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EX-2.1 - EXHIBIT 2.1 - NEW YORK MORTGAGE TRUST INCmembershipinterestpurchase.htm
EX-12.1 - EXHIBIT 12.1 - NEW YORK MORTGAGE TRUST INCcopyofex121.htm
EX-31.1 - EXHIBIT 31.1 - NEW YORK MORTGAGE TRUST INCcopyofex311.htm
EX-32.1 - EXHIBIT 32.1 - NEW YORK MORTGAGE TRUST INCcopyofex321.htm
EX-31.2 - EXHIBIT 31.2 - NEW YORK MORTGAGE TRUST INCcopyofex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q   
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

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 001-32216

NEW YORK MORTGAGE TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland 
47-0934168 
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

275 Madison Avenue, New York, New York 10016
(Address of Principal Executive Office) (Zip Code)

(212) 792-0107
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 ☐
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 ☒


The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on May 5, 2016 was 109,409,236.




NEW YORK MORTGAGE TRUST, INC.

FORM 10-Q

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
 
March 31, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investment securities, available for sale, at fair value (including $41,490 and $40,734 held in securitization trusts as of March 31, 2016 and December 31, 2015, respectively and pledged securities of $645,267 and $639,683, as of March 31, 2016 and December 31, 2015, respectively)
$
794,473

 
$
765,454

Residential mortgage loans held in securitization trusts, net
113,186

 
119,921

Distressed residential mortgage loans, net (including $0 and $114,214 held in securitization trusts)
537,616

 
558,989

Multi-family loans held in securitization trusts, at fair value
7,250,586

 
7,105,336

Derivative assets
288,925

 
228,775

Receivables for securities sold
1,858

 

Cash and cash equivalents
39,931

 
61,959

Receivables and other assets
226,369

 
215,808

Total Assets (1)
$
9,252,944

 
$
9,056,242

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Financing arrangements, portfolio investments
$
589,919

 
$
577,413

Financing arrangements, distressed residential mortgage loans
216,604

 
212,155

Residential collateralized debt obligations
110,023

 
116,710

Multi-family collateralized debt obligations, at fair value
6,957,293

 
6,818,901

Securitized debt
83,471

 
116,541

Derivative liabilities
4,998

 
1,500

Payable for securities purchased
311,250

 
227,969

Accrued expenses and other liabilities
59,378

 
59,527

Subordinated debentures
45,000

 
45,000

Total liabilities (1)
8,377,936

 
8,175,716

Commitments and Contingencies

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value, 7.75% Series B cumulative redeemable, $25 liquidation preference per share, 6,000,000 shares authorized, 3,000,000 shares issued and outstanding
$
72,397

 
$
72,397

Preferred stock, $0.01 par value, 7.875% Series C cumulative redeemable, $25 liquidation preference per share, 4,140,000 shares authorized, 3,600,000 shares issued and outstanding
86,862

 
86,862

Common stock, $0.01 par value, 400,000,000 shares authorized, 109,409,236 and 109,401,721 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
1,094

 
1,094

Additional paid-in capital
734,664

 
734,610

Accumulated other comprehensive income (loss)
4,106

 
(2,854
)
Accumulated deficit
(24,115
)
 
(11,583
)
Total stockholders' equity
$
875,008

 
$
880,526

Total Liabilities and Stockholders' Equity
$
9,252,944

 
$
9,056,242


(1) Our condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiary of these VIEs. As of March 31, 2016 and December 31, 2015, assets of consolidated VIEs totaled $7,432,157 and $7,413,082, respectively, and the liabilities of consolidated VIEs totaled $7,175,369 and $7,077,175, respectively. See Note 7 for further discussion.

The accompanying notes are an integral part of the consolidated financial statements.
3



NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(unaudited)
 
For the Three Months Ended
March 31,
 
2016
 
2015
INTEREST INCOME:
 
 
 
Investment securities and other
$
8,434

 
$
11,344

Multi-family loans held in securitization trusts
63,532

 
66,300

Residential mortgage loans held in securitization trusts
837

 
1,180

Distressed residential mortgage loans
8,823

 
10,161

Total interest income
81,626

 
88,985

 
 
 
 
INTEREST EXPENSE:
 
 
 
Investment securities and other
3,849

 
3,463

Multi-family collateralized debt obligations
57,200

 
60,095

Residential collateralized debt obligations
303

 
239

Securitized debt
2,131

 
3,127

Subordinated debentures
501

 
460

Total interest expense
63,984

 
67,384

 
 
 
 
NET INTEREST INCOME
17,642

 
21,601

 
 
 
 
OTHER INCOME (LOSS):
 
 
 
Recovery (provision) for loan losses
645

 
(436
)
Realized gain on investment securities and related hedges, net
1,266

 
1,124

Gain on de-consolidation of multi-family loans held in securitization trust and multi-family collateralized debt obligations

 
1,483

Realized gain on distressed residential mortgage loans
5,548

 
676

Unrealized loss on investment securities and related hedges, net
(2,490
)
 
(5,728
)
Unrealized gain on multi-family loans and debt held in securitization trusts, net
818

 
13,628

Other income
3,073

 
2,286

Total other income
8,860

 
13,033

 
 
 
 
Base management and incentive fees
3,526

 
6,870

Expenses related to distressed residential mortgage loans
3,194

 
1,884

Other general and administrative expenses
2,640

 
2,092

Total general, administrative and other expenses
9,360

 
10,846

 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAXES
17,142

 
23,788

Income tax expense
191

 
245

NET INCOME
16,951

 
23,543

Preferred stock dividends
(3,225
)
 
(1,453
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
13,726

 
$
22,090

 
 
 
 
Basic income per common share
$
0.13

 
$
0.21

Diluted income per common share
$
0.13

 
$
0.21

Weighted average shares outstanding-basic
109,402

 
105,488

Weighted average shares outstanding-diluted
109,402

 
105,488


The accompanying notes are an integral part of the consolidated financial statements.
4


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(unaudited)
 
For the Three Months Ended
March 31,
 
2016
 
2015
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
13,726

 
$
22,090

OTHER COMPREHENSIVE INCOME
 
 
 
Increase in fair value on available for sale securities
7,862

 
3,137

Decrease in fair value of derivative instruments utilized for cash flow hedges
(902
)
 
(1,261
)
OTHER COMPREHENSIVE INCOME
6,960

 
1,876

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
20,686

 
$
23,966


The accompanying notes are an integral part of the consolidated financial statements.
5


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(unaudited)
 
Common
Stock
 
Preferred
Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance, December 31, 2015
$
1,094

 
$
159,259

 
$
734,610

 
$
(11,583
)
 
$
(2,854
)
 
$
880,526

Net income

 

 

 
16,951

 

 
16,951

Stock issuance, net

 

 
54

 

 

 
54

Dividends declared on common and preferred stock

 

 


 
(29,483
)
 

 
(29,483
)
Increase in fair value on available for sale securities

 

 

 

 
7,862

 
7,862

Decrease in fair value of derivative instruments utilized for cash flow hedges

 

 

 

 
(902
)
 
(902
)
Balance, March 31, 2016
$
1,094

 
$
159,259

 
$
734,664

 
$
(24,115
)
 
$
4,106

 
$
875,008


The accompanying notes are an integral part of the consolidated financial statements.
6

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)


 
For the Three Months Ended
March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
16,951

 
$
23,543

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization (accretion)
1,012

 
(1,226
)
Realized gain on investment securities and related hedges, net
(1,266
)
 
(1,124
)
Realized gain on distressed residential mortgage loans
(5,548
)
 
(676
)
Unrealized loss on investment securities and related hedges, net
2,490

 
5,728

Gain on de-consolidation of multi-family loans held in securitization trusts and multi-family collateralized debt obligations

 
(1,483
)
Unrealized gain on loans and debt held in multi-family securitization trusts
(818
)
 
(13,628
)
Net decrease in loans held for sale
151

 
4

(Recovery of) provision for loan losses
(645
)
 
436

Income from investments in limited partnerships and limited liability companies
(4,366
)
 
(2,920
)
Distributions of income from investments in limited partnership and limited liability companies
6,119

 
2,302

Amortization of stock based compensation, net
253

 
174

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
4,339

 
(136
)
Accrued expenses and other liabilities
(151
)
 
(5,346
)
Net cash provided by operating activities
18,521

 
5,648

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Restricted cash
(6,483
)
 
