UPB of such mortgage loans backing the Trust Certificate. Waterfall Commercial Depositor and Sutherland Asset I  are also required to pay the bank a commitment fee for the Citi Loan Repurchase Facility, as well as certain other administrative costs and expenses. The Citi Loan Repurchase Facility also includes financial maintenance covenants, which include (i) our operating partnership’s net asset value not (A) declining more than 15% in any calendar month, (B) declining more than 25% in any calendar quarter, (C) declining more than 35% in any calendar year, or (D) declining more than 50% from our operating partnership’s highest net asset value set forth in any audited financial statement provided to the bank; (ii) our operating partnership maintaining liquidity in an amount equal to at least 1% of our outstanding indebtedness; and (iii) the ratio of our operating partnership’s total indebtedness (excluding non-recourse liabilities in connection with any securitization transaction) to our net asset value not exceeding 4:1 at any time.

Securities Repurchase Agreements

We have also entered into master repurchase agreements with four counterparties to fund our acquisitions of SBC ABS and short term investments, and as of March 31, 2017, $327.4 million of borrowings were outstanding with four counterparties. We have master repurchase agreements with two additional counterparties to fund our retained interests in consolidated VIEs.  As of March 31, 2017, $43.1 million of borrowings were outstanding with these counterparties.

General Statements Regarding Loan and Security Repurchase Facilities

At March 31, 2017, we had $442.9 million in fair value of Trust Certificates and loans pledged against our borrowings under the Loan Repurchase Facilities and $331.0 million in fair value of SBC ABS and short term investments pledged against our securities repurchase agreement borrowings.

Under the Loan Repurchase Facilities and securities repurchase agreements, we may be required to pledge additional assets to our counterparties (lenders) in the event that the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional assets or cash. Generally, the Loan Repurchase Facilities and securities repurchase agreements contain a LIBOR-based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. Further, at March 31, 2017, the average haircut provisions associated with our repurchase agreements was 31.4% for pledged Trust Certificates and loans and was 31.2% and 0.1% for pledged SBC ABS and short-term investments, respectively.

If the estimated fair value of the assets increases due to changes in market interest rates or market factors, lenders may release collateral back to us. Margin calls may result from a decline in the value of the investments securing the Loan Repurchase Facilities and securities repurchase agreements, prepayments on the loans securing such investments and from changes in the estimated fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of our Company and/or the performance of the assets in question. Historically, disruptions in the financial and credit markets have resulted in increased volatility in these levels, and this volatility could persist as market conditions continue to change. Should prepayment speeds on the mortgages

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underlying our investments or market interest rates suddenly increase, margin calls on the Loan Repurchase Facilities and securities repurchase agreements could result, causing an adverse change in our liquidity position. To date, we have satisfied all of our margin calls and have never sold assets in response to any margin call under these borrowings.

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

JPMorgan Credit Facility

We renewed our master loan and security agreement with JPMorgan in June 2016 providing for a credit facility of up to $250 million which we used to fund a portion of the final phase of the CIT loan acquisition and loan acquisitions of our subsidiary ReadyCap Lending, LLC in 2014. As of March 31, 2017, we had $135.9 million outstanding under this credit facility. The credit facility is structured as a secured loan facility in which ReadyCap Lending LLC and Sutherland 2016‑1 JPM Grantor Trust act as borrowers. Under this facility, ReadyCap and Sutherland 2016-1 JPM Grantor Trust pledge loans guaranteed by the SBA under the SBA Section 7(a) Loan Program, SBA 504 loans and other loans which were part of the CIT loan acquisition. We act as a guarantor under this facility. The agreement contains financial maintenance covenants, which include (i) Total Stockholders’ Equity must not be permitted to be less than the sum of (a) 60% of Total Stockholders Equity as of the closing date of the facility plus (b) 50% of the net proceeds of any equity issuance after the closing date (ii) maximum leverage of 2:1, provided that as of the closing date of the facility the guarantor shall be required to maintain a leverage ratio of less than 2.5:1, of which 0.5 of the 2.5 comprising the indebtedness in the leverage ratio for such date shall be comprised of short-term US Treasury securities and (iii) liquidity equal to at least the lesser of (a) 4% of the sum of (without duplication) (1) any outstanding indebtedness plus (2) amounts due under the repurchase agreement and (b) $25,000,000. The amended terms have an interest rate based on loan type ranging from 1 month LIBOR (reset daily), plus 3.25-3.5% per annum. The term of the facility is one year, with an option to extend for an additional year.

