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EX-32.1 - EXHIBIT 32.1 - NEW YORK MORTGAGE TRUST INCex321sept16.htm
EX-31.2 - EXHIBIT 31.2 - NEW YORK MORTGAGE TRUST INCex312september16.htm
EX-31.1 - EXHIBIT 31.1 - NEW YORK MORTGAGE TRUST INCex311september16.htm
EX-12.1 - EXHIBIT 12.1 - NEW YORK MORTGAGE TRUST INCex121september16.htm
EX-10.3 - EXHIBIT 10.3 - NEW YORK MORTGAGE TRUST INCex103sep2016.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, 2016

OR


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

For the transition period from _______ to ____________

Commission file number 001-32216

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒
Accelerated Filer ☐
Non-Accelerated Filer ☐
Smaller Reporting Company ☐

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


The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on November 3, 2016 was 109,569,315.




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, 2016
 
December 31, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investment securities, available for sale, at fair value (including $43,074 and $40,734 held in securitization trusts as of September 30, 2016 and December 31, 2015, respectively and pledged securities of $712,064 and $639,683, as of September 30, 2016 and December 31, 2015, respectively)
$
807,702

 
$
765,454

Residential mortgage loans held in securitization trusts, net
99,426

 
119,921

Distressed residential mortgage loans, net (including $204,275 and $114,214 held in securitization trusts)
501,881

 
558,989

Multi-family loans held in securitization trusts, at fair value
7,221,402

 
7,105,336

Derivative assets
291,318

 
228,775

Cash and cash equivalents
65,282

 
61,959

Investment in unconsolidated entities
81,284

 
87,662

Mezzanine loan and preferred equity investments
99,477

 
44,151

Goodwill
24,982

 

Receivables and other assets
168,572

 
83,995

Total Assets (1)
$
9,361,326

 
$
9,056,242

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Financing arrangements, portfolio investments
$
671,774

 
$
577,413

Financing arrangements, residential mortgage loans
181,979

 
212,155

Residential collateralized debt obligations
96,062

 
116,710

Multi-family collateralized debt obligations, at fair value
6,913,855

 
6,818,901

Securitized debt
232,365

 
116,541

Derivative liabilities
1,788

 
1,500

Payable for securities purchased
290,833

 
227,969

Accrued expenses and other liabilities
64,590

 
59,527

Subordinated debentures
45,000

 
45,000

Total liabilities (1)
$
8,498,246

 
$
8,175,716

Commitments and Contingencies

 

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

 
$
72,397

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

 
86,862

Common stock, $0.01 par value, 400,000,000 shares authorized, 109,569,315 and 109,401,721 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
1,096

 
1,094

Additional paid-in capital
735,507

 
734,610

Accumulated other comprehensive income (loss)
9,584

 
(2,854
)
Accumulated deficit
(45,456
)
 
(11,583
)
Company's stockholders' equity
$
859,990

 
$
880,526

Non-controlling interest
$
3,090

 
$

Total equity
$
863,080

 
$
880,526

Total Liabilities and Stockholders' Equity
$
9,361,326

 
$
9,056,242


(1) 
Our condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiary of these VIEs. As of September 30, 2016 and December 31, 2015, assets of consolidated VIEs totaled $7,631,478 and $7,413,082, respectively, and the liabilities of consolidated VIEs totaled $7,267,689 and $7,077,175, respectively. See Note 9 for further discussion.

The accompanying notes are an integral part of the condensed 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,
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME:
 
 
 
 
 
 
 
Investment securities and other
$
8,587

 
$
6,792

 
$
25,612

 
$
28,332

Multi-family loans held in securitization trusts
62,126

 
63,431

 
187,427

 
192,715

Residential mortgage loans held in securitization trusts
947

 
875

 
2,705

 
2,950

Distressed residential mortgage loans
7,865

 
11,489

 
25,173

 
31,975

Total interest income
79,525

 
82,587

 
240,917

 
255,972

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Investment securities and other
4,598

 
3,432

 
12,409

 
10,337

Multi-family collateralized debt obligations
55,359

 
57,388

 
167,783

 
174,475

Residential collateralized debt obligations
322

 
219

 
937

 
679

Securitized debt
3,209

 
2,782

 
8,436

 
8,883

Subordinated debentures
519

 
474

 
1,528

 
1,402

Total interest expense
64,007

 
64,295

 
191,093

 
195,776

 
 
 
 
 
 
 
 
NET INTEREST INCOME
15,518

 
18,292

 
49,824

 
60,196

 
 
 
 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
 
 
 
(Provision) recovery for loan losses
(26
)
 
(1,117
)
 
661

 
(1,664
)
Realized gain (loss) on investment securities and related hedges, net
2,306

 
(2,895
)
 
5,333

 
(3,062
)
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
6,416

 
27,224

 
11,990

 
31,514

Unrealized gain (loss) on investment securities and related hedges, net
1,563

 
(2,631
)
 
(1,594
)
 
(3,643
)
Unrealized gain (loss) on multi-family loans and debt held in securitization trusts, net
738

