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EX-31.1 - EXHIBIT 31.1 - NEW YORK MORTGAGE TRUST INCex31-1.htm
EX-12.1 - EXHIBIT 12.1 - NEW YORK MORTGAGE TRUST INCex12-1.htm
EX-31.2 - EXHIBIT 31.2 - NEW YORK MORTGAGE TRUST INCex31-2.htm
EX-32.1 - EXHIBIT 32.1 - NEW YORK MORTGAGE TRUST INCex32-1.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 September 30, 2015

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 November 1, 2015 was 109,401,721.




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)
 
September 30, 2015
 
December 31, 2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investment securities, available for sale, at fair value (including pledged securities of $636,081 and $702,684, respectively)
$
733,227

 
$
816,647

Investment securities, available for sale, at fair value held in securitization trusts
40,608

 
38,594

Residential mortgage loans held in securitization trusts (net)
132,882

 
149,614

Distressed residential mortgage loans held in securitization trusts (net)
156,062

 
221,591

Distressed residential mortgage loans
353,357

 
361,106

Multi-family loans held in securitization trusts, at fair value
7,296,462

 
8,365,514

Derivative assets
286,913

 
288,850

Receivables for securities sold
1,480

 

Cash and cash equivalents
123,801

 
75,598

Receivables and other assets
237,018

 
222,491

Total Assets (1)
$
9,361,810

 
$
10,540,005

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Financing arrangements, portfolio investments
$
586,075

 
$
651,965

Financing arrangements, distressed residential mortgage loans
185,452

 
238,949

Residential collateralized debt obligations
129,090

 
145,542

Multi-family collateralized debt obligations, at fair value
7,011,351

 
8,048,053

Securitized debt
140,946

 
232,877

Derivative liabilities
6,670

 
1,463

Payable for securities purchased
283,991

 
283,537

Accrued expenses and other liabilities (including $572 and $6,317 to related parties, respectively)
62,587

 
74,692

Subordinated debentures
45,000

 
45,000

Total liabilities (1)
8,451,162

 
9,722,078

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 and 3,450,000 shares authorized as of September 30, 2015 and December 31, 2014, respectively, 3,000,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
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 as of September 30, 2015, 3,600,000 and 0 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
86,862

 

Common stock, $0.01 par value, 400,000,000 shares authorized, 109,401,721 and 105,094,565 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
1,094

 
1,051

Additional paid-in capital
734,381

 
701,871

Accumulated other comprehensive income
2,222

 
10,015

Retained earnings
13,692

 
32,593

Total stockholders' equity
910,648

 
817,927

Total Liabilities and Stockholders' Equity
$
9,361,810

 
$
10,540,005

(1) Our 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 September 30, 2015 and December 31, 2014, assets of consolidated VIEs totaled $7,674,252 and $8,847,078, respectively, and the liabilities of consolidated VIEs totaled $7,307,182 and $8,457,034, 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
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
INTEREST INCOME:
 
 
 
 
 
 
 
Investment securities and other
$
6,792

 
$
12,868

 
$
28,332

 
$
42,025

Multi-family loans held in securitization trusts
63,431

 
75,891

 
192,715

 
226,336

Residential mortgage loans held in securitization trusts
875

 
970

 
2,950

 
2,772

Distressed residential mortgage loans
11,489

 
5,208

 
31,975

 
14,590

Total interest income
82,587

 
94,937

 
255,972

 
285,723

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Investment securities and other
3,432

 
1,230

 
10,337

 
4,102

Multi-family collateralized debt obligations
57,388

 
69,310

 
174,475

 
207,167

Residential collateralized debt obligations
219

 
223

 
679

 
686

Securitized debt
2,782

 
4,389

 
8,883

 
13,350

Subordinated debentures
474

 
465

 
1,402

 
1,390

Total interest expense
64,295

 
75,617

 
195,776

 
226,695

NET INTEREST INCOME
18,292

 
19,320

 
60,196

 
59,028

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Provision for loan losses
(1,117
)
 
(82
)
 
(1,664
)
 
(1,234
)
Realized (loss) gain on investment securities and related hedges, net
(2,895
)
 
17,055

 
(3,062
)
 
20,419

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
27,224

 
834

 
31,514

 
9,477

Unrealized loss on investment securities and related hedges, net
(2,631
)
 
(1,020
)
 
(3,643
)
 
(4,047
)
Unrealized (loss) gain on multi-family loans and debt held in securitization trusts, net
(2,170
)
 
18,115

 
16,876

 
43,060

Loss on extinguishment of debt

 
(3,397
)
 

 
(3,397
)
Other income (including $1,293, $1,244, $4,873 and $1,548 from related parties, respectively)
1,807

 
1,613

 
6,393

 
2,326

Total other income
20,218

 
33,118

 
47,897

 
66,604

 
 
 
 
 
 
 
 