1,534

Proceeds from sales of investment securities
58,875

 

Purchases of investment securities
(90,351
)
 

Purchases of other assets
(2
)
 
(4
)
Funding of mezzanine loans, equity and preferred equity investments

 
(12,701
)
Net proceeds on other derivative instruments settled during the period
1,418

 
1,165

Principal repayments received on residential mortgage loans held in securitization trusts
6,421

 
6,776

Principal repayments and proceeds from sales and refinancing of distressed residential mortgage loans
47,441

 
36,643

Principal repayments received on multi-family loans held in securitization trusts
34,745

 
19,793

Principal paydowns on investment securities - available for sale
24,427

 
11,618

Proceeds from sale of real estate owned
541

 
344

Purchases of residential mortgage loans and distressed residential mortgage loans
(29,684
)
 

Proceeds from sales of loans held in multi-family securitization trusts

 
44,261

Net cash provided by investing activities
47,348

 
109,429

 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net Proceeds from (payments made on) financing arrangements, including FHLBI advances and payments
16,955

 
(32,945
)
Common stock issuance (repurchases), net
(198
)
 
20,839

Dividends paid on common stock
(26,256
)
 
(28,376
)
Dividends paid on preferred stock
(3,225
)
 
(1,453
)
Payments made on residential collateralized debt obligations
(6,715
)
 
(7,205
)
Payments made on multi-family collateralized debt obligations
(34,741
)
 
(19,790
)
Payments made on securitized debt
(33,717
)
 
(32,755
)
Net cash used in financing activities
(87,897
)
 
(101,685
)
Net (Decrease) Increase in Cash and Cash Equivalents
(22,028
)
 
13,392

Cash and Cash Equivalents - Beginning of Period
61,959

 
75,598

Cash and Cash Equivalents - End of Period
$
39,931

 
$
88,990

 
 
 
 

The accompanying notes are an integral part of the consolidated financial statements.
7

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollar amounts in thousands)
(unaudited)


Supplemental Disclosure:
 
 
 
Cash paid for interest
$
75,048

 
$
82,606

Cash paid for income taxes
$
807

 
$
1,180

Non-Cash Investment Activities:
 
 
 
Sales of investment securities not yet settled
$
1,858

 
$
19,373

Purchase of investment securities not yet settled
$
311,250

 
$
350,145

Deconsolidation of multi-family loans held in securitization trusts
$

 
$
1,075,529

Deconsolidation of multi-family collateralized debt obligations
$

 
$
1,031,268

Non-Cash Financing Activities:
 
 
 
Dividends declared on common stock to be paid in subsequent period
$
26,258

 
$
29,147

Dividends declared on preferred stock to be paid in subsequent period
$
3,225

 
$
1,453


The accompanying notes are an integral part of the consolidated financial statements.
8


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)
1.
Organization

New York Mortgage Trust, Inc., together with its consolidated subsidiaries ("NYMT," "we," "our," or the “Company"), is a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets and financial assets. Our objective is to deliver stable distributions to our stockholders over diverse economic conditions through a combination of income generated by net interest margin and net realized capital gains from our diversified investment portfolio. Our portfolio includes residential mortgage loans, including loans sourced from distressed markets, multi-family CMBS, mezzanine loans to and preferred equity investments in owners of multi-family properties, equity and debt securities issued by entities that invest in commercial real estate and commercial real estate-related debt investments, Agency RMBS consisting of fixed-rate, adjustable-rate and hybrid adjustable-rate RMBS and Agency IOs consisting of interest only and inverse interest-only RMBS that represent the right to the interest component of the cash flow from a pool of mortgage loans and certain other investments in mortgage-related and financial assets.

The Company conducts its business through the parent company, New York Mortgage Trust, Inc., and several subsidiaries, including special purpose subsidiaries established for residential loan, distressed residential loan and CMBS securitization purposes, taxable REIT subsidiaries ("TRSs") and qualified REIT subsidiaries ("QRSs"). The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”).

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.


9


2.
Summary of Significant Accounting Policies

Definitions – The following defines certain of the commonly used terms in these financial statements: 

“RMBS” refers to residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only and principal only mortgage-backed securities;
“Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a federally chartered corporation (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”);
“Non-Agency RMBS” refers to RMBS backed by prime jumbo mortgage loans including re-performing and non-performing loans;
“IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans;
“POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;
“Agency IOs” refers to an IO that represents the right to the interest component of the cash flows from a pool of residential mortgage loans issued or guaranteed by a GSE or an agency of the U.S. government;
“ARMs” refers to adjustable-rate residential mortgage loans;
“Prime ARM loans” and “residential securitized loans” each refer to prime credit quality residential ARM loans (“prime ARM loans”) held in securitization trusts; “Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;
“CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans;
“Multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties; “CDOs” refers to collateralized debt obligations; and
“CLO” refers to collateralized loan obligations.

Basis of Presentation – The accompanying condensed consolidated balance sheet as of December 31, 2015 has been derived from audited financial statements. The accompanying condensed consolidated balance sheet as of March 31, 2016, the accompanying condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015, the accompanying condensed consolidated statements of comprehensive income for the three months ended March 31, 2016 and 2015, the accompanying condensed consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2016 and the accompanying condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full year.

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made significant estimates in several areas, including valuation of its CMBS investments, multi-family loans held in securitization trusts and multi-family CDOs, as well as, income recognition on distressed residential mortgage loans purchased at a discount. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially impact the Company’s results of operations and its financial condition.

Principles of Consolidation and Variable Interest Entities – The accompanying condensed consolidated financial statements of the Company include the accounts of all its subsidiaries which are majority-owned, controlled by the Company or a VIE where the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.



10


A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company consolidates a VIE when it is the primary beneficiary of such VIE, herein referred to as a "Consolidated VIE". As primary beneficiary, it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

Investment Securities Available for Sale – The Company's investment securities, where the fair value option has not been elected and which are reported at fair value with unrealized gains and losses reported in Other Comprehensive Income (“OCI”), include Agency RMBS, non-Agency RMBS and CMBS. The Company has elected the fair value option for its Agency IOs, U.S. Treasury securities, certain Agency ARMs and Agency fixed rate securities within the Agency IO portfolio, which measures unrealized gains and losses through earnings in the accompanying condensed consolidated statements of operations. The fair value option was elected for these investment securities to better match the accounting for these investment securities with the related derivative instruments within the Agency IO portfolio, which are not designated as hedging instruments for accounting purposes.

The Company generally intends to hold its investment securities until maturity; however, from time to time, it may sell any of its securities as part of the overall management of its business. As a result, our investment securities are classified as available for sale securities. Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in realized gain (loss) on investment securities and related hedges in the accompanying condensed consolidated statements of operations.

Interest income on our investment securities available for sale is accrued based on the outstanding principal balance and their contractual terms. Purchase premiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the effective yield method. Adjustments to amortization are made for actual prepayment activity.

Interest income on our credit sensitive securities, such as our CMBS that were purchased at a discount to par value, is recognized based on the security’s effective interest rate. The effective interest rate on these securities is based on management’s estimate from each security of the projected cash flows, which are estimated based on assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, management reviews and, if appropriate, adjusts its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on these securities.

A portion of the purchase discount on the Company’s first loss tranche PO multi-family CMBS is designated as non-accretable purchase discount or credit reserve, which partially mitigates the Company’s risk of loss on the mortgages collateralizing such multi-family CMBS, and is not expected to be accreted into interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is more favorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of a security with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and writedowns of such securities to a new cost basis could be required.

The Company accounts for debt securities that are of high credit quality (generally those rated AA or better by a Nationally Recognized Statistical Rating Organization, or NRSRO) at date of acquisition in accordance with Accounting Standards Codification (“ASC”) 320-10. The Company accounts for debt securities that are not of high credit quality (i.e., those whose risk of loss is less than remote) or securities that can be contractually prepaid such that we would not recover our initial investment at the date of acquisition in accordance with ASC 325-40. The Company considers credit ratings, the underlying credit risk and other market factors in determining whether the debt securities are of high credit quality; however, securities rated lower than AA or an equivalent rating are not considered of high credit quality and are accounted for in accordance with ASC 325-40. If ratings are inconsistent among NRSROs, the Company uses the lower rating in determining whether the securities are of high credit quality.