At March 31, 2017, we had a leverage ratio of 2.6x on a debt-to-equity basis, 2.0x excluding $319.4 million in outstanding repurchase agreements on U.S Treasury securities.

We maintain certain assets, which, from time to time, may include cash, unpledged SBC loans, SBC ABS and short term investments (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by our counterparties, or collectively, the “Cushion”, to meet routine margin calls and protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of our investments, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. At March 31, 2017, we were in compliance with all debt covenants.

At March 31, 2017, we had $1.8 million of restricted cash pledged against our derivative instruments and borrowings under repurchase agreements.

Other credit facilities

GMFS funds its origination platform through warehouse lines of credit with four counterparties with total borrowings outstanding of $96.8 million at March 31, 2017. GMFS has a $75 million committed warehouse line of credit agreement expiring on September 29, 2017, a $40 million committed warehouse line of credit expiring on August 12, 2017, a $65 million committed warehouse line of credit expiring on November 24, 2017, and a $25 million committed warehouse line of credit expiring on September 30, 2017. The lines are collateralized by the underlying mortgages and related documents and instruments and contain a LIBOR-based financing rate and term, haircut and collateral posting provisions which depend on the types of collateral and the counterparties involved. These agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with

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affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants as of and for the three months ended March 31, 2017.

ReadyCap Holdings’ 7.50% Senior Secured Notes due 2022

On February 13, 2017, ReadyCap Holdings, an indirect wholly-owned subsidiary of our Company, issued $75.0 million in aggregate principal amount of its 7.50% Senior Secured Notes due 2022 in a private placement.  The Notes are senior secured obligations of ReadyCap Holdings. Payments of the amounts due on the Notes are fully and unconditionally guaranteed by the Guarantors.

The Notes bear interest at 7.50% per annum payable semiannually on each February 15 and August 15, beginning on August 15, 2017. The Notes will mature on February 15, 2022, unless redeemed or repurchased prior to such date.  ReadyCap Holdings may redeem the Notes prior to November 15, 2021, at its option, in whole or in part at any time and from time to time, at a price equal to 100% of the outstanding principal amount thereof, plus the applicable “make-whole” premium as of, and unpaid interest, if any, accrued to, the redemption date.  On and after November 15, 2021, ReadyCap Holdings may redeem the Notes, at its option, in whole or in part at any time and from time to time, at a price equal to 100% of the outstanding principal amount thereof plus unpaid interest, if any, accrued to the redemption date.

ReadyCap Holdings’ and the Guarantors’ respective obligations under the Notes and the Guarantees are secured by a perfected first-priority lien on the capital stock of ReadyCap Holdings and ReadyCap Commercial and certain other assets owned by certain of our Company’s subsidiaries as described in greater detail in our Current Report on Form 8-K filed on February 13, 2017.  The Notes were issued pursuant to an indenture (the "Indenture") and a first supplemental indenture (the "First Supplemental Indenture"), which contains covenants that, among other things: (i) limit the ability of our Company and its subsidiaries (including ReadyCap Holdings and the other Guarantors) to incur additional indebtedness; (ii) require that our Company maintain, on a consolidated basis, quarterly compliance with the applicable consolidated recourse indebtedness to equity ratio of our Company and consolidated indebtedness to equity ratio of our Company and specified ratios of our Company’s stockholders’ equity to aggregate principal amount of the outstanding Notes and our Company's consolidated unencumbered assets to aggregate principal amount of the outstanding Notes; (iii) limit the ability of ReadyCap Holdings and ReadyCap Commercial to pay dividends or distributions on, or redeem or repurchase, the capital stock of ReadyCap Holdings or ReadyCap Commercial; (iv) limit (1) ReadyCap's Holdings ability to create or incur any lien on the collateral and (2) unless the Notes are equally and ratably secured, (a) ReadyCap's Holdings ability to create or incur any lien on the capital stock of its wholly-owned subsidiary, ReadyCap Lending and (b) ReadyCap's Holdings ability to permit ReadyCap Lending to create or incur any lien on its assets to secure indebtedness of its affiliates other than its subsidiaries or any securitization entity; and (v) limit ReadyCap Holding's and the Guarantors' ability to consolidate, merge or transfer all or substantially all of ReadyCap' Holdings and the Guarantors’ respective properties and assets.  The First Supplemental Indenture also requires that our Company ensure that the Replaceable Collateral Value (as defined therein) is not less than the aggregate principal amount of the Notes outstanding as of the last day of each of our Company's fiscal quarters.