Base management and incentive fees (including $1,029, $5,747, $5,851 and $7,966 to related parties, respectively)
3,676

 
7,752

 
14,687

 
15,396

Expenses related to distressed residential mortgage loans
3,261

 
1,491

 
7,827

 
3,920

Other general and administrative expenses
2,893

 
2,370

 
7,302

 
7,433

Total general, administrative and other expenses
9,830

 
11,613

 
29,816

 
26,749

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAXES
28,680

 
40,825

 
78,277

 
98,883

Income tax expense
3,048

 
1,100

 
4,471

 
4,668

NET INCOME
25,632

 
39,725

 
73,806

 
94,215

Preferred stock dividends
(3,225
)
 
(1,453
)
 
(7,765
)
 
(4,359
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
22,407

 
$
38,272

 
$
66,041

 
$
89,856

 
 
 
 
 
 
 
 
Basic income per common share
$
0.20

 
$
0.42

 
$
0.61

 
$
1.06

Diluted income per common share
$
0.20

 
$
0.42

 
$
0.61

 
$
1.06

Weighted average shares outstanding-basic
109,402

 
90,685

 
108,061

 
85,018

Weighted average shares outstanding-diluted
109,402

 
90,685

 
108,061

 
85,018


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
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
22,407

 
$
38,272

 
$
66,041

 
$
89,856

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Increase in net unrealized gain on available for sale securities
3,566

 
3,759

 
3,212

 
25,636

Reclassification adjustment for net gain included in net income

 
(4,884
)
 
(9,063
)
 
(4,884
)
(Decrease) increase in fair value of derivative instruments utilized for cash flow hedges
(781
)
 
1,181

 
(1,942
)
 
(149
)
OTHER COMPREHENSIVE INCOME (LOSS)
2,785

 
56

 
(7,793
)
 
20,603

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
25,192

 
$
38,328

 
$
58,248

 
$
110,459


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
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance, December 31, 2014
$
1,051

 
$
72,397

 
$
701,871

 
$
32,593

 
$
10,015

 
$
817,927

Net income

 

 

 
73,806

 

 
73,806

Stock issuance, net
43

 
86,862

 
32,510

 

 

 
119,415

Dividends declared

 

 

 
(92,707
)
 

 
(92,707
)
Reclassification adjustment for net gain included in net income

 

 

 

 
(9,063
)
 
(9,063
)
Increase in net unrealized loss on available for sale securities

 

 

 

 
3,212

 
3,212

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

 

 

 

 
(1,942
)
 
(1,942
)
Balance, September 30, 2015
$
1,094

 
$
159,259

 
$
734,381

 
$
13,692

 
$
2,222

 
$
910,648


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 Nine Months Ended
September 30,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net income
$
73,806

 
$
94,215

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization
1,440

 
(2,883
)
Realized loss (gain) on investment securities and related hedges, net
3,062

 
(20,419
)
Realized gain on distressed residential mortgage loans
(31,514
)
 
(9,477
)
Unrealized loss on investment securities and related hedges, net
3,643

 
4,047

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
(16,876
)
 
(43,060
)
Net decrease in loans held for sale
14

 
38

Loss on extinguishment of debt

 
3,397

Provision for loan losses
1,664

 
1,234

Income from investments in limited partnerships and limited liability companies
(8,603
)
 
(2,192
)
Distributions of income from investments in limited partnership and limited liability companies
6,199

 
1,019

Amortization of stock based compensation, net
721

 
929

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
8,331

 
(825
)
Accrued expenses and other liabilities and accrued expenses, related parties
(11,758
)
 
2,629

Net cash provided by operating activities
28,646

 
28,652

Cash Flows from Investing Activities:
 
 
 
Restricted cash
1,577

 
(19,754
)
Purchases of investment securities
(87,844
)
 
(20,273
)
Proceeds from sales of investment securities
67,775

 
41,442

Purchases of FHLBI stock
(5,445
)
 

Purchases of other assets
(29
)
 
(100
)
Funding of first mortgage loan

 
(1,142
)
Funding of mezzanine loans, equity and preferred equity investments
(43,800
)
 
(12,567
)
Proceeds from sale of mezzanine loans

 
5,590

Net (purchases) proceeds on other derivative instruments settled during the period
(5,820
)
 
4,360

Principal repayments received on residential mortgage loans held in securitization trusts
16,100

 
9,949

Principal repayments and proceeds from sales and refinancing of distressed residential mortgage loans
232,075

 
61,036

Principal repayments received on multi-family loans held in securitization trusts
57,421

 
50,195

Principal paydowns on investment securities - available for sale
79,055

 
75,140

Proceeds from sale of real estate owned
750

 
3,559

Purchases of residential mortgage loans and distressed residential mortgage loans
(97,654
)
 
(50,515
)
Proceeds from sales of loans held in multi-family securitization trusts
65,587

 