 
(2,170
)
 
2,340

 
16,876

Other income
5,635

 
1,807

 
16,833

 
6,393

Total other income
16,632

 
20,218

 
35,563

 
47,897

 
 
 
 
 
 
 
 
Base management and incentive fees
1,453

 
3,676

 
7,958

 
14,687

Expenses related to distressed residential mortgage loans
2,398

 
3,261

 
8,332

 
7,827

Other general and administrative expenses
4,854

 
2,893

 
11,711

 
7,302

Total general, administrative and other expenses
8,705

 
9,830

 
28,001

 
29,816

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAXES
23,445

 
28,680

 
57,386

 
78,277

Income tax expense
163

 
3,048

 
2,720

 
4,471

NET INCOME
$
23,282

 
$
25,632

 
$
54,666

 
$
73,806

Net income attributable to non-controlling interest
(14
)
 

 
(12
)
 

NET INCOME ATTRIBUTABLE TO COMPANY
$
23,268

 
$
25,632

 
$
54,654

 
$
73,806

Preferred stock dividends
(3,225
)
 
(3,225
)
 
(9,675
)
 
(7,765
)
NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
20,043

 
$
22,407

 
$
44,979

 
$
66,041

 
 
 
 
 
 
 
 
Basic income per common share
$
0.18

 
$
0.20

 
$
0.41

 
$
0.61

Diluted income per common share
$
0.18

 
$
0.20

 
$
0.41

 
$
0.61

Weighted average shares outstanding-basic
109,569

 
109,402

 
109,487

 
108,061

Weighted average shares outstanding-diluted
109,569

 
109,402

 
109,487

 
108,061


The accompanying notes are an integral part of the condensed 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,
 
2016
 
2015
 
2016
 
2015
NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
20,043

 
$
22,407

 
$
44,979

 
$
66,041

OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Increase in fair value of available for sale securities
1,469

 
3,566

 
13,045

 
3,212

Reclassification adjustment for net gain included in net income

 

 

 
(9,063
)
Increase (decrease) in in fair value of derivative instruments utilized for cash flow hedges
521

 
(781
)
 
(607
)
 
(1,942
)
OTHER COMPREHENSIVE INCOME (LOSS)
1,990

 
2,785

 
12,438

 
(7,793
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
22,033

 
$
25,192

 
$
57,417

 
$
58,248


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


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

 
$
159,259

 
$
734,610

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

 
$

 
$
880,526

Net income

 

 

 
54,654

 

 
54,654

 
12

 
54,666

Stock issuance, net
2

 

 
897

 

 

 
899

 

 
899

Dividends declared on common and preferred stock

 

 

 
(88,527
)
 

 
(88,527
)
 

 
(88,527
)
Increase in fair value on available for sale securities

 

 

 

 
13,045

 
13,045

 

 
13,045

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

 

 

 

 
(607
)
 
(607
)
 

 
(607
)
Increase in non-controlling interest related to consolidation of interest in a limited liability company

 

 

 

 

 

 
3,078

 
3,078

Balance, September 30, 2016
$
1,096

 
$
159,259

 
$
735,507

 
$
(45,456
)
 
$
9,584

 
$
859,990

 
$
3,090

 
$
863,080


The accompanying notes are an integral part of the condensed 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,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
54,666

 
$
73,806

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization (accretion)
5,713

 
1,440

Realized (gain) loss on investment securities and related hedges, net
(5,333
)
 
3,062

Realized gain on distressed residential mortgage loans
(11,990
)
 
(31,514
)
Unrealized loss on investment securities and related hedges, net
1,594

 
3,643

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

 
(1,483
)
Gain on remeasurement of existing membership interest in businesses acquired
(5,052
)
 

Gain on bargain purchase on businesses acquired
(65
)
 

Unrealized gain on loans and debt held in multi-family securitization trusts
(2,340
)
 
(16,876
)
Net decrease in loans held for sale
432

 
14

(Recovery of) provision for loan losses
(661
)
 
1,664

Income from unconsolidated entity, mezzanine loan and preferred equity investments
(16,934
)
 
(8,603
)
Distributions of income from unconsolidated entity, mezzanine loan and preferred equity investments
12,085

 
6,199

Amortization of stock based compensation, net
514

 
721

Changes in operating assets and liabilities:


 

Receivables and other assets
8,288

 
8,331

Accrued expenses and other liabilities
3,687

 
(11,758
)
Net cash provided by operating activities
44,604

 
28,646

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Acquisition of businesses, net of cash acquired
(28,468
)
 

Restricted cash
(57,829
)
 
1,577

Proceeds from sales of investment securities
198,280

 
67,775

Purchases of investment securities
(339,650
)
 
(87,844
)
Redemption (purchases) of FHLBI stock
5,423

 
(5,445
)
Purchases of other assets
(85
)
 
(29
)
Funding of mezzanine loans, equity and preferred equity investments
(40,860
)
 
(43,800
)
Principal repayments received on mezzanine loans
464

 

