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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-31458

Newcastle Investment Corp.

(Exact name of registrant as specified in its charter)

 

Maryland   81-0559116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1345 Avenue of the Americas, New York, NY   10105
(Address of principal executive offices)   (Zip Code)

(212) 798-6100

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

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  x    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 Regulations 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    (Do not check if a smaller reporting company)

Smaller reporting company  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 62,024,945 shares outstanding as of August 4, 2010.


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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors that could materially affect our operations and prospects include, but are not limited to:

 

   

our ability to take advantage of opportunities in additional asset classes at attractive risk-adjusted prices;

 

   

our ability to deploy capital accretively;

 

   

the risks that default and recovery rates on our loan portfolios exceed our underwriting estimates;

 

   

the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;

 

   

the relative spreads between the yield on the assets we invest in and the cost of financing;

 

   

changes in economic conditions generally and the real estate and bond markets specifically;

 

   

adverse changes in the financing markets we access affecting our ability to finance our investments or our ability to maintain our historic net spreads;

 

   

changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or entering into new financings with us;

 

   

changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;

 

   

the quality and size of the investment pipeline and the rate at which we can invest our cash, including cash inside our CDOs;

 

   

impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities, loans or real estate are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;

 

   

legislative/regulatory changes, including, but not limited to, any modification of the terms of loans or requirements with respect to asset-backed securities that we may issue;

 

   

reductions in cash flows received from our investments, particularly our CDOs;

 

   

completion of pending investments;

 

   

the availability and cost of capital for future investments;

 

   

competition within the finance and real estate industries; and

 

   

other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other SEC reports.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.


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SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

 

   

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk tone of the parties if those statements provide to be inaccurate;

 

   

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 

   

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

 

   

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.


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NEWCASTLE INVESTMENT CORP.

FORM 10-Q

INDEX

 

          PAGE

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009    1
   Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2010 and 2009    2
   Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited) for the six months ended June 30, 2010    3
   Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009    4
   Notes to Consolidated Financial Statements (unaudited)    5

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    26

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    49

Item 4.

   Controls and Procedures    52

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    53

Item 1A.

   Risk Factors    53

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    71

Item 3.

   Defaults upon Senior Securities    71

Item 4.

   Reserved    71

Item 5.

   Other Information    71

Item 6.

   Exhibits    72

SIGNATURES

   73


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

 

     June 30, 2010
(Unaudited)
    December 31, 2009  

Assets

    

Non-Recourse VIE Financing Structures

    

Real estate securities, available for sale

   $ 1,872,612      $ 1,784,487   

Real estate related loans, held for sale, net

     671,657        554,367   

Residential mortgage loans, held for investment, net

     131,084        —     

Residential mortgage loans, held for sale, net

     258,373        380,123   

Subprime mortgage loans subject to call option

     403,383        403,006   

Restricted cash

     145,366        200,251   

Receivables and other assets

     32,769        36,643   
                
     3,515,244        3,358,877   
                

Recourse Financing Structures and Unlevered Assets

    

Real estate securities, available for sale

     3,467        46,308   

Real estate related loans, held for sale, net

     23,001        19,495   

Residential mortgage loans, held for sale, net

     4,182        3,524   

Operating real estate, held for sale

     9,906        9,966   

Cash and cash equivalents

     37,684        68,300   

Receivables and other assets

     1,016        8,158   
                
     79,256        155,751   
                
   $ 3,594,500      $ 3,514,628   
                

Liabilities and Stockholders’ Equity (Deficit)

    

Liabilities

    

Non-Recourse VIE Financing Structures

    

CDO bonds payable

   $ 3,481,618      $ 4,058,928   

Other bonds payable

     275,933        303,697   

Notes payable

     4,582        —     

Financing of subprime mortgage loans subject to call option

     403,383        403,006   

Derivative liabilities

     203,274        203,054   

Accrued expenses and other liabilities

     7,415        2,992   
                
     4,376,205        4,971,677   
                

Recourse Financing Structures and Other Liabilities

    

Repurchase agreements

     —          71,309   

Junior subordinated notes payable

     51,256        103,264   

Derivative liabilities

     —          4,100   

Due to affiliates

     1,419        1,497   

Accrued expenses and other liabilities

     3,086        3,433   
                
     55,761        183,603   
                
     4,431,966        5,155,280   
                

Stockholders’ Equity (Deficit)

    

Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 and 2,500,000 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 and 1,600,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 and 2,000,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of June 30, 2010 and December 31, 2009, respectively

     61,583        152,500   

Common stock, $0.01 par value, 500,000,000 shares authorized, 62,024,945 and 52,912,513 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

     620        529   

Additional paid-in capital

     1,065,362        1,033,520   

Accumulated deficit

     (1,690,870     (2,193,383

Accumulated other comprehensive income (loss)

     (274,161     (633,818
                
     (837,466     (1,640,652
                
   $ 3,594,500      $ 3,514,628   
                

 

1


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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(dollars in thousands, except share data)

 

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Interest income

   $ 74,183      $ 87,338      $ 144,275      $ 211,811   

Interest expense

     43,141        54,172        88,730        114,716   
                                

Net interest income

     31,042        33,166        55,545        97,095   
                                

Impairment

        

Valuation allowance (reversal) on loans

     (91,534     (30,869     (187,308     90,019   

Other-than-temporary impairment on securities

     33,925        209,554        98,781        396,136   

Portion of other-than-temporary impairment on securities recognized in other comprehensive income (loss), net of the reversal of other comprehensive loss into net income (loss)

     15,114        (55,278     (22,000     (55,278
                                
     (42,495     123,407        (110,527     430,877   
                                

Net interest income (loss) after impairment

     73,537        (90,241     166,072        (333,782

Other Income (Loss)

        

Gain on settlement of investments, net

     8,954        17,544        18,631        9,497   

Gain on extinguishment of debt

     46,728        26,830        95,074        53,675   

Other income (loss), net

     (2,298     10,911        (3,778     4,430   
                                
     53,384        55,285        109,927        67,602   
                                

Expenses

        

Loan and security servicing expense

     1,322        1,370        2,357        2,772   

General and administrative expense

     1,938        2,965        4,976        4,591   

Management fee to affiliate

     4,258        4,492        8,735        8,983   

Depreciation and amortization

     62        73        125        145   
                                
     7,580        8,900        16,193        16,491   
                                

Income (loss) from continuing operations

     119,341        (43,856     259,806        (282,671

Income (loss) from discontinued operations

     13        (142     (27     (175
                                

Net Income (Loss)

     119,354        (43,998     259,779        (282,846

Preferred dividends

     (1,395     (3,376     (4,663     (6,751

Excess of carrying amount of exchanged preferred stock over fair value of consideration paid - Note 9

     —          —          43,043        —     
                                

Income (Loss) Applicable to Common Stockholders

   $ 117,959      $ (47,374   $ 298,159      $ (289,597
                                

Income (Loss) Per Share of Common Stock

        

Basic

   $ 1.90      $ (0.90   $ 5.16      $ (5.48
                                

Diluted

   $ 1.90      $ (0.90   $ 5.16      $ (5.48
                                

Income (loss) from continuing operations per share of common stock, after preferred dividends and excess of carrying amount of exchanged preferred stock over fair value of consideration paid

        

Basic

   $ 1.90      $ (0.90   $ 5.16      $ (5.48
                                

Diluted

   $ 1.90      $ (0.90   $ 5.16      $ (5.48
                                

Income (loss) from discontinued operations per share of common stock

        

Basic

   $ —        $ —        $ —        $ —     
                                

Diluted

   $ —        $ —        $ —        $ —     
                                

Weighted Average Number of Shares of Common Stock Outstanding

        