Net cash provided by investing activities
279,748

 
146,920

Cash Flows from Financing Activities:
 
 
 
Payments made on financing arrangements, net of FHLBI advances
(119,387
)
 
(163,244
)
Common stock issuance, net
31,832

 
185,734

Preferred stock issuance, net
86,862

 

Dividends paid on common stock
(87,061
)
 
(62,220
)
Dividends paid on preferred stock
(5,993
)
 
(4,359
)
Payments made on residential collateralized debt obligations
(16,519
)
 
(10,151
)
Payments made on multi-family collateralized debt obligations
(57,411
)
 
(53,543
)
Payments made on securitized debt
(92,514
)
 
(71,074
)
Net cash used in financing activities
(260,191
)
 
(178,857
)
Net Increase (Decrease) in Cash and Cash Equivalents
48,203

 
(3,285
)
Cash and Cash Equivalents - Beginning of Period
75,598

 
31,798

Cash and Cash Equivalents - End of Period
$
123,801

 
$
28,513


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
$
232,077

 
$
265,842

Cash paid for income taxes
$
2,720

 
$
5,741

Non-Cash Investment Activities:
 
 
 
Sales of investment securities not yet settled
$
1,480

 
$

Purchase of investment securities not yet settled
$
283,991

 
$
215,417

Deconsolidation of multi-family loans held in securitization trusts
$
1,075,529

 
$

Deconsolidation of multi-family collateralized debt obligations
$
1,009,942

 
$

Non-Cash Financing Activities:
 
 
 
Dividends declared on common stock to be paid in subsequent period
$
26,256

 
$
24,485

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
September 30, 2015
(unaudited)
1.
Organization

New York Mortgage Trust, Inc., together with its consolidated subsidiaries ("we," "our," "NYMT" 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 manage a portfolio of investments that will deliver stable distributions to our stockholders over diverse economic conditions. We intend to achieve this objective through a combination of net interest margin and net realized capital gains from our investment portfolio. Our portfolio includes investments in mortgage-related and financial assets, 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.

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 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; “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, 2014 has been derived from audited financial statements. The accompanying condensed consolidated balance sheet as of September 30, 2015, the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014, the accompanying condensed consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2015 and the accompanying condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 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, 2014, as filed with the U.S. Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2015 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. 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. 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.

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.

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. 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.


10


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 CLOs. The Company has elected the fair value option for its Agency IOs, U.S. Treasury securities, certain Agency ARMs and Agency Fixed 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 mitigate earnings volatility by better matching the accounting for these investment securities with the related derivative instruments within the Agency IO portfolio. The derivative instruments within the Agency IO portfolio 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. 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.

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.

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 purchase date (or last date previously revised) 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.


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Investment Securities Available for Sale Held in Securitization Trusts – The Company’s investment securities available for sale held in securitization trusts as of September 30, 2015 and December 31, 2014 are comprised of multi-family CMBS consisting of PO securities that represent the first loss tranche of the securitizations from which they were issued, or “first loss tranche”, and certain IOs issued from two Freddie Mac-sponsored multi-family K-Series securitizations. These securities are reported at fair value with unrealized gains and losses reported in OCI. Realized gains and losses recorded on the sale of investment securities available for sale held in securitization trusts are based on the specific identification method and included in realized gain (loss) on sale of securities and related hedges in the accompanying condensed consolidated statements of operations. Purchase premiums or discounts are amortized or accreted to interest income over the estimated life of the investment securities using the effective yield method.

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 held in securitization trusts are comprised of pools of fixed and adjustable rate residential mortgage loans acquired by the Company at a discount (that is due, in part, to the credit quality of the borrower). 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.

The Company considers the purchase price for the acquired distressed residential mortgage loans to be at fair value at the date of acquisition. These acquired distressed residential mortgage loans were initially recorded at fair value with no allowance for loan losses.

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"). 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

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).


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The Company monitors actual cash collections against its expectations, and revised cash flow estimates are prepared as necessary. These estimates incorporate assumptions regarding default rates, loss severities, value of the underlying real estate securing the loans, the amounts and timing of prepayments and other factors that reflect then-current market conditions. 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.

An acquired distressed residential mortgage loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. For acquired distressed residential mortgage loans held in pools, in the event of a sale of the loan, 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, an individual loan is removed from the pool at the fair value of the underlying collateral less costs to sell. For loans satisfied by payment in full, the loan is removed from the pool. 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, the loss is recognized if the carrying value exceeds the fair value of the collateral (less costs to sell). A gain is not recognized if the fair value of collateral (less costs to sell) exceeds the carrying value.

Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are comprised of multi-family mortgage loans held in five and six Freddie Mac-sponsored multi-family K-Series securitizations (the “Consolidated K-Series”) as of September 30, 2015 and December 31, 2014, respectively. 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 in the assets and liabilities of the Consolidated K-Series be reflected in the Company's accompanying condensed consolidated statement of operations, as the Company believes this accounting treatment more accurately and consistently reflects its results of operations.