Return of capital from unconsolidated entity and preferred equity investments
6,002

 

Net proceeds (payments) on other derivative instruments settled during the period
8,155

 
(5,820
)
Principal repayments received on residential mortgage loans held in securitization trusts
19,607

 
16,100

Principal repayments and proceeds from sales and refinancing of distressed residential mortgage loans
100,217

 
232,075

Principal repayments received on multi-family loans held in securitization trusts
91,914

 
57,421

Principal paydowns on investment securities - available for sale
84,592

 
79,055

Proceeds from sale of real estate owned
1,525

 
750

Purchases of residential mortgage loans and distressed residential mortgage loans
(52,130
)
 
(97,654
)
Proceeds from sales of loans held in multi-family securitization trusts

 
65,587

Net cash (used in) provided by investing activities
(2,843
)
 
279,748

 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net proceeds from (payments made on) financing arrangements, including FHLBI advances and payments
64,185

 
(119,387
)
Proceeds from issuance of securitized debt
167,724

 

Common stock issuance, net
385

 
31,832

Preferred stock issuance, net

 
86,862

Dividends paid on common stock
(78,811
)
 
(87,061
)
Dividends paid on preferred stock
(9,675
)
 
(5,993
)
Payments made on residential collateralized debt obligations
(20,736
)
 
(16,519
)
Payments made on multi-family collateralized debt obligations
(91,901
)
 
(57,411
)
Payments made on securitized debt
(53,354
)
 
(92,514
)
Redemption of preferred equity
(16,255
)
 

Net cash used in financing activities
(38,438
)
 
(260,191
)
Net Increase in Cash and Cash Equivalents
3,323

 
48,203

Cash and Cash Equivalents - Beginning of Period
61,959

 
75,598

Cash and Cash Equivalents - End of Period
$
65,282

 
$
123,801


The accompanying notes are an integral part of the condensed 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
$
226,555

 
$
232,077

Cash paid for income taxes
$
2,172

 
$
2,720

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

 
$
1,480

Purchase of investment securities not yet settled
$
290,833

 
$
283,991

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
$
26,296

 
$
26,256

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

 
$
3,225


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


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)
1.
Organization

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

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

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


9


2.Summary of Significant Accounting Policies

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

“RMBS” refers to residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only and principal only mortgage-backed securities;
“Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a federally chartered corporation (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”);
“Non-Agency RMBS” refers to RMBS backed by prime jumbo mortgage loans, including re-performing and non-performing loans;
“IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans;
“POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;
“Agency IOs” refers to an IO that represents the right to the interest component of the cash flows from a pool of residential mortgage loans issued or guaranteed by a GSE or an agency of the U.S. government;
“ARMs” refers to adjustable-rate residential mortgage loans;
“Prime ARM loans” and “residential securitized loans” each refer to prime credit quality residential ARM loans (“prime ARM loans”) held in securitization trusts formed in 2005;
“Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;
"Agency fixed-rate RMBS" refers to Agency RMBS comprised of fixed-rate RMBS;
“CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans;
“Multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties;
“CDOs” refers to collateralized debt obligations; and
“CLO” refers to collateralized loan obligations.

Basis of Presentation – The accompanying condensed consolidated balance sheet as of December 31, 2015 has been derived from audited financial statements. The accompanying condensed consolidated balance sheet as of September 30, 2016, the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015, the accompanying condensed consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2016 and the accompanying condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year.

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

Reclassifications – Certain prior period amounts have been reclassified in the condensed consolidated financial statements to conform to current period presentation.



10




Business Combinations – The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. The Company accounts for business combinations by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. Transaction costs related to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.

Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income.

Net cash paid to acquire a business is classified as investing activities on the accompanying condensed consolidated statements of cash flows.

On May 16, 2016, the Company acquired the outstanding membership interests in RiverBanc LLC ("RiverBanc"), RB Multifamily Investors LLC ("RBMI"), and RB Development Holding Company, LLC ("RBDHC") that were not previously owned by the Company through the consummation of separate membership interest purchase agreements, thereby increasing the Company's ownership of each of these entities to 100% (see Note 21).

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 variable interest entity ("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, herein referred to as a "Consolidated VIE". As primary beneficiary, it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

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

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

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


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

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

The Company accounts for debt securities that are of high credit quality (generally those rated AA or better by a Nationally Recognized Statistical Rating Organization, or NRSRO) at date of acquisition in accordance with ASC 320-10, Investments - Debt and Equity Securities ("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, Investments - Beneficial Interests in Securitized Financial Assets ("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 320-10. When the fair value of an investment security is less than its amortized cost as of the reporting balance sheet date, the security is considered impaired.  If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through earnings equal to the entire difference between the investment’s amortized cost and its fair value as of the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as a component of other comprehensive income (loss) on the accompanying condensed consolidated balance sheets. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security, which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment as well the Company’s estimates of the future performance and cash flow projections. As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

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


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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 all cases when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