Basic

     62,010,570        52,836,208        57,838,286        52,821,800   
                                

Diluted

     62,010,570        52,836,208        57,838,286        52,821,800   
                                

Dividends Declared per Share of Common Stock

   $ —        $ —        $ —        $ —     
                                

See notes to consolidated financial statements

 

2


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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(dollars in thousands)

 

 

    Preferred Stock     Common Stock   Additional
Paid-in
 

Accumulated

    Accum. Other
Comp. Income
   

Total

Stockholders’ Equity

 
    Shares     Amount     Shares   Amount   Capital   Deficit     (Loss)     (Deficit)  

Stockholders’ equity (deficit) - December 31, 2009

  6,100,000      $ 152,500      52,912,513   $ 529   $ 1,033,520   $ (2,193,383   $ (633,818   $ (1,640,652

Preferred dividends declared

  —          —        —       —       —       (19,484     —          (19,484

Exchange of preferred stock for common stock and cash

  (3,636,679     (90,917   9,091,668     91     31,782     43,043        —          (16,001

Issuance of common stock to directors

  —          —        20,764     —       60     —          —          60   

Deconsolidation of CDO VII:

             

Cumulative net loss

  —          —        —       —       —       219,175        —          219,175   

Deconsolidation of unrealized loss on securities

  —          —        —       —       —       —          40,715        40,715   

Deconsolidation of unrealized loss on derivatives designated as cash flow hedges

  —          —        —       —       —       —          28,514        28,514   

Comprehensive income:

             

Net income (loss)

  —          —        —       —       —       259,779        —          259,779   

Net unrealized gain on securities

  —          —        —       —       —       —          262,032        262,032   

Reclassification of net realized loss on securities into earnings

  —          —        —       —       —       —          54,930        54,930   

Net unrealized (loss) on derivatives designated as cash flow hedges

  —          —        —       —       —       —          (32,680     (32,680

Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings

  —          —        —       —       —       —          6,146        6,146   
                     

Total comprehensive income (loss)

                550,207   
                                                     

Stockholders’ equity (deficit) - June 30, 2010

  2,463,321      $ 61,583      62,024,945   $ 620   $ 1,065,362   $ (1,690,870   $ (274,161   $ (837,466
                                                     

See notes to consolidated financial statements

 

3


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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands)

 

 

     Six Months Ended June 30,  
     2010     2009  

Cash Flows From Operating Activities

    

Net income (loss)

   $ 259,779      $ (282,846

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities (inclusive of amounts related to discontinued operations):

    

Depreciation and amortization

     125        150   

Accretion of discount and other amortization

     (8,377     (29,466

Interest income in CDOs redirected for reinvestment or CDO bonds paydown

     (3,793     (6,447

Valuation allowance on loans

     (187,308     90,019   

Non-cash directors’ compensation

     60        91   

(Gain) loss on sale of investments

     (18,631     (9,497

Unrealized (gain) loss on non-hedge derivatives and hedge ineffectiveness

     4,299        (4,197

Other-than-temporary impairment on securities

     76,781        340,858   

Impairment on real estate held for sale

     60        250   

(Gain) loss on extinguishment of debt

     (95,074     (53,675

Change in:

    

Restricted cash

     (215     3,760   

Receivables and other assets

     2,967        2,343   

Due to affiliates

     (78     (35

Accrued expenses and other liabilities

     (1,346     (1,674
                

Net cash provided by (used in) operating activities

     29,249        49,634   
                

Cash Flows From Investing Activities

    

Purchase of real estate securities

     (2,291     (1,800

Proceeds from sale of real estate securities

     48,367        135,999   

Purchase of and advances on loans

     —          (14,723

Repayments of loan and security principal

     105,748        51,635   

Margin received on derivative instruments

     5,073        3,550   

Return of margin deposits on total rate of return swaps (treated as derivative instruments)

     —          37   

Payments on settlement of derivative instruments

     (11,394     (11,610

Proceeds from sale of real estate held for sale

     —          1,350   

Distributions of capital from equity method investees

     159        48   
                

Net cash provided by (used in) investing activities

     145,662        164,486   
                

Cash Flows From Financing Activities

    

Repayments and repurchases of CDO bonds payable

     (89,975     (23,675

Repurchase of CDO bonds payable

     (9,927     (3,069

Issuance of other bonds payable

     97,650        —     

Repayments of other bonds payable

     (124,104     (51,472

Repayments of repurchase agreements

     (71,309     (159,048

Margin deposits under repurchase agreements

     —          (7,303

Return of margin deposits under repurchase agreements

     —          7,586   

Cash consideration paid in exchange for junior subordinated notes

     (9,715     —     

Cash consideration paid to redeem preferred stock

     (16,001     —     

Dividends paid

     (19,484     —     

Payment of deferred financing costs

     (1,677     (1,900

Restricted cash returned from refinancing activities

     39,015        41,643   
                

Net cash provided by (used in) financing activities

     (205,527     (197,238
                

Net Increase (Decrease) in Cash and Cash Equivalents

     (30,616     16,882   

Cash and Cash Equivalents, Beginning of Period

     68,300        49,746   
                

Cash and Cash Equivalents, End of Period

   $ 37,684      $ 66,628   
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for interest expense

   $ 65,946      $ 87,067   

Supplemental Schedule of Non-Cash Investing and Financing Activities

    

Common stock issued to redeem preferred stock

   $ 28,457      $ —     

Face amount of CDO bonds issued in exchange for previously issued junior subordinated notes of $52,094

   $ 37,625      $ —     

See notes to consolidated financial statements

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

1. GENERAL

Newcastle Investment Corp. (and its subsidiaries, “Newcastle”) is a Maryland corporation that was formed in 2002. Newcastle conducts its business through four primary segments: (i) investments financed with non-recourse collateralized debt obligations (“CDOs”), (ii) investments financed with other non-recourse debt, (iii) investments financed with recourse debt, including FNMA / FHLMC securities, and (iv) unlevered investments.

Newcastle is organized and conducts its operations to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. As such, Newcastle will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

Newcastle is party to a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), a subsidiary of Fortress Investment Group LLC (“Fortress”), under which the Manager advises Newcastle on various aspects of its business and manages its day-to-day operations, subject to the supervision of Newcastle’s board of directors. For its services, the Manager receives an annual management fee and incentive compensation, both as defined in the Management Agreement.

Approximately 3.8 million shares of Newcastle’s common stock were held by Fortress, through its affiliates, and its principals at June 30, 2010. In addition, Fortress, through its affiliates, held options to purchase approximately 1.7 million shares of Newcastle’s common stock at June 30, 2010.

The accompanying consolidated financial statements and related notes of Newcastle have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Newcastle’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Newcastle’s consolidated financial statements for the year ended December 31, 2009 and notes thereto included in Newcastle’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in Newcastle’s consolidated financial statements for the year ended December 31, 2009.

Change in Presentation

Newcastle has changed the format of its consolidated balance sheets for all periods presented to reflect the requirements of new guidance which became effective January 1, 2010. This change in format did not have any effect on any of the reported line items within the balance sheets, other than breaking them out by financing type, or on the statement of consolidated equity (deficit).