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. Purchasers of mezzanine loans benefit from a right to foreclose on the ownership equity in a more efficient manner than senior mortgage debt.

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.


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Mezzanine loans and preferred equity investments, where the risks and payment characteristics are equivalent to mezzanine loans, are accounted for as loans held for investment 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. We accrete or amortize any discounts or premiums over the life of the related loan receivable utilizing the effective interest method or straight line-method, if the result is not materially different. We evaluate 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.

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 Limited Partnership and Limited Liability Companies.” The mezzanine loans and preferred equity investments are included in receivables and other assets.
 
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 Limited Partnership and Limited Liability Companies – 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. Where the Company is not required to fund additional losses, the Company does not continue to record its proportionate share of the entity’s losses such that its investment balance would go below zero.

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.

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 September 30, 2015 and December 31, 2014 include restricted cash held by third parties of $52.7 million and $54.2 million, respectively. Included in restricted cash is $23.9 million and $40.6 million held in our Agency IO portfolio to be used for trading purposes and $12.1 million and $11.4 million held by counterparties as collateral for hedging instruments as of September 30, 2015 and December 31, 2014, respectively. Interest receivable on multi-family loans held in securitization trusts is also included in the amounts of $23.9 million and $29.8 million as of September 30, 2015 and December 31, 2014, respectively.

Financing Arrangements, Portfolio Investments – The Company finances its Agency RMBS using repurchase agreements and Federal Home Loan Bank advances. 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 under ASC 860, Transfers and Servicing. Under ASC 860, for these transactions to be treated as financings, they must be separate transactions and not linked. If the Company finances the purchase of its securities with repurchase agreements with the same counterparty from which the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed under GAAP to be part of the same arrangement, or a "Linked Transaction," unless certain criteria are met. None of the Company’s repurchase agreements are accounted for as linked transactions because they met the applicable criteria in accordance with ASC 860-10-40.


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On February 20, 2015, our wholly-owned subsidiary, Great Lakes Insurance Holdings LLC (“GLIH”), became a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”). As a member of the FHLBI, GLIH has access to a variety of products and services offered by the FHLBI, including secured advances. As of September 30, 2015, GLIH had $121 million in outstanding secured advances from FHLBI, which are included on the Company’s accompanying condensed balance sheets in financing arrangements, portfolio investments.

Financing Arrangements, Distressed Residential Mortgage Loans – The Company finances a portion of its distressed residential mortgage loans through a repurchase agreement, expiring within one year. 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 included on the Company’s accompanying condensed consolidated balance sheets in receivables and other assets in the amount of $0.4 million as of September 30, 2015 and $1.7 million as of December 31, 2014. 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 has completed four residential mortgage loan securitizations since inception. 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.

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 included on the Company’s accompanying condensed consolidated balance sheets in receivables and other assets in the amount of $1.3 million and $2.2 million as of September 30, 2015 and December 31, 2014, 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 – The Company has developed risk management programs and processes, which include investments in derivative financial instruments designed to manage interest rate and prepayment risk associated with its securities investment activities.

Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks and investment banks who meet established credit and capital guidelines.

The Company invests in 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. Realized and unrealized gains and losses associated with these TBAs are recognized through earnings as other income (expense) in the condensed consolidated statements of operations.


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For derivative instruments that are designated and qualify as a cash flow hedge, 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.

For instruments that are not designated or qualify as a cash flow hedge, such as our use of U.S. Treasury securities or financial futures and options on financial futures contracts, any realized and unrealized gains and losses associated with these instruments are recognized through earnings as other income (expense) in the condensed consolidated statements of operations.

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.

Revenue Recognition – Interest income on our investment securities and on our mortgage loans is accrued based on the outstanding principal balance and their contractual terms. Premiums and discounts associated with investment securities and mortgage loans at the time of purchase or origination are amortized into interest income over the life of such 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 CLOs and certain of 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 the Company’s assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to 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.

Based on the projected cash flows from the Company’s first loss tranche PO multi-family CMBS purchased at a discount to par value, a portion of the purchase discount 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 write-downs of such securities to a new cost basis could result.

With respect to interest rate swaps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps will be recognized in current earnings.

See Acquired Distressed Residential Mortgage Loans” for a description of our revenue recognition policy for acquired distressed residential mortgage loans.

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 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 and nine months ended September 30, 2015 and 2014.

Stock Based 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.

The Company has awarded restricted stock to eligible employees and officers as part of their compensation. Compensation expense for awarded restricted stock is based on the grant date fair value of the stock and is recognized over the vesting period.

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

Receivables (ASC 310)

In April 2014, the FASB issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40)—Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”). The amendments of this ASU are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. In addition, the amendments clarify that if an in substance repossession or foreclosure occurs, then a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. ASU 2014-04 became effective for the Company beginning January 1, 2015. The adoption of ASU 2014-04 did not have a material effect on our financial condition, results of operations and disclosures.