11


The Company assesses its impaired securities on at least a quarterly basis and designates such impairments as either “temporary” or “other-than-temporary” by applying the guidance prescribed in ASC Topic 320-10. When the fair value of an investment security is less than its amortized cost as of the reporting balance sheet date, the security is considered impaired.  If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through earnings equal to the entire difference between the investment’s amortized cost and its fair value as of the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as a component of other comprehensive income (loss) on the accompanying condensed consolidated balance sheets. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security, which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment as well the Company’s estimates of the future performance and cash flow projections. As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

In determining the other-than temporary impairment related to credit losses for securities that are not of high credit quality, the Company compares the present value of the remaining cash flows expected to be collected at the prior reporting date or purchase date, whichever is most recent against the present value of the cash flows expected to be collected at the current financial reporting date. The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities and delinquency rates.

Residential Mortgage Loans Held in Securitization Trusts – Residential mortgage loans held in securitization trusts are comprised of certain ARM loans transferred to Consolidated VIEs that have been securitized into sequentially rated classes of beneficial interests. The Company accounted for these securitization trusts as financings which are consolidated into the Company’s financial statements. Residential mortgage loans held in securitization trusts are carried at their unpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses. Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of residential mortgage loans held in securitization trusts. Estimation involves the consideration of various credit-related factors, including but not limited to, macro-economic conditions, current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower's current economic condition and other factors deemed to warrant consideration. Additionally, we look at the balance of any delinquent loan and compare that to the current value of the collateralizing property. We utilize various home valuation methodologies including appraisals, broker pricing opinions, internet-based property data services to review comparable properties in the same area or consult with a real estate agent in the property's area.

Acquired Distressed Residential Mortgage Loans – Distressed residential mortgage loans are comprised of pools of fixed and adjustable rate residential mortgage loans acquired by the Company at a discount, with evidence of credit deterioration since their origination and where it is possible that the Company will not collect all contractually required principal payments. Distressed residential mortgage loans held in securitization trusts are distressed residential mortgage loans transferred to Consolidated VIEs that have been securitized into beneficial interests. The Company accounted for these securitization trusts as financings which are consolidated into the Company’s financial statements.

Acquired distressed residential mortgage loans that have evidence of deteriorated credit quality at acquisition are accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Management evaluates whether there is evidence of credit quality deterioration as of the acquisition date using indicators such as past due or modified status, risk ratings, recent borrower credit scores and recent loan-to-value percentages. Acquired distressed residential mortgage loans are recorded at fair value as the date of acquisition, with no allowance for loan losses. Under ASC 310-30, the acquired loans may be accounted for individually or aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an expectation of aggregate cash flows. Once a pool is assembled, it is treated as if it was one loan for purposes of applying the accounting guidance.

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Under ASC 310-30, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” is accreted into interest income over the life of the loans in each pool or individually using a level yield methodology. Accordingly, our acquired distressed residential mortgage loans accounted for under ASC 310-30 are not subject to classification as nonaccrual classification in the same manner as our residential mortgage loans that were not distressed when acquired by us. Rather, interest income on acquired distressed residential mortgage loans relates to the accretable yield recognized at the pool level or on an individual loan basis, and not to contractual interest payments received at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable difference,” includes estimates of both the impact of prepayments and expected credit losses over the life of the individual loan, or the pool (for loans grouped into a pool).

Management monitors actual cash collections against its expectations, and revised cash flow estimates are prepared as necessary. A decrease in expected cash flows in subsequent periods may indicate that the loan pool or individual loan, as applicable, is impaired thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for prospectively as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool or individual loan, as applicable. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income.

A distressed residential mortgage loan disposal, which may include a loan sale, receipt of payment in full from the borrower or foreclosure, results in removal of the loan from the loan pool at its allocated carrying amount. In the event of a sale of the loan and receipt of payment (in full or partial) from the borrower, a gain or loss on sale is recognized and reported based on the difference between the sales proceeds or payment from the borrower and the allocated carrying amount of the acquired distressed residential mortgage loan. In the case of a foreclosure, an individual loan is removed from the pool, a gain or loss on sale is recognized and reported based on the difference between the fair value of the underlying collateral less costs to sell and the carrying amount of the acquired distressed residential mortgage loan.

The Company uses the specific allocation method for the removal of loans as the estimated cash flows and related carrying amount for each individual loan are known. In these cases, the remaining accretable yield is unaffected and any material change in remaining effective yield caused by the removal of the loan from the pool is addressed by the re-assessment of the estimate of cash flows for the pool prospectively.

Acquired distressed residential mortgage loans subject to modification are not removed from the pool even if those loans would otherwise be considered troubled debt restructurings because the pool, and not the individual loan, represents the unit of account.

For individual loans not accounted for in pools that are sold or satisfied by payment in full, a gain or loss on sale is recognized and reported based on the difference between the sales proceeds and the carrying amount of the acquired distressed residential mortgage loan. In the case of a foreclosure, a gain or loss sale is recognized and reported based on the difference between the fair value of the underlying collateral less costs to sell and the carrying amount of the acquired distressed residential mortgage loan.


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Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are comprised of multi-family mortgage loans held in five Freddie Mac-sponsored multi-family K-Series securitizations (the “Consolidated K-Series”) as of March 31, 2016 and December 31, 2015. Based on a number of factors, we determined that we were the primary beneficiary of each VIE within the Consolidated K-Series, met the criteria for consolidation and, accordingly, have consolidated these Freddie Mac-sponsored multi-family K-Series securitizations, including their assets, liabilities, income and expenses in our financial statements. The Company has elected the fair value option on each of the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations be reflected in the Company's accompanying condensed consolidated statement of operations. The Company has adopted ASU 2014-13 effective January 1, 2016, which updates the guidance on measuring the financial assets and financial liabilities of consolidated collateralized financing entities, or CFEs. The update allows the Company to measure both the financial assets and financial liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s securitization trusts are considered qualifying CFEs, the Company determines the fair value of multi-family loans held in securitization trusts based on the fair value of its multi-family collateralized debt obligations and its retained interests from these securitizations (eliminated in consolidation in accordance with U.S. GAAP), as the fair value of these instruments is more observable.

Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Mezzanine Loan and Preferred Equity Investments – The Company invests in mezzanine loans and preferred equity of entities that have significant real estate assets. The mezzanine loan is secured by a pledge of the borrower’s equity ownership in the property. Unlike a mortgage, this loan does not represent a lien on the property. Therefore, it is always junior and subordinate to any first-lien as well as second liens, if applicable, on the property. These loans are senior to any preferred equity or common equity interests.

A preferred equity investment is an equity investment in the entity that owns the underlying property. Preferred equity is not secured by the underlying property, but holders have priority relative to common equity holders on cash flow distributions and proceeds from capital events. In addition, preferred equity holders may be able to enhance their position and protect their equity position with covenants that limit the entity’s activities and grant the holder the exclusive right to control the property after an event of default.

Mezzanine loans and preferred equity investments, where the risks and payment characteristics are equivalent to mezzanine loans, are accounted for as loans and are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances, and are included in receivables and other assets. The Company has evaluated its mezzanine loan and preferred equity investments for accounting treatment as loans versus equity investment utilizing the guidance provided by the ADC Arrangements Subsection of ASC 310, Receivables.
 
For mezzanine loan and preferred equity investments where the characteristics, facts and circumstances indicate that loan accounting treatment is appropriate, the Company accretes or amortizes any discounts or premiums and deferred fees and expenses over the life of the related asset utilizing the effective interest method or straight line-method, if the result is not materially different.

Management evaluates the collectibility of both interest and principal of each of our loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to the estimated fair value of the loan or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. Interest income is accrued and recognized as revenue when earned according to the terms of the loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

The Company had preferred equity and mezzanine loan investments accounted for as loans included in receivables and other assets in the amounts of $44.4 million and $44.2 million as of March 31, 2016 and December 31, 2015, respectively.

Mezzanine loans and preferred equity investments where the risks and payment characteristics are equivalent to an equity investment are accounted for using the equity method of accounting. See “Investment in Unconsolidated Entities.
 

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Mortgage Loans Held for Investment – Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances, and are included in receivables and other assets. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in interest income. A loan is considered to be impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on the facts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan over either: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price.