2. INFORMATION REGARDING BUSINESS SEGMENTS

Newcastle conducts its business through four primary segments: (i) investments financed with non-recourse collateralized debt obligations (“CDOs”), (ii) investments financed with other non-recourse debt, (iii) investments financed with recourse debt, and (iv) unlevered investments.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Summary financial data on Newcastle’s segments is given below, together with a reconciliation to the same data for Newcastle as a whole:

 

     CDOs (A)     Other
Non-Recourse
(A) (B)
    Recourse     Unlevered     Unallocated     Total  

Six Months Ended June 30, 2010

            

Interest income

   $ 105,721      $ 36,806      $ 976      $ 742      $ 30      $ 144,275   

Interest expense

     56,174        29,901        645        356        1,654        88,730   
                                                

Net interest income (expense)

     49,547        6,905        331        386        (1,624     55,545   

Impairment

     (60,308     (34,229     (60     (15,930     —          (110,527

Other income (loss)

     115,730        (3,781     (663     (1,014     (345     109,927   

Depreciation and amortization

     —          —          —          —          125        125   

Other operating expenses

     789        1,626        4        10        13,639        16,068   
                                                

Income (loss) from continuing operations

     224,796        35,727        (276     15,292        (15,733     259,806   

Income (loss) from discontinued operations

     —          —          —          (27     —          (27
                                                

Net income (loss)

     224,796        35,727        (276     15,265        (15,733     259,779   

Preferred dividends

     —          —          —          —          (4,663     (4,663

Excess of carrying amount of exchanged preferred stock over fair value of consideration paid - Note 9

     —          —          —          —          43,043        43,043   
                                                

Income (loss) applicable to common stockholders

   $ 224,796      $ 35,727      $ (276   $ 15,265      $ 22,647      $ 298,159   
                                                

Three Months Ended June 30, 2010

            

Interest income

   $ 54,778      $ 18,760      $ 117      $ 519      $ 9      $ 74,183   

Interest expense

     27,308        14,862        18        356        597        43,141   
                                                

Net interest income (expense)

     27,470        3,898        99        163        (588     31,042   

Impairment

     (29,462     3,063        —          (16,096     —          (42,495

Other income (loss)

     56,008        (2,383     —          104        (345     53,384   

Depreciation and amortization

     —          —          —          —          62        62   

Other operating expenses

     437        948        —          9        6,124        7,518   
                                                

Income (loss) from continuing operations

     112,503        (2,496     99        16,354        (7,119     119,341   

Income (loss) from discontinued operations

     —          —          —          13        —          13   
                                                

Net income (loss)

     112,503        (2,496     99        16,367        (7,119     119,354   

Preferred dividends

     —          —          —          —          (1,395     (1,395

Excess of carrying amount of exchanged preferred stock over fair value of consideration paid - Note 9

     —          —          —          —          —          —     
                                                

Income (loss) applicable to common stockholders

   $ 112,503      $ (2,496   $ 99      $ 16,367      $ (8,514   $ 117,959   
                                                

June 30, 2010

            

Investments (C) (D)

   $ 2,591,198      $ 745,911      $ —        $ 40,556      $ —        $ 3,377,665   

Cash and restricted cash

     145,366        —          —          347        37,337        183,050   

Other assets

     32,769        —          —          221        795        33,785   
                                                

Total assets

     2,769,333        745,911        —          41,124        38,132        3,594,500   
                                                

Debt (D)

     (3,486,200     (679,316     —          —          (51,256     (4,216,772

Derivative liabilities

     (184,839     (18,435     —          —          —          (203,274

Other liabilities

     (6,649     (766     —          (771     (3,734     (11,920
                                                

Total liabilities

     (3,677,688     (698,517     —          (771     (54,990     (4,431,966
                                                

Preferred stock

     —          —          —          —          (61,583     (61,583
                                                

GAAP book value (E)

   $ (908,355   $ 47,394      $ —        $ 40,353      $ (78,441   $ (899,049
                                                

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

     CDOs (A)     Other
Non-Recourse
(A) (B)
    Recourse     Unlevered     Unallocated     Total  

Six Months Ended June 30, 2009

            

Interest income

   $ 166,939      $ 38,859      $ 4,802      $ 1,168      $ 43      $ 211,811   

Interest expense

     73,567        34,917        2,188        —          4,044        114,716   
                                                

Net interest income (expense)

     93,372        3,942        2,614        1,168        (4,001     97,095   

Impairment

     399,176        (6,557     32,471        5,787        —          430,877   

Other income (loss)

     58,873        4,515        4,311        (98     1        67,602   

Depreciation and amortization

     —          —          —          —          145        145   

Other operating expenses

     882        1,870        25        1        13,568        16,346   
                                                

Income (loss) from continuing operations

     (247,813     13,144        (25,571     (4,718     (17,713     (282,671

Income (loss) from discontinued operations

     —          —          —          (175     —          (175
                                                

Net income (loss)

     (247,813     13,144        (25,571     (4,893     (17,713     (282,846

Preferred dividends

     —          —          —          —          (6,751     (6,751
                                                

Income (loss) applicable to common stockholders

   $ (247,813   $ 13,144      $ (25,571   $ (4,893   $ (24,464   $ (289,597
                                                

Three Months Ended June 30, 2009

            

Interest income

   $ 66,176      $ 18,517      $ 2,284      $ 339      $ 22      $ 87,338   

Interest expense

     35,253        15,761        991        —          2,167        54,172   
                                                

Net interest income (expense)

     30,923        2,756        1,293        339        (2,145     33,166   

Impairment

     119,235        (10,153     11,177        3,148        —          123,407   

Other income (loss)

     45,073        10,196        78        (61     (1     55,285   

Depreciation and amortization

     —          —          —          —          73        73   

Other operating expenses

     442        929        3        —          7,453        8,827   
                                                

Income (loss) from continuing operations

     (43,681     22,176        (9,809     (2,870     (9,672     (43,856

Income (loss) from discontinued operations

     —          —          —          (142     —          (142
                                                

Net income (loss)

     (43,681     22,176        (9,809     (3,012     (9,672     (43,998

Preferred dividends

     —          —          —          —          (3,376     (3,376
                                                

Income (loss) applicable to common stockholders

   $ (43,681 )   $ 22,176      $ (9,809   $ (3,012   $ (13,048   $ (47,374
                                                

 

(A) Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, economic losses from such structures cannot exceed Newcastle’s invested equity in them. Therefore, economically their book value cannot be less than zero, except for the amounts described in note (B) below.
(B) Includes all of the manufactured housing loan financing, of which $1.4 million (carrying value) was recourse as of June 30, 2010.
(C) The following table summarizes the investments in the unlevered segment as of June 30, 2010:

 

     Outstanding Face Amount    Carrying Value

Real estate securities

   $ 175,607    $ 3,467

Real estate related loans

     236,486      23,001

Residential mortgage loans

     5,460      4,182

Operating real estate

     N/A      9,906
             
   $ 417,553    $ 40,556
             

 

(D) Included in the other non-recourse segment were $403.4 million of Investments and Debt at June 30, 2010, representing the loans subject to call option of the two subprime securitizations and the corresponding financing.
(E) Newcastle cannot economically lose more than its investment amount in any given non-recourse financing structure. Therefore, impairment recorded in excess of such investment, which results in negative GAAP book value for a given non-recourse financing structure, cannot economically be incurred and will eventually be reversed through amortization, sales at gains, or as gains at the deconsolidation or termination of such non-recourse financing structure. For non-recourse financing structures with negative GAAP book value, except as noted in (B) above, the aggregate negative GAAP book value which will eventually be recorded as an increase to GAAP book value is $641 million as of June 30, 2010.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Comprehensive Income

The following table summarizes our comprehensive income for the interim periods presented:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net income (loss)

   $ 119,354      $ (43,998   $ 259,779      $ (282,846

Net unrealized gain on securities

     144,104        131,196        262,032        49,531   

Reclassification of net realized loss on securities into earnings

     40,144        137,078        54,930        331,891   

Net unrealized gain (loss) on derivatives designated as cash flow hedges

     (24,152     86,834        (32,680     108,817   

Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings

     1,267        (9,433     6,146        2,517   
                                
   $ 280,717      $ 301,677      $ 550,207      $ 209,910   
                                

Variable Interest Entities (“VIEs”)

In June 2009, the FASB issued new guidance which changes the definition of a VIE and changes the methodology to determine who is the primary beneficiary of, or in other words who consolidates, a VIE. Furthermore, it eliminates the scope exception for qualified special purpose entities (QSPEs), which are now subject to the VIE consolidation rules. This guidance is effective for fiscal years beginning after November 15, 2009.