Transfers and Servicing (ASC 860)

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transaction, Repurchase Financings, and Disclosures (“ASU 2014-09”). This guidance requires repurchase-to-maturity transactions to be accounted for as secured borrowings as if the transferor retains effective control, even though the transferred financial assets are not returned to the transferor at settlement. ASU 2014-09 also eliminates existing guidance for repurchase financings and requires instead that entities consider the initial transfer and the related repurchase agreement separately when applying the derecognition requirements of ASC 860, Transfers and Servicing. New disclosures will be required for (1) certain transactions accounted for as secured borrowings, and (2) transfers accounted for as sales when the transferor also retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. ASU 2014-09 became effective for the Company beginning January 1, 2015. The adoption of ASU 2014-11 did not have a significant effect on our financial condition, results of operations and disclosures.

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 is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. We do not expect the adoption of ASU 2014-13 to have a significant effect on our financial condition, results of operations and disclosures.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). The update is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The guidance is effective for fiscal years beginning after December 31, 2015, and the interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The Company is currently assessing the impact of this guidance.


18


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 in ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the Codification. The guidance is effective for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within those fiscal years. We do not expect the adoption of ASU 2015-03 to have a significant effect on our financial condition, results of operations and disclosures.



19



3.
Investment Securities Available For Sale

Investment securities available for sale consisted of the following as of September 30, 2015 and December 31, 2014 (dollar amounts in thousands):
 
September 30, 2015
 
December 31, 2014
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Agency RMBS (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency ARMs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
61,303

 
$
67

 
$
(268
)
 
$
61,102

 
$
57,597

 
$
55

 
$
(488
)
 
$
57,164

Fannie Mae
99,287

 
88

 
(595
)
 
98,780

 
113,192

 
81

 
(1,037
)
 
112,236

Ginnie Mae
3,087

 
8

 
(14
)
 
3,081

 
12,552

 

 
(259
)
 
12,293

Total Agency ARMs
163,677

 
163

 
(877
)
 
162,963

 
183,341

 
136

 
(1,784
)
 
181,693

Agency Fixed Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
33,186

 

 
(413
)
 
32,773

 
37,800

 

 
(629
)
 
37,171

Fannie Mae
396,470

 

 
(7,921
)
 
388,549

 
451,694

 

 
(10,184
)
 
441,510

Ginnie Mae
12,256

 
6

 
(309
)
 
11,953

 

 

 

 

Total Agency Fixed Rate
441,912

 
6

 
(8,643
)
 
433,275

 
489,494

 

 
(10,813
)
 
478,681

Agency IOs (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
35,144

 
852

 
(5,013
)
 
30,983

 
38,844

 
273

 
(5,779
)
 
33,338

Fannie Mae
44,599

 
646

 
(5,846
)
 
39,399

 
53,666

 
741

 
(6,388
)
 
48,019

Ginnie Mae
60,383

 
779

 
(6,277
)
 
54,885

 
42,991

 
310

 
(5,527
)
 
37,774

Total Agency IOs
140,126

 
2,277

 
(17,136
)
 
125,267

 
135,501

 
1,324

 
(17,694
)
 
119,131

Total Agency RMBS
745,715

 
2,446

 
(26,656
)
 
721,505

 
808,336

 
1,460

 
(30,291
)
 
779,505

Non-Agency RMBS
1,815

 
56

 
(255
)
 
1,616

 
2,061

 
69

 
(191
)
 
1,939

U.S. Treasury securities
10,113

 

 
(7
)
 
10,106

 

 

 

 

CLOs

 

 

 

 
26,140

 
9,063

 

 
35,203

Total investment securities available for sale
$
757,643

 
$
2,502

 
$
(26,918
)
 
$
733,227

 
$
836,537

 
$
10,592

 
$
(30,482
)
 
$
816,647

CMBS
$
28,031

 
$
12,577

 
$

 
$
40,608

 
$
26,193

 
$
12,401

 
$

 
$
38,594

Total investment securities available for sale held in securitization trusts
$
28,031

 
$
12,577

 
$

 
$
40,608

 
$
26,193

 
$
12,401

 
$

 
$
38,594

(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.

During the three and nine months ended September 30, 2015 the Company received proceeds of approximately $33.3 million and $67.8 million respectively, realizing approximately a loss of $0.1 million and a gain of $3.1 million. During the three and nine months ended September 30, 2014, the Company received proceeds of approximately $41.4 million, realizing $16.5 million of net gains, from the sale of investment securities available for sale.

Actual maturities of our available for sale securities are generally shorter than stated contractual maturities (which range up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of September 30, 2015 and December 31, 2014, 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 4.12 and 4.95 years, respectively.