GMFS Settlement Agreement

As previously disclosed in the Joint Proxy Statement Prospectus used in connection with the ZAIS Financial merger transaction and in our annual report on Form 10-K for the year ended December 31, 2016, a counterparty (the “Counterparty”) whose predecessor purchased mortgage loans from GMFS, which is currently our subsidiary, asserted claims (the “Claims”) against GMFS for breach of representations and warranties arising out these mortgage loan sales.  We estimate that dating back to a period that began in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold and servicing was released by GMFS to the predecessor to the Counterparty. As we have also previously disclosed, GMFS entered into a statute of limitations tolling agreement with the Counterparty on December 12, 2013 related to the Claims, which was further amended to extend the expiration date, most recently to May 15, 2017.

On April 25, 2017, the Company and GMFS entered into a definitive agreement (the “Settlement Agreement”) to settle all Claims with the Counterparty and provide for mutual releases.  Pursuant to the Settlement Agreement, the Company paid a total of $6.0 million in cash and issued 275,862 shares of the Company's common stock to the Counterparty (the “Shares”), resulting in a total of $10.0 million of consideration paid.  The Shares were issued on May 2, 2017, in a private placement transaction. As part of the settlement, the Company has granted the Counterparty customary resale registration rights.

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During the period beginning on the 24-month anniversary of the date of the Settlement Agreement (and ending 30 days thereafter), the Counterparty will have the right, but not the obligation, to require that the Company repurchase any and all the Shares that the Counterparty then owns at a price per share equal 65% of the then last reported book value per share of the Company's common stock.

GMFS was an indirect subsidiary of ZAIS Financial when the Company completed its merger transaction with ZAIS Financial on October 31, 2016.  As disclosed in the Joint Proxy Statement Prospectus used in connection with the merger transaction and in our annual report on Form 10-K for the year ended December 31, 2016, ZAIS Financial had originally acquired GMFS on October 31, 2014 (the “GMFS 2014 acquisition”) from investment partnerships that were advised by our Manager, and from certain other entities controlled by GMFS management (together, the “2014 GMFS sellers”). The terms of the GMFS 2014 acquisition provided for the payment of both cash consideration and the possible payment of additional contingent consideration based on the achievement by GMFS of certain financial milestones specified in the GMFS 2014 acquisition agreement.

The 2014 GMFS acquisition agreement contained representations and warranties related to GMFS, as well as indemnification obligations to cover breaches of representations and warranties, repurchase claims or demands from investors in respect of mortgage loans originated, purchased or sold by GMFS prior to the closing date of the acquisition.  The 2014 GMFS acquisition agreement also established an escrow fund to support the payment of indemnification claims and allowed for indemnification claims to be offset against the contingent consideration that would otherwise be payable to the 2014 GMFS sellers under the 2014 GMFS acquisition agreement.   

Under the terms of the indemnification provisions contained in the GMFS 2014 acquisition agreement, the 2014 GMFS sellers are liable for amounts paid in settlement of Claims made with their consent, which consent was not to be unreasonably withheld or delayed. Certain of the 2014 GMFS sellers did not consent to the settlement, and as a result, there can be no assurance that the exercise of the right to indemnification by the Company under the terms of the 2014 acquisition agreement would be successful. 