Investments in Unconsolidated Entities – Non-controlling, unconsolidated ownership interests in an entity may be accounted for using the equity method, at fair value or the cost method. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over the affairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings or preferred return and decreased for cash distributions and a proportionate share of the entity’s losses. Management periodically reviews its investments for impairment based on projected cash flows from the entity over the holding period. When any impairment is identified, the investments are written down to recoverable amounts. The Company had equity method investments included in receivables and other assets in the amounts of $19.9 million and $20.1 million as of March 31, 2016 and December 31, 2015, respectively.

The Company may account for an investment in an unconsolidated entity at fair value by electing the fair value option. The Company elected the fair value option for certain investments in unconsolidated entities that own interests (directly or indirectly) in commercial and residential real estate assets because the Company determined that such presentation represents the underlying economics of the respective investment. The Company records the change in fair value of its investment in other income in the consolidated statements of operations. The Company had investments in unconsolidated entities at fair value included in receivables and other assets in the amounts of $65.8 million and $67.6 million as of March 31, 2016 and December 31, 2015, respectively.

Investments in unconsolidated entities accounted at fair value consist of the following as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):

 
 
March 31, 2016
 
December 31, 2015
Investment Name
 
Ownership Interest
Carrying Amount
 
Ownership Interest
Carrying Amount
RB Development Holding Company, LLC
 
63%
$
2,034

 
63%
$
1,927

RB Multifamily Investors LLC (1)
 
70%
$
54,814

 
70%
$
56,891

Morrocroft Neighborhood Stabilization Fund II, LP
 
11%
$
8,950

 
13%
$
8,753


(1) Includes the Company's preferred and common equity interests.

The following table presents income (loss) from investments in unconsolidated entities accounted at fair value for the three months ended March 31, 2016 and March 31, 2015 (dollar amounts in thousands):
 
 
Three Months Ended March 31,
Investment Name
 
2016
 
2015
RB Development Holding Company, LLC
 
$
107

 
$
35

RB Multifamily Investors LLC (1)
 
1,756

 
1,147

Morrocroft Neighborhood Stabilization Fund II, LP
 
357

 









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The Company accounts for an investment that does not qualify for equity method accounting or for which the fair value option was not elected using the cost method if the Company determines the investment in the unconsolidated entity is insignificant. Under the cost method, equity in earnings is recorded as dividends are received to the extent they are not considered a return of capital, which is recorded as a reduction of cost of the investment. The Company had no investments in unconsolidated entities accounted for using the cost method.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Receivables and Other Assets – Receivables and other assets as of March 31, 2016 and December 31, 2015 include restricted cash held by third parties of $27.3 million and $20.8 million, respectively. Included in restricted cash is $13.5 million and $11.6 million held in our Agency IO portfolio to be used for trading purposes and $13.3 million and $8.2 million held by counterparties as collateral for hedging instruments as of March 31, 2016 and December 31, 2015, respectively. Interest receivable on multi-family loans held in securitization trusts is also included in the amounts of $24.5 million and $24.6 million as of March 31, 2016 and December 31, 2015, respectively.

Financing Arrangements, Portfolio Investments – The Company finances the majority of its Agency RMBS using repurchase agreements. Under a repurchase agreement, an asset is sold to a counterparty to be repurchased at a future date at a predetermined price, which represents the original sales price plus interest. The Company accounts for these repurchase agreements as financings and are carried at their contractual amounts, as specified in the respective agreements. Borrowings under repurchase agreements generally bear interest rates of a specified margin over one-month LIBOR.

On February 20, 2015, our wholly-owned, captive-insurance subsidiary, Great Lakes Insurance Holdings LLC (“GLIH”), became a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”). On January 12, 2016, the regulator of the Federal Home Loan Bank ("FHLB") system, the Federal Housing Finance Agency, released a final rule that amends regulations governing FHLB membership, including preventing captive insurance companies from being eligible for FHLB membership. Under the terms of the final rule, the Company's captive insurance subsidiary is required to terminate its membership and repay its existing advances within one year following the effective date of the final rule. In addition, the Company's captive insurance subsidiary is prohibited from taking new advances or renewing existing maturing advances during the one year transition period. The final rule became effective on February 19, 2016. During January 2016, the Company repaid all of its outstanding FHLBI advances, which repayment was funded primarily through repurchase agreement financing.

Financing Arrangements, Residential Mortgage Loans – The Company finances a portion of its residential mortgage loans, including its distressed residential mortgage loans through a repurchase agreement, expiring within 12 to 15 months. The borrowing under the repurchase agreement bears an interest rate of a specified margin over one-month LIBOR. The repurchase agreement is treated as a collateralized financing transaction and is carried at the contractual amounts, as specified in the respective agreement. Costs related to the establishment of the repurchase agreement which include underwriting, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $1.9 million as of March 31, 2016 and $2.3 million as of December 31, 2015. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

Residential Collateralized Debt Obligations (“Residential CDOs”) – We use Residential CDOs to permanently finance our residential mortgage loans held in securitization trusts. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the Company and the Residential CDOs are recorded as the Company’s debt. The Company completed four securitizations in 2005 and 2006.The first three were accounted for as a permanent financing while the fourth was accounted for as a sale and accordingly, is not included in the Company’s accompanying condensed consolidated financial statements.

Multi-Family Collateralized Debt Obligations (“Multi-Family CDOs”) – We consolidated the Consolidated K-Series including their debt, referred to as Multi-Family CDOs, in our financial statements. The Multi-Family CDOs permanently finance the multi-family mortgage loans held in the Consolidated K-Series securitizations. For financial reporting purposes, the loans held as collateral are recorded as assets of the Company and the Multi-Family CDOs are recorded as the Company’s debt. We refer to both the Residential CDOs and Multi-Family CDOs as CDOs in this report.





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Securitized Debt – Securitized Debt represents third-party liabilities of Consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that are eliminated on consolidation. The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the special purpose entities (the “SPEs”) that were created to facilitate the transactions and to which underlying assets in connection with the financing were transferred. The Company engaged in these transactions primarily to obtain permanent or longer term financing on a portion of its multi-family CMBS and acquired distressed residential mortgage loans.

Costs related to issuance of securitized debt which include underwriting, rating agency, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $0.5 million and $1.0 million as of March 31, 2016 and December 31, 2015, respectively. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

Derivative Financial Instruments – In accordance with ASC 815, the Company records derivative financial instruments on its consolidated balance sheet as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they qualify for hedge accounting treatment.

In connection with our investment in Agency IOs, the Company uses several types of derivative instruments such as interest rate swaps, futures, put and call options on futures and TBAs to hedge the interest rate risk, as well as spread risk associated with these investments. The Company also purchase, or sells short, To-Be-Announced securities (“TBAs”) through its Agency IO portfolio. TBAs are forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced.” Pursuant to these TBA transactions, we agree to purchase or sell, for future settlement, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. For TBA contracts that we have entered into, we have not asserted that physical settlement is probable, therefore we have not designated these forward commitments as hedging instruments. The use of TBAs, futures, options on futures and interest rate swaps in our Agency IO portfolio hedge the overall risk profile of investment securities in the portfolio. The derivative instruments in our Agency IO portfolio are not designated as hedging instruments, therefore realized and unrealized gains and losses associated with these derivative instruments are recognized through earnings and reported as part of the other income (loss) category in the Company's condensed consolidated statements of operations.

The Company also uses interest rate swaps to hedge the variable cash flows associated with borrowings made under its financing arrangements and Residential CDOs. We typically pay a fixed rate and receive a floating rate based on one month LIBOR, on the notional amount of the interest rate swaps. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics and cash flows of our financing arrangements. These interest rate swaps, qualify as a cash flow hedge, where the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change

Termination of Hedging Relationships – The Company employs risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.

Additionally, the Company may elect to un-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.

Manager Compensation – We are a party to separate investment management agreements with Headlands Asset Management LLC (“Headlands”), The Midway Group, LP (“Midway”) and RiverBanc LLC (“RiverBanc”), with Headlands providing investment management services with respect to our investments in certain distressed residential mortgage loans, Midway providing investment management services with respect to our investments in Agency IOs, and RiverBanc providing investment management services with respect to our investments in multifamily CMBS and certain commercial real estate-related equity and debt investments. These investment management agreements provide for the payment to our investment managers of a management fee, incentive fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred.