Under the new guidance, a primary beneficiary is defined as the party who has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and will absorb a significant portion of the VIE’s expected losses or receive a significant portion of the expected residual returns as a result of holding variable interests.

The VIEs in which Newcastle has a significant interest include (i) Newcastle’s CDOs, in which Newcastle has been determined to be the primary beneficiary and therefore consolidates them (with the exception of CDO VII as described below), since it has the power to direct the activities that most significantly impact the CDOs’ economic performance and would absorb a significant portion of their expected losses and receive a significant portion of their expected residual returns, and (ii) the manufactured housing loan financing structures, which are similar to the CDOs in analysis. Newcastle’s CDOs and manufactured housing loan financings are held in special purpose entities whose debt is treated as non-recourse secured borrowings of Newcastle. Newcastle’s subprime securitizations are also considered VIE’s, but Newcastle does not control their activities and no longer receives a significant portion of their returns. These subprime securitizations were not consolidated under the current or prior guidance.

In addition, Newcastle’s investments in CMBS, CDO securities and loans may be deemed to be variable interests in VIEs, depending on their structure. Newcastle is not obligated to provide, nor has it provided, any financial support to these VIEs. Newcastle monitors these investments and, to the extent Newcastle determines that it potentially owns a majority of the currently controlling class, it analyzes them for potential consolidation. As of June 30, 2010, Newcastle has not consolidated these potential VIEs due to the determination that, based on the nature of Newcastle’s investments and the provisions governing these structures, Newcastle does not have the power to direct the activities that most significantly impact their economic performance. Newcastle will continue to analyze future investments, as well as reconsideration events in existing entities, pursuant to the VIE requirements. These analyses require considerable judgment in determining the primary beneficiary of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could be the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would otherwise have been consolidated.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

On January 1, 2010, as a result of the adoption of the new guidance, Newcastle deconsolidated a non-recourse financing structure, CDO VII. Newcastle determined that it does not have the current power to direct the relevant activities of CDO VII as an event of default had occurred and we may be removed as the collateral manager by a single party. The deconsolidation reduced Newcastle’s gross assets by $149.4 million, reduced liabilities by $437.8 million and increased equity by $288.4 million. The deconsolidation also reduced revenues and expenses, but its impact was not material to the net income applicable to common stockholders. As a result of this new guidance, Newcastle has interests in the following unconsolidated VIE at June 30, 2010, in which it has a significant interest, in addition to the subprime securitizations which are described in Note 4:

 

Entity

   Gross Assets (A)    Debt (B)    Carrying Value of  Newcastle’s
Investment (C)

CDO VII

   $ 486,633    $ 470,489    $ —  

 

(A) Face amount.
(B) Includes $60.5 million face amount of debt owned by Newcastle with a carrying value of zero at June 30, 2010.
(C) Represent’s Newcastle’s maximum exposure to loss from these entities.

Gain (Loss) on Settlement of Investments, Net and Other Income (Loss), Net

These items are comprised of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Gain (loss) on settlement of investments, net

        

Gain on settlement of real estate securities

   $ 14,289      $ 18,082      $ 28,106      $ 25,470   

Loss on settlement of real estate securities

     (5,335     (884     (6,196     (16,503

Gain on disposition of loans held for sale

     —          346        —          526   

Realized gain (loss) on termination of derivative instruments

     —          —          (3,279     4   
                                
   $ 8,954      $ 17,544      $ 18,631      $ 9,497   
                                

Other income (loss), net

        

Gain (loss) on non-hedge derivative instruments

   $ (2,383   $ 10,196      $ (4,131   $ 13,312   

Unrealized (loss) recognized at de-designation of hedges

     —          —          —          (8,797

Hedge ineffectiveness

     (167     510        (168     (318

Other income (loss)

     252        205        521        233   
                                
   $ (2,298   $ 10,911      $ (3,778   $ 4,430   
                                

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

3. REAL ESTATE SECURITIES

The following is a summary of Newcastle’s real estate securities at June 30, 2010, all of which are classified as available for sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.

 

    Amortized Cost Basis                     Weighted Average  
     Outstanding
Face Amount
  Before
Impairment
  Other-Than-
Temporary
Impairment (A)
    After
Impairment
  Gross Unrealized     Carrying Value (B)   Number
of
Securities
  Rating (C)   Coupon     Yield     Maturity
(Years)
(D)
  Principal
Subordination
(E)
 

Asset Type

          Gains   Losses                

CMBS-Conduit

  $ 1,492,299   $ 1,281,193   $ (486,844   $ 794,349   $ 88,187   $ (124,113   $ 758,423     196   BB+   5.75   11.14   3.3   12.1

CMBS- Single Borrower

    538,964     522,973     (32,494     490,479     27,163     (74,862     442,780     66   BB-   4.27   6.44   2.0   8.2

CMBS-Large Loan

    60,378     60,374     —          60,374     —       (21,165     39,209     10   BB   2.09   2.14   0.9   16.5

REIT Debt

    389,550     389,115     —          389,115     16,360     (14,672     390,803     46   BB+   6.14   5.88   3.5   N/A   

ABS-Subprime (F)

    395,087     373,363     (199,820     173,543     16,809     (9,101     181,251     89   B-   1.68   13.40   4.4   20.9

ABS-Manufactured Housing

    49,345     47,961     —          47,961     785     (2,193     46,553     9   BBB+   6.68   7.26   6.0   37.2

ABS-Franchise

    31,218     31,527     (21,234     10,293     342     (2,484     8,151     13   CCC+   3.78   9.91   2.7   15.3

FNMA/FHLMC (G)

    3,759     4,100     —          4,100     51     —          4,151     1   AAA   5.71   3.91   3.5   N/A   

CDO (H)

    79,643     14,734     (14,734     —       —       —          —       4   C   4.21   0.00   —     N/A   
                                                                         

Debt Security Total
/Average (I)

    3,040,243     2,725,340     (755,126     1,970,214     149,697     (248,590     1,871,321     434   BB   4.89   8.74   3.1  
                                         

Equity Securities

      1,388     (276     1,112     3,646     —          4,758     2          
                                                         

Total

    $ 2,726,728   $ (755,402   $ 1,971,326   $ 153,343   $ (248,590   $ 1,876,079   $ 436          
                                                         

 

(A) Represents the cumulative impairment against amortized cost basis recorded through earnings, net of the effect of the cumulative adjustment as a result of the adoption of new accounting guidance on impairment in 2009.
(B) See Note 6 regarding the estimation of fair value, which is equal to carrying value for all securities.
(C) Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. FNMA/FHLMC securities have an implied AAA rating. Ratings provided were determined by third party rating agencies as of a particular date, may not be current and are subject to change (including a “negative watch” assignment) at any time.
(D) The weighted average maturity is based on the timing of expected principal reduction on the assets.
(E) Percentage of the outstanding face amount of securities that is subordinate to Newcastle’s investments.
(F) Includes the retained bonds with face amount of $40.5 million and carrying value of $2.1 million from Securitization Trust 2006 and Securitization Trust 2007 (Note 4). The residual interests were fully written off in the first quarter of 2010.
(G) Amortized cost basis and carrying value include principal receivable of $0.1 million.
(H) Includes one CDO bond issued by a third party and three CDO bonds issued by CDO VII, which has been deconsolidated, and held as investments by Newcastle.
(I) The total outstanding face amount of fixed rate securities was $2.2 billion, and of floating rate securities was $0.8 billion.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Unrealized losses that are considered other-than-temporary are recognized currently in income. During the six months ended June 30, 2010, Newcastle recorded other-than-temporary impairment charges (“OTTI”) of $98.8 million (gross of $22.0 million of the portion of other-than-temporary impairment recognized in other comprehensive income) with respect to real estate securities. Based on management’s analysis of these securities, the performance of the underlying loans and changes in market factors, Newcastle noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. Any remaining unrealized losses on Newcastle’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. The following table summarizes Newcastle’s securities in an unrealized loss position as of June 30, 2010.