20



The following table sets forth the weighted average lives our investment securities available for sale as of September 30, 2015 and December 31, 2014 (dollar amounts in thousands):
Weighted Average Life
September 30, 2015
 
December 31, 2014
0 to 5 years
$
540,758

 
$
393,080

Over 5 to 10 years
162,765

 
365,386

10+ years
29,704

 
58,181

Total
$
733,227

 
$
816,647


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 September 30, 2015 and December 31, 2014 at carrying value (dollar amounts in thousands):
 
September 30, 2015
 
December 31, 2014
 
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
$
140,615

 
$
30,418

 
$
550,472

 
$
721,505

 
$
89,442

 
$
21,746

 
$
668,317

 
$
779,505

Non-Agency RMBS
1,616

 

 

 
1,616

 
1,939

 

 

 
1,939

U.S. Treasury securities
10,106

 

 

 
10,106

 

 

 

 

CLOs

 

 

 

 
35,203

 

 

 
35,203

Total investment securities available for sale
$
152,337

 
$
30,418

 
$
550,472

 
$
733,227

 
$
126,584

 
$
21,746

 
$
668,317

 
$
816,647

CMBS
$

 
$

 
$
40,608

 
$
40,608

 
$

 
$

 
$
38,594

 
$
38,594

Total investment securities available for sale held in securitization trusts
$

 
$

 
$
40,608

 
$
40,608

 
$

 
$

 
$
38,594

 
$
38,594


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 September 30, 2015 and December 31, 2014 (dollar amounts in thousands):
September 30, 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
$
146,480

 
$
(1,090
)
 
$
409,662

 
$
(8,395
)
 
$
556,142

 
$
(9,485
)
Non-Agency RMBS
594

 
(116
)
 
200

 
(140
)
 
794

 
(256
)
Total investment securities available for sale
$
147,074

 
$
(1,206
)
 
$
409,862

 
$
(8,535
)
 
$
556,936

 
$
(9,741
)

December 31, 2014
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
$

 
$

 
$
638,936

 
$
(12,597
)
 
$
638,936

 
$
(12,597
)
Non-Agency RMBS

 

 
967

 
(191
)
 
967

 
(191
)
Total investment securities available for sale
$

 
$

 
$
639,903

 
$
(12,788
)
 
$
639,903

 
$
(12,788
)

For the three and nine months ended September 30, 2015 and 2014, the Company recognized no other-than-temporary impairment through earnings.

21


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 September 30, 2015 and December 31, 2014, respectively (dollar amounts in thousands):
 
September 30, 2015
 
December 31, 2014
Unpaid principal balance
$
136,203

 
$
152,277

Deferred origination costs – net
864

 
968

Reserve for loan losses
(4,185
)
 
(3,631
)
Total
$
132,882

 
$
149,614


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 nine months ended September 30, 2015 and 2014, respectively (dollar amounts in thousands):
 
Nine Months Ended September 30,
 
2015
 
2014
Balance at beginning of period
$
3,631

 
$
2,989

Provisions for loan losses
819

 
522

Transfer to real estate owned
(70
)
 
(157
)
Charge-offs
(195
)
 

Balance at the end of period
$
4,185

 
$
3,354


On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses as of September 30, 2015 was $4.2 million, representing 307 basis points of the outstanding principal balance of residential loans held in securitization trusts, as compared to 238 basis points as of December 31, 2014. 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 nine months ended September 30, 2015 and 2014, respectively (dollar amounts in thousands):
 
Nine Months Ended September 30,
 
2015
 
2014
Balance at beginning of period
965

 
$
1,108

Write downs

 
(103
)
Transfer from/(to) mortgage loans held in securitization trusts
(121
)
 
241

Disposal
(365
)
 
(577
)
Balance at the end of period
479

 
$
669


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.

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 $4.8 million and $5.6 million as of September 30, 2015 and December 31, 2014, respectively.



22


Delinquency Status of Our Residential Mortgage Loans Held in Securitization Trusts

As of September 30, 2015, we had 34 delinquent loans with an aggregate principal amount outstanding of approximately $21.3 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net). Of the $21.3 million in delinquent loans, $13.8 million, or 65%, 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 September 30, 2015 (dollar amounts in thousands):

September 30, 2015
Days Late
Number of
Delinquent
Loans 
 
Total
Unpaid
Principal 
 
% of Loan
Portfolio 
30 - 60
2
 
$
352

 
0.26
%
61 - 90
1
 
123

 
0.09
%
90 +
31
 
20,838

 
15.13
%
Real estate owned through foreclosure
4
 
1,502

 
1.09
%

As of December 31, 2014, we had 33 delinquent loans with an aggregate principal amount outstanding of approximately $18.5 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net). Of the $18.5 million in delinquent loans, $9.4 million, or 51%, 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, 2014 (dollar amounts in thousands):