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Other Comprehensive Income (Loss) – The Company’s comprehensive income/(loss) available to common stockholders includes net income, the change in net unrealized gains/(losses) on its available for sale securities and its derivative hedging instruments, currently comprised of interest rate swaps, (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of accumulated other comprehensive income/(loss) for available for sale securities and is reduced by dividends declared on the Company’s preferred stock.

Employee Benefits Plans – The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company made no contributions to the Plan for the three months ended March 31, 2016 and 2015.

Stock Based Compensation – The Company has awarded restricted stock to eligible employees and officers as part of their compensation. Compensation expense for equity based awards and stock issued for services are recognized over the vesting period of such awards and services based upon the fair value of the award at the grant date.

In May 2015, the Company granted certain Performance Share Awards (“PSAs”) which cliff vest after a three-year period, subject to the achievement of certain performance criteria based on a formula tied to the Company’s achievement of three-year total stockholder return (“TSR”) and the Company’s TSR relative to the TSR of certain peer companies. The feature in this award constitutes a “market condition” which impacts the amount of compensation expense recognized for these awards. The grant date fair values of PSAs were determined through Monte-Carlo simulation analysis.

Income Taxes – The Company operates in such a manner so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders, of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of the remaining balance may extend until timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

Certain activities of the Company are conducted through TRSs and therefore are subject to federal and various state and local income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. In situations involving uncertain tax positions related to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. ASC 740 was applied to all open taxable years as of the effective date. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based on factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company will recognize interest and penalties, if any, related to uncertain tax positions as income tax expense.

Earnings Per Share – Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Segment Reporting – ASC 280, Segment Reporting, is the authoritative guidance for the way public entities report information about operating segments in their annual financial statements. We are a REIT focused on the business of acquiring, investing in, financing and managing primarily mortgage-related and financial assets, and currently operate in only one reportable segment.


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Summary of Recent Accounting Pronouncements

Revenue Recognition (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This guidance creates a new, principle-based revenue recognition framework that will affect nearly every revenue-generating entity. ASU 2014-09 also creates a new topic in the Codification, Topic 606 (“ASC 606”). In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 does the following: (1) establishes a new control-based revenue recognition model; (2) changes the basis for deciding when revenue is recognized over time or at a point in time; (3) provides new and more detailed guidance on specific aspects of revenue recognition; and (4) expands and improves disclosures about revenue. In August 2015, the FASB issued ASU 2015-14 that defers the effective date of ASU 2014-09 for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early application is not permitted for public business entities. The Company is currently assessing the impact of this guidance.


Consolidation (Topic 810)

In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). For entities that consolidate a collateralized financing entity within the scope of this update, an option to elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement is provided. The guidance became effective for the Company beginning January 1, 2016. The adoption of this ASU using the modified retrospective approach did not have an impact on the Company's financial condition and results of operations.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”) which changes the guidance on the consolidation of certain investment funds as well as both the variable interest model and the voting model. The guidance became effective for the Company beginning January 1, 2016. The adoption of this ASU did not have a material impact on the Company’s financial condition or results of operations.

Interest - Imputation of Interest (Topic 835)

In April 2015, the FASB issued ASU 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance became effective for the Company beginning January 1, 2016. The adoption of this ASU did not have a material impact on the Company’s financial condition or results of operations.

Financial Instruments - Overall (Subtopic 825-10)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The amendments in ASU 2016-01 require (1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (2) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (3) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) and eliminates the requirement for public business entities to disclose the method(s) and (4) significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact of this guidance.


19


Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02") which required organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations creates by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Both types of leases however must now be recognized on the balance sheet. The lessee will be required to recognize both a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this guidance.

Investments - Equity Method and Joint Ventures (Topic 323)

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting ("ASU 2016-07"). The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

Additionally, the amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company is currently assessing the impact of this guidance.

Compensation - Stock Compensation (Topic 718)

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The amendments simplify several aspects of the accounting for share-based payment award transaction including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company has determined that this ASU will not have a material impact on the Company's financial condition or results of operations.





20



3.
Investment Securities Available For Sale

Investment securities available for sale consisted of the following as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):
 
March 31, 2016
 
December 31, 2015
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Agency RMBS (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency ARMs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
79,924

 
$
190

 
$
(229
)
 
$
79,885

 
$
62,383

 
$
41

 
$
(770
)
 
$
61,654

Fannie Mae
88,005

 
224

 
(393
)
 
87,836

 
92,605

 
121

 
(1,334
)
 
91,392

Ginnie Mae
35,985

 
166

 
(253
)
 
35,898

 
20,172

 
55

 
(260
)
 
19,967

Total Agency ARMs
203,914

 
580

 
(875
)
 
203,619

 
175,160

 
217

 
(2,364
)
 
173,013

Agency Fixed Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
29,994

 

 
(287
)
 
29,707

 
31,076

 

 
(719
)
 
30,357

Fannie Mae
365,466

 

 
(6,369
)
 
359,097

 
380,684

 

 
(12,149
)
 
368,535

Ginnie Mae
521

 

 
(8
)
 
513

 
25,923

 
9

 
(111
)
 
25,821

Total Agency Fixed Rate
395,981

 

 
(6,664
)
 
389,317

 
437,683

 
9

 
(12,979
)
 
424,713

Agency IOs (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
26,216

 
860

 
(4,676
)
 
22,400

 
28,970

 
680

 
(4,471
)
 
25,179

Fannie Mae
37,632

 
446

 
(7,718
)
 
30,360

 
39,603

 
433

 
(6,341
)
 
33,695

Ginnie Mae
70,794

 
1,697

 
(8,043
)
 
64,448

 
63,050

 
511

 
(7,045
)
 
56,516

Total Agency IOs
134,642

 
3,003

 
(20,437
)
 
117,208

 
131,623

 
1,624

 
(17,857
)
 
115,390

Total Agency RMBS
734,537

 
3,583

 
(27,976
)
 
710,144

 
744,466

 
1,850

 
(33,200
)
 
713,116

Non-Agency RMBS
17,126

 
120

 
(247
)
 
16,999

 
1,727

 
51

 
(211
)
 
1,567

U.S. Treasury securities (1)
7,982

 
7

 

 
7,989

 
10,113

 

 
(76
)
 
10,037

CMBS (2)
47,237

 
12,104

 

 
59,341

 
28,692

 
12,042

 

 
40,734

Total investment securities available for sale
$
806,882

 
$
15,814

 
$
(28,223
)
 
$
794,473

 
$
784,998

 
$
13,943

 
$
(33,487
)
 
$
765,454


(1) Included in investment securities available for sale are Agency IOs, Agency RMBS and U.S. Treasury securities managed by Midway that are measured at fair value through earnings.
(2) Included in CMBS is $41.5 million and $40.7 million of investment securities for sale held in securitization trusts as of March 31, 2016 and December 31, 2015, respectively.

Realized Gain or Loss Activity

During the three months ended March 31, 2016, the Company received proceeds of approximately $58.9 million on sales of investment securities available for sale realizing a loss of approximately $0.5 million. During the three months ended March 31, 2015, the Company had no sales of investments securities.

Weighted Average Life

Actual maturities of our available for sale securities are generally shorter than stated contractual maturities (with maturities up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of March 31, 2016 and December 31, 2015, based on management’s estimates using the three month historical constant prepayment rate (“CPR”), the weighted average life of the Company’s available for sale securities portfolio was approximately 4.2 years and 5 years, respectively.