 

    Amortized Cost Basis   Gross Unrealized             Weighted Average

Securities in

an Unrealized

Loss Position

  Outstanding
Face
Amount
  Before
Impairment
  Other-than-
Temporary
Impairment
    After
Impairment
  Gains   Losses     Carrying
Value
  Number
of
Securities
  Rating   Coupon     Yield     Maturity
(Years)

Less Than Twelve Months

  $ 244,766   $ 228,462   $ (81,272   $ 147,190   $ —     $ (7,241     139,949   29   BB+   4.68   9.08   3.3

Twelve or More Months

    1,178,656     1,170,154     (138,654     1,031,500     —       (241,349     790,151   183   BB   4.85   5.68   3.0
                                                                     

Total

  $ 1,423,422   $ 1,398,616   $ (219,926   $ 1,178,690   $ —     $ (248,590   $ 930,100   212   BB   4.82   6.11   3.0
                                                                     

Newcastle performed an assessment of all of its debt securities that are in an unrealized loss position (unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:

 

     June 30, 2010  
     Fair Value    Amortized
Cost Basis
   Unrealized Losses  
           Credit (B)     Non-Credit (C)  

Securities Newcastle intends to sell

   $ —      $ —      $ —          N/A   

Securities Newcastle is more likely than not to be required to sell (A)

     —        —        —          N/A   

Securities Newcastle has no intent to sell and is not more likely than not to be required to sell:

          

Credit impaired securities

     69,574      95,905      (209,952     (26,331

Non credit impaired securities

     860,526      1,082,785      —          (222,259
                              

Total debt securities in an unrealized loss position

   $ 930,100    $ 1,178,690    $ (209,952   $ (248,590
                              

 

(A) Newcastle may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, Newcastle must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.
(B) Excluding the effect of previously recorded OTTI. This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, Newcastle’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.
(C) This amount represents unrealized losses on securities that are due to non-credit factors and is required to be recorded through other comprehensive income.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

The following table summarizes the activity related to credit losses on debt securities for the six months ended June 30, 2010:

 

Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income

   $ (408,782

Additions for credit losses on securities for which an OTTI was not previously recognized

     (23,617

Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income

     (37,618

Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income

     (42,480

Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at June 30, 2010

     143,189   

Reduction for securities sold during the period

     40,590   

Reduction for securities deconsolidated during the period

     112,409   

Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security

     6,357   
        

Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income

   $ (209,952
        

The table below summarizes the geographic distribution of the collateral securing our CMBS and ABS at June 30, 2010 (in thousands):

 

     CMBS     ABS  

Geographic Location

   Outstanding Face Amount    Percentage     Outstanding Face Amount    Percentage  

Western U.S.

   $ 521,909    25.0   $ 133,985    28.2

Northeastern U.S.

     479,786    22.9     87,068    18.3

Southeastern U.S.

     414,064    19.8     110,883    23.3

Midwestern U.S.

     284,208    13.6     63,369    13.3

Southwestern U.S.

     243,966    11.7     50,123    10.5

Other

     126,406    6.0     30,213    6.4

Foreign

     21,302    1.0     9    0.0
                          
   $ 2,091,641    100.0   $ 475,650    100.0
                          

Geographic concentrations of investments expose Newcastle to the risk of economic downturns within the relevant regions, particularly given the current unfavorable market conditions. These market conditions may make regions more vulnerable to downturns in certain market factors. Any such downturn in a region where Newcastle holds significant investments could have a material, negative impact on Newcastle.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

4. REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

All of Newcastle’s loan investments, other than the manufactured housing loans Portfolio I as described below, were classified as held for sale as of June 30, 2010 and December 31, 2009 and marked to the lower of carrying value or fair value. The portfolio of manufactured housing loans, refinanced in April 2010 through a securitization transaction (see Note 5), with a face amount of $159.4 million as of June 30, 2010 was reclassified from held for sale to held for investment for the three months ended June 30, 2010.

The following is a summary of real estate related loans, residential mortgage loans and subprime mortgage loans at June 30, 2010. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.

 

Loan Type

  Outstanding
Face Amount
  Carrying
Value (A)
  Loan
Count
  Wtd. Avg.
Yield
    Weighted
Average
Coupon
    Weighted
Average
Maturity
(Years) (B)
  Floating Rate
Loans as a %
of Face
Amount
    Delinquent Face
Amount (C)

Mezzanine Loans

  $ 716,286   $ 313,879   20   23.21   4.73   2.1   85.4   $ 132,795

Corporate Bank Loans

    306,909     205,631   9   14.95   8.50   3.6   64.8     —  

B-Notes

    283,830     125,092   10   20.59   4.35   2.0   78.5     132,413

Whole Loans

    85,110     50,056   4   8.75   3.30   4.0   97.6     —  
                                           

Total Real Estate Related Loans Held for Sale, Net

  $ 1,392,135   $ 694,658   43   19.25   5.40   2.5   80.2   $ 265,208
                                           

Manufactured Housing Loans Portfolio I

  $ 159,355   $ 131,084   4,120   9.64   8.75   7.8   1.2   $ 1,421
                                           

Residential Mortgage Loans, Held for Investment, Net

  $ 159,355   $ 131,084   4,120   9.64   8.75   7.8   1.2   $ 1,421
                                           

Residential Loans

  $ 66,275   $ 50,548   231   3.89   2.40   5.9   100.0   $ 6,307

Manufactured Housing Loans

    1,665     563   41   47.30   8.43   0.7   0.0     936

Manufactured Housing Loans Portfolio II

    227,197     211,444   7,534   8.76   9.72   5.9   17.3     2,692
                                           

Total Residential Mortgage Loans Held for Sale, Net

  $ 295,137   $ 262,555   7,806   7.91   8.07   5.9   35.8   $ 9,935
                                           

Subprime Mortgage Loans Subject to Call Option

  $ 406,217   $ 403,383            
                       

 

(A) Carrying value includes interest receivable of $0.1 million for the residential housing loans and principal and interest receivable of $7.5 million for the manufactured housing loans.
(B) The weighted average maturity is based on the timing of expected principal reduction on the assets.
(C) Includes loans that are non-performing, in foreclosure, under bankruptcy, or considered real estate owned.

The following is a summary of real estate related loans by maturities at June 30, 2010:

 

Year of Maturity (1)

   Outstanding
Face Amount
   Carrying Value    Number of
Loans

Delinquent (2)

   $ 265,209    $ 20,372    8

Period from July 1, 2010 to December 31, 2010

     141,482      63,401    3

2011

     531,614      343,442    16

2012

     132,195      62,995    5

2013

     17,077      4,375    2

2014

     125,672      60,056    3

2015

     160,029      122,473    5

Thereafter

     18,857      7,544    1
                  

Total

   $ 1,392,135      684,658    43
                  

 

(1) Based on the final extended maturity date of each loan investment as of June 30, 1010.
(2) Includes loans that are non-performing, in foreclosure, or under bankruptcy.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

The following is a reconciliation of the related loss allowance.