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

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

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

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

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


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

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

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

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

Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are comprised of multi-family mortgage loans held in 5 Freddie Mac-sponsored multi-family K-Series securitizations (the “Consolidated K-Series”) as of September 30, 2016 and December 31, 2015. Based on a number of factors, we determined that we were the primary beneficiary of each VIE within the Consolidated K-Series, met the criteria for consolidation and, accordingly, have consolidated these Freddie Mac-sponsored multi-family K-Series securitizations, including their assets, liabilities, income and expenses in our financial statements. The Company has elected the fair value option on each of the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations be reflected in the Company's accompanying condensed consolidated statement of operations. The Company has adopted ASU 2014-13 effective January 1, 2016, which updates the guidance on measuring the financial assets and financial liabilities of consolidated collateralized financing entities, or CFEs. The update allows the Company to measure both the financial assets and financial liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s securitization trusts are considered qualifying CFEs, the Company determines the fair value of multi-family loans held in securitization trusts based on the fair value of its multi-family collateralized debt obligations and its retained interests from these securitizations (eliminated in consolidation in accordance with U.S. GAAP), as the fair value of these instruments is more observable.

Interest income is accrued and recognized as revenue when earned according to the terms of the multi-family loans and when, in the opinion of management, it is collectible. The accrual of interest on multi-family loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than 90 days delinquent. The multi-family loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

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

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


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

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

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

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

The Company may elect the fair value option for an investment in an unconsolidated entity that is accounted for using the equity method. The Company elected the fair value option for certain investments in unconsolidated entities that own interests (directly or indirectly) in commercial and residential real estate assets because the Company determined that such presentation represents the underlying economics of the respective investment. The Company records the change in fair value of its investment in other income in the condensed consolidated statements of operations. The Company had investments in unconsolidated entities at fair value option included in investment in unconsolidated entities in the amounts of $62.5 million and $67.6 million as of September 30, 2016 and December 31, 2015, respectively.







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Real Estate Under Development – The Company's expenditures which directly relate to the acquisition, development, construction and improvement of properties are capitalized, at cost. During the development period, which culminates once a property is substantially complete and ready for intended use, operating and carrying costs such as interest expense, real estate taxes, insurance and other direct costs are capitalized. Advertising and general administrative costs that do not relate to the development of a property are expensed as incurred. Real estate under development as of September 30, 2016 and December 31, 2015 of $16.4 million and $0, respectively, is included in receivables and other assets on the condensed consolidated balance sheets.

The Company periodically evaluates its long-lived assets for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company's ability to hold and its intent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment is warranted. If impairment indicators exist for long-lived assets to be held and used, and the expected future undiscounted cash flows are less than the carrying amount of the asset, then the Company will record an impairment loss for the difference between the fair value of the asset and its carrying amount. If the asset is to be disposed of, then an impairment loss is recognized for the difference between the estimated fair value of the asset, less costs to sell, and its carrying amount.

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.

Goodwill – Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity. Goodwill is not amortized but tested for impairment annually or more frequently if events or circumstances indicate that goodwill may be impaired. Goodwill of $25.0 million as of September 30, 2016 relates to the Company's multifamily investment reporting unit.

Goodwill is measured for impairment by initially performing a qualitative screen and, if necessary, then comparing fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill is lower than its carrying value, an impairment charge equal to the difference is recorded.

Intangible Assets – Intangible assets consisting of acquired trade name, acquired technology, and employee non-compete agreements with useful lives ranging from 1 to 10 years are included in receivables and other assets on the condensed consolidated balance sheets. Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The useful lives of intangible assets are evaluated on an annual basis to determine whether events and circumstances warrant a revision to the remaining useful life.

Receivables and Other Assets – Receivables and other assets as of September 30, 2016 and December 31, 2015 include restricted cash held by third parties of $78.6 million and $20.8 million, respectively. Included in restricted cash is $41.1 million and $11.6 million held in our Agency IO portfolio to be used for trading purposes and $14.3 million and $6.3 million held by counterparties as collateral for hedging instruments as of September 30, 2016 and December 31, 2015, respectively. Interest receivable on multi-family loans held in securitization trusts is also included in the amounts of $23.5 million and $24.6 million as of September 30, 2016 and December 31, 2015, respectively.

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


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

Financing Arrangements, Residential Mortgage Loans – The Company finances a portion of its residential mortgage loans, including its distressed residential mortgage loans, through a repurchase agreement expiring within 12 to 15 months. The borrowing under the repurchase agreement bears an interest rate of a specified margin over one-month LIBOR. The repurchase agreement is treated as a collateralized financing transaction and is carried at the contractual amounts, as specified in the respective agreement. Costs related to the establishment of the repurchase agreement which include underwriting, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $0.9 million as of September 30, 2016 and $2.3 million as of December 31, 2015. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

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

Multi-Family Collateralized Debt Obligations (“Multi-Family CDOs”) – We consolidated the Consolidated K-Series including its 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 presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $1.6 million and $1.0 million as of September 30, 2016 and December 31, 2015, respectively. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

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


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

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

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

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

Manager Compensation – We are a party to separate investment management agreements with Headlands Asset Management LLC (“Headlands”) and The Midway Group, LP (“Midway”), with Headlands providing investment management services with respect to our investments in certain distressed residential mortgage loans and Midway providing investment management services with respect to our investments in Agency IOs. 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.