December 31, 2014
Days Late
Number of Delinquent
Loans 
 
Total
Unpaid Principal 
 
% of Loan
Portfolio 
30 - 60
4
 
$
1,522

 
0.99
%
61 - 90
 
$

 
%
90 +
29
 
$
16,997

 
11.01
%
Real estate owned through foreclosure
6
 
$
2,100

 
1.36
%

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 September 30, 2015 and December 31, 2014 are as follows:
 
September 30, 2015
 
December 31, 2014
New York
35.2
%
 
36.1
%
Massachusetts
23.0
%
 
24.0
%
New Jersey
11.6
%
 
10.9
%
Florida
6.9
%
 
6.2
%
Connecticut
5.8
%
 
5.9
%


23


5.
Distressed Residential Mortgage Loans

As of September 30, 2015 and December 31, 2014, the carrying value of the Company’s distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, amounts to approximately $509.4 million and $582.7 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.

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 nine months ended September 30, 2015 (dollar amounts in thousands):
 
September 30, 2015
Contractually required principal and interest
$
207,395

Non-accretable yield
(16,354
)
Expected cash flows to be collected
191,041

Accretable yield
(97,206
)
Fair value at the date of acquisition
$
93,835


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 nine months ended September 30, 2015 and 2014, respectively (dollar amounts in thousands):
 
September 30, 2015
 
September 30, 2014
Balance at beginning of period
$
640,416

 
$
171,112

Additions
108,780

 
181,324

Disposals
(187,001
)
 
(73,906
)
Accretion
(31,962
)
 
(14,400
)
Balance at end of period (1)
$
530,233

 
$
264,130

(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 nine-month period ended September 30, 2015 and 2014 is not necessarily indicative of future results.


24


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 September 30, 2015 and December 31, 2014, respectively, are as follows:
 
September 30, 2015
 
December 31, 2014
Florida
13.1
%
 
12.4
%
North Carolina
8.7
%
 
8.2
%
California
7.1
%
 
8.9
%
Georgia
6.5
%
 
6.9
%
New York
4.4
%
 
5.1
%

The Company’s distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $156.1 million and $221.6 million at September 30, 2015 and December 31, 2014, respectively, are 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 $259.3 million at September 30, 2015 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 $285.1 million and $317.5 million at September 30, 2015 and December 31, 2014, respectively (see Note 7). The Consolidated K-Series is comprised of five and six K-Series securitizations as of September 30, 2015 and December 31, 2014, respectively.

The condensed consolidated balance sheets of the Consolidated K-Series at September 30, 2015 and December 31, 2014, respectively, are as follows (dollar amounts in thousands):

Balance Sheets
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Multi-family loans held in securitization trusts
$
7,296,462

 
$
8,365,514

Receivables
23,940

 
29,809

Total Assets
$
7,320,402

 
$
8,395,323

Liabilities and Equity
 
 
 
Multi-family CDOs
$
7,011,351

 
$
8,048,053

Accrued expenses
23,843

 
29,354

Total Liabilities
7,035,194

 
8,077,407

Equity
285,208

 
317,916

Total Liabilities and Equity
$
7,320,402

 
$
8,395,323


The multi-family loans held in securitization trusts had an unpaid principal balance of approximately $6.8 billion and $7.9 billion at September 30, 2015 and December 31, 2014, respectively. The multi-family CDOs had an unpaid principal balance of approximately $6.8 billion and $7.9 billion at September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015 and December 31, 2014, the current weighted average interest rate on these multi-family CDOs was 4.11% and 4.15%, respectively.

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.


25


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 and nine months ended September 30, 2015 and 2014, respectively, are as follows (dollar amounts in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Statements of Operations
2015
 
2014
 
2015
 
2014
Interest income
$
63,431

 
$
75,891

 
$
192,715

 
$
226,336

Interest expense
57,388

 
69,310

 
174,475

 
207,167

Net interest income
6,043

 
6,581

 
18,240

 
19,169

Unrealized (loss) gain on multi-family loans and debt held in securitization trusts, net
(2,170
)
 
18,115

 
16,876

 
43,060

Net Income
$
3,873

 
$
24,696

 
$
35,116

 
$
62,229


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 September 30, 2015 and December 31, 2014, respectively, are as follows:

 
September 30, 2015
 
December 31, 2014
California
13.7
%
 
13.5
%
Texas
12.6
%
 
12.5
%
New York
8.0
%
 
7.7
%
Maryland
5.2
%
 
5.2
%


26


7.
Use of Special Purpose Entities and Variable Interest Entities

A SPE is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used 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 evaluated its CMBS investments in Freddie Mac-sponsored K-Series securitizations to determine whether they are VIEs. In addition, the Company also evaluated its financing transactions, such as its Residential CDOs completed in 2005, its multi-family CMBS re-securitization transaction completed in May 2012, its collateralized recourse financing transactions completed in November 2013 and 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.