21


The following table sets forth the weighted average lives our investment securities available for sale as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):
Weighted Average Life
March 31, 2016
 
December 31, 2015
0 to 5 years
$
622,949

 
$
518,594

Over 5 to 10 years
152,537

 
219,747

10+ years
18,987

 
27,113

Total
$
794,473

 
$
765,454


Portfolio Interest Reset Periods

The following tables set forth the stated reset periods of our investment securities available for sale and investment securities available for sale held in securitization trusts at March 31, 2016 and December 31, 2015 at carrying value (dollar amounts in thousands):
 
March 31, 2016
 
December 31, 2015
 
Less than 6
months
 
6 to 24
months
 
More than
24 months
 
Total
 
Less than
6 months
 
6 to 24
months
 
More than
24 months
 
Total
Agency RMBS
$
146,846

 
$
53,003

 
$
510,295

 
$
710,144

 
$
92,693

 
$
44,700

 
$
575,723

 
$
713,116

Non-Agency RMBS
15,309

 

 
1,690

 
16,999

 
188

 
1,379

 

 
1,567

U.S. Treasury securities

 
7,989

 

 
7,989

 
10,037

 

 

 
10,037

CMBS
17,851

 

 
41,490

 
59,341

 

 

 
40,734

 
40,734

Total investment securities available for sale
$
180,006

 
$
60,992

 
$
553,475

 
$
794,473

 
$
102,918

 
$
46,079

 
$
616,457

 
$
765,454


Unrealized Losses in OCI

The following tables present the Company's investment securities available for sale in an unrealized loss position reported through OCI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015 (dollar amounts in thousands):
March 31, 2016
Less than 12 Months
 
Greater than 12 months
 
Total
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
Agency RMBS
$
18,641

 
$
(359
)
 
$
455,020

 
$
(7,125
)
 
$
473,661

 
$
(7,484
)
Non-Agency RMBS

 

 
712

 
(247
)
 
712

 
(247
)
Total investment securities available for sale
$
18,641

 
$
(359
)
 
$
455,732

 
$
(7,372
)
 
$
474,373

 
$
(7,731
)

December 31, 2015
Less than 12 Months
 
Greater than 12 months
 
Total
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
Agency RMBS
$
71,587

 
$
(688
)
 
$
476,157

 
$
(14,497
)
 
$
547,744

 
$
(15,185
)
Non-Agency RMBS
771

 

 
796

 
(211
)
 
1,567

 
(211
)
Total investment securities available for sale
$
72,358

 
$
(688
)
 
$
476,953

 
$
(14,708
)
 
$
549,311

 
$
(15,396
)

Other than Temporary Impairment

For the three months ended March 31, 2016 and 2015, the Company recognized no other-than-temporary impairment through earnings.

22



4.
Residential Mortgage Loans Held in Securitization Trusts (Net) and Real Estate Owned

Residential mortgage loans held in securitization trusts (net) consist of the following as of March 31, 2016 and December 31, 2015, respectively (dollar amounts in thousands):
 
March 31, 2016
 
December 31, 2015
Unpaid principal balance
$
116,118

 
$
122,545

Deferred origination costs – net
736

 
775

Reserve for loan losses
(3,668
)
 
(3,399
)
Total
$
113,186

 
$
119,921


Allowance for Loan Losses - The following table presents the activity in the Company's allowance for loan losses on residential mortgage loans held in securitization trusts for the three months ended March 31, 2016 and 2015, respectively (dollar amounts in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Balance at beginning of period
$
3,399

 
$
3,631

Provisions for loan losses
246

 
310

Transfer to real estate owned
23

 
1

Charge-offs

 

Balance at the end of period
$
3,668

 
$
3,942


On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses as of March 31, 2016 was $3.7 million, representing 316 basis points of the outstanding principal balance of residential loans held in securitization trusts, as compared to 277 basis points as of December 31, 2015. As part of the Company’s allowance for loan loss adequacy analysis, management will assess an overall level of allowances while also assessing credit losses inherent in each non-performing residential mortgage loan held in securitization trusts. These estimates involve the consideration of various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, the borrower’s current economic and credit status and other relevant factors.

Real Estate Owned – The following table presents the activity in the Company’s real estate owned held in residential securitization trusts for the three months ended March 31, 2016 and 2015, respectively (dollar amounts in thousands):
 
Three Months Ended March 31,
 
2016
 
2015
Balance at beginning of period
$
411

 
$
965

Write downs

 

Transfer from/(to) mortgage loans held in securitization trusts
23

 
(192
)
Disposal

 
(315
)
Balance at the end of period
$
434

 
$
458


Real estate owned held in residential securitization trusts are included in receivables and other assets on the accompanying condensed consolidated balance sheets and write downs are included in provision for loan losses in the accompanying condensed consolidated statements of operations for reporting purposes.


23


All of the Company’s mortgage loans and real estate owned held in residential securitization trusts are pledged as collateral for the Residential CDOs issued by the Company. The Company’s net investment in the residential securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents the difference between (i) the carrying amount of the mortgage loans and real estate owned held in residential securitization trusts and (ii) the amount of Residential CDOs outstanding, was $4.3 million and $4.4 million as of March 31, 2016 and December 31, 2015, respectively.

Delinquency Status of Our Residential Mortgage Loans Held in Securitization Trusts

As of March 31, 2016, we had 34 delinquent loans with an aggregate principal amount outstanding of approximately $19.2 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net) of which $11.7 million, or 61%, are under some form of temporary modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned (“REO”) through foreclosure, as of March 31, 2016 (dollar amounts in thousands):

March 31, 2016
Days Late
Number of
Delinquent
Loans 
 
Total
Unpaid
Principal 
 
% of Loan
Portfolio 
30 - 60
4
 
$
1,033

 
0.89
%
61 - 90
1
 
$
685

 
0.59
%
90 +
29
 
$
17,491

 
14.99
%
Real estate owned through foreclosure
3
 
$
574

 
0.49
%

As of December 31, 2015, we had 31 delinquent loans with an aggregate principal amount outstanding of approximately $18.0 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net), of which $11.9 million, or 67%, are under some form of modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned through foreclosure (REO), as of December 31, 2015 (dollar amounts in thousands):

December 31, 2015
Days Late
Number of Delinquent
Loans 
 
Total
Unpaid Principal 
 
% of Loan
Portfolio 
30 - 60
3
 
$
825

 
0.67
%
61 - 90
2
 
$
1,763

 
1.43
%
90 +
26
 
$
15,365

 
12.48
%
Real estate owned through foreclosure
3
 
$
574

 
0.47
%

The geographic concentrations of credit risk exceeding 5% of the total loan balances in our residential mortgage loans held in securitization trusts and real estate owned held in residential securitization trusts as of March 31, 2016 and December 31, 2015 are as follows:
 
March 31, 2016
 
December 31, 2015
New York
34.1
%
 
35.6
%
Massachusetts
20.9
%
 
20.7
%
New Jersey
11.6
%
 
11.1
%
Florida
8.0
%
 
7.7
%
Connecticut
6.8
%
 
6.5
%


24


5.
Distressed Residential Mortgage Loans

As of March 31, 2016 and December 31, 2015, the carrying value of the Company’s distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, amounts to approximately $537.6 million and $559.0 million, respectively.

The Company considers its purchase price for the distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, to be at fair value at the date of acquisition. The Company only establishes an allowance for loan losses subsequent to acquisition.

There were no acquisitions of distressed residential mortgage loans during the three months ended March 31, 2015.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the distressed residential mortgage loans acquired during the three months ended March 31, 2016 (dollar amounts in thousands):
 
March 31, 2016
Contractually required principal and interest
$
52,302

Non-accretable yield
(5,464
)
Expected cash flows to be collected
46,838

Accretable yield
(25,759
)
Fair value at the date of acquisition
$
21,079


The following table details activity in accretable yield for the distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, for the three months ended March 31, 2016 and 2015, respectively (dollar amounts in thousands):
 
March 31, 2016
 
March 31, 2015
Balance at beginning of period
$
579,009

 
$
640,416

Additions
29,581

 
1,317

Disposals
(59,629
)
 
(12,658
)
Accretion
(8,815
)
 
(10,218
)
Balance at end of period (1)
$
540,146

 
$
618,857


(1) 
Accretable yield is the excess of the distressed residential mortgage loans’ cash flows expected to be collected over the purchase price. The cash flows expected to be collected represents the Company’s estimate of the amount and timing of undiscounted principal and interest cash flows. Additions include accretable yield estimates for purchases made during the period and reclassification to accretable yield from nonaccretable yield. Deletions include distressed residential mortgage loan dispositions, which include refinancing, sale and foreclosure of the underlying collateral and resulting removal of the distressed residential mortgage loans from the accretable yield, and reclassifications from accretable to nonaccretable yield. The reclassifications between accretable and nonaccretable yield and the accretion of interest income is based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to update its estimates regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the three-month period ended March 31, 2016 and 2015 is not necessarily indicative of future results.