Since the resolution of the Claims and related settlement occurred subsequent to the March 31, 2017 balance sheet date, but before the issuance of the financial statements, the effects have been reflected and recognized in the consolidated financial statements as of March 31, 2017.  As a result, we recorded a legal settlement payable amount of $10.0 million, which is reflected in Other Liabilities on the consolidated balance sheet as of March 31, 2017. In accordance with the terms of the 2014 GMFS acquisition agreement, $4.0 million of the total consideration will be paid by withdrawing funds from the escrow account established by the 2014 GMFS sellers at the time of the acquisition, which has been recorded as a receivable in Other Assets on the consolidated balance sheet as of March 31, 2017. A total of $0.2 million of the loan indemnification reserve has been released as of March 31, 2017. Also in accordance with the terms of the 2014 GMFS acquisition agreement, we have applied the remaining amount of $5.8 million against the continent consideration accrued on our balance sheet to cover the possible payment pursuant to the GMFS 2014 acquisition agreement. As a result, we have reduced the remaining contingent consideration on our balance sheet from $14.6 million to $8.8 million as of March 31, 2017.

As a result, the settlement did not result in a charge to our earnings or otherwise adversely impact our results of operations.

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Cash Flow Activity for the Three Months Ended March 31, 2017 and March 31, 2016

The following table provides a summary of the net change in our cash and cash equivalents for the three months ended March 31, 2017 and 2016:

	For the three months ended March 31,
(in thousands)	2017		2016
Cash flows provided by (used in) operating activities (1)	$	24,163	$	(3,367)
Cash flows provided by (used in) investing activities (1)		15,299		138,854
Cash flows provided by (used in) financing activities		(59,028)		(117,126)
Net increase (decrease) in cash and cash equivalents	$	(19,566)	$	18,361
(1) Includes discontinued operations

The three months ended March 31, 2017 compared to the three months ended March 31, 2016

Cash and cash equivalents decreased by $19.6 million during the three months ended March 31, 2017, reflecting net cash provided by operating activities of $24.2 million and net cash provided by investing activities of $15.3 million, partially offset by net cash used in financing activities of $59.0 million. Cash and cash equivalents increased by $18.4 million during the three months ended March 31, 2016, reflecting net cash used in operating activities of $3.4 million, net cash provided by investing activities of $138.9 million, partially offset by net cash used in financing activities of $117.1 million.

Net cash provided by operating activities of $24.2 million for the three months ended March 31, 2017 related primarily to sales on loans, held for sale, at fair value of $584.2 million offset by $536.6 million of originations and purchases of loans, held for sale, at fair value. Net cash used in operating activities of $3.4 million was the result of general net changes in operating assets and liabilities.

Net cash provided by investing activities of $15.3 million for the three months ended March 31, 2017 related primarily to repayments of loans, held at fair value and held-for-investment of $117.7 million offset by $104.3 million of originations and purchases of loans, held at fair value and held-for-investment. Net cash provided by investing activities of $138.9 million for the three months ended March 31, 2016 related primarily to net sales and pay-downs of MBS of $95.4 million and repayments of loans, held at fair value and held-for-investment of $270.9 million offset by $227.6 million of originations and purchases of loans, held at fair value and held-for-investment.

Net cash used in financing activities of $59.0 million for the three months ended March 31, 2017 related primarily to net repayments of our secured short-term borrowings, partially offset by proceeds received from our senior secured note offering. Net cash used in financing activities of $117.1 million for the three months ended March 31, 2016 related primarily to net repayments of our secured short-term borrowings.

Contractual Obligations

The following table provides a summary of our contractual obligations, including interest, as of March 31, 2017:

(in thousands)	Total		1 year		1 to 3 years		3 to 5 years		5+ years
Borrowings under credit facilities	$	266,323	$	266,323	$	-	$	-	$	-
Borrowings under repurchase agreements		632,951		632,951		-		-		-
Guaranteed loan financing		361,916		2,262		9,790		11,019		338,845
Promissory note payable		7,046		-		-		7,046		-
Senior secured note		73,390		-		-		-		73,390
Future operating lease commitments		3,616		1,718		1,898		-		-
Total	$	1,345,242	$	903,254	$	11,688	$	18,065	$	412,235

The table above does not include amounts due under our management agreement or derivative agreements as those contracts do not have fixed and determinable payments.