The Company then completed an analysis of whether the VIEs should be consolidated by the Company, based on consideration of its involvement in each of the VIEs, including the design and purpose of the SPE, 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 Company has determined that it has a variable interest in the Consolidated K-Series for which it is the primary beneficiary and has a controlling financial interest and, accordingly, has consolidated their assets, liabilities, income and expenses in the accompanying condensed consolidated financial statements (see Notes 2 and 6).

Also, based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that the Financing VIEs met the criteria for consolidation and, accordingly, consolidated the Financing VIEs created to facilitate these transactions as of September 30, 2015.

The following tables presents a summary of the assets and liabilities of these consolidated VIEs as of September 30, 2015 and December 31, 2014, respectively. Intercompany balances have been eliminated for purposes of this presentation.


27


Assets and Liabilities of consolidated VIEs as of September 30, 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
 
Residential
Mortgage
Loan Securitization
 
Multi-
family
CMBS(3)
 
Total
Investment securities available for sale, at fair value held in securitization trusts
$
40,608

 
$

 
$

 
$

 
$

 
$
40,608

Residential mortgage loans held in securitization trusts (net)

 

 

 
132,882

 

 
132,882

Distressed residential mortgage loans held in securitization trust, (net)

 

 
156,062

 

 

 
156,062

Multi-family loans held in securitization trusts, at fair value
1,269,821

 
4,749,797

 

 

 
1,276,844

 
7,296,462

Receivables and other assets
4,835

 
14,896

 
22,178

 
1,023

 
5,306

 
48,238

Total assets
$
1,315,264

 
$
4,764,693

 
$
178,240

 
$
133,905

 
$
1,282,150

 
$
7,674,252

 
 
 
 
 
 
 
 
 
 
 
 
Residential collateralized debt obligations
$

 
$

 
$

 
$
129,090

 
$

 
$
129,090

Multi-family collateralized debt obligations, at fair value
1,214,259

 
4,581,768

 

 

 
1,215,324

 
7,011,351

Securitized debt
27,962

 
55,853

 
57,131

 

 

 
140,946

Accrued expenses and other liabilities
4,384

 
14,313

 
1,777

 
15

 
5,306

 
25,795

Total liabilities
$
1,246,605

 
$
4,651,934

 
$
58,908

 
$
129,105

 
$
1,220,630

 
$
7,307,182


(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)
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 September 30, 2015. In February 2015, the Company sold a first loss 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.

28


Assets and Liabilities of consolidated Financing VIEs as of December 31, 2014 (dollar amounts in thousands):
 
Financing VIEs
 
Non-financed VIEs
 
 
 
Multi-family
CMBS re-
securitization(1)
 
Collateralized
Recourse
Financing(2)
 
Distressed
Residential
Mortgage
Loan
Securitization
 
Residential
Mortgage
Loan Securitization
 
Multi-
family
CMBS(3)
 
Total
Investment securities available for sale, at fair value held in securitization trusts
$
38,594

 
$

 
$

 
$

 
$

 
$
38,594

Residential mortgage loans held in securitization trusts (net)

 

 

 
149,614

 

 
149,614

Distressed residential mortgage loans held in securitization trust (net)

 

 
221,591

 

 

 
221,591

Multi-family loans held in securitization trusts, at fair value
1,273,633

 
4,720,908

 

 

 
2,370,973

 
8,365,514

Receivables and other assets
5,097

 
15,631

 
39,084

 
1,545

 
10,408

 
71,765

Total assets
$
1,317,324

 
$
4,736,539

 
$
260,675

 
$
151,159

 
$
2,381,381

 
$
8,847,078

 
 
 
 
 
 
 
 
 
 
 
 
Residential collateralized debt obligations
$

 
$

 
$

 
$
145,542

 
$

 
$
145,542

Multi-family collateralized debt obligations, at fair value
1,221,555

 
4,558,065

 

 

 
2,268,433

 
8,048,053

Securitized debt
27,660

 
55,853

 
149,364

 

 

 
232,877

Accrued expenses and other liabilities
4,581

 
14,639

 
1,024

 
14

 
10,304

 
30,562

Total liabilities
$
1,253,796

 
$
4,628,557

 
$
150,388

 
$
145,556

 
$
2,278,737

 
$
8,457,034

(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). In September 2014, the Company repaid the Company’s outstanding notes from its collateralized recourse financing transaction completed in November 2012 with a principal amount of $52.0 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated the financing transaction and the multi-family CMBS serving as collateral on the notes were transferred back to the Company.
(3)
Two of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series are not subject to any Financing VIE as of December 31, 2014.


29



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)
Original Face amount of Notes issued by the VIE and purchased by third party investors
$
35,000

 
$
55,853

 
$
176,970

Principal Amount at September 30, 2015
$
33,927

 
$
55,853

 
$
57,132

Principal Amount at December 31, 2014
$
34,208

 
$
55,853

 
$
149,364

Carrying Value at September 30, 2015 (4)