 

     Held For Sale     Held For Investment  
     Real Estate
Related Loans
    Residential
Mortgage Loans
    Residential Mortgage
Loans
 

Balance at December 31, 2009

   $ (822,409   $ (96,409   $ —     

Charge-offs (A)

     32,432        5,004        —     

Deconsolidation of CDO VII

     5,263        —          —     

Transfer to held for investment

     —          21,884        (21,884

Recoveries

     —          —          —     

Valuation (allowance) reversal on loans

     153,265        34,712        (669
                        

Balance at June 30, 2010

   $ (631,449   $ (34,809   $ (22,553
                        

 

(A) The charge-offs of $32.4 million in real estate related loans for the six months ended June 30, 2010 represent three loans which were either sold, restructured or paid off at a discounted price during the period.

Securitization of Subprime Mortgage Loans

The following table presents information on the retained interests in Newcastle’s securitizations of subprime mortgage loans at June 30, 2010:

 

     Subprime Portfolio
     I    II

Total securitized loans (unpaid principal balance) (A)

   $ 556,930    $ 733,920

Loans subject to call option (carrying value)

   $ 299,176    $ 104,207

Retained interests (fair value) (B)

   $ 1,947    $ 129

 

(A) Average loan seasoning of 59 months and 41 months for Subprime Portfolios I and II, respectively, at June 30, 2010.
(B) The retained interests include retained bonds of the securitizations. Newcastle’s residual interests were written off in the first quarter of 2010. Fair value is estimated based on pricing models.

The following table summarizes certain characteristics of the underlying subprime mortgage loans, and related financing, in the securitizations as of June 30, 2010:

 

     Subprime Portfolio  
     I     II  

Loan unpaid principal balance (UPB)

   $ 556,930      $ 733,920   

Weighted average coupon rate of loans

     6.57     6.27

Delinquencies of 60 or more days (UPB) (A)

   $ 132,426      $ 246,915   

Net credit losses for the six months ended June 30, 2010

   $ 18,874      $ 37,136   

Cumulative net credit losses

   $ 144,401      $ 140,383   

Cumulative net credit losses as a % of original UPB

     9.61     12.90

Percentage of ARM loans (B)

     53.3     66.1

Percentage of loans with original loan-to-value ratio >90%

     10.40     17.20

Percentage of interest-only loans

     22.9     4.0

Face amount of debt (C)

   $ 540,517      $ 709,806   

Weighted average funding cost of debt (D)

     1.60     1.72

 

(A) Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or real estate owned.
(B) ARM loans are adjustable-rate mortgage loans. An option ARM is an adjustable-rate mortgage that provides the borrower with an option to choose from several payment amounts each month for a specified period of the loan term. None of the loans in the subprime portfolios are an option ARM.
(C) Excludes face amount of $16.4 million and $24.1 million of retained notes for Subprime Portfolios I and II, respectively, at June 30, 2010.
(D) Includes the effect of applicable hedges.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Newcastle received net cash inflows of $0.2 million and $0.4 million from the retained interests of Subprime Portfolios I and II, respectively, during the six months ended June 30, 2010 and $0.5 million and $0.8 million from I and II, respectively, during the six months ended June 30, 2009.

The weighted average yield of the retained notes of Subprime Portfolios I and II was 27.6%, as of June 30, 2010. The loans subject to call option and the corresponding financing recognize interest income and expense based on the expected weighted average coupons of the loans subject to call option at the call date of 9.24% and 8.68% for Subprime Portfolio’s I and II, respectively.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

5. DEBT OBLIGATIONS

The following table presents certain information regarding Newcastle’s debt obligations and related hedges at June 30, 2010:

 

                                         Collateral    

Debt Obligation/Collateral

  Month
Issued
    Outstanding
Face
Amount
  Carrying
Value
 
Unhedged
Weighted
Average
Funding Cost (A)
  Final Stated
Maturity
 
Weighted
Average
Funding
Cost (B)
   
Weighted
Average
Maturity
(Years)
  Face
Amount
of
Floating
Rate
Debt
 
Outstanding
Face
Amount (C)
 
Amortized
Cost Basis (C)
 
Carrying
Value (C)
  Weighted
Average
Maturity
(Years)
  Floating  Rate
Face
Amount (C)
  Aggregate
Notional
Amount
of

Current
Hedges

CDO Bonds Payable

                           

CDO IV (D)

  Mar 2004      $ 360,666   $ 359,669   1.44%   Mar 2039   3.01   2.7   $ 336,684   $ 411,503   $ 340,073   $ 291,739   3.0   $ 168,289   $ 163,700

CDO V

  Sep 2004        387,220     385,807   1.26%   Sep 2039   3.10   2.7     375,220     443,457     320,761     276,183   3.3     162,351     188,298

CDO VI (D)

  Apr 2005        410,885     409,530   0.86%   Apr 2040   3.21   3.8     402,875     450,569     226,427     215,549   2.6     137,876     214,595

CDO VIII

  Nov 2006        618,313     618,059   0.98%   Nov 2052   2.25   3.3     610,713     829,325     491,458     505,294   3.6     533,850     161,655

CDO IX

  May 2007        530,125     534,731   0.35%   May 2052   1.67   4.4     530,125     759,356     472,430     487,601   2.7     522,900     91,651

CDO X

  Jul 2007        1,175,000     1,173,822   0.63%   Jul 2052   4.46   5.1     1,175,000     1,322,198     983,399     962,696   3.5     268,305     932,231
                                                                   
      3,482,209     3,481,618       3.19   4.0     3,430,617     4,216,408     2,834,548     2,739,062   3.2     1,793,571     1,752,130
                                                                   

Other Bonds Payable

                           

MH loans Portfolio I (E)

  Apr 2010        93,913     92,385   4.74%   Jul 2035   5.36   3.7     —       159,355     131,084     131,084   7.8     1,964     —  

MH loans Portfolio II (F)

  Aug 2006        183,985     183,548   LIBOR+ 0.89%   Aug 2011   6.10   1.0     183,985     227,197     211,444     211,444   5.9     39,437     —  
                                                                   
      277,898     275,933       5.85   1.9     183,985     386,552     342,528     342,528   6.7     41,401     —  
                                                                   

Notes Payable (G)

                           

Residential Mortgage Loans

  Aug 2004        4,582     4,582   LIBOR+ 0.90%   Dec 2034   1.25   6.0     4,582     4,582     4,582     4,582   6.0     4,582     —  
                                                                   
      4,582     4,582       1.25   6.0     4,582     4,582     4,582     4,582   6.0     4,582     —  
                                                                   

Corporate

                           

Junior subordinated notes payable

  Mar 2006        51,004     51,256   7.57% (I)   Apr 2035   7.42   24.8     —       —       —       —     —       —       —  
                                                                   
      51,004     51,256       7.42   24.8     —       —       —       —     —       —       —  
                                                                   

Subtotal debt obligations

      3,815,693     3,813,389       3.44   4.1   $ 3,619,184   $ 4,607,542   $ 3,181,658   $ 3,086,172   3.5   $ 1,839,554   $ 1,752,130
                                                                   

Financing on subprime mortgage loans subject to call option

  (H     406,217     403,383                      
                                   

Total debt obligations

    $ 4,221,910   $ 4,216,772                      
                                   

 

(A) Weighted average, including floating and fixed rate classes and excluding the amortization of deferred financing costs.
(B) Including the effect of applicable hedges.
(C) Including restricted cash held for reinvestment in CDOs.
(D) CDOs IV and VI were not in compliance with their applicable over collateralization tests as of June 30, 2010. Newcastle is not receiving cash flows from these CDOs (other than senior management fees) and expects these CDOs to remain out of compliance for the foreseeable future.
(E) See further description below.
(F) Of which $1.4 million face amount is recourse financing and was subsequently repaid in full in July 2010.
(G) Notes payable issued to CDO VII, which was eliminated in consolidation through December 31, 2009.
(H) Issued in April 2006 and July 2007. See Note 4 regarding the securitizations of Subprime Portfolios I and II.
(I) LIBOR + 2.25% after April 2016.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

See Note 2 regarding the deconsolidation of CDO VII.