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Off-Balance Sheet Arrangements

As of the date of this quarterly report on Form 10-Q, we had no off-balance sheet arrangements, other than the operating lease commitments noted above.

Inflation

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we enter into transactions in various financial instruments that expose us to various types of risk, both on and off balance sheet, which are associated with such financial instruments and markets for which we invest. These financial instruments expose us to varying degrees of market risk, credit risk, interest rate risk, liquidity risk, off balance sheet risk and prepayment risk.

Market Risk

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

Credit Risk

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

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, subject to a floor, as determined by the particular financing arrangement. The general impact of changing interest rates are discussed above under “— Factors Impacting Operating Results —  Changes in Market Interest Rates.” In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest-earning assets and interest-bearing liabilities.

Additionally, non-performing SBC loans are not as interest rate sensitive as performing loans, as earnings on non-performing loans are often generated from restructuring the assets through loss mitigation strategies and opportunistically

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disposing of them. Because non-performing SBC loans are short-term assets, the discount rates used for valuation are based on short-term market interest rates, which may not move in tandem with long-term market interest rates. A rising rate environment often means an improving economy, which might have a positive impact on commercial property values, resulting in increased gains on the disposition of these assets. While rising rates could make it more costly to refinance these assets, we expect that the impact of this would be mitigated by higher property values. Moreover, small business owners are generally less interest rate sensitive than large commercial property owners, and interest cost is a relatively small component of their operating expenses. An improving economy will likely spur increased property values and sales, thereby increasing the need for SBC financing.

The following table projects the impact on our interest income and expense for the twelve month period following March 31, 2017, assuming an immediate increase or decrease of 25, 50, 75 and 100 basis points in LIBOR:

		12-month pretax net interest income sensitivity profiles
		Instantaneous change in rates
(in thousands)		25 basis point increase		50 basis point increase		75 basis point increase		100 basis point increase		25 basis point decrease		50 basis point decrease		75 basis point decrease		100 basis point decrease
Assets:
Acquired loans	$	624	$	1,249	$	1,873	$	2,549	$	(305)	$	(679)	$	(1,050)	$	(1,413)
Originated SBC loans		-		-		-		-		-		-		-		-
Originated Transitional loans		424		842		1,252		1,698		(335)		(541)		(564)		(564)
Originated Freddie loans		-		-		-		-		-		-		-		-
Acquired SBA 7(a) loans		1,382		2,765		4,147		5,530		(1,382)		(2,764)		(4,147)		(5,529)
Originated SBA 7(a) loans		73		146		219		291		(73)		(146)		(219)		(291)
Originated Residential Agency loans		-		-		-		-		-		-		-		-
Total		$ 2,504		$ 5,001		$ 7,491		$ 10,068		$ (2,095)		$ (4,131)		$ (5,979)		$ (7,797)
Liabilities
Repurchase agreements	$	656	$	1,312	$	1,968	$	2,624	$	(656)	$	(1,312)	$	(1,968)	$	(2,624)
Credit facilities		666		1,332		1,997		2,663		(666)		(1,332)		(1,997)		(2,663)
Securitized debt obligations		188		376		563		751		(188)		(376)		(563)		(751)
Total		$ 1,510		$ 3,020		$ 4,528		$ 6,038		$ (1,510)		$ (3,020)		$ (4,528)		$ (6,038)
Total Net Impact to Net Interest Income (Expense)		$ 994		$ 1,981		$ 2,963		$ 4,030		$ (585)		$ (1,111)		$ (1,451)		$ (1,759)

Such hypothetical impact of interest rates on our variable rate debt does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in our financial structure.