Other Comprehensive Income (Loss) – The Company’s comprehensive income/(loss) attributable to the Company's 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, reduced by dividends declared on the Company’s preferred stock and increased for net loss attributable to non-controlling interest.

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 $0.1 million in contributions to the Plan for the nine months ended September 30, 2016. The Company made no contributions to the Plan for the nine months ended September 30, 2015.

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

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

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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 ("ASC 740"), 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 attributable to the Company's 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.

Summary of Recent Accounting Pronouncements

Revenue Recognition (Topic 606)

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










19


Consolidation (Topic 810)

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

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

Interest - Imputation of Interest (Topic 835)

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

Financial Instruments - Overall (Subtopic 825-10)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The amendments in ASU 2016-01 require (1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (2) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (3) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) and eliminates the requirement for public business entities to disclose the method(s) and (4) significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has determined that the adoption of ASU will not have a material impact on the Company's financial condition or results of operations.


Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02") which required organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Both types of leases however must now be recognized on the balance sheet. The lessee will be required to recognize both a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has determined that the adoption of ASU will not have a material impact on the Company's financial condition or results of operations.


20



Investments - Equity Method and Joint Ventures (Topic 323)

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

Additionally, the amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company has determined that the adoption of ASU will not have a material impact on the Company's financial condition or results of operations.

Compensation - Stock Compensation (Topic 718)

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

Financial Instruments —Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance.

Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments (Topic 230)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments (Topic 230) ("ASU 2016-15"). The amendments provide guidance on eight specific cash flow issues in how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing the existing diversity in practice. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance.


21



3.
Investment Securities Available For Sale

Investment securities available for sale consisted of the following as of September 30, 2016 and December 31, 2015 (dollar amounts in thousands):
 
September 30, 2016
 
December 31, 2015
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Agency RMBS (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency ARMs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
42,808

 
$
335

 
$
(159
)
 
$
42,984

 
$
62,383

 
$
41

 
$
(770
)
 
$
61,654

Fannie Mae
74,787

 
249

 
(217
)
 
74,819

 
92,605

 
121

 
(1,334
)
 
91,392

Ginnie Mae
6,408

 

 
(237
)
 
6,171

 
20,172

 
55

 
(260
)
 
19,967

Total Agency ARMs
124,003

 
584

 
(613
)
 
123,974

 
175,160

 
217

 
(2,364
)
 
173,013

Agency Fixed Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
27,184

 
5

 
(168
)
 
27,021

 
31,076

 

 
(719
)
 
30,357

Fannie Mae
331,592

 
214

 
(3,921
)
 
327,885

 
380,684

 

 
(12,149
)
 
368,535

Ginnie Mae
482

 

 
(2
)
 
480

 
25,923

 
9

 
(111
)
 
25,821

Total Agency Fixed Rate
359,258

 
219

 
(4,091
)
 
355,386

 
437,683

 
9

 
(12,979
)
 
424,713

Agency IOs (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
21,479

 
538

 
(4,926
)
 
17,091

 
28,970

 
680

 
(4,471
)
 
25,179

Fannie Mae
29,786

 
698

 
(7,442
)
 
23,042

 
39,603

 
433

 
(6,341
)
 
33,695

Ginnie Mae
53,416

 
1,660

 
(8,866
)
 
46,210

 
63,050

 
511

 
(7,045
)
 
56,516

Total Agency IOs
104,681

 
2,896

 
(21,234
)
 
86,343

 
131,623

 
1,624

 
(17,857
)
 
115,390

Total Agency RMBS
587,942

 
3,699

 
(25,938
)
 
565,703

 
744,466

 
1,850

 
(33,200
)
 
713,116

Non-Agency RMBS
175,125

 
949

 
(216
)
 
175,858

 
1,727

 
51

 
(211
)
 
1,567

U.S. Treasury securities (1)

 

 

 

 
10,113

 

 
(76
)
 
10,037

CMBS (2)
53,088

 
13,053

 

 
66,141

 
28,692

 
12,042

 

 
40,734

Total investment securities available for sale
$
816,155

 
$
17,701

 
$
(26,154
)
 
$
807,702

 
$
784,998

 
$
13,943

 
$
(33,487
)
 
$
765,454


(1) 
Included in investment securities available for sale are Agency IOs, Agency RMBS and U.S. Treasury securities managed by Midway that are measured at fair value through earnings.
(2) 
Included in CMBS is $43.1 million and $40.7 million of investment securities for sale held in securitization trusts as of September 30, 2016 and December 31, 2015, respectively.