In the first six months of 2010, Newcastle repurchased $119.9 million face amount of CDO bonds for $24.1 million. As a result, Newcastle extinguished $119.9 million face amount of CDO debt and recorded a gain on extinguishment of debt of $95.1 million.

On January 29, 2010, Newcastle entered into an Exchange Agreement, dated as of January 29, 2010 (the “Exchange Agreement”), with Taberna Capital Management, LLC and certain of its affiliates (collectively, “Taberna”), pursuant to which Newcastle and Taberna agreed to exchange (the “Exchange”) approximately $52.1 million aggregate principal amount of junior subordinated notes due 2035 for approximately $37.6 million face amount of previously issued CDO securities and approximately $9.7 million of cash held by Newcastle. In other words, $52.1 million face amount of Newcastle’s debt, in the form of junior subordinated notes payable, was repurchased and extinguished for GAAP purposes in exchange for (i) the payment of $9.7 million of cash and (ii) the reissuance of $37.6 million face amount of CDO bonds payable (which had previously been repurchased by Newcastle). In connection with the Exchange, Newcastle paid or reimbursed $0.6 million of expenses incurred by Taberna, various indenture trustees and their respective advisors in accordance with the terms of the Exchange Agreement. Newacastle accounted for this exchange as a troubled debt restructuring involving the partial repayment of debt. As a result, Newcastle recorded no gain or loss. The following table presents certain information regarding the exchange, as of the date of the exchange:

 

           Consideration
     Repurchased junior
subordinated notes
    Cash    Reissued CDO bonds     Total

Outstanding face amount

   $ 52,094      $ 9,715    $ 37,625      $ 47,340

Weighted average coupon

     7.574 % (A)      N/A      LIBOR + 0.66 % (B)   

Maturity

     April 2035           June 2052     

Collateral

    
 
General credit of
Newcastle
  
  
      
 
Assets within the
respective CDOs
  
  
 

 

(A) LIBOR + 2.25% after April 2016
(B) Weighted average effective interest rate of approximately LIBOR+0.35% after the Exchange.

The fair value of the consideration paid approximated the fair value of the repurchased junior subordinated notes of $16.7 million.

In March 2010, Newcastle sold $22.8 million face amount of FHLMC securities and repaid the corresponding repurchase agreements in the amount of $22.6 million. Concurrent with the sales, Newcastle terminated the related interest rate swap agreements. As a result, the gain on sale recorded from these assets was offset by the loss on the termination of the derivatives.

On April 15, 2010, Newcastle completed a securitization transaction to refinance its Manufactured Housing Loans Portfolio I (the “Portfolio”). Newcastle sold approximately $164.1 million outstanding principal balance of manufactured housing loans to Newcastle MH I LLC (the “Issuer”). The Issuer issued approximately $134.5 million aggregate principal amount of asset-backed notes (the “Notes”), of which $97.6 million was sold to third parties and $36.9 million was sold to certain CDOs managed and consolidated by Newcastle. At the closing of the securitization transaction, Newcastle used the gross proceeds received from the issuance of the Notes to repay the previously existing financing on this portfolio in full, terminate the related interest rate swap contracts, pay the related transaction costs and increase its unrestricted cash by approximately $14 million. Under the applicable accounting guidance, the securitization transaction is accounted for as a secured borrowing. As a result, no gain or loss is recorded for the transaction. Newcastle continues to recognize the portfolio of manufactured housing loans as pledged assets, which have been classified as loans held for investment at securitization, and records the notes issued to third parties as a secured borrowing. The associated assets, liabilities, revenues and expenses are presented in the non-recourse financing structure sections of the consolidated financial statements.

In April 2010, Newcastle repaid in full all of its outstanding repurchase agreements.

In July 2010, Newcastle repaid in full the remaining $1.4 million of recourse debt on its Manufactured Housing Loan Portfolio II.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Summary Table

Newcastle held the following financial instruments at June 30, 2010:

 

    Principal
Balance or
Notional
Amount
  Carrying
Value
  Fair Value  

Fair Value Method (A)

  Weighted
Average
Yield/Funding
Cost
    Weighted
Average
Maturity
(Years)
 

Assets

           

Non-Recourse VIE Financing Structures (F)

           

Financial instruments:

           

Real estate securities, available for sale*

  $ 2,864,635   $ 1,872,612   $ 1,872,612   Broker quotations, counterparty quotations, pricing services, pricing models   8.69   3.3   

Real estate related loans, held for sale, net

    1,155,949     671,657     671,657   Broker quotations, counterparty quotations, pricing services, pricing models   18.73   2.8   

Residential mortgage loans, held for investment, net

    159,355     131,084     131,444   Pricing models   9.64   7.8   

Residential mortgage loans, held for sale, net

    289,677     258,373     258,373   Pricing models   7.95   5.9   

Subprime mortgage loans subject to call option (B)

    406,217     403,383     403,383   (B)   9.09   (B

Restricted cash*

    145,366     145,366     145,366      

Receivables and other assets

      32,769     32,769      
                   
    $ 3,515,244   $ 3,515,604      
                   

Recourse Financing Structures and Unlevered Assets

           

Financial instruments:

           

Real estate securities, available for sale*

  $ 175,608   $ 3,467   $ 3,467   Broker quotations, counterparty quotations, pricing services, pricing models   38.09   0.3   

Real estate related loans, held for sale, net

    236,186     23,001     23,001   Broker quotations, counterparty quotations, pricing services, pricing models   34.54   1.3   

Residential mortgage loans, held for sale, net

    5,460     4,182     4,182   Pricing models   8.25   2.13   

Cash and cash equivalents*

    37,684     37,684     37,684      

Operating real estate, held for sale

      9,906     9,906      

Receivables and other assets

      1,016     1,016      
                   
    $ 79,256   $ 79,256      
                   

Liabilities

           

Non-Recourse VIE Financing Structures (F) (G)

           

Financial instruments:

           

CDO bonds payable

  $ 3,482,209   $ 3,481,618   $ 2,143,736   Pricing models   3.19   4.0   

Other bonds payable ($1.4 million face amount is recourse)

    277,899     275,933     254,844   Pricing models   5.85   1.9   

Notes payable

    4,582     4,582     3,732   Broker quotation   1.25   6.0   

Financing of subprime mortgage loans subject to call option (B)

    406,217     403,383     403,383   (B)   9.09   (B

Interest rate swaps, treated as hedges (C )(E)*

    1,752,130     184,839     184,839   Counterparty quotations   N/A      (C

Non-hedge derivatives (D)(E)*

    139,825     18,435     18,435   Counterparty quotations   N/A      (D

Accrued expenses and other liabilities

      7,415     7,415      
                   
    $ 4,376,205   $ 3,016,384      
                   

Recourse Financing Structures and Other Liabilities (G)

           

Financial instruments:

           

Junior subordinated notes payable

  $ 51,004   $ 51,256   $ 16,963   Pricing models   7.42   24.8   

Due to affiliates

      1,419     1,419      

Accrued expenses and other liabilities

      3,086     3,086      
                   
    $ 55,761   $ 21,468      
                   

 

* Measured at fair value on a recurring basis.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

(A) Methods are listed in order of priority. In the case of real estate securities and real estate related loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded.
(B) These two items result from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 4), are noneconomic until such option is exercised, and are equal and offsetting.
(C) Represents current swap agreements as follows:

 

Year of Maturity

   Weighted Average Month of
Maturity
   Aggregate Notional
Amount
   Weighted Average
Fixed Pay Rate
    Aggregate
Fair Value
Liability,
Net
 