25


The geographic concentrations of credit risk exceeding 5% of the unpaid principal balance of our distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, as of March 31, 2016 and December 31, 2015, respectively, are as follows:
 
March 31, 2016
 
December 31, 2015
Florida
11.9
%
 
12.6
%
California
8.3
%
 
7.7
%
North Carolina
8.0
%
 
8.1
%
Georgia
6.1
%
 
6.1
%
Maryland
5.2
%
 
5.4
%
New York
5.0
%
 
5.2
%

As of March 31, 2016, the Company had no distressed residential mortgage loans held in securitization trusts. At December 31, 2015, the Company's distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $114.2 million were pledged as collateral for certain of the Securitized Debt issued by the Company (see Note 7). In addition, distressed residential mortgage loans with a carrying value of approximately $247.7 million and $307.0 million at March 31, 2016 and December 31, 2015, respectively, are pledged as collateral for a Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch (see Note 10).

6.
Consolidated K-Series

The Company has elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations in the assets and liabilities of the Consolidated K-Series be reflected in the Company's statements of operations. Our investment in the Consolidated K-Series is limited to the multi-family CMBS comprised of first loss tranche PO securities and/or certain IOs issued by certain K-Series securitizations with an aggregate net carrying value of $293.3 million and $286.4 million at March 31, 2016 and December 31, 2015, respectively (see Note 7). The Consolidated K-Series is comprised of five K-Series securitizations as of March 31, 2016 and December 31, 2015.

The condensed consolidated balance sheets of the Consolidated K-Series at March 31, 2016 and December 31, 2015, respectively, are as follows (dollar amounts in thousands):

Balance Sheets
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Multi-family loans held in securitization trusts
$
7,250,586

 
$
7,105,336

Receivables
24,492

 
24,579

Total Assets
$
7,275,078

 
$
7,129,915

Liabilities and Equity
 
 
 
Multi-family CDOs
$
6,957,293

 
$
6,818,901

Accrued expenses
24,396

 
24,483

Total Liabilities
6,981,689

 
6,843,384

Equity
293,389

 
286,531

Total Liabilities and Equity
$
7,275,078

 
$
7,129,915


The multi-family loans held in securitization trusts had an unpaid principal balance of approximately $6.8 billion and $6.8 billion at March 31, 2016 and December 31, 2015, respectively. The multi-family CDOs had an unpaid principal balance of approximately $6.8 billion at March 31, 2016 and December 31, 2015. As of March 31, 2016 and December 31, 2015, the current weighted average interest rate on these multi-family CDOs was 3.98%.

In February 2015, the Company sold a first loss PO security in one of the Company’s Consolidated K-Series obtaining total proceeds of approximately $44.3 million and realizing a gain of approximately $1.5 million. The sale resulted in a de-consolidation of $1.1 billion in Multi-Family loans held in a securitization trust and $1.0 billion in Multi-Family CDOs.


26



The Company does not have any claims to the assets or obligations for the liabilities of the Consolidated K-Series (other than the security represented by our first loss tranche securities). We have elected the fair value option for the Consolidated K-Series. The net fair value of our investment in the Consolidated K-Series, which represents the difference between the carrying values of multi-family loans held in securitization trusts less the carrying value of multi-family CDOs, approximates the fair value of our underlying securities. The fair value of our underlying securities is determined using the same valuation methodology as our CMBS investments available for sale (see Note 14).

The condensed consolidated statements of operations of the Consolidated K-Series for the three months ended March 31, 2016 and 2015, respectively, are as follows (dollar amounts in thousands):

 
Three Months Ended
March 31,
Statements of Operations
2016
 
2015
Interest income
$
63,532

 
$
66,300

Interest expense
57,200

 
60,095

Net interest income
6,332

 
6,205

Unrealized gain on multi-family loans and debt held in securitization trusts, net
818

 
13,628

Net Income
$
7,150

 
$
19,833


The geographic concentrations of credit risk exceeding 5% of the total loan balances related to our CMBS investments included in investment securities available for sale and multi-family loans held in securitization trusts as of March 31, 2016 and December 31, 2015, respectively, are as follows:

 
March 31, 2016
 
December 31, 2015
California
13.9
%
 
13.8
%
Texas
12.4
%
 
12.3
%
New York
8.1
%
 
8.0
%
Maryland
5.3
%
 
5.2
%


27


7.
Use of Special Purpose Entities and Variable Interest Entities

The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.    

The Company has entered into resecuritization and financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. The Company evaluated the following resecuritization and financing transactions: 1) its Residential CDOs completed in 2005; 2) its multi-family CMBS re-securitization transaction completed in May 2012; 3) its collateralized recourse financing transactions completed in November 2013 and 4) its distressed residential mortgage loan securitization transactions completed in December 2012, July 2013 and September 2013 (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company consolidated the Financing VIEs as of March 31, 2016.

The Company invests in multi-family CMBS consisting of PO securities that represent the first loss tranche of the securitizations from which they were issued, and certain IOs issued from Freddie Mac-sponsored multi-family K-Series securitization trusts. The Company has evaluated these CMBS investments in Freddie Mac-sponsored K-Series securitization trusts to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that five Freddie Mac-sponsored multi-family K-Series securitization trusts as of March 31, 2016 and December 31, 2015, respectively are VIEs. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying consolidated financial statements (see Notes 2 and 6). One of the Company’s multi-family CMBS investments included in the Consolidated K-Series (herein referred to as "Non-Financed VIEs") is not subject to any financing as of March 31, 2016 and December 31, 2015, respectively.

In analyzing whether the Company is primary beneficiary of the Consolidated K-Series and the Financing VIEs (collectively referred to in this footnote as "Consolidated VIEs"), the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:

whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and
whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.

The following tables present a summary of the assets and liabilities of these consolidated VIEs as of March 31, 2016 and December 31, 2015, respectively. Intercompany balances have been eliminated for purposes of this presentation.


28


Assets and Liabilities of Consolidated VIEs as of March 31, 2016 (dollar amounts in thousands):

 
Financing VIEs
 
Non-financed VIEs
 
 
 
Multi-family
CMBS re-
securitization(1)
 
Collateralized
Recourse
Financing(2)
 
Distressed
Residential
Mortgage
Loan
Securitization(3)
 
Residential
Mortgage
Loan Securitization
 
Multi-
family
CMBS
 
Total
Investment securities available for sale, at fair value held in securitization trusts
$
41,490

 
$

 
$

 
$

 
$

 
$
41,490

Residential mortgage loans held in securitization trusts (net)

 

 

 
113,186

 

 
113,186

Multi-family loans held in securitization trusts, at fair value
1,249,895

 
4,743,795

 

 

 
1,256,896

 
7,250,586

Receivables and other assets
4,476

 
14,981

 
856

 
1,150

 
5,432

 
26,895

Total assets
$
1,295,861

 
$
4,758,776

 
$
856

 
$
114,336

 
$
1,262,328

 
$
7,432,157

 
 
 
 
 
 
 
 
 
 
 
 
Residential collateralized debt obligations
$

 
$

 
$

 
$
110,023

 
$

 
$
110,023

Multi-family collateralized debt obligations, at fair value
1,193,308

 
4,570,783

 

 

 
1,193,202

 
6,957,293

Securitized debt
27,781

 
55,690

 

 

 

 
83,471

Accrued expenses and other liabilities
4,455

 
14,677

 

 
18

 
5,432

 
24,582

Total liabilities
$
1,225,544

 
$
4,641,150

 
$

 
$
110,041

 
$
1,198,634

 
$
7,175,369


(1) 
The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).
(2) 
The multi-family CMBS serving as collateral under the November 2013 collateralized recourse financing are comprised of securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. The Financing VIE consolidated these K-Series securitizations, including their assets, liabilities, income and expenses, in its financial statements as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in such K-Series securitizations (see Note 6). One of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series is not subject to any financing as of March 31, 2016.
(3) 
In February 2016, the Company repaid the Company’s outstanding notes from its distressed residential mortgage loan securitizations transactions completed in 2013 with original principal amounts of $138.3 million and outstanding principal balance at the time of repayment amounting to $31.9 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIEs that facilitated these financing transactions and the distressed residential loans serving as collateral on the notes were transferred back to the Company.