Realized Gain or Loss Activity

During the three and nine months ended September 30, 2016, the Company received proceeds of approximately $9.6 million and $112.0 million on sales of investment securities available for sale realizing a loss of approximately $1.4 million and $2.4 million, respectively. During the three and nine months ended September 30, 2015, the Company received proceeds of approximately $33.3 million and $67.8 million, realizing a loss of approximately $0.1 million and a gain of approximately $3.1 million, respectively, from the sale of investment securities available for sale.


22


Weighted Average Life

Actual maturities of our available for sale securities are generally shorter than stated contractual maturities (with maturities up to 30 years), as they are affected by periodic payments and prepayments of principal on the underlying mortgages. As of September 30, 2016 and December 31, 2015, based on management’s estimates using the three month historical constant prepayment rate (“CPR”), the weighted average life of the Company’s available for sale securities portfolio was approximately 4.6 years and 5.0 years, respectively.

The following table sets forth the weighted average lives of our investment securities available for sale as of September 30, 2016 and December 31, 2015 (dollar amounts in thousands):
Weighted Average Life
September 30, 2016
 
December 31, 2015
0 to 5 years
$
629,145

 
$
518,594

Over 5 to 10 years
142,946

 
219,747

10+ years
35,611

 
27,113

Total
$
807,702

 
$
765,454


Portfolio Interest Reset Periods

The following tables set forth the stated reset periods of our investment securities available for sale and investment securities available for sale held in securitization trusts at September 30, 2016 and December 31, 2015 at carrying value (dollar amounts in thousands):
 
September 30, 2016
 
December 31, 2015
 
Less than 6
months
 
6 to 24
months
 
More than
24 months
 
Total
 
Less than
6 months
 
6 to 24
months
 
More than
24 months
 
Total
Agency RMBS
$
26,412

 
$
89,094

 
$
450,197

 
$
565,703

 
$
92,693

 
$
44,700

 
$
575,723

 
$
713,116

Non-Agency RMBS
175,858

 

 

 
175,858

 
188

 
1,379

 

 
1,567

U.S. Treasury securities

 

 

 

 
10,037

 

 

 
10,037

CMBS

 

 
66,141

 
66,141

 

 

 
40,734

 
40,734

Total investment securities available for sale
$
202,270

 
$
89,094

 
$
516,338

 
$
807,702

 
$
102,918

 
$
46,079

 
$
616,457

 
$
765,454


Unrealized Losses in OCI

The following tables present the Company's investment securities available for sale in an unrealized loss position reported through OCI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015 (dollar amounts in thousands):
September 30, 2016
Less than 12 Months
 
Greater than 12 months
 
Total
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
Agency RMBS
$
4,346

 
$
(30
)
 
$
356,081

 
$
(4,671
)
 
$
360,427

 
$
(4,701
)
Non-Agency RMBS

 

 
579

 
(216
)
 
579

 
(216
)
CMBS

 

 

 

 

 

Total investment securities available for sale
$
4,346

 
$
(30
)
 
$
356,660

 
$
(4,887
)
 
$
361,006

 
$
(4,917
)


23


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

 
$
(688
)
 
$
476,157

 
$
(14,497
)
 
$
547,744

 
$
(15,185
)
Non-Agency RMBS
771

 

 
796

 
(211
)
 
1,567

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

 
$
(688
)
 
$
476,953

 
$
(14,708
)
 
$
549,311

 
$
(15,396
)

Other than Temporary Impairment

For the three and nine months ended September 30, 2016 and 2015, the Company recognized no other-than-temporary impairment through earnings.

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, 2016 and December 31, 2015, respectively (dollar amounts in thousands):
 
September 30, 2016
 
December 31, 2015
Unpaid principal balance
$
102,610

 
$
122,545

Deferred origination costs – net
649

 
775

Reserve for loan losses
(3,833
)
 
(3,399
)
Total
$
99,426

 
$
119,921


Allowance for Loan Losses - The following table presents the activity in the Company's allowance for loan losses on residential mortgage loans held in securitization trusts for the nine months ended September 30, 2016 and 2015, respectively (dollar amounts in thousands):
 
Nine Months Ended September 30,
 
2016
 
2015
Balance at beginning of period
$
3,399

 
$
3,631

Provisions for loan losses
557

 
819

Transfer to real estate owned

 
(70
)
Charge-offs
(123
)
 
(195
)
Balance at the end of period
$
3,833

 
$
4,185


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, 2016 was $3.8 million, representing 374 basis points of the outstanding principal balance of residential loans held in securitization trusts, as compared to 277 basis points as of December 31, 2015. As part of the Company’s allowance for loan loss adequacy analysis, management will assess an overall level of allowances while also assessing credit losses inherent in each non-performing residential mortgage loan held in securitization trusts. These estimates involve the consideration of various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, the borrower’s current economic and credit status and other relevant factors.











24


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, 2016 and 2015, respectively (dollar amounts in thousands):
 
Nine Months Ended September 30,
 
2016
 
2015
Balance at beginning of period
$
411

 
$
965

Write downs

 

Transfer from/(to) mortgage loans held in securitization trusts
173

 
(121
)
Disposal
(411
)
 
(365
)
Balance at the end of period
$
173

 
$
479


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, real estate owned and receivables held in residential securitization trusts and (ii) the amount of Residential CDOs outstanding, was $4.2 million and $4.4 million as of September 30, 2016 and December 31, 2015, respectively.

