ZAIS Financial Corp (ZFC) to Acquire GMFS, LLC in $63M + Milestones Deal

ZAIS Financial Corp (NYSE: ZFC) has entered into a definitive agreement to acquire GMFS, LLC ("GMFS").

GMFS is a privately-owned mortgage company that originates residential mortgage loans, primarily in the southern U.S., and holds the servicing rights on those mortgages. Founded in 1999, GMFS is headquartered in Baton Rouge, LA and is licensed as a mortgage banker in 29 states. In 2013, GMFS originated approximately $1.4 billion in mortgage loans, generating net income of approximately $14.7 million. At December 31, 2013, GMFS held a portfolio of mortgage servicing rights ("MSR") of approximately $2.2 billion in unpaid principal balance.

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") 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, VA and USDA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The purchase price will consist of cash payable at closing, estimated at approximately $61 million, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits which will be payable over a four year period if certain conditions are met. The cash payable at closing will reflect the actual market value of GMFS's MSR portfolio, which was $30.1 million at June 30, 2014 and the actual value of GMFS's net tangible assets at closing. The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The additional contingent consideration is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the additional contingent consideration may be paid in common stock of the Company, at the Company's option. The Company intends to fund the closing payment from existing cash and the sale of non-agency RMBS holdings.

The Company believes that the acquisition provides attractive strategic and financial benefits to ZAIS Financial and its shareholders, including:

• Addition of an origination platform to ZAIS Financial's sourcing capabilities, allowing access to new credit investment opportunities while controlling the origination process.
• Enhancement and growth of the GMFS origination platform through better access to capital and an expanded product offering.
• Acquisition of a Fannie Mae and Freddie Mac seller/servicer and HUD/FHA approved mortgagee, opening the opportunity for ZAIS Financial to invest in MSRs through retention and secondary market transactions.
• Insight provided by GMFS's seasoned management team into new product offerings, control of the origination process, and opportunities for future growth and expansion.
• Expected accretive earnings impact of the transaction commencing in 2015.

Michael Szymanski, Chief Executive Officer of ZAIS Financial, commented,

"We are delighted to announce this acquisition as a transformational next step in our evolution as a mortgage operating company. GMFS already has a solid mortgage banking franchise with significant retail operations that have continued to outperform in the current loan origination environment. The acquisition provides us with the opportunity to advance two of our core strategic objectives: first, to directly source newly originated mortgage loans while controlling the origination process, and second, to diversify revenue streams to include origination activities and mortgage servicing rights investment income. At the same time, GMFS is well positioned to substantially benefit from our investment capital and resources."

Terrell "Tee" Brown Jr., President and CEO of GMFS, stated,

"ZAIS Financial stood out to us as the right strategic partner and today's announcement signifies the full support of the GMFS management team. From the beginning, our key objective was to find a partner with a strong cultural fit who would provide balance sheet and strategic support for growth. We are excited and energized by this transaction and look forward to servicing our clients with the support of ZAIS Financial."

The acquisition, in the form of a merger of a wholly owned subsidiary of the Company into GMFS, is subject to customary closing conditions as well as receipt of regulatory and seller/servicer related approvals relating to the transfer of GMFS's licenses. The Company anticipates that the closing will occur in the fourth quarter of 2014. Upon closing, the Company expects GMFS to continue to operate under its existing name, and under the leadership of the current management team.

The acquisition is expected to be slightly dilutive to earnings in 2014, primarily due to transaction expenses, and accretive to earnings beginning in 2015.

The Company will be filing a Form 8-K with the Securities and Exchange Commission containing further details of the terms of and conditions to the transaction.

Houlihan Lokey Capital, Inc. is acting as financial adviser to ZAIS Financial in connection with the transaction. Sandler O'Neill & Partners, L.P. is acting as financial advisor to GMFS in connection with the transaction.

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