29


Assets and Liabilities of consolidated Financing VIEs as of December 31, 2015 (dollar amounts in thousands):
 
Financing VIEs
 
Non-financed VIEs
 
 
 
Multi-family
CMBS re-
securitization(1)
 
Collateralized
Recourse
Financing(2)
 
Distressed
Residential
Mortgage
Loan
Securitization (3)
 
Residential
Mortgage
Loan Securitization
 
Multi-
family
CMBS(4)
 
Total
Investment securities available for sale, at fair value held in securitization trusts
$
40,734

 
$

 
$

 
$

 
$

 
$
40,734

Residential mortgage loans held in securitization trusts (net)

 

 

 
119,921

 

 
119,921

Distressed residential mortgage loans held in securitization trust (net)

 

 
114,214

 

 

 
114,214

Multi-family loans held in securitization trusts, at fair value
1,224,036

 
4,633,061

 

 

 
1,248,239

 
7,105,336

Receivables and other assets
4,864

 
15,281

 
6,076

 
1,200

 
5,456

 
32,877

Total assets
$
1,269,634

 
$
4,648,342

 
$
120,290

 
$
121,121

 
$
1,253,695

 
$
7,413,082

 
 
 
 
 
 
 
 
 
 
 
 
Residential collateralized debt obligations
$

 
$

 
$

 
$
116,710

 
$

 
$
116,710

Multi-family collateralized debt obligations, at fair value
1,168,470

 
4,464,340

 

 

 
1,186,091

 
6,818,901

Securitized debt
27,613

 
55,629

 
33,299

 

 

 
116,541

Accrued expenses and other liabilities
4,436

 
14,750

 
368

 
13

 
5,456

 
25,023

Total liabilities
$
1,200,519

 
$
4,534,719

 
$
33,667

 
$
116,723

 
$
1,191,547

 
$
7,077,175


(1) 
The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).
(2) 
The multi-family CMBS serving as collateral under the November 2013 collateralized recourse financing are comprised of securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. The Financing VIE consolidated these K-Series securitizations, including their assets, liabilities, income and expenses, in its financial statements as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in such K-Series securitizations (see Note 6).
(3) 
In December 2015, the Company repaid the Company’s outstanding notes from its distressed residential mortgage loan securitization transaction completed in December 2012 with an original principal amount of $38.7 million and outstanding principal balance at the time of repayment amounting to $5.5 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated this financing transaction and the distressed residential loans serving as collateral on the notes were transferred back to the Company.


30



(4) 
In February 2015, the Company sold a first loss tranche PO security issued by one of the Consolidated K-Series securitizations obtaining total proceeds of approximately $44.3 million and realizing a gain of approximately $1.5 million. The sale resulted in a de-consolidation of $1.1 billion in Multi-Family loans held in a securitization trust and $1.0 billion in Multi-Family CDOs.

The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS and distressed residential mortgage loans (dollar amounts in thousands):
 
Multi-family CMBS
Re-securitization (1)
 
Collateralized
Recourse Financing (2)
 
Distressed
Residential Mortgage
Loan Securitizations (3)
Principal Amount at March 31, 2016
$
33,720

 
$
55,853

 
$

Principal Amount at December 31, 2015
$
33,781

 
$
55,853

 
$
33,656

Carrying Value at March 31, 2016 (4)
$
27,781

 
$
55,690

 
$

Carrying Value at December 31, 2015 (4)
$
27,613

 
$
55,629

 
$
33,299

Pass-through rate of Notes issued
5.35%
 
One-month LIBOR plus 5.25%
 
4.25% - 4.85%

(1) 
The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-family CMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations and warranties. The Company will receive all remaining cash flow, if any, through its retained ownership.
(2) 
The Company entered into a CMBS Master Repurchase Agreement with a three-year term for the purpose of financing a portion of its multi-family CMBS portfolio. In connection with the transaction, the Company agreed to guarantee the due and punctual payment of its wholly-owned subsidiary's obligations under the CMBS Master Repurchase Agreement.
(3) 
The Company engaged in these transactions for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financings are comprised of performing, re-performing and, to a lesser extent, non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Two of the four securitization transactions provide for a revolving period of one to two years from the date of the respective financing (“Revolving Period”) where no principal payments will be made on these two notes. All cash proceeds generated by the distressed residential mortgage loans and received by the respective securitization trust during the Revolving Period, after payment of interest on the respective note, reserve amounts and certain other transaction expenses, will be available for the purchase by the respective trust of additional mortgage loans that satisfy certain eligibility criteria. In December 2015, the Company repaid the Company’s outstanding notes from its distressed residential mortgage loan securitization transaction completed in December 2012 with an original principal amount of $38.7 million and outstanding principal balance at the time of repayment amounting to $5.5 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated this financing transaction and the distressed residential loans serving as collateral on the notes were transferred back to the Company.
(4) 
Classified as securitized debt in the liability section of the Company’s accompanying condensed consolidated balance sheets, net of debt issuance costs.



31



The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of March 31, 2016 and December 31, 2015, respectively:
Scheduled Maturity (principal amount) 
March 31, 2016
 
December 31, 2015
(Dollar amount in thousands)
 
 
 
Within 24 months
$
55,853

 
$
89,509

Over 36 months
33,720

 
33,781

Total outstanding principal
89,573

 
123,290

Discount
(5,555
)
 
(5,763
)
Debt Issuance Cost
(547
)
 
(986
)
Carrying value
$
83,471

 
$
116,541


There is no guarantee that the Company will receive any cash flows from these securitization trusts.

Residential Mortgage Loan Securitization Transaction

The Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussed above) since inception, the first three were accounted for as permanent financings and have been included in the Company’s accompanying condensed consolidated financial statements. The fourth was accounted for as a sale and accordingly, is not included in the Company’s accompanying condensed consolidated financial statements.

Unconsolidated VIEs

The Company has evaluated its multi-family CMBS investments in two Freddie Mac-sponsored K-Series securitizations, mezzanine loan, preferred equity and other equity investments as of March 31, 2016 and December 31, 2015, respectively, to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. The following table presents the classification and carrying value of unconsolidated VIEs as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):
 
March 31, 2016
 
December 31, 2015
 
Investment
securities
available for
sale, at fair
value 
 
Receivables and other Assets
 
Total
 
Investment
securities
available for
sale, at fair value
 
Receivables and
other Assets
 
Total
Multi-Family CMBS
$
41,490

 
$
75

 
$
41,565

 
$
40,734

 
$
76

 
$
40,810

Mezzanine loan, preferred equity and investments in unconsolidated entities

 
128,027

 
128,027

 

 
129,887

 
129,887

Total assets
$
41,490

 
$
128,102

 
$
169,592

 
$
40,734

 
$
129,963

 
$
170,697


Our maximum loss exposure on the multi-family CMBS investments, mezzanine loan and equity investments is approximately $169.6 million and $170.7 million at March 31, 2016 and December 31, 2015, respectively. The Company’s maximum exposure does not exceed the carrying value of its investments.


32


8.
Derivative Instruments and Hedging Activities

The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments include interest rate swaps, swaptions and futures. The Company may also purchase or sell short TBAs purchase put or call options on U.S. Treasury futures or invest in other types of mortgage derivative securities.

Derivatives Not Designated as Hedging Instruments

The following table presents the fair value of derivative instruments that were not designated as hedging instruments and their location in our condensed consolidated balance sheets at March 31, 2016 and December 31, 2015, respectively (dollar amounts in thousands):

Derivatives Not Designated
as Hedging Instruments
 
Balance Sheet Location
 
March 31, 2016
 
December 31, 2015
TBA securities
 
Derivative assets
 
$
288,455

 
$
226,929

Options on U.S. Treasury futures
 
Derivative assets
 
79

 
15

Interest rate swap futures
 
Derivative assets
 

 
706

Swaptions
 
Derivative assets
 
391

 
821

Eurodollar futures
 
Derivative liabilities
 
3,277

 
1,242

U.S. Treasury futures
 
Derivative liabilities
 
64

 

Interest rate swap futures
 
Derivative liabilities
 
682

 

Interest rate swaps(1)
 
Derivative liabilities
 
377

 
258


(1) 
Includes interest rate swaps in our Agency IO portfolio. Contracts in a liability position of $0.5 million have been netted against the asset position of $0.1 million in the accompanying condensed consolidated balance sheets at March 31, 2016. There was no netting of interest rate swaps at December 31, 2015.

The tables below summarize the activity of derivative instruments not designated as hedges for the three months ended March 31, 2016 and 2015, respectively (dollar amounts in thousands):
 
Notional Amount For the Three Months Ended March 31, 2016
Derivatives Not Designated
as Hedging Instruments 
December 31, 2015
 
Additions
 
Settlement,
Expiration
or Exercise 
 
March 31, 2016
TBA securities
$
222,000

 
$
1,065,000