Delinquency Status of Our Residential Mortgage Loans Held in Securitization Trusts

As of September 30, 2016, we had 33 delinquent loans with an aggregate principal amount outstanding of approximately $18.9 million categorized as residential mortgage loans held in securitization trusts (net), of which $12.0 million, or 63%, 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 REO through foreclosure, as of September 30, 2016 (dollar amounts in thousands):

September 30, 2016
Days Late
Number of
Delinquent
Loans 
 
Total
Unpaid
Principal 
 
% of Loan
Portfolio 
30 - 60
1
 
$
565

 
0.55
%
61 - 90
1
 
$
159

 
0.15
%
90 +
31
 
$
18,216

 
17.72
%
Real estate owned through foreclosure
1
 
$
193

 
0.19
%

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

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

 
0.67
%
61 - 90
2
 
$
1,763

 
1.43
%
90 +
26
 
$
15,365

 
12.48
%
Real estate owned through foreclosure
3
 
$
574

 
0.47
%


25


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, 2016 and December 31, 2015 are as follows:
 
September 30, 2016
 
December 31, 2015
New York
34.0
%
 
35.6
%
Massachusetts
20.2
%
 
20.7
%
New Jersey
10.5
%
 
11.1
%
Florida
8.7
%
 
7.7
%
Connecticut
7.5
%
 
6.5
%
Maryland
5.3
%
 
4.9
%

5.
Distressed Residential Mortgage Loans

As of September 30, 2016 and December 31, 2015, the carrying value of the Company’s distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, amounts to approximately $501.9 million and $559.0 million, respectively.

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

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, 2016 and 2015, respectively (dollar amounts in thousands):
 
September 30, 2016
 
September 30, 2015
Contractually required principal and interest
$
89,590

 
$
207,395

Non-accretable yield
(7,516
)
 
(16,354
)
Expected cash flows to be collected
82,074

 
191,041

Accretable yield
(44,007
)
 
(97,206
)
Fair value at the date of acquisition
$
38,067

 
$
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, 2016 and 2015, respectively (dollar amounts in thousands):
 
September 30, 2016
 
September 30, 2015
Balance at beginning of period
$
579,009

 
$
640,416

Additions
54,917

 
108,780

Disposals
(119,113
)
 
(187,001
)
Accretion
(25,166
)
 
(31,962
)
Balance at end of period (1)
$
489,647

 
$
530,233


(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 each of the nine-month periods ended September 30, 2016 and 2015 is not necessarily indicative of future results.


26


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, 2016 and December 31, 2015, respectively, are as follows:
 
September 30, 2016
 
December 31, 2015
Florida
12.1
%
 
12.6
%
California
8.0
%
 
7.7
%
North Carolina
8.0
%
 
8.1
%
Georgia
6.2
%
 
6.1
%
Maryland
5.4
%
 
5.4
%
New York
5.1
%
 
5.2
%

The Company's distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $204.3 million and $114.2 million at September 30, 2016 and December 31, 2015, respectively, are pledged as collateral for certain of the Securitized Debt issued by the Company (see Note 9). In addition, distressed residential mortgage loans with a carrying value of approximately $268.5 million and $307.0 million at September 30, 2016 and December 31, 2015, respectively, are pledged as collateral for a Master Repurchase Agreement with Deutsche Bank AG, Cayman Islands Branch (see Note 12).

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 condensed consolidated 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 $307.5 million and $286.4 million at September 30, 2016 and December 31, 2015, respectively (see Note 9). The Consolidated K-Series is comprised of five K-Series securitizations as of September 30, 2016 and December 31, 2015.

The condensed consolidated balance sheets of the Consolidated K-Series at September 30, 2016 and December 31, 2015, respectively, are as follows (dollar amounts in thousands):

Balance Sheets
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Multi-family loans held in securitization trusts
$
7,221,402

 
$
7,105,336

Receivables
23,526

 
24,579

Total Assets
$
7,244,928

 
$
7,129,915

Liabilities and Equity
 
 
 
Multi-family CDOs
$
6,913,855

 
$
6,818,901

Accrued expenses
23,430

 
24,483

Total Liabilities
6,937,285

 
6,843,384

Equity
307,643

 
286,531

Total Liabilities and Equity
$
7,244,928

 
$
7,129,915


The multi-family loans held in securitization trusts had an unpaid principal balance of approximately $6.7 billion and $6.8 billion at September 30, 2016 and December 31, 2015, respectively. The multi-family CDOs had an unpaid principal balance of approximately $6.7 billion and $6.8 billion at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, the current weighted average interest rate on these multi-family CDOs was 4.11% and 3.98%, respectively.


27


The Company does not have any claims to the assets or obligations for the liabilities of the Consolidated K-Series (other than those securities 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 16).