Liquidity Risk

Liquidity risk arises in our investments and the general financing of our investing activities. It includes the risk of not being able to fund acquisition and origination activities at settlement dates and/or liquidate positions in a timely manner at a reasonable price, in addition to potential increases in collateral requirements during times of heightened market volatility. If we were forced to dispose of an illiquid investment at an inopportune time, we might be forced to do so at a substantial discount to the market value, resulting in a realized loss. We attempt to mitigate our liquidity risk by regularly monitoring the liquidity of our investments in SBC loans, ABS and other financial instruments. Factors such as our expected exit strategy for, the bid to offer spread of, and the number of broker dealers making an active market in a particular strategy and the availability of long-term funding, are considered in analyzing liquidity risk. To reduce any perceived disparity between the liquidity and the terms of the debt instruments in which we invest, we attempt to minimize our reliance on short-term financing arrangements. While we may finance certain investment in security positions using traditional margin arrangements and reverse repurchase agreements, other financial instruments such as collateralized debt obligations, and other longer-term financing vehicles may be utilized to attempt to provide us with sources of long-term financing.

Prepayment Risk

Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of

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purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

SBC Loan and ABS Extension Risk

Our Manager computes the projected weighted‑average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the mortgages or extend. If prepayment rates decrease in a rising interest rate environment or extension options are exercised, the life of the fixed‑rate assets could extend beyond the term of the secured debt agreements. This could have a negative impact on our results of operations. In some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Real Estate Risk

The market values of commercial mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.

Fair Value Risk

The estimated fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed‑rate investments would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed‑rate investments would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our assets recorded and/or disclosed may be adversely impacted. Our economic exposure is generally limited to our net investment position as we seek to fund fixed rate investments with fixed rate financing or variable rate financing hedged with interest rate swaps.

Counterparty Risk

We finance the acquisition of a significant portion of our commercial and residential mortgage loans, MBS and other assets with our repurchase agreements and credit facilities. In connection with these financing arrangements, we pledge our mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings ( i.e. the haircut) such that the borrowings will be over-collateralized. As a result, we are exposed to the counterparty if, during the term of the financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.

We are exposed to changing interest rates and market conditions, which affects cash flows associated with borrowings. We enter into derivative instruments, such as interest rate swaps and credit default swaps, to mitigate these risks.  Interest rate swaps are used to mitigate the exposure to changes in interest rates and involve the receipt of variable-rate interest amounts from a counterparty in exchange for us making payments based on a fixed interest rate over the life of the swap contract. Credit default swaps are executed in order to mitigate the risk of deterioration in the current credit health of the commercial mortgage market.

Certain of our subsidiaries have entered into over-the-counter interest rate swap agreements to hedge risks associated with movements in interest rates. Because certain interest rate swaps were not cleared through a central counterparty, we remain exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an over-the-counter swap counterparty cannot perform under the terms of an interest rate swap, our subsidiary would not receive payments due under that agreement, we may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While we would seek to terminate the relevant over-the-counter swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that we would

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be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, we could be forced to cover our unhedged liabilities at the then current market price. We may also be at risk for any collateral we have pledged to secure our obligations under the over-the-counter interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.

The following table summarizes the Company’s exposure to its repurchase agreements and credit facilities counterparties at March 31, 2017:

(in thousands)	Borrowings under repurchase agreements and credit facilities (1)	Assets pledged on borrowings under repurchase agreements and credit facilities	Net Exposure (2)	Exposure as a Percentage of Total Assets
Total Counterparty Exposure	$ 899,274	$ 1,107,797	$ 208,523	8.3	%
(1) Includes accrued interest payable
(2) The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and credit facilities, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets

The following table presents information with respect to any counterparty for repurchase agreements for which our Company had greater than 5% of stockholders’ equity at risk in the aggregate at March 31, 2017:

(in thousands)	Counterparty Rating (1)	Amount of Risk (2)	Weighted Average Months to Maturity for Agreement	Percentage of Stockholders’ Equity
JPMorgan Chase Bank, N.A.	A+ / Aa3	$ 47,983	8	8.8	%
Deutsche Bank AG	A- / Baa2	$ 52,101	11	9.5	%
(1) The counterparty rating presented is the long-term issuer credit rating as rated at March 31, 2017 by S&P and Moody’s, respectively.
(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities

Capital Market Risk

We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other financing arrangements. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.