Agreements which receive 1-Month LIBOR:

          

2011

   Dec    $ 91,651    5.00   $ (5,621

2014

   Oct      16,073    5.09     (2,153

2015

   Sep      938,219    5.31     (91,080

2016

   May      180,155    5.04     (24,267

2017

   Aug      174,034    5.24     (31,599

Agreements which receive 3-Month LIBOR:

          

2014

   Jun      351,998    4.20     (30,119
                    
      $ 1,752,130      $ (184,839
                    

 

(D) This represents an interest rate swap with a notional balance of $139.8 million, maturing in June 2016. Newcastle entered into this swap agreement to reduce its exposure to interest rate changes on the floating rate financings of its manufactured housing loan portfolio II. This swap was not designated as a hedge for hedge accounting purposes.
(E) Newcastle’s derivatives fall into two categories. Derivatives held within Newcastle’s nonrecourse debt structures (primarily CDOs), all of which were liabilities at period end, are not subject to Newcastle’s credit risk as they are senior to all the debt obligations of the related CDO. As a result, no adjustments have been made to the fair value quotations received related to credit risk. Newcastle’s significant derivative counterparties include Bank of America, Deutsche Bank, Wachovia and Credit Suisse.
(F) Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, our economic losses from such structures cannot exceed Newcastle’s invested equity in them. Therefore, economically, their net book value cannot be less than zero and as a result, the fair value of Newcastle’s net investments in these non-recourse financing structures is equal to the present value of their expected future net cash flows.
(G) Newcastle notes that the unrealized gain on the liabilities within such structures cannot be fully realized.

Valuation Hierarchy

The methodologies used for valuing such instruments have been categorized into three broad levels which form a hierarchy. Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

The following table summarizes such financial assets and liabilities measured at fair value on a recurring basis at June 30, 2010:

 

     Principal Balance
or Notional
Amount
   Carrying Value    Fair Value
           Level 2    Level 3A (1)    Level 3B (2)    Total

Assets:

                 

Real estate securities, available for sale:

                 

CMBS

   $ 2,091,641    $ 1,240,412    $ —      $ 1,089,606    $ 150,806    $ 1,240,412

REIT debt

     389,550      390,803      390,803      —        —        390,803

ABS - subprime

     395,087      181,251      —        89,693      91,558      181,251

ABS - other real estate

     80,563      54,704      —        47,058      7,646      54,704

FNMA / FHLMC

     3,759      4,151      4,151      —        —        4,151

CDO

     79,643      —        —        —        —        —  
                                         

Debt security total

     3,040,243      1,871,321      394,954      1,226,357      250,010      1,871,321
                     

Equity securities

        1,112      —        —        4,758      4,758
                                     

Total

      $ 1,872,433    $ 394,954    $ 1,226,357    $ 254,768    $ 1,876,079
                                     

Liabilities:

                 

Interest rate swaps, treated as hedges

     1,752,130      184,839      184,839      —        —        184,839

Non-hedge derivatives

     139,825      18,435      18,435      —        —        18,435

 

(1) Third party pricing sources with significant unobservable inputs.
(2) Internal models with significant unobservable inputs.

 

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NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Newcastle’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2010 as follows:

 

     Level 3A  
     CMBS     ABS     Equity/Other
Securities
    Total  
     Conduit     Other     Subprime     Other      

Balance at December 31, 2009

   $ 536,092      $ 397,407      $ 87,883      $ 46,059      $ —        $ 1,067,441   

Transfers (C)

            

Transfers from Level 3B

     310        1,637        —          —          —          1,947   

Transfers into Level 3B

     (39,541     (17,427     (10,538     —          —          (67,506

CDO VII Deconsolidation

     (32,858     (3,379     (10,685     —          —          (46,922

Total gains (losses) (A)

            

Included in net income (loss) (B)

     5,614        300        59        —          —          5,973   

Included in other comprehensive income (loss)

     102,163        56,903        (2,103     4,183        —          161,146   

Amortization included in interest income

     6,384        3,557        4,621        87        —          14,649   

Purchases, sales and settlements

            

Purchases

     127,029        17,958        39,013        —          —          184,000   

Proceeds from sales

     (25,679     (6,934     (6,478     —          —          (39,091

Proceeds from repayments

     (4,385     (35,545     (12,079     (3,271     —          (55,280
                                                

Balance at June 30, 2010

   $ 675,129      $ 414,477      $ 89,693      $ 47,058      $ —        $ 1,226,357   
                                                
     Level 3B  
     CMBS     ABS     Equity/Other
Securities
    Total  
     Conduit     Other     Subprime     Other      

Balance at December 31, 2009

   $ 95,376      $ 32,744      $ 85,377      $ 10,719      $ 2,620      $ 226,836   

Transfers (C)

            

Transfers from Level 3A

     39,541        17,427        10,538        —          —          67,506   

Transfers into Level 3A

     (310     (1,637     —          —          —          (1,947

CDO VII Deconsolidation

     (48,665     —          (17,890     (457     —          (67,012

Total gains (losses) (A)

            

Included in net income (loss) (B)

     (67,616     9,459        (5,092     (2,675     (279     (66,203

Included in other comprehensive income (loss)

     71,980        69,428        26,194        1,083        2,414        171,099   

Amortization included in interest income

     7,417        153        4,892        272        —          12,734   

Purchases, sales and settlements

            

Purchases

     —          —          —          —          3        3   

Proceeds from sales

     (435     (21,646     (1,063     —          —          (23,144

Proceeds from repayments

     (13,995     (38,415     (11,398     (1,296     —          (65,104
                                                

Balance at June 30, 2010

   $ 83,293      $ 67,513      $ 91,558      $ 7,646      $ 4,758      $ 254,768   
                                                

 

(A) None of the gains (losses) recorded in earnings during the period is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.
(B)

 

     Six Months Ended
June 30, 2010
 
     Level 3A     Level 3B  

Gain (loss) on settlement of investments, net

   $ 6,705      $ 9,844   

Other income (loss), net

     —          —     

OTTI

     (732     (76,047
                

Total

   $ 5,973      $ (66,203
                

Gain (loss) on settlement of investments, net, from investments transferred into Level 3 during the period

   $ —        $ —     

 

(C) Transfers are assumed to occur at the beginning of the quarter.

 

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Table of Contents

NEWCASTLE INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2010

(dollars in tables in thousands, except share data)

 

 

Securities Valuation

As of June 30, 2010, Newcastle’s securities valuation methodology and results are further detailed as follows:

 

     Outstanding
Face
Amount (A)
   Amortized
Cost
Basis (B)
   Fair Value

Asset Type

         Multiple
Quotes (C)
   Single
Quote (D)
   Internal
Pricing
Models (E)
   Total

CMBS

   $ 2,091,641    $ 1,345,202    $ 923,193    $ 166,413    $ 150,806    $ 1,240,412

REIT debt

     389,550      389,115      348,953      41,850      —        390,803

ABS – subprime

     395,087      173,543      45,888      43,805      91,558      181,251

ABS – other real estate

     80,563      58,254      4,426      42,632      7,646      54,704

FNMA / FHLMC

     3,759      4,100      —        4,151      —        4,151

CDO

     79,643      —        —        —        —        —  
                                         

Debt security total

   $ 3,040,243      1,970,214      1,322,460      298,851      250,010      1,871,321
                     

Equity securities

        1,112      —        —        4,758      4,758
                                     

Total

      $ 1,971,326    $ 1,322,460    $ 298,851    $ 254,768      1,876,079
                                     

 

(A) Net of incurred losses.
(B) Net of discounts (or gross of premiums) and after OTTI, including impairment taken during the period ended June 30, 2010.
(C)