The condensed consolidated statements of operations of the Consolidated K-Series for the three and nine months ended September 30, 2016 and 2015, respectively, are as follows (dollar amounts in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Statements of Operations
2016
 
2015
 
2016
 
2015
Interest income
$
62,126

 
$
63,431

 
$
187,427

 
$
192,715

Interest expense
55,359

 
57,388

 
167,783

 
174,475

Net interest income
6,767

 
6,043

 
19,644

 
18,240

Unrealized gain (loss) on multi-family loans and debt held in securitization trusts, net
738

 
(2,170
)
 
2,340

 
16,876

Net Income
$
7,505

 
$
3,873

 
$
21,984

 
$
35,116


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, 2016 and December 31, 2015, respectively, are as follows:

 
September 30, 2016
 
December 31, 2015
California
13.9
%
 
13.8
%
Texas
12.4
%
 
12.3
%
New York
8.1
%
 
8.0
%
Maryland
5.3
%
 
5.2
%



28


7.
Investment in Unconsolidated Entities

The Company's investments in unconsolidated entities accounted for under the equity method consist of the following as of September 30, 2016 and December 31, 2015 (dollar amounts in thousands):

 
 
September 30, 2016

December 31, 2015
Investment Name
 
Ownership Interest
 
Carrying Amount
 
Ownership Interest
 
Carrying Amount
Autumnwood Investments LLC
 
 
$
2,119

 
 
$
2,127

200 RHC Hoover, LLC
 
63%
 
8,800

 
63%
 
8,649

BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the Green Apartments, L.L.C. (collectively)
 
45%
 
7,862

 
 

RiverBanc LLC (1) ("RiverBanc")
 
 

 
20%
 
597

Kiawah River View Investors LLC (2) ("KRVI")
 
 

 
31%
 
8,718

Total
 
 
 
$
18,781

 
 
 
$
20,091



(1) 
As of May 16, 2016, RiverBanc became a wholly-owned subsidiary of the Company as a result of the Company's acquisition of the remaining ownership interests in RiverBanc held by other unaffiliated entities (see Note 21).
(2) 
As of May 16, 2016, the Company consolidated KRVI in its condensed consolidated financial statements (see Note 9).
    
The Company's investments in unconsolidated entities accounted for at fair value consist of the following as of September 30, 2016 and December 31, 2015 (dollar amounts in thousands):

 
 
September 30, 2016
 
December 31, 2015
Investment Name
 
Ownership Interest
 
Carrying Amount
 
Ownership Interest
 
Carrying Amount
RB Development Holding Company, LLC (1) ("RBDHC")
 
 
$

 
63%
 
$
1,927

RB Multifamily Investors LLC (1) (2)("RBMI")
 
 

 
70%
 
56,891

Morrocroft Neighborhood Stabilization Fund II, LP
 
11%
 
9,623

 
13%
 
8,753

Evergreens JV Holdings, LLC (3)
 
85%
 
3,700

 
 

Bent Tree JV Holdings, LLC (3)
 
78%
 
9,810

 
 

Summerchase LR Partners LLC (3)
 
80%
 
4,390

 
 

Lake Mary Realty Partners, LLC (3)
 
80%
 
10,400

 
 

The Preserve at Port Royal Venture, LLC (3)
 
77%
 
12,120

 
 

WR Savannah Holdings, LLC (3)
 
90%
 
12,460

 
 

Total
 
 
 
$
62,503

 
 
 
$
67,571


(1) 
As of May 16, 2016, RBDHC and RBMI became wholly-owned subsidiaries of the Company as a result of the Company's acquisition of the remaining ownership interests in those entities held by other unaffiliated entities (see Note 21).
(2) 
As of December 31, 2015, includes the Company's preferred and common equity interests in this entity.
(3) 
Investments held by RBMI that are consolidated into the Company's financial statements beginning May 16, 2016.

    

29


The following table presents income (loss) from investments in unconsolidated entities for the three and nine months ended September 30, 2016 and September 30, 2015 (dollar amounts in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Investment Name
 
2016
 
2015
 
2016
 
2015
Autumnwood Investments LLC
 
$
71

 
$
70

 
$
213

 
$
210

200 RHC Hoover, LLC
 
276

 

 
1,091

 

BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the Green Apartments, L.L.C. (collectively)
 
189

 

 
189

 

RiverBanc LLC
 

 
(285
)
 
125

 
468

Kiawah River View Investors LLC
 

 
231

 
1,250

 
627

RB Development Holding Company, LLC
 

 
27

 
107

 
34

RB Multifamily Investors LLC
 

 
1,578

 
2,262

 
4,405

Morrocroft Neighborhood Stabilization Fund II, LP
 
244

 
(18
)
 
702

 
3

Evergreens JV Holdings, LLC
 
79

 

 
89

 

Bent Tree JV Holdings, LLC
 
157

 

 
257

 

Summerchase LR Partners LLC
 
190

 

 
200

 

Lake Mary Realty Partners, LLC
 
238

 

 
258