Off Balance Sheet Risk

Off balance sheet risk refers to situations where the maximum potential loss resulting from changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the underlying financial instruments may result in changes in the value of a particular financial instrument in excess of the reported amounts of such assets and liabilities currently reflected in the accompanying Consolidated Balance Sheets.

Inflation Risk

Most of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance significantly more than inflation does. Changes in interest rates may correlate with inflation rates and/or changes in inflation rates. Our consolidated financial statements are prepared in accordance with U.S. GAAP and our distributions are determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation

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Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934, as amended (the "Exchange Act"), reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2017. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s “internal control over financial reporting” (as defined in Rule 13a‑15(f) of the Exchange Act) that occurred during the three months ended March 31, 2017 that have materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. See “Liquidity and Capital Resources – GMFS Settlement Agreement” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this quarterly report on Form 10-Q for a discussion relating to the tolling agreement executed by GMFS and the related settlement agreement reached on April 25, 2017.

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

Item 1A. Risk Factors

See the Company's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the Company's risk factors during the three months ended March 31, 2017.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.
2.1**	Agreement and Plan of Merger, dated as of April 6, 2016, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Merger Sub, LLC, Sutherland Asset Management Corporation and Sutherland Partners, L.P. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed April 7, 2016)
2.2**	Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 9, 2016, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Merger Sub, LLC, Sutherland Asset Management Corporation and Sutherland Partners, L.P. (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed May 9, 2016)
2.3**	Amendment No. 2 to the Agreement and Plan of Merger, dated as of August 4, 2016, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Merger Sub, LLC, Sutherland Asset Management Corporation and Sutherland Partners, L.P. (incorporated by reference to Exhibit 2.3 of the Registrant's Current Report on Form 8-K filed November 4, 2016)
3.1**	Articles of Amendment and Restatement of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)
3.2**	Articles Supplementary of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938)
3.3**	Articles of Amendment and Restatement of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed November 4, 2016)
3.4**	Amended and Restated Bylaws of ZAIS Financial Corp. (incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report on Form 10-K filed on March 13, 2014)
3.5**	Amended and Restated Bylaws of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 3.5 of the Registrant's Annual Report on Form 10-K filed on March 15, 2017)
4.1**	Specimen Common Stock Certificate of Sutherland Asset Management Corporation (incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K filed on March 15, 2017)
4.2**	Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC and ReadyCap Commercial, LLC, each as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed February 13, 2017)
4.3**	First Supplemental Indenture, dated February 13, 2017, by and among ReadyCap Holdings, LLC, as issuer, Sutherland Asset Management Corporation, Sutherland Partners, L.P., Sutherland Asset I, LLC, ReadyCap Commercial, LLC, each as guarantors and U.S. Bank National Association, as trustee and as collateral agent, including the form of 7.5% Senior Secured Notes due 2022 and the related guarantees (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed February 13, 2017)
10.1**	Third Amended and Restated Master Repurchase Agreement, dated as of February 14, 2017, by and among ReadyCap Commercial, LLC, Sutherland Warehouse Trust II, Sutherland Asset I, LLC, as sellers, U.S. Bank National Association, as depository and paying agent and Deutsche Bank AG, Cayman Island Branch, as buyer (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed February 21, 2017)
10.2**	Second Amended and Restated Guaranty, dated as of October 31, 2016, from Sutherland Partners, L.P. to Deutsche Bank AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed February 21, 2017)

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Exhibit No.
10.3**	Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 of the Registrant's Form S-8 (Registration No. 333-216988))
10.4**	Amended and Restated Agreement of Limited Partnership of Sutherland Partners, L.P., dated as of October 31, 2016, by and among Sutherland Asset Management Corporation, as General Partner, and the limited partners listed on Exhibit A thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed November 4, 2016)
31.1+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Scheme
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

**Filed previously.

+Filed herewith.

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Sutherland Asset Management Corporation

Date:  May 10, 2017	By:	/s/ Thomas E. Capasse
	Thomas E. Capasse
	Chairman of the Board and Chief Executive
	(Principal Executive Officer)

Date:  May 10, 2017	By:	/s/ Frederick C. Herbst
	Frederick C. Herbst
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

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